<PAGE>
Prospectus
GOLDMAN SACHS ASSET ALLOCATION PORTFOLIOS
Service Shares
May 1, 2000
. Goldman Sachs
Conservative
Strategy
Portfolio
. Goldman Sachs
Balanced
Strategy
Portfolio
. Goldman Sachs
Growth and
Income
Strategy
Portfolio
. Goldman Sachs
Growth
Strategy
Portfolio
. Goldman Sachs
Aggressive
Growth
Strategy
Portfolio
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN A FUND
INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
[GRAPHIC]
<PAGE>
NOT FDIC-INSURED May Lose Value No Bank Guarantee
<PAGE>
General Investment
Management Approach
Goldman Sachs Asset Management, a unit of the Investment Management Division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser (the
"Investment Adviser") to five asset allocation portfolios: the Conservative
Strategy Portfolio, Balanced Strategy Portfolio, Growth and Income Strategy
Portfolio, Growth Strategy Portfolio and Aggressive Growth Strategy Portfo-
lio (referred to as the "Portfolios" or the "Funds" interchangeably herein).
The Portfolios are intended for investors who prefer to have their asset
allocation decisions made by professional money managers. Each Portfolio
seeks to achieve its objectives by investing in a combination of underlying
funds for which Goldman Sachs now or in the future acts as investment
adviser or principal underwriter (the "Underlying Funds"). Some of these
Underlying Funds invest primarily in fixed-income or money market securities
(the "Underlying Fixed-Income Funds") and other Underlying Funds invest pri-
marily in equity securities (the "Underlying Equity Funds"). An investor may
choose to invest in one or more of the Portfolios based on individual
investment goals, risk tolerance, and financial circumstances.
The investment objectives and policies of the Portfolios are similar to the
investment objectives and policies of other mutual funds that the Investment
Adviser manages. Although the objectives and policies may be similar, the
investment results of the Portfolios may be higher or lower than the results
of such other mutual funds. The Investment Adviser cannot guarantee, and
makes no representation, that the investment results of similar funds will
be comparable even though the funds have the same Investment Adviser.
Goldman Sachs' Asset Allocation Investment Philosophy:
The Investment Adviser's Quantitative Strategies Group uses disciplined
quantitative models to determine the relative attractiveness of the world's
stock, bond and currency markets. These models use financial and economic
variables to capture fundamental relationships that the Quantitative Strate-
gies Group believes make sense. While the Investment Adviser's process is
rigorous and quantitative, it also incorporates clear economic reasoning
behind each recommendation.
The Asset Allocation Investment Process involves investing a Portfolio's
assets in other Goldman Sachs Funds within specified equity and fixed-income
percentage ranges.
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1
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Each Portfolio starts with a strategic allocation among the various asset
classes. The Investment Adviser then tactically deviates from the strategic
allocations based on forecasts provided by the models. The tactical process
seeks to add value by overweighting attractive markets and underweighting
unattractive markets. Greater deviations from the strategic allocation of a
given Portfolio result in higher risk that the tactical allocation will
underperform the strategic allocation. However, the Investment Adviser's
risk control process balances the amount any asset class can be overweighted
in seeking to achieve higher expected returns against the amount of risk
imposed by that deviation from the strategic allocation. The Investment
Adviser employs Goldman Sachs' proprietary Black-Litterman asset allocation
technique in an effort to optimally balance these two goals.
2
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Portfolio Investment Objectives and Strategies
Goldman Sachs Conservative Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Current income, consistent with the preservation of capi-
tal and secondarily the potential for capital appreciation
Investment Focus: Primarily domestic fixed-income funds (approximately 80%)
focusing on short-term investments and money market funds,
with the balance in domestic stock funds and an allocation
to a global bond fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks current income, consistent with the preservation of cap-
ital and secondarily also considers the potential for capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 80% of the Portfolio's total assets
will be allocated among Underlying Fixed-Income Funds, with a focus on
short-term investments including money market funds. Allocation to Under-
lying Equity Funds is intended to add diversification and enhance returns,
but will also add some volatility. The Investment Adviser expects that the
Portfolio will invest a relatively significant percentage of its assets in
the Global Income Fund, Financial Square Prime Obligations Fund and CORE(SM)
Large Cap Value Fund. It is expected that the Portfolio will invest more
than 25% of its assets in the Short Duration Government Fund. The Portfolio
may not invest in Underlying Equity Funds that invest principally in foreign
equity securities.
3
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Goldman Sachs Balanced Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Current income and long-term capital appreciation
Investment Focus: Domestic fixed-income funds (approximately 60%), with
the remaining balance in domestic and international
stock funds and an allocation to a global bond fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks current income and long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 60% of the Portfolio's total assets
will be allocated among Underlying Fixed-Income Funds. Allocation to Under-
lying Equity Funds is intended to add diversification and enhance returns,
but will also add some volatility. The Investment Adviser expects that the
Portfolio will invest a relatively significant percentage of its equity
allocation in the CORE SM Large Cap Growth, CORE Large Cap Value and CORE SM
International Equity Funds and will invest a relatively significant percent-
age of its assets in the Global Income Fund. It is expected that the Portfo-
lio will invest more than 25% of its assets in the Short Duration Government
Fund.
4
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PORTFOLIO INVESTMENT OBJECTIVES AND STRATEGIES
Goldman Sachs
Growth and Income Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation and current income
Investment Focus: Domestic and international fixed-income and stock funds
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 60% of the Portfolio's total assets
will be allocated among Underlying Equity Funds, which are intended to pro-
vide the capital appreciation component. Allocation to Underlying Fixed-
Income Funds is intended to provide the income component. The Investment
Adviser expects that the Portfolio will invest a relatively significant per-
centage of its equity allocation in the CORE Large Cap Growth, CORE Large
Cap Value and CORE International Equity Funds and will invest a relatively
significant percentage of its assets in the Core Fixed Income and Global
Income Funds.
5
<PAGE>
Goldman Sachs
Growth Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation and secondarily current
income
Investment Focus: Primarily a blend of domestic large cap, small cap and
international stock funds (approximately 80%), with the
balance in domestic fixed-income funds and a global bond
fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation and secondarily current
income.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 80% of the Portfolio's total assets
will be allocated among Underlying Equity Funds, with a blend of domestic
large cap, small cap and international exposure to seek capital apprecia-
tion. Allocation to Underlying Fixed-Income Funds is intended to provide
diversification. The Investment Adviser expects that the Portfolio will
invest a relatively significant percentage of its equity allocation in the
CORE Large Cap Growth, CORE Large Cap Value and CORE International Equity
Funds.
6
<PAGE>
PORTFOLIO INVESTMENT OBJECTIVES AND STRATEGIES
Goldman Sachs Aggressive Growth Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation
Investment Focus: Equity funds, with a greater focus on international and
small cap investments
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, substantially all of the Portfolio's total assets
will be allocated among Underlying Equity Funds, with a greater focus on
small cap and international investments. The Investment Adviser expects that
the Portfolio will invest a relatively significant percentage of its assets
in the CORE Large Cap Growth, CORE Large Cap Value and CORE International
Equity Funds.
7
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Principal Investment Strategies
Each Portfolio seeks to achieve its investment objective by investing within
specified equity and fixed-income ranges among Underlying Funds. The table
below illustrates the current Underlying Equity/Fixed-Income Fund allocation
targets and ranges for each Portfolio:
Equity/Fixed-Income Range (Percentage of Each Portfolio's Total Assets)
<TABLE>
<CAPTION>
Portfolio Target Range
- -------------------------------------------
<S> <C> <C>
Conservative Strategy
Equity 20% 0%-25%
Fixed-Income 80% 75%-100%
- -------------------------------------------
Balanced Strategy
Equity 40% 20%-60%
Fixed-Income 60% 40%-80%
- -------------------------------------------
Growth and Income Strategy
Equity 60% 40%-80%
Fixed-Income 40% 20%-60%
- -------------------------------------------
Growth Strategy
Equity 80% 60%-100%
Fixed-Income 20% 0%-40%
- -------------------------------------------
Aggressive Growth Strategy
Equity 100% 75%-100%
Fixed-Income 0% 0%-25%
- -------------------------------------------
</TABLE>
A Portfolio will invest in particular Underlying Funds based on various crite-
ria. Among other things, the Investment Adviser will analyze the Underlying
Funds' respective investment objectives, policies and investment strategies in
order to determine which Underlying Funds, in combination with other Underlying
Funds, are appropriate in light of a Portfolio's investment objective.
A Portfolio may purchase or sell securities to: (a) accommodate purchases and
sales of its shares; (b) change the percentages of its assets invested in each
of the Underlying Funds in response to economic or market conditions; and (c)
maintain or modify the allocation of its assets among the Underlying Funds
within the percentage ranges described above.
8
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
While each Portfolio can invest in any or all of the Underlying Funds, it is
expected that each Portfolio will normally invest in only some of the Under-
lying Funds at any particular time. Each Portfolio's investment in any of
the Underlying Funds may, and in some cases is expected to, exceed 25% of
such Portfolio's total assets.
THE PARTICULAR UNDERLYING FUNDS IN WHICH EACH PORTFOLIO MAY INVEST, THE
EQUITY/FIXED-INCOME TARGETS AND RANGES AND THE INVESTMENTS IN EACH UNDER-
LYING FUND MAY BE CHANGED FROM TIME TO TIME WITHOUT SHAREHOLDER APPROVAL.
In addition, each Portfolio's investment objectives and all policies not
specifically designated as fundamental in this Prospectus or the Statement
of Additional Information (the "Additional Statement") are non-fundamental
and may be changed without shareholder approval. If there is a change in a
Portfolio's investment objective, you should consider whether that Portfolio
remains an appropriate investment in light of your then current financial
position and needs.
9
<PAGE>
Principal Risks of the Portfolios
Loss of money is a risk of investing in each Portfolio. An investment in a
Portfolio is not a deposit of any bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other governmental agency. While
the Portfolios offer a greater level of diversification than many other types
of mutual funds, a single Portfolio may not provide a complete investment pro-
gram for an investor. The following summarizes important risks that apply to
the Portfolios and may result in a loss of your investment. There can be no
assurance that a Portfolio will achieve its investment objective.
.Investing in the Underlying Funds--The investments of each Portfolio are
concentrated in the Underlying Funds, and each Portfolio's investment
performance is directly related to the investment performance of the
Underlying Funds held by it. The ability of each Portfolio to meet its
investment objective is directly related to the ability of the Underlying
Funds to meet their objectives as well as the allocation among those
Underlying Funds by the Investment Adviser. The value of the Underlying Funds'
investments, and the net asset values ("NAV") of the shares of both the
Portfolios and the Underlying Funds, will fluctuate in response to various
market and economic factors related to the equity and fixed-income markets, as
well as the financial condition and prospects of issuers in which the
Underlying Funds invest. There can be no assurance that the investment
objective of any Portfolio or any Underlying Fund will be achieved.
.Investments of the Underlying Funds--Because the Portfolios invest in the
Underlying Funds, the Portfolios' shareholders will be affected by the
investment policies of the Underlying Funds in direct proportion to the amount
of assets the Portfolios allocate to those Funds. Each Portfolio may invest in
Underlying Funds that in turn invest in small capitalization companies and
foreign issuers and thus are subject to additional risks, including changes in
foreign currency exchange rates and political risk. Foreign investments may
include securities of issuers located in emerging countries in Asia, Latin
America, Eastern Europe and Africa. Each Portfolio may also invest in
Underlying Funds that in turn invest in non-investment grade fixed-income
securities ("junk bonds"), which are considered speculative by traditional
standards. In addition, the Underlying Funds may purchase derivative
securities; enter into forward currency transactions; lend their portfolio
securities; enter into futures contracts and options transactions; purchase
zero coupon bonds and payment-in-kind bonds; purchase securities issued by
real estate investment trusts ("REITs") and other issuers in the real estate
industry; purchase restricted and illiquid securities; purchase securities on
a when-issued or delayed delivery basis; enter into repurchase agreements;
borrow money; and
10
<PAGE>
PRINCIPAL RISKS OF THE PORTFOLIOS
engage in various other investment practices. The risks presented by these
investment practices are discussed in Appendix A to this Prospectus and the
Additional Statement.
.Affiliated Persons--In managing the Portfolios, the Investment Adviser will
have the authority to select and substitute Underlying Funds. The Investment
Adviser is subject to conflicts of interest in allocating Portfolio assets
among the various Underlying Funds both because the fees payable to it and/or
its affiliates by some Underlying Funds are higher than the fees payable by
other Underlying Funds and because the Investment Adviser and its affiliates
are also responsible for managing the Underlying Funds. The Trustees and
officers of the Goldman Sachs Trust may also have conflicting interests in
fulfilling their fiduciary duties to both the Portfolios and the Underlying
Funds.
.Expenses--You may invest in the Underlying Funds directly. By investing in the
Underlying Funds indirectly through a Portfolio, you will incur not only a
proportionate share of the expenses of the Underlying Funds held by the
Portfolio (including operating costs and investment management fees), but also
expenses of the Portfolio.
.Temporary Investments--Although the Portfolios normally seek to remain
substantially invested in the Underlying Funds, each Portfolio may invest a
portion of its assets in high-quality, short-term debt obligations (including
commercial paper, certificates of deposit, bankers' acceptances, repurchase
agreements, debt obligations backed by the full faith and credit of the U.S.
government and demand and time deposits of domestic and foreign banks and
savings and loan associations) to maintain liquidity, to meet shareholder
redemptions and for other short-term cash needs. Also, there may be times
when, in the opinion of the Investment Adviser, abnormal market or economic
conditions warrant that, for temporary defensive purposes, a Portfolio may
invest without limitation in short-term obligations. When a Portfolio's assets
are invested in such investments, the Portfolio may not be achieving its
investment objective.
11
<PAGE>
Description of the Underlying Funds
DESCRIPTION OF THE UNDERLYING FUNDS
The following is a concise description of the investment objectives and
practices for each of the Underlying Funds that are available for investment
by the Portfolios as of the date of this Prospectus. A Portfolio may also
invest in other Underlying Funds not listed below that may become available
for investment in the future at the discretion of the Investment Adviser
without shareholder approval. Additional information regarding the invest-
ment practices of the Underlying Funds is provided in Appendix A to this
Prospectus and the Additional Statement. No offer is made in this Prospectus
of any of the Underlying Funds.
<TABLE>
<CAPTION>
Investment
Underlying Fund Objectives Investment Criteria
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
CORE Large Cap Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Value of capital and foreign issuers traded in the United States. The Fund's investments are selected using both
dividend income. a variety of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the Russell 1000 Value Index.
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CORE(SM) U.S. Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Equity of capital and foreign issuers traded in the United States. The Fund's investments are selected using both
dividend income. a variety of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the S&P 500 Index.
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CORE Large Cap Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Growth of capital. foreign issuers traded in the United States. The Fund's investments are selected using both
Dividend a variety of quantitative techniques and fundamental research in seeking to maximize the
income is a Fund's expected return, while maintaining risk, style, capitalization and industry
secondary characteristics similar to the Russell 1000 Growth Index.
consideration.
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</TABLE>
12
<PAGE>
DESCRIPTION OF THE UNDERLYING FUNDS
<TABLE>
<CAPTION>
Investment
Underlying Fund Objectives Investment Criteria
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
CORE(SM) Small Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Cap Equity of capital. foreign issuers traded in the United States. The Fund's investments are selected using both
a variety of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the Russell 2000 Index.
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Capital Growth Long-term At least 90% of total assets in a diversified portfolio of equity securities. Long-term
capital capital appreciation potential is considered in selecting investments.
growth.
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Mid Cap Value* Long-term At least 65% of total assets in equity securities of companies with public stock market
capital capitalizations within the range of the market capitalization of companies constituting the
appreciation. Russell Midcap Value Index at the time of the investment (currently between $300 million
and $15 billion).
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Small Cap Value Long-term At least 65% of total assets in equity securities of companies with public stock market
capital capitalizations of $1 billion or less at the time of investment.
growth.
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Real Estate Total return Substantially all, and at least 80%, of total assets in a diversified portfolio of equity
Securities comprised securities of issuers that are primarily engaged in or related to the real estate industry.
of long-term The Fund expects that a substantial portion of its total assets will be invested in REITS.
growth of
capital and
dividend income.
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CORE Long-term growth At least 90% of total assets in equity securities of companies organized outside the United
International of capital. States or whose securities are principally traded outside the United States. The Fund's
Equity investments are selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's expected return, while maintaining risk, style,
capitalization and industry characteristics similar to the unhedged Morgan Stanley Capital
International (MSCI) Europe, Australia and Far East Index (the "EAFE Index"). The Fund may
employ certain currency management techniques.
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</TABLE>
*Formerly, "Mid Cap Equity."
13
<PAGE>
<TABLE>
<CAPTION>
Investment
Underlying Fund Objectives Investment Criteria
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
International Long-term Substantially all, and at least 65%, of total assets in equity securities of companies
Equity capital organized outside the United States or whose securities are principally traded outside the
appreciation. United States. The Fund may employ certain currency management techniques.
-------------------------------------------------------------------------------------------------------------------------------
European Equity Long-term Substantially all, and at least 65%, of total assets in equity securities of European
capital companies. The Fund may employ certain currency management techniques.
appreciation.
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Japanese Equity Long-term Substantially all, and at least 65%, of total assets in equity securities of Japanese
capital companies. The Fund may employ certain currency management techniques.
appreciation.
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International Long-term Substantially all, and at least 65%, of total assets in equity securities of companies with
Small Cap capital public stock market capitalizations of $1 billion or less at the time of investment that
appreciation. are organized outside the United States or whose securities are principally traded outside
the United States. The Fund may employ certain currency management techniques.
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Emerging Long-term Substantially all, and at least 65%, of total assets in equity securities of emerging
Markets Equity capital country issuers. The Fund may employ certain currency management techniques.
appreciation.
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Asia Growth Long-term Substantially all, and at least 65%, of total assets in equity securities of companies in
capital China, Hong Kong, India, Indonesia, Malaysia, Pakistan, the Philippines, Singapore, South
appreciation. Korea, Sri Lanka, Taiwan and Thailand. The Fund may employ certain currency management
techniques.
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</TABLE>
14
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[This page intentionally left blank]
15
<PAGE>
<TABLE>
<CAPTION>
Approximate
Investment Interest Rate
Underlying Fund Objectives Duration or Maturity Sensitivity
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial Square Prime Maximize Maximum Maturity of 3-month
Obligations current income Individual Investments = 13 Treasury bill
to the extent months at time of purchase.
consistent Maximum Dollar-Weighted
with the Average Portfolio Maturity =
maintenance of 90 days
liquidity.
-----------------------------------------------------------------------------------
Adjustable Rate A high level Target Duration = 6-month to 9-month U.S.
Government of current 1-year U.S. Treasury Treasury bill
income, Securities Maximum Duration*=
consistent 2 years
with low
volatility of
principal.
-----------------------------------------------------------------------------------
Short Duration A high level Target Duration = 2 year U.S. 2-year U.S.
Government of current Treasury Security plus or Treasury note
income and minus .5 years Maximum
secondarily, Duration*= 3 years
in seeking
current
income, may
also consider
the potential
for capital
appreciation.
-----------------------------------------------------------------------------------
Government Income A high level Target Duration = Lehman 5-year U.S.
of current Brothers Mutual Fund Treasury note
income, Government/Mortgage Index
consistent plus or minus 1 year Maximum
with safety of Duration*= 6 years
principal.
-----------------------------------------------------------------------------------
Core Fixed Income Total return Target Duration = Lehman 5-year U.S.
consisting of Brothers Aggregate Bond Index Treasury note
capital plus or minus 1 year Maximum
appreciation Duration*= 6 years
and income
that exceeds
the total
return of the
Lehman
Brothers
Aggregate Bond
Index.
-----------------------------------------------------------------------------------
Global Income A high total Target Duration = J.P. Morgan 6-year
return, Global Government Bond Index government
emphasizing (hedged) plus or minus 2.5 bond
current years Maximum Duration*= 7.5
income, and, years
to a lesser
extent,
providing
opportunities
for capital
appreciation.
-----------------------------------------------------------------------------------
High Yield A high level Target Duration = Lehman 6-year U.S.
of current Brothers High Yield Bond Treasury note
income and Index plus or minus 2.5 years
capital Maximum Duration* = 7.5 years
appreciation.
-----------------------------------------------------------------------------------
</TABLE>
* Under normal interest rate conditions.
16
<PAGE>
DESCRIPTION OF THE UNDERLYING FUNDS
<TABLE>
<CAPTION>
Credit
Investment Sector Quality Other Investments
----------------------------------------------------------------------------------------
<S> <C> <C>
Money market High Quality N/A
instruments (short-term
including securities ratings of
issued or guaranteed A-1, P-1 or
by the U.S. comparable
government, its quality).
agencies,
instrumentalities or
sponsored
enterprises ("U.S.
Government
Securities"); U.S.
bank obligations,
commercial paper and
other short-term
obligations of U.S.
corporations,
governmental and
other entities;
asset-backed and
receivables-backed
securities; and
related repurchase
agreements.
----------------------------------------------------------------------------------------
At least 65% of U.S. Fixed-rate mortgage
total assets in U.S. Government pass-through
Government Securities securities and
Securities that are repurchase
adjustable rate agreements
mortgage pass- collateralized by
through securities U.S. Government
and other mortgage Securities.
securities with
periodic interest
rate resets.
----------------------------------------------------------------------------------------
At least 65% of U.S. Mortgage pass-
total assets in U.S. Government through securities
Government Securities and other
Securities and securities
repurchase representing an
agreements interest in or
collateralized by collateralized by
such securities. mortgage loans.
----------------------------------------------------------------------------------------
At least 65% of U.S. Non-government
total assets in U.S. Government mortgage pass-
Government Securities through securities,
Securities, and non-U.S. asset-backed
including mortgage- Government securities and
backed U.S. Securities = corporate fixed-
Government AAA/Aaa income securities.
Securities and
repurchase
agreements
collateralized by
such securities.
----------------------------------------------------------------------------------------
At least 65% of Minimum = Foreign fixed-
total assets in BBB/Baa income, municipal
fixed-income Minimum for and convertible
securities, non-dollar securities, foreign
including U.S. securities = currencies and
Government AA/Aa repurchase
Securities, agreements
corporate, mortgage- collateralized by
backed and asset- U.S. Government
backed securities. Securities.
----------------------------------------------------------------------------------------
Securities of U.S. Minimum = Mortgage-backed and
and foreign BBB/Baa At asset-backed
governments and least 50% = securities, foreign
corporations. AAA/Aaa currencies and
repurchase
agreements
collateralized by
U.S. Government
Securities or
certain foreign
government
securities.
----------------------------------------------------------------------------------------
At least 65% of At least 65% Mortgage-backed and
total assets in = BB/Ba or asset-backed
fixed-income below securities, U.S.
securities rated Government
below investment Securities,
grade, including investment grade
U.S. and non-U.S. corporate fixed-
dollar corporate income securities,
debt, foreign structured
government securities, foreign
securities, currencies and
convertible repurchase
securities and agreements
preferred stock. collateralized by
U.S. Government
Securities.
----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Principal Risks of the Underlying Funds
The following summarizes important risks that apply to the Underlying Funds and
may result in a loss of your investment in a Portfolio. There can be no assur-
ance that an Underlying Fund will achieve its investment objective.
Risks That Apply To All Underlying Funds:
.Interest Rate Risk--The risk that when interest rates increase, fixed-income
securities held by an Underlying Fund will decline in value. Long-term fixed-
income securities will normally have more price volatility because of this
risk than short-term securities.
.Credit/Default Risk--The risk that an issuer or guarantor of fixed-income
securities held by an Underlying Fund (which may have low credit ratings) may
default on its obligation to pay interest and repay principal.
.Market Risk--The risk that the value of the securities in which an Underlying
Fund invests may go up or down in response to the prospects of individual com-
panies and/or general economic conditions. Price changes may be temporary or
last for extended periods.
.Derivatives Risk--The risk that loss may result from an Underlying Fund's
investments in options, futures, swaps, structured securities and other deriv-
ative instruments. These instruments may be leveraged so that small changes
may produce disproportionate losses to an Underlying Fund.
.Foreign Risk--The risk that when an Underlying Fund invests in foreign securi-
ties, it will be subject to risk of loss not typically associated with domes-
tic issuers. Loss may result because of less foreign government regulation,
less public information and less economic, political and social stability.
Loss may also result from the imposition of exchange controls, confiscations
and other government restrictions. The Underlying Funds will also be subject
to the risk of negative foreign currency rate fluctuations. Foreign risks will
normally be greatest when an Underlying Fund invests in issuers located in
emerging countries.
.Management Risk--The risk that a strategy used by an investment adviser to the
Underlying Funds may fail to produce the intended results.
.Liquidity Risk--The risk that an Underlying Fund will not be able to pay
redemption proceeds within the time period stated in the Underlying Fund's
Prospectus because of unusual market conditions, an unusually high volume of
redemption requests, or other reasons. Underlying Funds that invest in non-
investment grade fixed-income securities, small capitalization stocks, REITs
or emerging country issuers will be especially subject to the risk that during
certain periods the liquidity of particular issuers or industries, or all
securities within these investment categories, will shrink or disappear sud-
denly and without warning as a result of adverse economic, market or political
events, or adverse investor perceptions whether or not accurate.
18
<PAGE>
PRINCIPAL RISKS OF THE UNDERLYING FUNDS
Risks That Apply Primarily To The Underlying Fixed-Income Funds:
.Call Risk--The risk that an issuer will exercise its right to pay principal on
an obligation held by an Underlying Fund (such as a Mortgage-Backed Security)
earlier than expected. This may happen when there is a decline in interest
rates. Under these circumstances, an Underlying Fund may be unable to recoup
all of its initial investment and will also suffer from having to reinvest in
lower yielding securities.
.Extension Risk--The risk that an issuer will exercise its right to pay princi-
pal on an obligation held by an Underlying Fund (such as a Mortgage-Backed
Security) later than expected. This may happen when there is a rise in inter-
est rates. Under these circumstances, the value of an obligation will
decrease, and an Underlying Fund will also suffer from the inability to invest
in higher yielding securities.
.U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risk That Applies Primarily To The Underlying Equity Funds:
.Stock Risk--The risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high levels.
There is no guarantee that such levels will continue.
19
<PAGE>
Risks That Are Particularly Important For Specific Underlying Funds:
.Geographic Risk--The European Equity Fund invests primarily in equity securi-
ties of European companies. The Japanese Equity Fund invests primarily in
equity securities of Japanese equity companies. The Asia Growth Fund invests
primarily in equity securities of Asian issuers. The Global Income Fund is
non-diversified meaning that it is permitted to invest more of its assets in
fewer issuers than "diversified" mutual funds. Thus, it may be more suscepti-
ble to adverse developments affecting any single issuer held in its portfolio,
and may be more susceptible to greater losses because of these developments.
In addition, the Global Income Fund may invest more than 25% of its total
assets in the securities of corporate and governmental issuers located in each
of Canada, Germany, Japan, and the United Kingdom as well as in the securities
of U.S. issuers. Concentration of the investments of these or other Underlying
Funds in issuers located in a particular country or region will subject the
Underlying Fund, to a greater extent than if investments were less concen-
trated, to losses arising from adverse developments affecting those issuers or
countries.
.Emerging Countries Risk--Certain Underlying Funds may invest in emerging coun-
try securities. The securities markets of Asian, Latin American, Eastern Euro-
pean, African and other emerging countries are less liquid, are especially
subject to greater price volatility, have smaller market capitalizations, have
less government regulation and are not subject to as extensive and frequent
accounting, financial and other reporting requirements as the securities mar-
kets of more developed countries. These risks are not normally associated with
investments in more developed countries.
.Small Cap Stock and REIT Risks--Certain Underlying Funds may invest in small
cap stocks and REITs. The securities of small capitalization companies and
REITs involve greater risks than those associated with larger, more estab-
lished companies and may be subject to more abrupt or erratic price movements.
Securities of such issuers may lack sufficient market liquidity to enable an
Underlying Fund to effect sales at an advantageous time or without a substan-
tial drop in price.
."Junk Bond" Risk--Certain Underlying Funds may invest in non-investment grade
fixed-income securities (commonly known as "junk bonds") that are considered
predominantly speculative by traditional investment standards. Non-investment
grade fixed-income securities and unrated securities of comparable credit
quality are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities may be subject to greater
price volatility due to such factors as specific corporate developments,
interest rate sensitivity, negative perceptions of the junk bond markets gen-
erally and less secondary market liquidity.
20
<PAGE>
PRINCIPAL RISKS OF THE UNDERLYING FUNDS
More information about the portfolio securities and investment techniques of
the Underlying Funds, and their associated risks, is provided in Appendix A.
You should consider the investment risks discussed in this section and in
Appendix A. Both are important to your investment choice.
21
<PAGE>
Portfolio Performance
HOW THE PORTFOLIOS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Portfolio by showing: (a) changes in the performance of a Portfo-
lio's Service Shares from year to year; and (b) how the average annual
returns of a Portfolio's Service Shares compare to those of broad-based
securities market indices. The bar chart and table assume reinvestment of
dividends and distributions. A Portfolio's past performance is not necessar-
ily an indication of how the Portfolio will perform in the future. Perfor-
mance reflects expense limitations in effect. If expense limitations were
not in place, a Portfolio's performance would have been reduced. The Conser-
vative Strategy Portfolio did not commence operations until February 8,
1999. Since the Portfolio had less than one calendar year's performance as
of December 31, 1999, no performance information is provided in this sec-
tion.
22
<PAGE>
PORTFOLIO PERFORMANCE
Balanced Strategy Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '98 +7.01%
Worst Quarter
Q3 '98 -5.76%
[GRAPH]
1998 6.30%
1999 10.47%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
-----------------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 1/2/98) 10.47% 8.38%
S&P 500 Index* 21.04% 24.75%
Two-Year U.S. Treasury Security** 1.89% 4.20%
Lehman Brothers High Yield Bond Index*** 2.39% 2.13%
-----------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks,
an unmanaged index of common stocks. The Index figures do not reflect any
fees or expenses.
** The Two-Year U.S. Treasury Security, as reported by Merrill Lynch, does not
reflect any fees or expenses.
*** The Lehman Brothers High Yield Bond Index is a total return performance
benchmark for fixed-income securities having a maximum quality rating of
Ba1, a minimum amount outstanding of $100 million and at least one year to
maturity. The Index is unmanaged and does not reflect any fees or expenses.
23
<PAGE>
Growth and Income Strategy Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 +10.21%
Worst Quarter
Q3 '98 -10.20%
[GRAPH]
1998 6.43%
1999 15.60%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
---------------------------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 1/2/98) 15.60% 10.94%
S&P 500 Index* 21.04% 24.75%
MSCI Europe, Australasia, Far East (EAFE) Index
(unhedged)** 27.29% 23.76%
Lehman Brothers Aggregate Bond Index*** (0.82)% 3.82%
Lehman Brothers High Yield Bond Index+ 2.39% 2.13%
---------------------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks,
an unmanaged index of common stocks. The Index figures do not reflect any
fees or expenses.
** The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-
weighted composite of securities in 20 developed markets. The Index figures
do not reflect any fees or expenses.
*** The Lehman Brothers Aggregate Bond Index represents a diversified portfolio
of fixed-income securities, including U.S. Treasuries, investment-grade
corporate bonds, and mortgaged-backed and asset-backed securities. The
Index figures do not reflect any fees or expenses.
+ The Lehman Brothers High Yield Bond Index is a total return performance
benchmark for fixed-income securities having a maximum quality rating of
Ba1, a minimum amount outstanding of $100 million and at least one year to
maturity. The Index is unmanaged and does not reflect any fees or expenses.
24
<PAGE>
PORTFOLIO PERFORMANCE
Growth Strategy Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 +13.04%
Worst Quarter
Q3 '98 -14.24%
[GRAPH]
1998 4.45%
1999 20.62%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
----------------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 1/2/98) 20.62% 12.26%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI Emerging Markets Free (EMF) Index+ 66.42% 11.47%
----------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks,
an unmanaged index of common stocks. The Index figures do not reflect any
fees or expenses.
** The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-
weighted composite of securities in 20 developed markets. The Index figures
do not reflect any fees or expenses.
*** The Russell 2000 Index is an unmanaged index of common stock prices. The
Index figures do not reflect any fees or expenses.
+ The unmanaged MSCI EMF Index is a market capitalization-weighted composite
of securities in over 30 emerging market countries. "Free" indicates an
index that excludes shares in otherwise free markets that are not purchas-
able by foreigners. The Index figures do not reflect any fees or expenses.
25
<PAGE>
Aggressive Growth Strategy Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 +15.70%
Worst Quarter
Q3 '98 -17.19%
[GRAPH]
1998 2.54%
1999 25.17%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year Since Inception
-----------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 1/2/98) 25.17% 13.31%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI EMF Index+ 66.42% 11.47%
-----------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks,
an unmanaged index of common stocks. The Index figures do not reflect any
fees or expenses.
** The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-
weighted composite of securities in 20 developed markets. The Index figures
do not reflect any fees or expenses.
*** The Russell 2000 Index is an unmanaged index of common stock prices. The
Index figures do not reflect any fees or expenses.
+ The unmanaged MSCI EMF Index is a market capitalization-weighted composite
of securities in over 30 emerging market countries. "Free" indicates an
index that excludes shares in otherwise free markets that are not purchas-
able by foreigners. The Index figures do not reflect any fees or expenses.
26
<PAGE>
[This page intentionally left blank]
27
<PAGE>
Portfolio Fees and Expenses (Service Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Service Shares of a Portfolio.
<TABLE>
<CAPTION>
Conservative Balanced
Strategy Strategy
Portfolio Portfolio
- ------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None
Maximum Deferred Sales Charge (Load) None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None
Redemption Fees None None
Exchange Fees None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):/1/
Management Fees (for asset allocation)/2/ 0.35% 0.35%
Service Fees/3/ 0.50% 0.50%
Other Expenses/4/ 2.60% 0.30%
Underlying Fund Expenses/1/ 0.55% 0.69%
- ------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 3.15% 0.94%
- ------------------------------------------------------------------------------
Total Portfolio Operating Expenses* 4.00% 1.84%
- ------------------------------------------------------------------------------
</TABLE>
See page 30 for all other footnotes.
* As a result of current waivers and expense limita-
tions, "Other Expenses" and "Total Portfolio Operating
Expenses" of the Portfolio which are actually incurred
are as set forth below. The waivers and expense limi-
tations may be terminated at any time at the option of
the Investment Adviser. If this occurs, "Other
Expenses" and "Total Portfolio Operating Expenses" may
increase without shareholder approval.
<TABLE>
<CAPTION>
Conservative Balanced
Strategy Strategy
Portfolio Portfolio
-------------------------------------------------------------------------------
<S> <C> <C>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):/1/
Management Fees (for asset allocation)/2/ 0.15% 0.15%
Service Fees/3/ 0.50% 0.50%
Other Expenses/4/ 0.04% 0.04%
Underlying Fund Expenses/1/ 0.55% 0.69%
-------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 0.59% 0.73%
-------------------------------------------------------------------------------
Total Portfolio Operating Expenses (after current
waivers and expense limitations) 1.24% 1.38%
-------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
PORTFOLIO FEES AND EXPENSES
<TABLE>
<CAPTION>
Growth and Aggressive
Income Growth Growth
Strategy Strategy Strategy
Portfolio Portfolio Portfolio
- -----------------------------------
<S> <C> <C>
None None None
None None None
None None None
None None None
0.35% 0.35% 0.35%
0.50% 0.50% 0.50%
0.10% 0.12% 0.25%
0.79% 0.84% 0.90%
- -----------------------------------
1.39% 1.46% 1.65%
- -----------------------------------
1.74% 1.81% 2.00%
- -----------------------------------
<CAPTION>
Growth and Aggressive
Income Growth Growth
Strategy Strategy Strategy
Portfolio Portfolio Portfolio
- -----------------------------------
<S> <C> <C>
0.15% 0.15% 0.15%
0.50% 0.50% 0.50%
0.04% 0.04% 0.04%
0.79% 0.84% 0.90%
- -----------------------------------
0.83% 0.88% 0.94%
- -----------------------------------
1.48% 1.53% 1.59%
- -----------------------------------
</TABLE>
29
<PAGE>
Portfolio Fees and Expenses continued
/1/The Portfolios' annual operating expenses have been restated to reflect cur-
rent fees, except for the Conservative Strategy Portfolio, whose expenses are
estimated for the current fiscal year. "Underlying Fund Expenses" for each
Portfolio are based upon the strategic allocation of each Portfolio's invest-
ment in the Underlying Funds and upon the actual total operating expenses of
the Underlying Funds (including any current waivers and expense limitations of
the Underlying Funds). Actual Underlying Fund Expenses incurred by each Portfo-
lio may vary with changes in the allocation of each Portfolio's assets among
the Underlying Funds and with other events that directly affect the expenses of
the Underlying Funds.
/2/The Investment Adviser has voluntarily agreed not to impose a portion of the
management fee on the Portfolios equal to 0.20% of the Portfolios' average
daily net assets. As a result of fee waivers, current management fees of the
Portfolios are 0.15% of each Portfolio's average daily net assets. The waivers
may be terminated at any time at the option of the Investment Adviser.
/3/Service Organizations may charge other fees to their customers who are bene-
ficial owners of Service Shares in connection with their customers' accounts.
Such fees may affect the return customers realize with respect to their invest-
ments.
/4/"Other Expenses" include transfer agency fees equal to 0.04% of the average
daily net assets of each Portfolio's Service Shares plus all other ordinary
expenses not detailed above. The Investment Adviser has voluntarily agreed to
reduce or limit "Other Expenses" (excluding management fees, transfer agency
fees, service fees, taxes, interest and brokerage fees and litigation, indemni-
fication and other extraordinary expenses) to 0.00% of each Portfolio's average
daily net assets.
30
<PAGE>
PORTFOLIO FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Portfolio (without the waivers and expense limitations) with the cost of
investing in other mutual funds. The Example assumes that you invest $10,000 in
Service Shares of a Portfolio for the time periods indicated and then redeem
all of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that a Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Conservative Strategy $402 $1,218 $2,051 $4,206
- -----------------------------------------------------------
Balanced Strategy $187 $ 579 $ 995 $2,159
- -----------------------------------------------------------
Growth and Income Strategy $177 $ 548 $ 944 $2,052
- -----------------------------------------------------------
Growth Strategy $184 $ 569 $ 980 $2,127
- -----------------------------------------------------------
Aggressive Growth Strategy $203 $ 627 $1,078 $2,327
- -----------------------------------------------------------
</TABLE>
Service Organizations that invest in Service Shares on behalf of their custom-
ers may charge other fees directly to their customer accounts in connection
with their investments. You should contact your Service Organization for infor-
mation regarding such charges. Such fees, if any, may affect the return such
customers realize with respect to their investments.
Certain Service Organizations that invest in Service Shares may receive other
compensation in connection with the sale and distribution of Service Shares or
for services to their customers' accounts and/or the Portfolios. For additional
information regarding such compensation, see "Shareholder Guide" in the Pro-
spectus and "Other Information" in the Additional Statement.
31
<PAGE>
Service Providers
INVESTMENT ADVISERS
<TABLE>
<CAPTION>
Investment Adviser Portfolio
-----------------------------------------------------
<S> <C>
Goldman Sachs Asset
Management ("GSAM") Conservative Strategy
32 Old Slip Balanced Strategy
New York, New York 10005 Growth and Income Strategy
Growth Strategy
Aggressive Growth Strategy
-----------------------------------------------------
</TABLE>
Except as noted below, GSAM also serves as investment adviser to each Under-
lying Fund.
<TABLE>
<CAPTION>
Investment Adviser Underlying Fund
-----------------------------------------------------
<S> <C>
Goldman Sachs Funds
Management, L.P.
("GSFM") CORE U.S. Equity
32 Old Slip Capital Growth
New York, New York 10005 Adjustable Rate Government
Short Duration Government
-----------------------------------------------------
Goldman Sachs Asset
Management International Equity
International ("GSAMI") Japanese Equity
Procession House European Equity
55 Ludgate Hill International Small Cap
London EC4M 7JW Emerging Markets Equity
England Asia Growth
Global Income
-----------------------------------------------------
</TABLE>
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM, GSAMI and GSFM. Goldman Sachs registered as an invest-
ment adviser in 1981. GSAMI, a member of the Investment Management Regula-
tory Organization Limited since 1990 and a registered investment adviser
since 1991, is an affiliate of Goldman Sachs. GSFM, a registered investment
adviser since 1990, is a Delaware limited partnership which is an affiliate
of Goldman Sachs. The Goldman Sachs Group, L.P., which controlled the
Investment Advisers, merged into the Goldman Sachs Group, Inc. as a result
of an initial public offering. As of December 31, 1999, GSAM, GSAMI and
GSFM, along with other units of IMD, had assets under management of $258.5
billion.
32
<PAGE>
SERVICE PROVIDERS
Under an Asset Allocation Management Agreement with each Portfolio, the
Investment Adviser, subject to the general supervision of the Trustees, pro-
vides day-to-day advice as to each Portfolio's investment transactions,
including determinations concerning changes to (a) the Underlying Funds in
which the Portfolios may invest; and (b) the percentage range of assets of
any Portfolio that may be invested in the Underlying Equity Funds and the
Underlying Fixed-Income Funds as separate groups.
The Investment Adviser also performs the following additional services for
the Portfolios:
. Supervises all non-advisory operations of the Portfolios
. Provides personnel to perform necessary executive, administrative and
clerical services to the Portfolios
. Arranges for the preparation of all required tax returns, reports to
shareholders, prospectuses and statements of additional information and
other reports filed with the Securities and Exchange Commission (the
"SEC") and other regulatory authorities
. Maintains the records of each Portfolio
.Provides office space and all necessary office equipment and services
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate
For the Fiscal Year Ended
Portfolio Contractual Rate December 31, 1999
------------------------------------------------------------------------
<S> <C> <C>
Conservative Strategy 0.35% 0.15%
------------------------------------------------------------------------
Balanced Strategy 0.35% 0.15%
------------------------------------------------------------------------
Growth and Income Strategy 0.35% 0.15%
------------------------------------------------------------------------
Growth Strategy 0.35% 0.15%
------------------------------------------------------------------------
Aggressive Growth Strategy 0.35% 0.15%
------------------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Portfolios reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
33
<PAGE>
In addition, each Portfolio, as a shareholder in the Underlying Funds, will
indirectly bear a proportionate share of any investment management fees and
other expenses paid by the Underlying Funds. The following chart shows the
total net operating expense ratios (management fee plus other operating
expenses) of Institutional Shares of each Underlying Fund in which the Portfo-
lios may invest after applicable fee waivers and expense limitations, as of the
end of each Underlying Fund's most recent fiscal year. In addition, the follow-
ing chart shows the contractual investment management fees payable to the
investment adviser and its affiliates by the Underlying Funds (in each case as
an annualized percentage of a Fund's average net assets). Absent voluntary fee
waivers and/or expense reimbursements, which may be discontinued at any time,
the total operating expense ratios of certain Underlying Funds would be higher.
<TABLE>
<CAPTION>
Total Net
Contractual Operating
Management Expense
Underlying Fund Fee Ratio
- ---------------------------------------------------------
<S> <C> <C>
Financial Square Prime Obligations 0.205% 0.18%
- ---------------------------------------------------------
Short Duration Government 0.50% 0.54%
- ---------------------------------------------------------
Adjustable Rate Government 0.40% 0.49%
- ---------------------------------------------------------
Core Fixed Income 0.40% 0.54%
- ---------------------------------------------------------
Government Income 0.65% 0.58%
- ---------------------------------------------------------
Global Income 0.90% 0.69%
- ---------------------------------------------------------
High Yield 0.70% 0.76%
- ---------------------------------------------------------
Growth and Income 0.70% 0.79%
- ---------------------------------------------------------
CORE U.S. Equity 0.75% 0.74%
- ---------------------------------------------------------
CORE Large Cap Growth 0.75% 0.64%
- ---------------------------------------------------------
CORE Large Cap Value 0.60% 0.64%
- ---------------------------------------------------------
CORE Small Cap Equity 0.85% 0.93%
- ---------------------------------------------------------
Capital Growth 1.00% 1.04%
- ---------------------------------------------------------
CORE International Equity 0.85% 1.01%
- ---------------------------------------------------------
Mid Cap Value* 0.75% 0.89%
- ---------------------------------------------------------
Small Cap Value 1.00% 1.10%
- ---------------------------------------------------------
International Equity 1.00% 1.14%
- ---------------------------------------------------------
Japanese Equity 1.00% 1.05%
- ---------------------------------------------------------
European Equity 1.00% 1.14%
- ---------------------------------------------------------
International Small Cap 1.20% 1.40%
- ---------------------------------------------------------
Emerging Markets Equity 1.20% 1.39%
- ---------------------------------------------------------
Asia Growth 1.00% 1.20%
- ---------------------------------------------------------
Real Estate Securities 1.00% 1.04%
- ---------------------------------------------------------
</TABLE>
*Formerly, "Mid Cap Equity."
34
<PAGE>
SERVICE PROVIDERS
PORTFOLIO MANAGERS
Robert B. Litterman, Ph.D., a Managing Director of Goldman Sachs, is the co-
developer, along with the late Fischer Black, of the Black-Litterman Global
Asset Allocation Model, a key tool in IMD's asset allocation process. As
Director of Quantitative Resources, Dr. Litterman oversees Quantitative
Equities, the Quantitative Strategies Group, the Investment Performance &
Valuation Oversight Group, and the Client Research Groups. In total, these
groups include over 120 professionals. Prior to moving to IMD, Dr. Litterman
was the head of the Firmwide Risk department since becoming a Partner in
1994. Preceding his time in the Operations, Technology & Finance Division,
Dr. Litterman spent eight years in the Fixed Income Division's research
department where he was co-director of the research and model development
group.
Quantitative Strategies Group
. The 30-person Quantitative Strategies Group includes eight Ph.Ds, with
extensive academic and practitioner experience
. Disciplined, quantitative models are used to determine the relative
attractiveness of the world's stock, bond and currency markets
. Theory and economic intuition guide the investment process
- --------------------------------------------------------------------------------
Quantitative Strategies Group
<TABLE>
<CAPTION>
Years Primarily
Name and Title Responsible Five Year Employment History
- --------------------------------------------------------------------------------
<C> <C> <S>
Mark M. Carhart, Since Dr. Carhart joined the Investment
Ph.D., CFA Managing 1998 Adviser as a member of the Quantitative
Director, Co-Head Strategies Group in 1997. From August
Quantitative 1995 to September 1997, he was Assistant
Strategies and Senior Professor of Finance at the Marshall
Portfolio Manager School of Business at USC and a Senior
Fellow of the Wharton Financial
Institutions Center. From 1993 to 1995,
he was a lecturer and graduate student
at the University of Chicago Graduate
School of Business.
- --------------------------------------------------------------------------------
Raymond J. Iwanowski Since Mr. Iwanowski joined the Investment
Managing Director, Co- 1998 Adviser as an associate and portfolio
Head Quantitative manager in 1997. From 1993 to 1997, he
Strategies and Senior was a Vice President and head of the
Portfolio Manager Fixed Derivatives Client Research group
at Salomon Brothers.
- --------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
Quantitative Strategies Group
<TABLE>
<CAPTION>
Years Primarily
Name and Title Responsible Five Year Employment History
- --------------------------------------------------------------------------------
<C> <C> <S>
Donald M. Raymond, Since Prior to joining the Investment Adviser
Ph.D. Vice President 1998 in July 1988, Dr. Raymond spent four
and Portfolio Manager years as head of Fixed Income Research
and Chief Strategist for Goldman Sachs
Canada. Prior to joining the Investment
Adviser, Dr. Raymond worked for a
Canadian Investment Bank for three
years, where he developed fixed income
cash and derivative pricing models, and
portfolio arbitrage strategies.
- --------------------------------------------------------------------------------
Giorgio De Santis, Since Dr. DeSantis joined the Investment
Ph.D. Vice President 1998 Adviser in 1998. From 1992 to 1998, he
and Portfolio Manager was Assistant Professor of Finance and
Business Economics at the Marshall
School of Business at USC.
- --------------------------------------------------------------------------------
William J. Fallon, Since Dr. Fallon joined the Investment Adviser
Ph.D. Vice President 1998 in 1998. From 1996 to 1998, he worked in
and Portfolio Manager the Firmwide Risk Group of Goldman
Sachs. From 1991 to 1996, he attended
Columbia University, where he earned a
Ph.D. in Finance.
- --------------------------------------------------------------------------------
Guang-Liang He, Ph.D. Since Dr. He joined the Investment Adviser in
Vice President and 1998 1998. In 1997, he worked in the Firmwide
Portfolio Manager Risk Group of Goldman Sachs. From 1992
to 1997, he worked at Quantitative
Financial Strategies, Inc. where he was
responsible for the research and
development of proprietary trading
models.
- --------------------------------------------------------------------------------
</TABLE>
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Portfolio's shares.
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois, 60606-6372, also serves
as each Portfolio's transfer agent (the "Transfer Agent") and, as such, per-
forms various shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Underlying Funds or Portfolios. Goldman Sachs reserves
the right to redeem at any time some or all of the shares acquired for its
own account.
36
<PAGE>
SERVICE PROVIDERS
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS
The involvement of the Investment Adviser, Goldman Sachs and their affili-
ates in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect
to an Underlying Fund or limit an Underlying Fund's investment activities.
Goldman Sachs and its affiliates engage in proprietary trading and advise
accounts and funds which have investment objectives similar to those of the
Underlying Funds and/or which engage in and compete for transactions in the
same types of securities, currencies and instruments as the Underlying
Funds. Goldman Sachs and its affiliates will not have any obligation to make
available any information regarding their proprietary activities or strate-
gies, or the activities or strategies used for other accounts managed by
them, for the benefit of the management of the Underlying Funds. The results
of an Underlying Fund's investment activities, therefore, may differ from
those of Goldman Sachs and its affiliates, and it is possible that an Under-
lying Fund could sustain losses during periods in which Goldman Sachs and
its affiliates and other accounts achieve significant profits on their trad-
ing for proprietary or other accounts. In addition, the Underlying Funds
may, from time to time, enter into transactions in which other clients of
Goldman Sachs have an adverse interest. An Underlying Fund's activities may
be limited because of regulatory restrictions applicable to Goldman Sachs
and its affiliates, and/or their internal policies designed to comply with
such restrictions.
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology problems associated with the transition to Year 2000 and to
confirm that its service providers did the same. As a result of those
efforts, Goldman Sachs did not experience any material disruptions in its
operations as a result of the transition to the Year 2000.
37
<PAGE>
Dividends
Each Fund pays dividends from its net investment income and capital gain net
income. You may choose to have dividends paid in:
. Cash
. Additional shares of the same class of the same Fund
. Shares of the same or an equivalent class of another Goldman Sachs Fund. Spe-
cial restrictions may apply for certain ILA Portfolios. See the Additional
Statement.
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time before the record date for a
particular dividend. If you do not indicate any choice, dividends will be rein-
vested automatically in the applicable Fund.
The election to reinvest dividends in additional shares will not affect the tax
treatment of such dividends, which will be treated as received by you and then
used to purchase the shares.
Dividends from net investment income and capital gain net income are declared
and paid as follows:
<TABLE>
<CAPTION>
Net Investment Capital Gain
Portfolio Income Net Income
- -------------------------------------------------------
<S> <C> <C>
Conservative Strategy Monthly Annually
- -------------------------------------------------------
Balanced Strategy Quarterly Annually
- -------------------------------------------------------
Growth and Income Strategy Quarterly Annually
- -------------------------------------------------------
Growth Strategy Annually Annually
- -------------------------------------------------------
Aggressive Growth Strategy Annually Annually
- -------------------------------------------------------
</TABLE>
From time to time a portion of a Portfolio's dividends may constitute a return
of capital.
At the time of an investor's purchase of shares of a Portfolio, a portion of
the net asset value ("NAV") per share may be represented by undistributed
income or undistributed realized appreciation of the Portfolio's portfolio
securities. Therefore, subsequent distributions on such shares from such income
or realized appreciation may be taxable to you even if the NAV of the shares
is, as a result of the distributions, reduced below the cost of such shares and
the distributions (or portions thereof) represent a return of a portion of the
purchase price.
38
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Service
Shares.
HOW TO BUY SHARES
How Can I Purchase Service Shares Of The Funds?
Generally, Service Shares may be purchased only through institutions that
have agreed to provide account administration and personal and account main-
tenance services to their customers who are the beneficial owners of Service
Shares. These institutions are called "Service Organizations." Customers of
a Service Organization will normally give their purchase instructions to the
Service Organization, and the Service Organization will, in turn, place pur-
chase orders with Goldman Sachs. Service Organizations will set times by
which purchase orders and payments must be received by them from their cus-
tomers. Generally, Service Shares may be purchased from the Funds on any
business day at their NAV next determined after receipt of an order by
Goldman Sachs from a Service Organization. No sales load is charged. Pur-
chases of Service Shares must be settled within three business days of
receipt of a complete purchase order.
Service Organizations are responsible for transmitting purchase orders and
payments to Goldman Sachs in a timely fashion. Service Organizations should
place an order with Goldman Sachs at 1-800-621-2550 and either:
.Wire federal funds to The Northern Trust Company ("Northern"), as
subcustodian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian) on the next business day; or
.Send a check or Federal Reserve draft payable to Goldman Sachs Funds--(Name
of Fund and Class of Shares), 4900 Sears Tower--60th Floor, Chicago, IL
60606-6372. The Fund will not accept a check drawn on a foreign bank or a
third-party check.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
What Do I Need To Know About Service Organizations?
Service Organizations may provide the following services in connection with
their customers' investments in Service Shares:
.Acting, directly or through an agent, as the sole shareholder of record
.Maintaining account records for customers
39
<PAGE>
.Processing orders to purchase, redeem or exchange shares for customers
.Responding to inquiries from prospective and existing shareholders
.Assisting customers with investment procedures
In addition, some (but not all) Service Organizations are authorized to
accept, on behalf of Goldman Sachs Trust (the "Trust"), purchase, redemption
and exchange orders placed by or on behalf of their customers, and may des-
ignate other intermediaries to accept such orders, if approved by the Trust.
In these cases:
.A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized Service Organization or intermediary on
a business day, and the order will be priced at the Fund's NAV next deter-
mined after such acceptance.
.Service Organizations or intermediaries will be responsible for transmit-
ting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your Service Organization directly to learn whether it is
authorized to accept orders for the Trust.
Pursuant to a service plan adopted by the Trust's Board of Trustees, Service
Organizations are entitled to receive payment for their services from the
Trust of up to 0.50% (on an annualized basis) of the average daily net
assets of the Service Shares of the Funds, which are attributable to or held
in the name of the Service Organization for its customers.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Service Organizations and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds. Additional compensation based on
sales may, but is currently not expected to, exceed 0.50% (annualized) of
the amount invested.
In addition to Service Shares, each Fund also offers other classes of shares
to investors. These other share classes are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than Service Shares.
Information regarding these other share classes may be obtained from your
sales representative or from Goldman Sachs by calling the number on the back
cover of this Prospectus.
What Is My Minimum Investment In The Funds?
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance. A Serv-
ice
40
<PAGE>
SHAREHOLDER GUIDE
Organization may redeem Service Shares held by non-complying accounts, and
may impose a charge for any special services.
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
.Reject or restrict any purchase or exchange orders by a particular pur-
chaser (or group of related purchasers). This may occur, for example, when
a pattern of frequent purchases, sales or exchanges of Service Shares of a
Fund is evident, or if purchases, sales or exchanges are, or a subsequent
abrupt redemption might be, of a size that would disrupt the management of
a Fund.
.Close a Fund to new investors from time to time and reopen any such Fund
whenever it is deemed appropriate by a Fund's Investment Adviser.
The Funds may allow Service Organizations to purchase shares with securities
instead of cash if consistent with a Fund's investment policies and opera-
tions and if approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Service Shares
is determined by a Fund's NAV. The Funds calculate NAV as follows:
<TABLE>
<S> <C>
(Value of Assets of the Class)
NAV = - (Liabilities of the Class)
-----------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
The Funds' investments are valued based on market quotations or, if accurate
quotations are not readily available, the fair value of the Fund's invest-
ments may be determined in good faith under procedures established by the
Trustees.
.NAV per share of each class is calculated by State Street on each business
day as of the close of regular trading on the New York Stock Exchange (nor-
mally 4:00 p.m. New York time). Fund shares will not be priced on any day
the New York Stock Exchange is closed.
.When you buy shares, you pay the NAV next calculated after the Funds
receive your order in proper form.
.When you sell shares, you receive the NAV next calculated after the Funds
receive your order in proper form.
Note: The time at which transactions and shares are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
Foreign securities may trade in their local markets on days a Fund is
closed. As a result, if the Fund holds foreign securities its NAV may be
impacted on days when investors may not purchase or redeem Fund shares.
41
<PAGE>
In addition, the impact of events that occur after the publication of market
quotations used by a Fund to price its securities (for example, in foreign
markets), but before the close of regular trading on the New York Stock
Exchange will normally not be reflected in a Fund's next determined NAV
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.
HOW TO SELL SHARES
How Can I Sell Service Shares Of The Funds?
Generally, Service Shares may be sold (redeemed) only through Service Orga-
nizations. Customers of a Service Organization will normally give their
redemption instructions to the Service Organization, and the Service Organi-
zation will, in turn, place redemption orders with the Funds. Generally,
each Fund will redeem its Service Shares upon request on any business day at
their NAV next determined after receipt of such request in proper form.
Redemption proceeds may be sent to recordholders by check or by wire (if the
wire instructions are on record).
A Service Organization may request redemptions in writing or by telephone if
the optional telephone redemption privilege is elected on the Account
Application.
<TABLE>
<S> <C>
-----------------------------------------------------------------
By Writing: Goldman Sachs Funds
4900 Sears Tower--60th Floor
Chicago, IL 60606-6372
-----------------------------------------------------------------
By Telephone: If you have elected the telephone
redemption privilege on your Account Application:
.1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
-----------------------------------------------------------------
</TABLE>
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
.All telephone requests are recorded.
.Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing
and signed by an authorized person designated on the Account Application.
The
42
<PAGE>
SHAREHOLDER GUIDE
written request may be confirmed by telephone with both the requesting
party and the designated bank account to verify instructions.
.The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
How Are Redemption Proceeds Paid?
By Wire: The Funds will arrange for redemption proceeds to be wired as fed-
eral funds to the bank account designated in the recordholder's Account
Application. The following general policies govern wiring redemption pro-
ceeds:
.Redemption proceeds will normally be wired on the next business day in fed-
eral funds (for a total of one business day delay), but may be paid up to
three business days following receipt of a properly executed wire transfer
redemption request. If the shares to be sold were recently paid for by
check, the Fund will pay the redemption proceeds when the check has
cleared, which may take up to 15 days. If the Federal Reserve Bank is
closed on the day that the redemption proceeds would ordinarily be wired,
wiring the redemption proceeds may be delayed one additional business day.
.To change the bank designated on your Account Application, you must send
written instructions signed by an authorized person designated on the
Account Application to the Service Organization.
.Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of intermediaries or your Service Organ-
ization in the transfer process. If a problem with such performance arises,
you should deal directly with such intermediaries or Service Organization.
By Check: A recordholder may elect in writing to receive redemption proceeds
by check. Redemption proceeds paid by check will normally be mailed to the
address of record within three business days of receipt of a properly exe-
cuted redemption request. If the shares to be sold were recently paid for by
check, the Fund will pay the redemption proceeds when the check has cleared,
which may take up to 15 days.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate the timely transmittal of redemption requests, Service Organi-
zations may set times by which they must receive redemption requests.
Service Organizations may also require additional documentation from you.
43
<PAGE>
The Trust reserves the right to:
. Redeem the Service Shares of any Service Organization whose account bal-
ance falls below $50 as a result of a redemption. The Funds will not
redeem Service Shares on this basis if the value of the account falls
below the minimum account balance solely as a result of market conditions.
The Fund will give 60 days' prior written notice to allow a Service Organ-
ization to purchase sufficient additional shares of the Fund in order to
avoid such redemption.
. Redeem the shares in other circumstances determined by the Board of Trust-
ees to be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distribu-
tions be returned to the Fund as undeliverable or remain uncashed for six
months. In addition, that distribution and all future distributions pay-
able to you will be reinvested at NAV in additional Fund shares. No inter-
est will accrue on amounts represented by uncashed distribution or redemp-
tion checks.
Can I Exchange My Investment From One Fund To Another?
A Service Organization may exchange Service Shares of a Fund at NAV for
Service Shares of any other Goldman Sachs Fund. The exchange privilege may
be materially modified or withdrawn at any time upon 60 days' written
notice.
<TABLE>
<CAPTION>
Instructions For
Exchanging
Shares:
-----------------------------------------------------------------
<S> <C>
By Writing: .Write a letter of instruction that includes:
.The recordholder name(s) and signature(s)
.The account number
.The Fund names and Class of Shares
.The dollar amount to be exchanged
.Mail the request to:
Goldman Sachs Funds
4900 Sears Tower--60th Floor
Chicago, IL 60606-6372
-----------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
.1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
-----------------------------------------------------------------
</TABLE>
44
<PAGE>
SHAREHOLDER GUIDE
You should keep in mind the following factors when making or considering an
exchange:
.You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
.All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
.Telephone exchanges normally will be made only to an identically registered
account.
.Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized person
designated on the Account Application.
.Exchanges are available only in states where exchanges may be legally made.
.It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
.Goldman Sachs may use reasonable procedures described under "What Do I Need
To Know About Telephone Redemption Requests?" in an effort to prevent unau-
thorized or fraudulent telephone exchange requests.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
What Types Of Reports Will Be Sent Regarding Investments In Service Shares?
Service Organizations will receive from the Funds annual reports containing
audited financial statements and semi-annual reports. Service Organizations
will also be provided with a printed confirmation for each transaction in
their account and a monthly account statement. Service Organizations are
responsible for providing these or other reports to their customers who are
the beneficial owners of Service Shares in accordance with the rules that
apply to their accounts with the Service Organizations.
45
<PAGE>
Taxation
TAXABILITY OF DISTRIBUTIONS
As with any investment, you should consider how your investment in the Port-
folios will be taxed. The tax information below is provided as general
information. More tax information is available in the Additional Statement.
You should consult your tax adviser about the federal, state, local or for-
eign tax consequences of your investment in the Portfolios.
Unless your investment is an IRA or other tax-advantaged account, you should
consider the possible tax consequences of Portfolio distributions and the
sale of your Portfolio shares.
TAXES ON DISTRIBUTIONS
Distributions you receive from the Portfolios are generally subject to fed-
eral income tax, and may also be subject to state or local taxes. This is
true whether you reinvest your distributions in additional Portfolio shares
or receive them in cash. For federal tax purposes, the Portfolios' income
dividend distributions and short-term capital gain distributions are taxable
to you as ordinary income. Any long-term capital gain distributions are tax-
able as long-term capital gains, no matter how long you have owned your
Portfolio shares.
Although distributions are generally treated as taxable to you in the year
they are paid, distributions declared in October, November or December but
paid in January are taxable as if they were paid in December. A percentage
of the Portfolios' dividends paid to corporate shareholders may be eligible
for the corporate dividends-received deduction. The Portfolios will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
The REIT investments of the underlying Real Estate Securities Fund often do
not provide complete tax information to the Fund until after the calendar
year-end. Consequently, because of the delay, it may be necessary for the
Portfolios to request permission to extend the deadline for issuance of
Forms 1099-DIV beyond January 31.
Each Portfolio may be subject to foreign withholding or other foreign taxes
on income or gain from certain foreign securities. In general, the Portfo-
lios may deduct these taxes in computing their taxable income.
46
<PAGE>
TAXATION
If you buy shares of a Portfolio before it makes a distribution, the distri-
bution will be taxable to you even though it may actually be a return of a
portion of your investment. This is known as "buying a dividend."
TAXABILITY OF SALES AND EXCHANGES
Your sale of Portfolio shares is a taxable transaction for federal income
tax purposes, and may also be subject to state and local taxes. For tax pur-
poses, the exchange of your Portfolio shares for shares of a different
Goldman Sachs Fund is the same as a sale. When you sell your shares, you
will generally recognize a capital gain or loss in an amount equal to the
difference between your adjusted tax basis in the shares and the amount
received. Generally, this gain or loss will be long-term or short-term
depending on whether your holding period for the shares exceeds twelve
months, except that any loss realized on shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gain dividends that were received on the shares.
OTHER INFORMATION
When you open your account, you should provide your social security or tax
identification number on your Account Application. By law, each Portfolio
must withhold 31% of your taxable distributions and any redemption proceeds
if you do not provide your correct taxpayer identification number, or cer-
tify that it is correct, or if the IRS instructs the Portfolio to do so.
Non-U.S. investors may be subject to U.S. withholding and estate tax.
47
<PAGE>
Appendix A
Additional Information on the Underlying Funds
This Appendix provides further information on certain types of securities
and techniques that may be used by the Underlying Funds, including their
associated risks. Additional information is provided in the Additional
Statement, which is available upon request, and in the prospectuses of the
Underlying Funds.
The Underlying Equity Funds invest primarily in common stocks and other
equity securities, including preferred stocks, interests in real estate
investment trusts, convertible debt obligations, convertible preferred
stocks, equity interests in trusts, partnerships, joint ventures, limited
liability companies and similar enterprises, warrants and stock purchase
rights ("equity securities"). The Underlying Fixed-Income Funds invest pri-
marily in fixed-income securities, including senior and subordinated corpo-
rate debt obligations (such as bonds, debentures, notes and commercial
paper), convertible and non-convertible corporate debt obligations, loan
participations and preferred stock.
The Short-Duration Government and Adjustable Rate Government Funds invest in
U.S. Government Securities and related repurchase agreements, and neither of
these Underlying Funds, the Government Income Fund nor the Financial Square
Prime Obligations Fund makes foreign investments. The investments of the
Financial Square Prime Obligations Fund are limited by SEC regulations
applicable to money market funds as described in its prospectus, and do not
include many of the types of investments discussed below that are permitted
for the other Underlying Funds. With these exceptions, and the further
exceptions noted below, the following description applies generally to the
Underlying Funds.
A. General Risks of the Underlying Funds
The Underlying Equity Funds will be subject to the risks associated with
common stocks and other equity securities. In general, stock values fluctu-
ate in response to the activities of individual companies and in response to
general market and economic conditions. Accordingly, the value of the stocks
that an Underlying Fund holds may decline over short or extended periods.
The stock markets tend to be cyclical, with periods when stock prices gener-
ally rise and periods when prices generally decline.
The Underlying Fixed-Income Funds will be subject to the risks associated
with fixed-income securities. These risks include interest rate risk, credit
risk and call/extension risk. In general, interest rate risk involves the
risk that when interest
48
<PAGE>
APPENDIX A
rates decline, the market value of fixed-income securities tends to increase
than other debt securities (although many mortgage related securities will
have less potential than other debt securities for capital appreciation dur-
ing periods of declining rates). Conversely, when interest rates increase,
the market value of fixed-income securities tends to decline. Credit risk
involves the risk that an issuer could default on its obligations, and an
Underlying Fund will not recover its investment. Call risk and extension
risk are normally present in adjustable rate mortgage loans ("ARMs"), mort-
gage-backed securities. For example, homeowners have the option to prepay
their mortgages. Therefore, the duration of a security backed by home mort-
gages can either shorten (call risk) or lengthen (extension risk). In gener-
al, if interest rates on new mortgage loans fall sufficiently below the
interest rates on existing outstanding mortgage loans, the rate of prepay-
ment would be expected to increase. Conversely, if mortgage loan interest
rates rise above the interest rates on existing outstanding mortgage loans,
the rate of prepayment would be expected to decrease. In either case, a
change in the prepayment rate can result in losses to investors.
The Financial Square Prime Obligations Fund attempts to maintain a stable
NAV of $1.00 per share and values its assets using the amortized cost method
in accordance with SEC regulations. There is no assurance, however, that the
Financial Square Prime Obligations Fund will be successful in maintaining
its per share value at $1.00 on a continuous basis. The per share NAVs of
the other Underlying Funds are expected to fluctuate on a daily basis.
The portfolio turnover rates of the Underlying Funds have ranged from 40% to
280% during their most recent fiscal years. A high rate of portfolio turn-
over (100% or more) involves correspondingly greater expenses which must be
borne by an Underlying Fund and its shareholders, and is also likely to
result in higher short-term capital gains taxable to shareholders. The port-
folio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of an Underlying Fund's portfolio securities, excluding securities
having a maturity at the date of purchase of one year or less. There can be
no assurance that the turnover rates of the Underlying Funds will remain
within this range during subsequent fiscal years. Higher turnover rates may
result in higher brokerage costs and expenses for the Underlying Funds. In
addition, higher turnover rates may result in higher taxable realized gains
for shareholders.
B. Other Risks of the Underlying Funds
Risks of Investing in Small Capitalization Companies and REITs. Certain
Underlying Funds may invest in small capitalization companies and REITs.
Investments in small capitalization companies and REITs involve greater risk
and portfolio
49
<PAGE>
price volatility than investments in larger capitalization stocks. Among the
reasons for the greater price volatility of these investments are the less
certain growth prospects of smaller firms and the lower degree of liquidity
in the markets for such securities. Small capitalization companies and REITs
may be thinly traded and may have to be sold at a discount from current mar-
ket prices or in small lots over an extended period of time. In addition,
these securities are subject to the risk that during certain periods the
liquidity of particular issuers or industries, or all securities in these
investment categories, will shrink or disappear suddenly and without warning
as a result of adverse economic or market conditions, or adverse investor
perceptions, whether or not accurate. Because of the lack of sufficient mar-
ket liquidity, an Underlying Fund may incur losses because it will be
required to effect sales at a disadvantageous time and only then at a sub-
stantial drop in price. Small capitalization companies and REITs include
"unseasoned" issuers that do not have an established financial history;
often have limited product lines, markets or financial resources; may depend
on or use a few key personnel for management; and may be susceptible to
losses and risks of bankruptcy. Transaction costs for these investments are
often higher than those for larger capitalization companies. Investments in
small capitalization companies and REITs may be more difficult to price pre-
cisely than other types of securities because of their characteristics and
lower trading volumes.
Risks of Foreign Investments. Certain of the Underlying Funds may invest in
foreign investments. Foreign investments involve special risks that are not
typically associated with U.S. dollar denominated or quoted securities of
U.S. issuers. Foreign investments may be affected by changes in currency
rates, changes in foreign or U.S. laws or restrictions applicable to such
investments and changes in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening
of the currency against the U.S. dollar) in which a portfolio security is
quoted or denominated relative to the U.S. dollar would reduce the value of
the portfolio security. In addition, if the currency in which an Underlying
Fund receives dividends, interest or other payments declines in value
against the U.S. dollar before such income is distributed as dividends to
shareholders or converted to U.S. dollars, the Underlying Fund may have to
sell portfolio securities to obtain sufficient cash to pay such dividends.
The introduction of a single currency, the euro, on January 1, 1999 for par-
ticipating nations in the Economic and Monetary Union presents unique uncer-
tainties, including the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather
than the euro; the establishment and maintenance of exchange rates for cur-
rencies being converted into the euro; the fluctuation of the euro relative
to non-euro currencies during the transition period from January 1, 1999 to
December 31, 2001 and beyond; whether the inter-
50
<PAGE>
APPENDIX A
est rate, tax and labor regimes of European countries participating in the
euro will converge over time; and whether the conversion of the currencies
of other countries that may in the future become members of the European
Union, may have an impact on the euro. These or other factors, including
political and economic risks, could cause market disruptions, and could
adversely affect the value of securities held by the Underlying Funds.
Because of the number of countries using this single currency, a significant
portion of the foreign assets held by certain of the Underlying Funds may be
denominated in the euro.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the United States. In addition, clearance and settlement procedures
may be different in foreign countries and, in certain markets, such proce-
dures have been unable to keep pace with the volume of securities transac-
tions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less gov-
ernment regulation of foreign markets, companies and securities dealers than
in the United States. Foreign securities markets may have substantially less
volume than U.S. securities markets and securities of many foreign issuers
are less liquid and more volatile than securities of comparable domestic
issuers. Furthermore, with respect to certain foreign countries, there is a
possibility of nationalization, expropriation or confiscatory taxation,
imposition of withholding or other taxes on dividend or interest payments
(or, in some cases, capital gains), limitations on the removal of funds or
other assets of the Underlying Funds, and political or social instability or
diplomatic developments which could affect investments in those countries.
Concentration of an Underlying Fund's assets in one or a few countries and
currencies will subject a Fund to greater risks than if an Underlying Fund's
assets were not geographically concentrated.
Investment in sovereign debt obligations by certain Underlying Funds
involves risks not present in debt obligations of corporate issuers. The
issuer of the debt or the governmental authorities that control the repay-
ment of the debt may be unable or unwilling to repay principal or pay inter-
est when due in accordance with the terms of such debt, and an Underlying
Fund may have limited recourse to compel payment in the event of a default.
Periods of economic uncertainty may result in the volatility of market
prices of sovereign debt, and in turn an Underlying Fund's NAV, to a greater
extent than the volatility inherent in debt obligations of U.S. issuers.
51
<PAGE>
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 avail-
ability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the sov-
ereign debtor's policy toward international lenders, and the political
constraints to which a sovereign debtor may be subject.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs"). Certain Underlying Funds may also invest in European
Depository Receipts ("EDRs") or other similar instruments representing secu-
rities of foreign issuers. ADRs represent the right to receive securities of
foreign issuers deposited in a domestic bank or a correspondent bank. Prices
of ADRs are quoted in U.S. dollars, and ADRs are traded in the United
States. EDRs and GDRs are receipts evidencing an arrangement with a non-U.S.
bank. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security.
Risks of Emerging Countries. Certain Underlying Funds may invest in securi-
ties of issuers located in emerging countries. The risks of foreign invest-
ment are heightened when the issuer is located in an emerging country.
Emerging countries are generally located in the Asia-Pacific region, Eastern
Europe, Latin and South America and Africa. An Underlying Fund's purchase
and sale of portfolio securities in certain emerging countries may be con-
strained by limitations as to daily changes in the prices of listed securi-
ties, periodic trading or settlement volume and/or limitations on aggregate
holdings of foreign investors. Such limitations may be computed based on the
aggregate trading volume by or holdings of an Underlying Fund, the invest-
ment adviser, its affiliates and their respective clients and other service
providers. An Underlying Fund may not be able to sell securities in circum-
stances where price, trading or settlement volume limitations have been
reached.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to
only a specified percentage of an issuer's outstanding securities or a spe-
cific class of securities which may have less advantageous terms (including
price) than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportuni-
ties in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by an Underlying Fund. The repatria-
52
<PAGE>
APPENDIX A
tion of both investment income and capital from certain emerging countries
is subject to restrictions such as the need for governmental consents. Due
to restrictions on direct investment in equity securities in certain Asian
countries, it is anticipated that an Underlying Fund may invest in such
countries through other investment funds in such countries.
Many emerging countries have experienced currency devaluations and substan-
tial (and, in some cases, extremely high) rates of inflation, which have had
a negative effect on the economies and securities markets of such emerging
countries. Economies in emerging countries generally are dependent heavily
upon commodity prices and international trade and, accordingly, have been
and may continue to be affected adversely by the economies of their trading
partners, trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by
the countries with which they trade.
Many emerging countries are subject to a substantial degree of economic,
political and social instability. Governments of some emerging countries are
authoritarian in nature or have been installed or removed as a result of
military coups, while governments in other emerging countries have periodi-
cally used force to suppress civil dissent. Disparities of wealth, the pace
and success of democratization, and ethnic, religious and racial disaffec-
tion, among other factors, have also led to social unrest, violence and/or
labor unrest in some emerging countries. Unanticipated political or social
developments may result in sudden and significant invest-ment losses.
Investing in emerging countries involves greater risk of loss due to expro-
priation, nationalization, confiscation of assets and property or the impo-
sition of restrictions on foreign investments and on repatriation of capital
invested.
An Underlying Fund's investment in emerging countries may also be subject to
withholding or other taxes, which may be significant and may reduce the
return from an investment in such country to the Underlying Fund.
Settlement procedures in emerging countries are frequently less developed
and reliable than those in the United States and often may involve an Under-
lying Fund's delivery of securities before receipt of payment for their
sale. In addition, significant delays are common in certain markets in reg-
istering the transfer of securities. Settlement or registration problems may
make it more difficult for an Underlying Fund to value its portfolio securi-
ties and could cause the Underlying Fund to miss attractive investment
opportunities, to have a portion of its assets uninvested or to incur losses
due to the failure of a counterparty to pay for securities the Underlying
Fund has delivered or the Underlying Fund's inability to complete its con-
tractual obligations. The creditworthiness of the local securities firms
used by an Underlying Fund in emerging countries may not be as sound as the
creditworthiness of firms used in more developed countries. As a result, the
Under-
53
<PAGE>
lying Fund may be subject to a greater risk of loss if a securities firm
defaults in the performance of its responsibilities.
The small size and inexperience of the securities markets in certain emerg-
ing countries and the limited volume of trading in securities in those coun-
tries may make an Underlying Fund's investments in such countries less liq-
uid and more volatile than investments in countries with more developed
securities markets (such as the United States, Japan and most Western Euro-
pean countries). An Underlying Fund's investments in emerging countries are
subject to the risk that the liquidity of a particular investment, or
investments generally, in such countries will shrink or disappear suddenly
and without warning as a result of adverse economic, market or political
conditions, or adverse investor perceptions, whether or not accurate.
Because of the lack of sufficient market liquidity, an Underlying Fund may
incur losses because it will be required to effect sales at a disadvanta-
geous time and then only at a substantial drop in price. Investments in
emerging countries may be more difficult to price precisely because of the
characteristics discussed above and lower trading volumes.
An Underlying Fund's use of foreign currency management techniques in emerg-
ing countries may be limited. Due to the limited market for these instru-
ments in emerging countries, the investment adviser does not currently
anticipate that a significant portion of the Underlying Funds' currency
exposure in emerging countries, if any, will be covered by such instruments.
Risks of Derivative Investments. An Underlying Fund's transactions in
options, futures, options on futures, swaps, interest rate caps, floors and
collars, structured securities, inverse floating-rate securities, stripped
mortgage-backed securities and currency transactions involve additional risk
of loss. Loss can result from a lack of correlation between changes in the
value of derivative instruments and the portfolio assets (if any) being
hedged, the potential illiquidity of the markets for derivative instruments,
or the risks arising from margin requirements and related leverage factors
associated with such transactions. The use of these management techniques
also involves the risk of loss if the investment adviser is incorrect in its
expectation of fluctuations in securities prices, interest rates or currency
prices. Certain Underlying Funds may also invest in derivative investments
for non-hedging purposes (that is, to seek to increase total return).
Investing for non-hedging purposes is considered a speculative practice and
presents even greater risk of loss.
Derivative mortgage-backed securities (such as principal-only ("POs"),
interest-only ("IOs") or inverse floating rate securities) are particularly
exposed to call and extension risks. Small changes in mortgage prepayments
can significantly impact the cash flow and the market value of these securi-
ties. In general, the risk of faster
54
<PAGE>
APPENDIX A
than anticipated prepayments adversely affects IOs, super floaters and pre-
mium priced mortgage-backed securities. The risk of slower than anticipated
prepayments generally adversely affects POs, floating-rate securities sub-
ject to interest rate caps, support tranches and discount priced mortgage-
backed securities. In addition, particular derivative securities may be
leveraged such that their exposure (i.e., price sensitivity) to interest
rate and/or prepayment risk is magnified.
Some floating-rate derivative debt securities can present more complex types
of derivative and interest rate risks. For example, range floaters are sub-
ject to the risk that the coupon will be reduced below market rates if a
designated interest rate floats outside of a specified interest rate band or
collar. Dual index or yield curve floaters are subject to lower prices in
the event of an unfavorable change in the spread between two designated
interest rates.
Risks of Illiquid Securities. The Underlying Funds may invest up to 15% (10%
in the case of the Financial Square Prime Obligations Fund) of their net
assets in illiquid securities which cannot be disposed of in seven days in
the ordinary course of business at fair value. Illiquid securities include:
.Both domestic and foreign securities that are not readily marketable
.Certain municipal leases and participation interests
.Certain stripped mortgage-backed securities
.Repurchase agreements and time deposits with a notice or demand period of
more than seven days
.Certain over-the-counter options
.Certain structured securities and all swap transactions
.Certain restricted securities, unless it is determined, based upon a review
of the trading markets for a specific restricted security, that the
restricted security is eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 ("144A Securities") and, therefore, is liquid.
Investing in 144A Securities may decrease the liquidity of an Underlying
Fund's portfolio to the extent that qualified institutional buyers become
for a time uninterested in purchasing these restricted securities. The pur-
chase price and subsequent valuation of restricted and illiquid securities
normally reflect a discount, which may be significant, from the market price
of comparable securities for which a liquid market exists.
Credit Risks. Debt securities purchased by the Underlying Funds may include
securities (including zero coupon bonds) issued by the U.S. government (and
its agencies, instrumentalities and sponsored enterprises), foreign govern-
ments, domestic and foreign corporations, banks and other issuers. Some of
these fixed-income securities are described in the next section below. Fur-
ther information is provided in the Additional Statement.
55
<PAGE>
Debt securities rated BBB or higher by Standard & Poor's Ratings Group
("Standard & Poor's") or Baa or higher by Moody's Investors Services, Inc.
("Moody's") are considered "investment grade." 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. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, determined by the investment
adviser to be of comparable credit quality. If a security satisfies an
Underlying Fund's minimum rating criteria at the time of purchase and is
subsequently downgraded below such rating, the Underlying Fund will not be
required to dispose of such security. If a downgrade occurs, the Underlying
Fund's investment adviser will consider what action, including the sale of
such security, is in the best interest of the Underlying Fund and its share-
holders.
Certain Underlying Funds may invest in fixed-income securities rated BB or
Ba or below (or comparable unrated securities) which are commonly referred
to as "junk bonds." Junk bonds are considered predominantly speculative and
may be questionable as to principal and interest payments.
In some cases, junk bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, invest-
ment in such bonds will present greater speculative risks than those associ-
ated with investment in investment grade bonds. Also, to the extent that the
rating assigned to a security in an Underlying Fund's portfolio is down-
graded by a rating organization, the market price and liquidity of such
security may be adversely affected.
Non-Diversification and Geographic Risks. The Global Income Fund is regis-
tered as a "non-diversified" fund under the Act and is, therefore, more sus-
ceptible to adverse developments affecting any single issuer held in its
portfolio, and may be more susceptible to greater losses because of these
developments. In addition, the Global Income Fund, and certain other Under-
lying Funds, may invest more than 25% of their total assets in the securi-
ties of corporate and governmental issuers located in a particular foreign
country or region. Concentration of the investments of these or other Under-
lying Funds in issuers located in a particular country or region will sub-
ject the Underlying Fund, to a greater extent than if investments were less
concentrated, to losses arising from adverse developments affecting those
issuers or countries.
Temporary Investment Risks. The Underlying Funds may invest a substantial
portion, and in some cases all, of their total assets, in cash equivalents
for temporary
56
<PAGE>
APPENDIX A
periods. When an Underlying Fund's assets are invested in such instruments,
the Underlying Fund may not be achieving its investment objective.
C. Investment Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Underlying Funds, including
their associated risks. Further information is provided in the Additional
Statement, which is available upon request.
U.S. Government Securities. Each Underlying Fund may invest in U.S. Govern-
ment Securities. U.S. Government Securities include U.S. Treasury obliga-
tions and obligations issued or guaranteed by U.S. government agencies,
instrumentalities or sponsored enterprises. U.S. Government Securities may
be supported by (a) the full faith and credit of the U.S. Treasury (such as
the Government National Mortgage Association ("Ginnie Mae")); (b) the right
of the issuer to borrow from the U.S. Treasury (such as securities of the
Student Loan Marketing Association); (c) the discretionary authority of the
U.S. government to purchase certain obligations of the issuer (such as the
Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan
Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issuer.
U.S. Government Securities also include Treasury receipts, zero coupon bonds
and other stripped U.S. Government Securities, where the interest and prin-
cipal components of stripped U.S. Government Securities are traded indepen-
dently.
Custodial Receipts. Each Underlying Fund may invest in custodial receipts.
Interests in U.S. Government Securities may be purchased in the form of cus-
todial receipts that evidence ownership of future interest payments, princi-
pal payments or both on certain notes or bonds issued or guaranteed as to
principal and interest by the U.S. government, its agencies, instrumentali-
ties, political subdivisions or authorities. For certain securities law pur-
poses, custodial receipts are not considered obligations of the U.S. govern-
ment.
Mortgage-Backed Securities. The Underlying Funds (other than CORE U.S. Equi-
ty, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity and
CORE International Equity Funds (the "CORE Equity Funds")) may invest in
securities that represent direct or indirect participations in, or are col-
lateralized by and payable from, mortgage loans secured by real property
("Mortgage-Backed Securities"). Mortgage-Backed Securities can be backed by
either fixed rate mortgage loans or adjustable rate mortgage loans, and may
be issued by either a governmental or non-governmental entity. Privately
issued Mortgage-Backed Securities are normally structured with one or more
types of "credit enhancement." However, these Mortgage-Backed Securities
typically do not
57
<PAGE>
have the same credit standing as U.S. government guaranteed Mortgage-Backed
Securities.
Mortgage-Backed Securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs"), and real estate mortgage
investment conduit ("REMIC") pass-through or participation certificates.
CMOs provide an investor with a specified interest in the cash flow from a
pool of underlying mortgages or of other Mortgage-Backed Securities. CMOs
are issued in multiple classes. In many cases, payments of principal are
applied to the CMO classes in the order of their respective stated maturi-
ties, so that no principal payments will be made on a CMO class until all
other classes having an earlier stated maturity date are paid in full. A
REMIC is a CMO that qualifies for special tax treatment under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code") and invests in
certain mortgages principally secured by interests in real property and
other permitted investments. Mortgage-Backed Securities also include
stripped Mortgage-Backed Securities ("SMBS"), which are derivative multiple
class Mortgage-Backed Securities. SMBS are usually structured with two dif-
ferent classes: one that receives substantially all of the interest payments
and the other that receives substantially all of the principal payments from
a pool of mortgage loans. The market value of SMBS consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on SMBS that receive all or most of the interest
from mortgage loans are generally higher than prevailing market yields on
other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
Asset-Backed Securities. The Underlying Funds (other than the CORE Equity
Funds) may invest in asset-backed securities. Asset-backed securities are
securities whose principal and interest payments are collateralized by pools
of assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Asset-backed 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. According-
ly, an Underlying 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 prin-
cipal at comparable yields is subject to generally prevailing interest rates
at that time. Asset-backed securities present credit risks that are not pre-
sented by Mortgage-Backed Securities. This is because asset-backed securi-
ties generally do not have the benefit of a security interest in collateral
that is comparable in quality to mortgage assets. There is the possibility
that, in some cases, recoveries on repossessed collateral may not be avail-
able to support payments on these securi-
58
<PAGE>
APPENDIX A
ties. In the event of a default, an Underlying Fund may suffer a loss if it
cannot sell collateral quickly and receive the amount it is owed.
Municipal Securities. Certain Underlying Funds may invest in securities and
instruments issued by state and local governmental issuers. Municipal secu-
rities in which an Underlying Fund may invest consist of bonds, notes, com-
mercial paper and other instruments (including participation interests in
such securities) issued by or on behalf of states, territories and posses-
sions of the United States (including the District of Columbia) and their
political subdivisions, agencies or instrumentalities. Municipal Securities
include both "general" and "revenue" bonds and may be issued to obtain funds
for various public purposes. General obligations are secured by the issuer's
pledge of its full faith, credit and taxing power. Revenue obligations are
payable only from the revenues derived from a particular facility or class
of facilities. Such securities may pay fixed, variable or floating rates of
interest. Municipal securities are often issued to obtain funds for various
public purposes, including the construction of a wide range of public facil-
ities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
municipal securities may be issued include refunding outstanding obliga-
tions, obtaining funds for general operating expenses, and obtaining funds
to lend to other public institutions and facilities. Municipal securities in
which the Underlying Funds may invest include private activity bonds, pre-
refunded municipal securities and auction rate 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 con-
ditions, the power or ability of the issuer to pay when due the principal of
or interest on a Municipal Security may be materially affected.
In addition, Municipal Securities include municipal leases, certificates of
participation and "moral obligation" bonds. A municipal lease is an obliga-
tion issued by a state or local government to acquire equipment or facili-
ties. Certificates of participation represent interests in municipal leases
or other instruments, such as installment purchase agreements. Moral obliga-
tion bonds are supported by a moral commitment, but not a legal obligation,
of a state or local government. Municipal leases, certificates of participa-
tion and moral obligation bonds frequently involve special risks not nor-
mally associated with general obligation or revenue bonds. In particular,
these instruments permit governmental issuers to acquire property and
59
<PAGE>
equipment without meeting constitutional and statutory requirements for the
issuance of debt. If, however, the governmental issuer does not periodically
appropriate money to enable it to meet its payment obligations under these
instruments, it cannot be legally compelled to do so. If a default occurs,
it is likely that an Underlying Fund would be unable to obtain another
acceptable source of payment. Some municipal leases, certificates of partic-
ipation and moral obligation bonds may be illiquid.
Municipal Securities may also be in the form of a tender option bond, which
is a Municipal Security (generally held pursuant to a custodial arrangement)
having a relatively long maturity and bearing interest at a fixed rate sub-
stantially higher than prevailing short-term, tax-exempt rates. The bond is
typically issued with the agreement of a third party, such as a bank, bro-
ker-dealer or other financial institution, which grants the security holders
the option, at periodic intervals, to tender their securities to the insti-
tution. After payment of a fee to the financial institution that provides
this option, the security holder effectively holds a demand obligation that
bears interest at the prevailing short-term, tax-exempt rate. An institution
may not be obligated to accept tendered bonds in the event of certain
defaults or a significant downgrading in the credit rating assigned to the
issuer of the bond. The tender option will be taken into account in deter-
mining the maturity of the tender option bonds and an Underlying Fund's
average portfolio maturity. There is risk that an Underlying Fund will not
be considered the owner of a tender option bond for federal income tax pur-
poses, and thus will not be entitled to treat such interest as exempt from
federal income tax. Certain tender option bonds may be illiquid.
Municipal Securities may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial
institutions.The credit quality of these banks and financial institutions
could, therefore, cause a loss to an Underlying Fund that invests in Munici-
pal Securities. Letters of credit and other obligations of foreign banks and
financial institutions may involve risks in addition to those of domestic
obligations because of less publicly available financial and other informa-
tion, less securities regulation, potential imposition of foreign withhold-
ing and other taxes, war, expropriation or other adverse governmental
actions. Foreign banks and their foreign branches are not regulated by U.S.
banking authorities, and are generally not bound by the accounting, auditing
and financial reporting standards applicable to U.S. banks.
Corporate and Bank Obligations; Trust Preferred Securities; Convertible
Securities. Certain Underlying Funds may invest in corporate debt obliga-
tions, trust preferred securities and convertible securities. Corporate debt
obligations include bonds, notes, debentures, commercial paper and other
obligations of U.S. or for-
60
<PAGE>
APPENDIX A
eign corporations to pay interest and repay principal, and include securi-
ties issued by banks and other financial institutions. Banks are subject to
extensive but different governmental regulations which may limit both the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of financ-
ing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possi-
ble financial difficulties of borrowers play an important part in the opera-
tion of this industry. A trust preferred 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 initiat-
ing a default event. The securities are generally senior in claim to stan-
dard preferred stock but junior to other bondholders.
Convertible securities are preferred stock or debt obligations that are con-
vertible into common stock. Convertible securities generally offer lower
interest or dividend yields than nonconvertible securities of similar quali-
ty. Convertible securities in which an Underlying Fund invests are subject
to the same rating criteria as its other investments in fixed-income securi-
ties. Convertible securities have both equity and fixed-income risk charac-
teristics. Like all fixed-income securities, the value of convertible secu-
rities is susceptible to the risk of market losses attributable to changes
in interest rates. Generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, to increase as
interest rates decline. However, when the market price of the common stock
underlying a convertible security exceeds the conversion price of the con-
vertible security, the convertible security tends to reflect the market
price of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security, like a fixed-income securi-
ty, tends to trade increasingly on a yield basis, and thus may not decline
in price to the same extent as the underlying common stock.
Zero Coupon, Deferred Interest, Pay-In-Kind and Capital Appreciation Bonds.
Certain Underlying Funds may invest in zero coupon, deferred interest, pay-
in-kind and capital appreciation bonds. These securities are issued at a
discount from their face value because interest payments are typically post-
poned until maturity. Pay-in-kind securities are securities that have inter-
est payable by the delivery of additional securities.The market prices of
these 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.
61
<PAGE>
Rating Criteria. Except as noted below, the Underlying Equity Funds (other
than the CORE Equity Funds, which may only invest in debt instruments that
are cash equivalents) may invest in debt securities rated at least invest-
ment grade at the time of investment. Investment grade debt securities are
securities rated BBB or higher by Standard & Poor's or Baa or higher by
Moody's. The Capital Growth, Small Cap Value, International Equity, Japanese
Equity, European Equity, International Small Cap, Emerging Markets Equity,
Asia Growth and Real Estate Securities Funds may invest up to 10%, 35%, 35%,
35%, 35%, 35%, 35%, 35% and 20%, respectively, of their total assets in debt
securities which are rated in the lowest rating categories by Standard &
Poor's or Moody's (i.e., BB or lower by Standard & Poor's or Ba or lower by
Moody's), including securities rated D by Moody's or Standard & Poor's. The
Mid Cap Value Fund may invest up to 10% of its total assets in below invest-
ment grade debt securities rated B or higher by Standard & Poor's or
Moody's. Fixed-income securities rated BB or Ba or below (or comparable
unrated securities) are commonly referred to as "junk bonds," are considered
predominately speculative and may be questionable as to principal and inter-
est payments as described above.
Structured Securities and Inverse Floaters. Certain Underlying Funds may
invest in structured securities. Structured securities are securities whose
value is determined by reference to changes in the value of specific curren-
cies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The
interest rate or the principal amount payable upon maturity or redemption
may be increased or decreased depending upon changes in the applicable Ref-
erence. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or decrease in
the interest rate or value of the security at maturity. In addition, changes
in the interest rates or the value of the security at maturity may be a mul-
tiple of changes in the value of the Reference. Consequently, structured
securities may present a greater degree of market risk than other types of
securities, and may be more volatile, less liquid and more difficult to
price accurately than less complex securities.
Structured securities include, but are not limited to, inverse floating rate
debt securities ("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 vola-
tility of its market value.
62
<PAGE>
APPENDIX A
Foreign Currency Transactions. Certain Underlying Funds may, to the extent
consistent with their investment policies, purchase or sell foreign curren-
cies on a cash basis or through forward contracts. A forward contract
involves an obligation to purchase or sell a specific currency at a future
date at a price set at the time of the contract. Certain Underlying Funds
may engage in foreign currency transactions for hedging purposes and to seek
to protect against anticipated changes in future foreign currency exchange
rates. In addition, certain Underlying Funds may also enter into such trans-
actions to seek to increase total return, which is considered a speculative
practice.
Underlying Funds may also engage in cross-hedging by using forward contracts
in a currency different from that in which the hedged security is denomi-
nated or quoted if the investment adviser determines that there is a pattern
of correlation between the two currencies. An Underlying Fund may hold for-
eign currency received in connection with investments in foreign securities
when, in the judgment of the investment adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date (e.g., the invest-
ment adviser may anticipate the foreign currency to appreciate against the
U.S. dollar).
Currency exchange rates may fluctuate significantly over short periods of
time, causing, along with other factors, an Underlying Fund's NAV to fluctu-
ate. Currency exchange rates also can be affected unpredictably by the
intervention of U.S. or foreign governments or central banks, or the failure
to intervene, or by currency controls or political developments in the
United States or abroad.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available
for currency instruments traded on an exchange. Such contracts are subject
to the risk that the counterparty to the contract will default on its obli-
gations. Since these contracts are not guaranteed by an exchange or clear-
inghouse, a default on a contract would deprive an Underlying Fund of
unrealized profits, transaction costs, or the benefits of a currency hedge,
or could force the Underlying Fund to cover its purchase or sale commit-
ments, if any, at the current market price.
Options on Securities, Securities Indices and Foreign Currencies. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) of the option the obligation to buy, the underlying instrument dur-
ing the option period. A call option gives the purchaser of the option the
right to buy, and the writer (seller) of the option the obligation to sell,
the underlying instrument during the option period. Each Underlying Fund may
write (sell) covered call and put options and purchase put and call options
on any securities in which it may invest or on any securities index com-
prised of securities in which it may invest. An
63
<PAGE>
Underlying Fund may also, to the extent that it invests in foreign securi-
ties, purchase and sell (write) put and call options on foreign currencies.
The writing and purchase of options is a highly specialized activity which
involves special investment risks. Options may be used for either hedging or
cross-hedging purposes, or to seek to increase total return (which is con-
sidered a speculative activity). The successful use of options depends in
part on the ability of an investment adviser to manage future price fluctua-
tions and the degree of correlation between the options and securities (or
currency) markets. If an investment adviser is incorrect in its expectation
of changes in market prices or determination of the correlation between the
instruments or indices on which options are written and purchased and the
instruments in an Underlying Fund's investment portfolio, the Underlying
Fund may incur losses that it would not otherwise incur. The use of options
can also increase an Underlying Fund's transaction costs. Options written or
purchased by the Underlying Funds may be traded on either U.S. or foreign
exchanges or over-the-counter. Foreign and over-the-counter options will
present greater possibility of loss because of their greater illiquidity and
credit risks.
Yield Curve Options. Certain Underlying Funds 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 desig-
nated securities rather than the prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profit-
able 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.
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.
Futures Contracts and Options on Futures Contracts. Futures contracts are
standardized, exchange-traded contracts that provide for the sale or pur-
chase of a specified financial instrument or currency at a future time at a
specified price. An option on a futures contract gives the purchaser the
right (and the writer of the option the obligation) to assume a position in
a futures contract at a specified exercise price within a specified period
of time. A futures contract may be based on various securities (such as U.S.
Government Securities), foreign currencies, securities indices and other
financial instruments and indices. Certain Underlying Funds may engage in
futures transactions on both U.S. and foreign exchanges.
64
<PAGE>
APPENDIX A
Certain Underlying Funds may purchase and sell futures contracts, and pur-
chase and write call and put options on futures contracts, in order to seek
to increase total return or to hedge against changes in interest rates,
securities prices or to the extent an Underlying Fund invests in foreign
securities, currency exchange rates, or to otherwise manage its term struc-
ture, sector selection and duration in accordance with its investment objec-
tives and policies. An Underlying Fund may also enter into closing purchase
and sale transactions with respect to such contracts and options. An Under-
lying Fund will engage in futures and related options transactions for bona
fide hedging purposes as defined in regulations of the Commodity Futures
Trading Commission or to seek to increase total return to the extent permit-
ted by such regulations. An Underlying Fund may not purchase or sell futures
contracts or purchase or sell related options to seek to increase total
return, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of initial margin deposits and premiums
paid on the Underlying Fund's outstanding positions in futures and related
options entered into for the purpose of seeking to increase total return
would exceed 5% of the market value of the Underlying Fund's net assets.
Futures contracts and related options present the following risks:
.While an Underlying Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices or cur-
rency exchange rates may result in a poorer overall performance than if the
Underlying Fund had not entered into any futures contracts or options
transactions.
.Because perfect correlation between a futures position and portfolio posi-
tion that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and an Underlying Fund may be exposed to
additional risk of loss.
.The loss incurred by an Underlying Fund in entering into futures contracts
and in writing call options on futures is potentially unlimited and may
exceed the amount of the premium received.
.Futures markets are highly volatile and the use of futures may increase the
volatility of an Underlying Fund's NAV.
.As a result of the low margin deposits normally required in futures trad-
ing, a relatively small price movement in a futures contract may result in
substantial losses to an Underlying Fund.
.Futures contracts and options on futures may be illiquid, and exchanges may
limit fluctuations in futures contract prices during a single day.
.Foreign exchanges may not provide the same protection as U.S. exchanges.
Preferred Stock, Warrants and Rights. Certain Underlying Funds may invest in
preferred stock, warrants and rights. Preferred stocks are securities that
represent
65
<PAGE>
an ownership interest providing the holder with claims on the issuer's earn-
ings 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
or other non-compliance by the issuer of the preferred stock.
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
or right. 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.
Loan Participations. Certain Underlying Funds may invest in loan participa-
tions. A loan participation is an interest in a loan to a U.S. or foreign
company or other borrower which is administered and sold by a financial
intermediary. Loan participation interests 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 participa-
tion in the seller's share of the loan. When the Underlying Fund acts as co-
lender in connection with a participation interest or when it acquires cer-
tain participation interests, the Underlying Fund will have direct recourse
against the borrower if the borrower fails to pay scheduled principal and
interest. In cases where the Underlying Fund lacks direct recourse, it
will look to an agent for the lenders (the "agent lender") to enforce appro-
priate credit remedies against the borrower. In these cases, the Underlying
Fund may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Underlying Fund had purchased a
direct obligation (such as commercial paper) of such borrower. Moreover,
under the terms of the loan participation, the Underlying Fund may be
regarded as a creditor of the agent lender (rather than of the underlying
corporate borrower), so that the Underlying Fund may also be subject to the
risk that the agent lender may become insolvent.
Real Estate Investment Trusts ("REITs"). The Real Estate Securities Fund
expects to invest a substantial portion of its total assets in REITs, which
are pooled investment vehicles that invest primarily in either real estate
or real estate related loans. In addition, other Underlying Equity Funds may
invest in REITs from time to time. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mort-
gage loans held by the REIT. REITs are dependent upon the ability of the
REITs' managers, and are subject to heavy cash flow dependency, default by
borrowers and the qualification of the REITs under applicable regulatory
requirements for favorable federal income tax treatment. REITs are also sub-
ject to risks generally associated with investments in
66
<PAGE>
APPENDIX A
real estate including possible declines in the value of real estate, general
and local economic conditions, environmental problems and changes in inter-
est rates. To the extent that assets underlying a REIT are concentrated geo-
graphically, by property type or in certain other respects, these risks may
be heightened. Each Underlying Fund will indirectly bear its proportionate
share of any expenses, including management fees, paid by a REIT in which it
invests.
Other Investment Companies. Certain Underlying Funds may invest in securi-
ties of other investment companies (including SPDRs and WEBS, as described
below and other exchange-traded funds) subject to statutory limitations.
These limitations include a prohibition on any Underlying Fund acquiring
more than 3% of the voting shares of any other investment company, and a
prohibition on investing more than 5% of an Underlying Fund's total assets
in securities of any one investment company or more than 10% of its total
assets in securities of all investment companies. An Underlying Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Exchange-traded funds such
as SPDRs and WEBS are shares of unaffiliated investment companies which are
traded like traditional equity securities on a national securities exchange
or the NASDAQ National Market System.
.Standard and Poor's Depository Receipts. The Underlying Equity Funds may,
consistent with their investment policies, purchase Standard & Poor's
Depository Receipts ("SPDRs"). SPDRs are securities traded on the American
Stock Exchange (the "AMEX") that represent ownership in the SPDR Trust, a
trust which has been established to accumulate and hold a portfolio of com-
mon stocks that is intended to track the price performance and dividend
yield of the S&P 500. SPDR Trust is sponsored by a subsidiary of the AMEX.
SPDRs may be used for several reasons, including, but not limited to,
facilitating the handling of cash flows or trading, or reducing transaction
costs. The price movement of SPDRs may not perfectly parallel the price
action of the S&P 500.
.World Equity Benchmark Shares. World Equity Benchmark Shares ("WEBS") are
shares of an investment company that invests substantially all of its
assets in securities included in the MSCI indices for specified countries.
WEBS are listed on the AMEX and were initially offered to the public in
1996. The market prices of WEBS are expected to fluctuate in accordance
with both changes in the NAVs of their underlying indices and supply and
demand of WEBS on the AMEX. To date, WEBS have traded at relatively modest
discounts and premiums to their NAVs. However, WEBS have a limited operat-
ing history and information is lacking regarding the actual performance and
trading liquidity of WEBS for extended periods or over complete market
cycles. In addition, there is no assurance that the requirements of the
AMEX necessary to
67
<PAGE>
maintain the listing of WEBS will continue to be met or will remain
unchanged. In the event substantial market or other disruptions affecting
WEBS should occur in the future, the liquidity and value of an Underlying
Equity Fund's shares could also be substantially and adversely affected. If
such disruptions were to occur, an Underlying Equity Fund could be required
to reconsider the use of WEBS as part of its investment strategy.
Unseasoned Companies. Certain Underlying Funds may invest in companies (in-
cluding predecessors) which have operated less than three years. The securi-
ties of such companies may have limited liquidity, which can result in their
being priced higher or lower than might otherwise be the case. In addition,
investments in unseasoned companies are more speculative and entail greater
risk than do investments in companies with an established operating record.
Non-Investment Grade Fixed-Income Securities. Non-investment grade fixed-
income securities and unrated securities of comparable credit quality (com-
monly known as "junk bonds") are considered predominantly speculative by
traditional investment standards. In some cases, these obligations may be
highly speculative and have poor prospects for reaching investment grade
standing. Non-investment grade fixed-income securities are subject to the
increased risk of an issuer's inability to meet principal and interest obli-
gations. These securities, also referred to as high yield securities, may be
subject to greater price volatility due to such factors as specific corpo-
rate developments, interest rate sensitivity, negative perceptions of the
junk bond markets generally and less secondary market liquidity.
Non-investment grade fixed-income securities are generally unsecured and are
often subordinated to the rights of other creditors of the issuers of such
securities. Investment by an Underlying Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect of such securities. Even if such securities are held to maturity,
recovery by an Underlying Fund of its initial investment and any anticipated
income or appreciation is uncertain.
Equity Swaps. Each Underlying Equity Fund may invest up to 15% of its net
assets in equity swaps. Equity swaps allow the parties to a swap agreement
to exchange dividend income or other components of return on an equity
investment (for example, a group of equity securities or an index) for a
component of return on another non-equity or equity investment.
An equity swap may be used by an Underlying Fund to invest in a market with-
out owning or taking physical custody of securities in circumstances in
which direct investment may be restricted for legal reasons or is otherwise
impractical. Equity
68
<PAGE>
APPENDIX A
swaps are derivatives and their value can be very volatile. To the extent
that an investment adviser does not accurately analyze and predict the
potential relative fluctuation of the components swapped with another party,
an Underlying Fund may suffer a loss. The value of some components of an
equity swap (such as the dividends on a common stock) may also be sensitive
to changes in interest rates. Furthermore, an Underlying Fund may suffer a
loss if the counterparty defaults.
When-Issued Securities and Forward Commitments. Each Underlying Fund may
purchase when-issued securities and enter into forward commitments. When-
issued securities are securities that have been authorized, but not yet
issued. When-issued securities are purchased in order to secure what is con-
sidered to be an advantageous price and yield to the Underlying Fund at the
time of entering into the transaction. A forward commitment involves the
entering into a contract to purchase or sell securities for a fixed price at
a future date beyond the customary settlement period.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased
declines before the settlement date. Conversely, the sale of securities on a
forward commitment basis involves the risk that the value of the securities
sold may increase before the settlement date. Although an Underlying Fund
will generally purchase securities on a when-issued or forward commitment
basis with the intention of acquiring the securities for its portfolio, an
Underlying Fund may dispose of when-issued securities or forward commitments
prior to settlement if its investment adviser deems it appropriate.
Repurchase Agreements. Repurchase agreements involve the purchase of securi-
ties subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price. The Underlying Funds may enter into repurchase
agreements with dealers in U.S. Government Securities and member banks of
the Federal Reserve System which furnish collateral at least equal in value
or market price to the amount of their repurchase obligation. Some Under-
lying Funds may also enter into repurchase agreements involving certain for-
eign government securities.
If the other party or "seller" defaults, an Underlying Fund might suffer a
loss to the extent that the proceeds from the sale of the underlying securi-
ties and other collateral held by the Underlying Fund are less than the
repurchase price and the Underlying Fund's costs associated with delay and
enforcement of the repurchase agreement. In addition, in the event of bank-
ruptcy of the seller, an Underlying Fund could suffer additional losses if a
court determines that the Underlying Fund's interest in the collateral is
not enforceable.
69
<PAGE>
In evaluating whether to enter into a repurchase agreement, an investment
adviser will carefully consider the creditworthiness of the seller. Certain
Underlying Funds, together with other registered investment companies having
advisory agreements with the investment adviser or any of its 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 agree-
ments.
Lending of Portfolio Securities. Each Underlying Fund may engage in securi-
ties lending. Securities lending involves the lending of securities owned by
an Underlying Fund to financial institutions such as certain broker-dealers.
The borrowers are required to secure their loans continuously with cash,
cash equivalents, U.S. Government Securities or letters of credit in an
amount at least equal to the market value of the securities loaned. Cash
collateral may be invested in cash equivalents. To the extent that cash col-
lateral is invested in other investment securities, such collateral will be
subject to market depreciation or appreciation, and an Underlying Fund will
be responsible for any loss that might result from its investment of the
borrowers' collateral. If an investment adviser determines to make securi-
ties loans, the value of the securities loaned may not exceed 33 1/3% of the
value of the total assets of an Underlying Fund (including the loan collat-
eral).
An Underlying Fund may lend its securities to increase its income. An Under-
lying Fund may, however, experience delay in the recovery of its securities
or a capital loss if the institution with which it has engaged in a portfo-
lio loan transaction breaches its agreement with the Underlying Fund.
Short Sales Against-the-Box. Certain Underlying Funds may make short sales
against-the-box. A short sale against-the-box means that at all times when a
short position is open the Underlying Fund will own an equal amount of secu-
rities sold short, or securities convertible into or exchangeable for, with-
out the payment of any further consideration, an equal amount of the securi-
ties of the same issuer as the securities sold short.
Mortgage Dollar Rolls. Certain Underlying Funds may enter into "mortgage
dollar rolls." In mortgage dollar rolls, an Underlying Fund sells securities
for delivery in the current month and simultaneously contracts with the same
counterparty to repurchase substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During
the roll period, the Underlying Fund loses the right to receive principal
and interest paid on the securities sold. However, the Underlying Fund bene-
fits to the extent of any difference between (a) the price received for the
securities sold and (b) the lower forward price for the future purchase
and/or fee income plus the interest earned on the cash proceeds of the secu-
rities sold. Unless the benefits of a mortgage dollar roll exceed the
income, capital appreciation and gain or loss due to mortgage prepayments
70
<PAGE>
APPENDIX A
that would have been realized on the securities sold as part of the roll,
the use of this technique will diminish the Underlying Fund's performance.
Successful use of mortgage dollar rolls depends upon an investment adviser's
ability to predict correctly interest rates and mortgage prepayments. If the
investment adviser is incorrect in its prediction, an Underlying Fund may
experience a loss. For financial reporting and tax purposes, the Funds treat
mortgage dollar rolls as two separate transactions: one involving the pur-
chase of a security and a separate transaction involving a sale. The Under-
lying Funds do not currently intend to enter into mortgage dollar rolls that
are accounted for as a financing and do not treat them as borrowings.
Borrowings and Reverse Repurchase Agreements. Each Underlying Fund can bor-
row money from banks, and certain Underlying Funds may enter into reverse
repurchase agreements with banks and other financial institutions in amounts
not exceeding one-third of its total assets. An Underlying Fund may not make
additional investments if borrowings exceed 5% of its total assets. Reverse
repurchase agreements involve the sale of securities held by an Underlying
Fund subject to the Underlying Fund's agreement to repurchase them at a
mutually agreed upon date and price (including interest). These transactions
may be entered into as a temporary measure for emergency purposes or to meet
redemption requests. Reverse repurchase agreements may also be entered into
when the investment adviser expects that the interest income to be earned
from the investment of the transaction proceeds will be greater than the
related interest expense. Borrowings and reverse repurchase agreements
involve leveraging. If the securities held by an Underlying Fund decline in
value while these transactions are outstanding, the NAV of the Underlying
Fund's outstanding shares will decline in value by proportionately more than
the decline in value of the securities. In addition, reverse repurchase
agreements involve the risk that any interest income earned by an Underlying
Fund (from the investment of the proceeds) will be less than the interest
expense of the transaction, that the market value of the securities sold by
an Underlying Fund will decline below the price the Underlying Fund is obli-
gated to pay to repurchase the securities, and that the securities may not
be returned to the Underlying Fund.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps and Inter-
est Rate Caps, Floors and Collars. To the extent consistent with their
investment policies, the Underlying Funds may enter into interest rate
swaps, mortgage swaps, credit swaps, currency swaps and interest rate caps,
floors and collars. Interest rate swaps involve the exchange by an Under-
lying 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
71
<PAGE>
similar to interest rate swaps in that they represent commitments to pay and
receive interest. The notional principal amount, however, is tied to a ref-
erence 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 transac-
tion 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 occur-
rence of specified credit events. Currency swaps involve the exchange of the
parties' respective rights to make or receive payments in specified curren-
cies. 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 enti-
tles the purchaser, to the extent that a specified index falls below a pre-
determined 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.
An Underlying Fund may enter into swap transactions for hedging purposes or
to seek to increase total return. 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 transac-
tions. If an investment adviser is incorrect in its forecasts of market val-
ues, interest rates and currency exchange rates, the investment performance
of an Underlying Fund would be less favorable than it would have been if
these investment techniques were not used.
72
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73
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Port-
folio's financial performance for the past five years (or less if the Port-
folio has been in operation for less than five years). Certain information
reflects financial results for a single Portfolio share. The total returns
in the table represent the rate that an investor would have earned or lost
on an investment in a Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Arthur Andersen LLP,
whose report, along with a Portfolio's financial statements, is included in
the Portfolio's annual report (available upon request without charge).
CONSERVATIVE STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Period Ended December 31,/e/
1999 - Class A Shares $10.00 $0.36 $0.18
1999 - Class B Shares 10.00 0.30 0.19
1999 - Class C Shares 10.00 0.29 0.18
1999 - Institutional Shares 10.00 0.40/f/ 0.20/f/
1999 - Service Shares 10.00 0.53 0.02
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on February 8, 1999.
f Calculated based on the average shares outstanding methodology.
74
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b,d/ (in 000s) net assets/c/
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.36) $(0.01) $ -- $0.17 $10.17 5.52% $ 1,697 0.59%
(0.30) (0.01) -- 0.18 10.18 4.92 10,451 1.34
(0.29) (0.01) -- 0.17 10.17 4.79 2,417 1.34
(0.40) (0.02) -- 0.18 10.18 6.04 6 0.19
(0.37) -- -- 0.18 10.18 5.56 14 0.69
- ------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
CONSERVATIVE STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
------------------------------------
Ratio of
net investment Ratio of Ratio of
income expenses to net investment Portfolio
to average average loss to average turnover
net assets/c/ net assets/c/ net assets/c/ rate/d/
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Period Ended
December 31,/e/
1999 - Class A Shares 4.38% 3.46% 1.51% 62.99%
1999 - Class B Shares 3.74 4.21 0.87 62.99
1999 - Class C Shares 3.62 4.21 0.75 62.99
1999 - Institutional
Shares 4.43 3.06 1.56 62.99
1999 - Service Shares 2.39 3.56 (0.48) 62.99
- -----------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on February 8, 1999.
f Calculated based on the average shares outstanding methodology.
76
<PAGE>
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77
<PAGE>
BALANCED STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.31 $0.34 $0.73
1999 - Class B Shares 10.31 0.26 0.72
1999 - Class C Shares 10.32 0.27 0.71
1999 - Institutional Shares 10.32 0.37 0.74
1999 - Service Shares 10.31 0.33 0.73
- -----------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.25 0.38
1998 - Class B Shares 10.00 0.19 0.38
1998 - Class C Shares 10.00 0.19 0.39
1998 - Institutional Shares 10.00 0.30 0.39
1998 - Service Shares 10.00 0.25 0.37
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
78
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b/ (in 000s) net assets
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.34) $(0.05) $ -- $0.68 $10.99 10.58% $39,774 0.59%
(0.26) (0.05) -- 0.67 10.98 9.66 32,932 1.34
(0.27) (0.04) -- 0.67 10.99 9.63 23,354 1.34
(0.37) (0.07) -- 0.67 10.99 10.92 1,753 0.19
(0.33) (0.05) -- 0.68 10.99 10.47 419 0.69
- -----------------------------------------------------------------------------------------------
(0.25) (0.03) (0.04) 0.31 10.31 6.38/d/ 40,237 0.60/c/
(0.19) (0.03) (0.04) 0.31 10.31 5.75/d/ 33,763 1.30/c/
(0.19) (0.03) (0.04) 0.32 10.32 5.83/d/ 24,195 1.30/c/
(0.30) (0.03) (0.04) 0.32 10.32 6.99/d/ 205 0.24/c/
(0.25) (0.02) (0.04) 0.31 10.31 6.30/d/ 456 0.74/c/
- -----------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
BALANCED STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
-------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 3.17% 1.05% 2.71% 51.24%
1999 - Class B Shares 2.42 1.80 1.96 51.24
1999 - Class C Shares 2.40 1.80 1.94 51.24
1999 - Institutional
Shares 3.93 0.65 3.47 51.24
1999 - Service Shares 3.04 1.15 2.58 51.24
- ---------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 3.03c 1.46/c/ 2.17/c/ 50.84/d/
1998 - Class B Shares 2.38c 2.08/c/ 1.60/c/ 50.84/d/
1998 - Class C Shares 2.34c 2.08/c/ 1.56/c/ 50.84/d/
1998 - Institutional
Shares 3.55c 1.02/c/ 2.77/c/ 50.84/d/
1998 - Service Shares 2.90c 1.52/c/ 2.12/c/ 50.84/d/
- ---------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
80
<PAGE>
[This page intentionally left blank]
81
<PAGE>
GROWTH AND INCOME STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.38 $0.22 $1.40
1999 - Class B Shares 10.36 0.14 1.40
1999 - Class C Shares 10.36 0.14 1.40
1999 - Institutional Shares 10.39 0.27 1.39
1999 - Service Shares 10.37 0.20 1.40
- -----------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.18 0.47
1998 - Class B Shares 10.00 0.12 0.46
1998 - Class C Shares 10.00 0.12 0.46
1998 - Institutional Shares 10.00 0.20 0.49
1998 - Service Shares 10.00 0.16 0.48
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
82
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b/ (in 000s) net assets
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.22) $(0.06) $(0.01) $1.33 $11.71 15.79% $195,153 0.59%
(0.14) (0.06) (0.01) 1.33 11.69 14.95 143,686 1.34
(0.14) (0.06) (0.01) 1.33 11.69 14.94 95,523 1.34
(0.27) (0.06) (0.01) 1.32 11.71 16.14 29,200 0.19
(0.20) (0.07) (0.01) 1.32 11.69 15.60 1,856 0.69
- -----------------------------------------------------------------------------------------------
(0.18) (0.04) (0.05) 0.38 10.38 6.55/d/ 181,441 0.60/c/
(0.12) (0.05) (0.05) 0.36 10.36 5.82/d/ 138,914 1.30/c/
(0.12) (0.05) (0.05) 0.36 10.36 5.80/d/ 100,711 1.30/c/
(0.20) (0.05) (0.05) 0.39 10.39 6.96/d/ 9,030 0.23/c/
(0.16) (0.06) (0.05) 0.37 10.37 6.43/d/ 1,354 0.73/c/
- -----------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
GROWTH AND INCOME STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
-------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 2.00% 0.85% 1.74% 49.06%
1999 - Class B Shares 1.24 1.60 0.98 49.06
1999 - Class C Shares 1.23 1.60 0.97 49.06
1999 - Institutional
Shares 2.53 0.45 2.27 49.06
1999 - Service Shares 1.91 0.95 1.65 49.06
- ---------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 2.37/c/ 1.05/c/ 1.92/c/ 41.91/d/
1998 - Class B Shares 1.72/c/ 1.68/c/ 1.34/c/ 41.91/d/
1998 - Class C Shares 1.68/c/ 1.68/c/ 1.30/c/ 41.91/d/
1998 - Institutional
Shares 2.97/c/ 0.61/c/ 2.59/c/ 41.91/d/
1998 - Service Shares 2.28/c/ 1.11/c/ 1.90/c/ 41.91/d/
- ------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
84
<PAGE>
[This page intentionally left blank]
85
<PAGE>
GROWTH STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.29 $0.11 $2.03
1999 - Class B Shares 10.28 0.02 2.02
1999 - Class C Shares 10.28 0.02 2.03
1999 - Institutional Shares 10.29 0.13 2.05
1999 - Service Shares 10.29 0.09 2.03
- -----------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.10 0.36
1998 - Class B Shares 10.00 0.05 0.35
1998 - Class C Shares 10.00 0.05 0.35
1998 - Institutional Shares 10.00 0.12 0.37
1998 - Service Shares 10.00 0.09 0.35
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
86
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b/ (in 000s) net assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.11) $(0.08) $ -- $1.95 $12.24 20.85% $130,322 0.59%
(0.02) (0.09) -- 1.93 12.21 19.87 121,937 1.34
(0.02) (0.09) -- 1.94 12.22 19.96 70,127 1.34
(0.13) (0.11) -- 1.94 12.23 21.24 5,891 0.19
(0.09) (0.10) -- 1.93 12.22 20.62 735 0.69
- -----------------------------------------------------------------------------------------------
(0.10) (0.02) (0.05) 0.29 10.29 4.62/d/ 128,832 0.60/c/
(0.05) (0.02) (0.05) 0.28 10.28 3.98/d/ 109,246 1.30/c/
(0.05) (0.02) (0.05) 0.28 10.28 3.96/d/ 63,925 1.30/c/
(0.12) (0.03) (0.05) 0.29 10.29 4.92/d/ 2,205 0.23/c/
(0.09) (0.01) (0.05) 0.29 10.29 4.45/d/ 378 0.73/c/
- -----------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE>
GROWTH STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 0.90% 0.87% 0.62% 49.52%
1999 - Class B Shares 0.17 1.62 (0.11) 49.52
1999 - Class C Shares 0.16 1.62 (0.12) 49.52
1999 - Institutional
Shares 1.40 0.47 1.12 49.52
1999 - Service Shares 0.87 0.97 0.59 49.52
- -----------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 1.50/c/ 1.15/c/ 0.95/c/ 38.43/d/
1998 - Class B Shares 0.83/c/ 1.78/c/ 0.35/c/ 38.43/d/
1998 - Class C Shares 0.79/c/ 1.78/c/ 0.31/c/ 38.43/d/
1998 - Institutional
Shares 2.88/c/ 0.71/c/ 2.40/c/ 38.43/d/
1998 - Service Shares 1.63/c/ 1.21/c/ 1.15/c/ 38.43/d/
- -----------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
88
<PAGE>
[This page intentionally left blank]
89
<PAGE>
AGGRESSIVE GROWTH STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income (loss) from
investment operations/a/
----------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income (loss) gain
- --------------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.16 $0.02 $2.56
1999 - Class B Shares 10.14 (0.07) 2.54
1999 - Class C Shares 10.15 (0.06) 2.53
1999 - Institutional Shares 10.16 0.06 2.55
1999 - Service Shares 10.15 -- 2.55
- --------------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.05 0.20
1998 - Class B Shares 10.00 0.01 0.18
1998 - Class C Shares 10.00 0.01 0.19
1998 - Institutional Shares 10.00 0.07 0.20
1998 - Service Shares 10.00 0.04 0.21
- --------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
90
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b/ (in 000s) net assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.02) $(0.11) $ -- $2.45 $12.61 25.39% $58,387 0.59%
-- (0.04) -- 2.43 12.57 24.41 47,462 1.34
-- (0.05) -- 2.42 12.57 24.35 28,573 1.34
(0.06) (0.11) -- 2.44 12.60 25.74 3,570 0.19
-- (0.11) -- 2.44 12.59 25.17 137 0.69
- -----------------------------------------------------------------------------------------------
(0.05) -- (0.04) 0.16 10.16 2.57/d/ 47,135 0.60/c/
(0.01) -- (0.04) 0.14 10.14 1.93/d/ 41,204 1.30/c/
(0.01) -- (0.04) 0.15 10.15 2.04/d/ 21,726 1.30/c/
(0.07) -- (0.04) 0.16 10.16 2.80/d/ 124 0.24/c/
(0.04) (0.02) (0.04) 0.15 10.15 2.54/d/ 121 0.74/c/
- -----------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
AGGRESSIVE GROWTH STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 0.12% 1.00% (0.29)% 47.34%
1999 - Class B Shares (0.63) 1.75 (1.04) 47.34
1999 - Class C Shares (0.61) 1.75 (1.02) 47.34
1999 - Institutional
Shares 0.66 0.60 0.25 47.34
1999 - Service Shares 0.00 1.10 (0.41) 47.34
- ------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 0.91/c/ 1.42/c/ 0.09/c/ 26.27/d/
1998 - Class B Shares 0.14/c/ 2.05/c/ (0.61)/c/ 26.27/d/
1998 - Class C Shares 0.16/c/ 2.05/c/ (0.59)/c/ 26.27/d/
1998 - Institutional
Shares 8.17/c/ 0.99/c/ 7.42/c/ 26.27/d/
1998 - Service Shares 0.76/c/ 1.49/c/ 0.01/c/ 26.27/d/
- ------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
92
<PAGE>
Index
<TABLE>
<C> <S>
1 General Investment
Management Approach
3 Portfolio Investment
Objectives and Strategies
3 Goldman Sachs Conservative
Strategy Portfolio
4 Goldman Sachs Balanced
Strategy Portfolio
5 Goldman Sachs Growth and
Income Strategy Portfolio
6 Goldman Sachs Growth
Strategy Portfolio
7 Goldman Sachs Aggressive
Growth Strategy Portfolio
8 Principal Investment
Strategies
10 Principal Risks of the
Portfolios
12 Description of the
Underlying Funds
</TABLE>
<TABLE>
<C> <S>
18 Principal Risks of the
Underlying Funds
22 Portfolio Performance
28 Portfolio Fees and
Expenses
32 Service Providers
38 Dividends
39 Shareholder Guide
39 How To Buy Shares
42 How To Sell Shares
46 Taxation
48 Appendix A
Additional Information
on the Underlying Funds
74 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Asset Allocation Portfolios Prospectus (Service Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semi-annual reports to shareholders. In the Portfo-
lios' annual reports, you will find a discussion of the market conditions
and investment strategies that significantly affect the Portfolios' perfor-
mance during the last fiscal year.
Statement of Additional Information
Additional information about the Portfolios and their policies is also
available in the Portfolios' Additional Statement. The Additional Statement
is incorporated by reference into this Prospectus (is legally considered
part of this Prospectus).
The Portfolios' annual and semi-annual reports, and the Additional State-
ment, are available free upon request by calling Goldman Sachs at 1-800-621-
2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Portfolios' documents are
located online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Portfolio documents by visiting the
SEC's Public Reference Room in Washington, D.C. You may also obtain copies
of Portfolio documents, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request to: [email protected]. Information on the operation of the public
reference room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Portfolios' investment company registration number is 811-5349.
CORE SM is a service mark of Goldman, Sachs & Co.
AAPROSVC
<PAGE>
Institutional
Shares
May 1, 2000
GOLDMAN SACHS ASSET ALLOCATION PORTFOLIOS
Prospectus
. Goldman Sachs
Conservative
Strategy
Portfolio
. Goldman Sachs
Balanced
Strategy
Portfolio
. Goldman Sachs
Growth and
Income
Strategy
Portfolio
. Goldman Sachs
Growth
Strategy
Portfolio
. Goldman Sachs
Aggressive
Growth
Strategy
Portfolio
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN A FUND
INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
NOT FDIC-INSURED May Lose Value No Bank Guarantee
<PAGE>
General Investment
Management Approach
Goldman Sachs Asset Management, a unit of the Investment Management Division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser (the
"Investment Adviser") to five asset allocation portfolios: the Conservative
Strategy Portfolio, Balanced Strategy Portfolio, Growth and Income Strategy
Portfolio, Growth Strategy Portfolio and Aggressive Growth Strategy Portfo-
lio (referred to as the "Portfolios" or the "Funds" interchangeably herein).
The Portfolios are intended for investors who prefer to have their asset
allocation decisions made by professional money managers. Each Portfolio
seeks to achieve its objectives by investing in a combination of underlying
funds for which Goldman Sachs now or in the future acts as investment
adviser or principal underwriter (the "Underlying Funds"). Some of these
Underlying Funds invest primarily in fixed-income or money market securities
(the "Underlying Fixed-Income Funds") and other Underlying Funds invest pri-
marily in equity securities (the "Underlying Equity Funds"). An investor may
choose to invest in one or more of the Portfolios based on individual
investment goals, risk tolerance, and financial circumstances.
The investment objectives and policies of the Portfolios are similar to the
investment objectives and policies of other mutual funds that the Investment
Adviser manages. Although the objectives and policies may be similar, the
investment results of the Portfolios may be higher or lower than the results
of such other mutual funds. The Investment Adviser cannot guarantee, and
makes no representation, that the investment results of similar funds will
be comparable even though the funds have the same Investment Adviser.
Goldman Sachs' Asset Allocation Investment Philosophy:
The Investment Adviser's Quantitative Strategies Group uses disciplined
quantitative models to determine the relative attractiveness of the world's
stock, bond and currency markets. These models use financial and economic
variables to capture fundamental relationships that the Quantitative Strate-
gies Group believes make sense. While the Investment Adviser's process is
rigorous and quantitative, it also incorporates clear economic reasoning
behind each recommendation.
The Asset Allocation Investment Process involves investing a Portfolio's
assets in other Goldman Sachs Funds within specified equity and fixed-income
percentage ranges.
- --------------------------------------------------------------------------------
1
<PAGE>
Each Portfolio starts with a strategic allocation among the various asset
classes. The Investment Adviser then tactically deviates from the strategic
allocations based on forecasts provided by the models. The tactical process
seeks to add value by overweighting attractive markets and underweighting
unattractive markets. Greater deviations from the strategic allocation of a
given Portfolio result in higher risk that the tactical allocation will
underperform the strategic allocation. However, the Investment Adviser's
risk control process balances the amount any asset class can be overweighted
in seeking to achieve higher expected returns against the amount of risk
imposed by that deviation from the strategic allocation. The Investment
Adviser employs Goldman Sachs' proprietary Black-Litterman asset allocation
technique in an effort to optimally balance these two goals.
2
<PAGE>
Portfolio Investment Objectives and Strategies
Goldman Sachs Conservative Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Current income, consistent with the preservation of capi-
tal and secondarily the potential for capital appreciation
Investment Focus: Primarily domestic fixed-income funds (approximately 80%)
focusing on short-term investments and money market funds,
with the balance in domestic stock funds and an allocation
to a global bond fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks current income, consistent with the preservation of cap-
ital and secondarily also considers the potential for capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 80% of the Portfolio's total assets
will be allocated among Underlying Fixed-Income Funds, with a focus on
short-term investments including money market funds. Allocation to Under-
lying Equity Funds is intended to add diversification and enhance returns,
but will also add some volatility. The Investment Adviser expects that the
Portfolio will invest a relatively significant percentage of its assets in
the Global Income Fund, Financial Square Prime Obligations Fund and CORE/SM/
Large Cap Value Fund. It is expected that the Portfolio will invest more
than 25% of its assets in the Short Duration Government Fund. The Portfolio
may not invest in Underlying Equity Funds that invest principally in foreign
equity securities.
3
<PAGE>
Goldman Sachs Balanced Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Current income and long-term capital appreciation
Investment Focus: Domestic fixed-income funds (approximately 60%), with
the remaining balance in domestic and international
stock funds and an allocation to a global bond fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks current income and long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 60% of the Portfolio's total assets
will be allocated among Underlying Fixed-Income Funds. Allocation to Under-
lying Equity Funds is intended to add diversification and enhance returns,
but will also add some volatility. The Investment Adviser expects that the
Portfolio will invest a relatively significant percentage of its equity
allocation in the CORE SM Large Cap Growth, CORE Large Cap Value and CORE SM
International Equity Funds and will invest a relatively significant percent-
age of its assets in the Global Income Fund. It is expected that the Portfo-
lio will invest more than 25% of its assets in the Short Duration Government
Fund.
4
<PAGE>
PORTFOLIO INVESTMENT OBJECTIVES AND STRATEGIES
Goldman Sachs Growth and Income Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation and current income
Investment Focus: Domestic and international fixed-income and stock funds
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 60% of the Portfolio's total assets
will be allocated among Underlying Equity Funds, which are intended to pro-
vide the capital appreciation component. Allocation to Underlying Fixed-
Income Funds is intended to provide the income component. The Investment
Adviser expects that the Portfolio will invest a relatively significant per-
centage of its equity allocation in the CORE Large Cap Growth, CORE Large
Cap Value and CORE International Equity Funds and will invest a relatively
significant percentage of its assets in the Core Fixed Income and Global
Income Funds.
5
<PAGE>
Goldman Sachs Growth Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation and secondarily current
income
Investment Focus: Primarily a blend of domestic large cap, small cap and
international stock funds (approximately 80%), with the
balance in domestic fixed-income funds and a global bond
fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation and secondarily current
income.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 80% of the Portfolio's total assets
will be allocated among Underlying Equity Funds, with a blend of domestic
large cap, small cap and international exposure to seek capital apprecia-
tion. Allocation to Underlying Fixed-Income Funds is intended to provide
diversification. The Investment Adviser expects that the Portfolio will
invest a relatively significant percentage of its equity allocation in the
CORE Large Cap Growth, CORE Large Cap Value and CORE International Equity
Funds.
6
<PAGE>
PORTFOLIO INVESTMENT OBJECTIVES AND STRATEGIES
Goldman Sachs Aggressive Growth Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation
Investment Focus: Equity funds, with a greater focus on international and
small cap investments
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, substantially all of the Portfolio's total assets
will be allocated among Underlying Equity Funds, with a greater focus on
small cap and international investments. The Investment Adviser expects that
the Portfolio will invest a relatively significant percentage of its assets
in the CORE Large Cap Growth, CORE Large Cap Value and CORE International
Equity Funds.
7
<PAGE>
Principal Investment Strategies
Each Portfolio seeks to achieve its investment objective by investing within
specified equity and fixed-income ranges among Underlying Funds. The table
below illustrates the current Underlying Equity/Fixed-Income Fund allocation
targets and ranges for each Portfolio:
Equity/Fixed-Income Range (Percentage of Each Portfolio's Total Assets)
<TABLE>
<CAPTION>
Portfolio Target Range
- -------------------------------------------
<S> <C> <C>
Conservative Strategy
Equity 20% 0%-25%
Fixed-Income 80% 75%-100%
- -------------------------------------------
Balanced Strategy
Equity 40% 20%-60%
Fixed-Income 60% 40%-80%
- -------------------------------------------
Growth and Income Strategy
Equity 60% 40%-80%
Fixed-Income 40% 20%-60%
- -------------------------------------------
Growth Strategy
Equity 80% 60%-100%
Fixed-Income 20% 0%-40%
- -------------------------------------------
Aggressive Growth Strategy
Equity 100% 75%-100%
Fixed-Income 0% 0%-25%
- -------------------------------------------
</TABLE>
A Portfolio will invest in particular Underlying Funds based on various crite-
ria. Among other things, the Investment Adviser will analyze the Underlying
Funds' respective investment objectives, policies and investment strategies in
order to determine which Underlying Funds, in combination with other Underlying
Funds, are appropriate in light of a Portfolio's investment objective.
A Portfolio may purchase or sell securities to: (a) accommodate purchases and
sales of its shares; (b) change the percentages of its assets invested in each
of the Underlying Funds in response to economic or market conditions; and (c)
maintain or modify the allocation of its assets among the Underlying Funds
within the percentage ranges described above.
8
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
While each Portfolio can invest in any or all of the Underlying Funds, it is
expected that each Portfolio will normally invest in only some of the Under-
lying Funds at any particular time. Each Portfolio's investment in any of
the Underlying Funds may, and in some cases is expected to, exceed 25% of
such Portfolio's total assets.
THE PARTICULAR UNDERLYING FUNDS IN WHICH EACH PORTFOLIO MAY INVEST, THE
EQUITY/FIXED-INCOME TARGETS AND RANGES AND THE INVESTMENTS IN EACH UNDER-
LYING FUND MAY BE CHANGED FROM TIME TO TIME WITHOUT SHAREHOLDER APPROVAL.
In addition, each Portfolio's investment objectives and all policies not
specifically designated as fundamental in this Prospectus or the Statement
of Additional Information (the "Additional Statement") are non-fundamental
and may be changed without shareholder approval. If there is a change in a
Portfolio's investment objective, you should consider whether that Portfolio
remains an appropriate investment in light of your then current financial
position and needs.
9
<PAGE>
Principal Risks of the Portfolios
Loss of money is a risk of investing in each Portfolio. An investment in a
Portfolio is not a deposit of any bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other governmental agency. While
the Portfolios offer a greater level of diversification than many other types
of mutual funds, a single Portfolio may not provide a complete investment
program for an investor. The following summarizes important risks that apply to
the Portfolios and may result in a loss of your investment. There can be no
assurance that a Portfolio will achieve its investment objective.
. Investing in the Underlying Funds--The investments of each Portfolio are
concentrated in the Underlying Funds, and each Portfolio's investment
performance is directly related to the investment performance of the
Underlying Funds held by it. The ability of each Portfolio to meet its
investment objective is directly related to the ability of the Underlying
Funds to meet their objectives as well as the allocation among those
Underlying Funds by the Investment Adviser. The value of the Underlying Funds'
investments, and the net asset values ("NAV") of the shares of both the
Portfolios and the Underlying Funds, will fluctuate in response to various
market and economic factors related to the equity and fixed-income markets, as
well as the financial condition and prospects of issuers in which the
Underlying Funds invest. There can be no assurance that the investment
objective of any Portfolio or any Underlying Fund will be achieved.
. Investments of the Underlying Funds--Because the Portfolios invest in the
Underlying Funds, the Portfolios' shareholders will be affected by the
investment policies of the Underlying Funds in direct proportion to the amount
of assets the Portfolios allocate to those Funds. Each Portfolio may invest in
Underlying Funds that in turn invest in small capitalization companies and
foreign issuers and thus are subject to additional risks, including changes in
foreign currency exchange rates and political risk. Foreign investments may
include securities of issuers located in emerging countries in Asia, Latin
America, Eastern Europe and Africa. Each Portfolio may also invest in
Underlying Funds that in turn invest in non-investment grade fixed-income
securities ("junk bonds"), which are considered speculative by traditional
standards. In addition, the Underlying Funds may purchase derivative
securities; enter into forward currency transactions; lend their portfolio
securities; enter into futures contracts and options transactions; purchase
zero coupon bonds and payment-in-kind bonds; purchase securities issued by
real estate investment trusts ("REITs") and other issuers in the real estate
industry; purchase restricted and illiquid securities; purchase securities on
a when-issued or delayed delivery basis; enter into repurchase agreements;
borrow money; and
10
<PAGE>
PRINCIPAL RISKS OF THE PORTFOLIOS
engage in various other investment practices. The risks presented by these
investment practices are discussed in Appendix A to this Prospectus and the
Additional Statement.
. Affiliated Persons--In managing the Portfolios, the Investment Adviser will
have the authority to select and substitute Underlying Funds. The Investment
Adviser is subject to conflicts of interest in allocating Portfolio assets
among the various Underlying Funds both because the fees payable to it and/or
its affiliates by some Underlying Funds are higher than the fees payable by
other Underlying Funds and because the Investment Adviser and its affiliates
are also responsible for managing the Underlying Funds. The Trustees and
officers of the Goldman Sachs Trust may also have conflicting interests in
fulfilling their fiduciary duties to both the Portfolios and the Underlying
Funds.
. Expenses--You may invest in the Underlying Funds directly. By investing in the
Underlying Funds indirectly through a Portfolio, you will incur not only a
proportionate share of the expenses of the Underlying Funds held by the
Portfolio (including operating costs and investment management fees), but also
expenses of the Portfolio.
. Temporary Investments--Although the Portfolios normally seek to remain
substantially invested in the Underlying Funds, each Portfolio may invest a
portion of its assets in high-quality, short-term debt obligations (including
commercial paper, certificates of deposit, bankers' acceptances, repurchase
agreements, debt obligations backed by the full faith and credit of the U.S.
government and demand and time deposits of domestic and foreign banks and
savings and loan associations) to maintain liquidity, to meet shareholder
redemptions and for other short-term cash needs. Also, there may be times
when, in the opinion of the Investment Adviser, abnormal market or economic
conditions warrant that, for temporary defensive purposes, a Portfolio may
invest without limitation in short-term obligations. When a Portfolio's assets
are invested in such investments, the Portfolio may not be achieving its
investment objective.
11
<PAGE>
Description of the Underlying Funds
DESCRIPTION OF THE UNDERLYING FUNDS
The following is a concise description of the investment objectives and
practices for each of the Underlying Funds that are available for investment
by the Portfolios as of the date of this Prospectus. A Portfolio may also
invest in other Underlying Funds not listed below that may become available
for investment in the future at the discretion of the Investment Adviser
without shareholder approval. Additional information regarding the invest-
ment practices of the Underlying Funds is provided in Appendix A to this
Prospectus and the Additional Statement. No offer is made in this Prospectus
of any of the Underlying Funds.
<TABLE>
<CAPTION>
Investment
Underlying Fund Objectives Investment Criteria
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
CORE Large Cap Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Value of capital and foreign issuers traded in the United States. The Fund's investments are selected using both
dividend income. a variety of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the Russell 1000 Value Index.
-------------------------------------------------------------------------------------------------------------------------------
CORE/SM/ U.S. Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Equity of capital and foreign issuers traded in the United States. The Fund's investments are selected using both
dividend income. a variety of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the S&P 500 Index.
-------------------------------------------------------------------------------------------------------------------------------
CORE Large Cap Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Growth of capital. foreign issuers traded in the United States. The Fund's investments are selected using both
Dividend a variety of quantitative techniques and fundamental research in seeking to maximize the
income is a Fund's expected return, while maintaining risk, style, capitalization and industry
secondary characteristics similar to the Russell 1000 Growth Index.
consideration.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
DESCRIPTION OF THE UNDERLYING FUNDS
<TABLE>
<CAPTION>
Investment
Underlying Fund Objectives Investment Criteria
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
CORESM Small Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Cap Equity of capital. foreign issuers traded in the United States. The Fund's investments are selected using both
a variety of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the Russell 2000 Index.
-------------------------------------------------------------------------------------------------------------------------------
Capital Growth Long-term At least 90% of total assets in a diversified portfolio of equity securities. Long-term
capital capital appreciation potential is considered in selecting investments.
growth.
-------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value* Long-term At least 65% of total assets in equity securities of companies with public stock market
capital capitalizations within the range of the market capitalization of companies constituting the
appreciation. Russell Midcap Value Index at the time of the investment (currently between $300 million
and $15 billion).
-------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Long-term At least 65% of total assets in equity securities of companies with public stock market
capital capitalizations of $1 billion or less at the time of investment.
growth.
-------------------------------------------------------------------------------------------------------------------------------
Real Estate Total return Substantially all, and at least 80%, of total assets in a diversified portfolio of equity
Securities comprised securities of issuers that are primarily engaged in or related to the real estate industry.
of long-term The Fund expects that a substantial portion of its total assets will be invested in REITS.
growth of
capital and
dividend income.
-------------------------------------------------------------------------------------------------------------------------------
CORE Long-term growth At least 90% of total assets in equity securities of companies organized outside the United
International of capital. States or whose securities are principally traded outside the United States. The Fund's
Equity investments are selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's expected return, while maintaining risk, style,
capitalization and industry characteristics similar to the unhedged Morgan Stanley Capital
International (MSCI) Europe, Australia and Far East Index (the "EAFE Index"). The Fund may
employ certain currency management techniques.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Formerly, "Mid Cap Equity."
13
<PAGE>
<TABLE>
<CAPTION>
Investment
Underlying Fund Objectives Investment Criteria
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
International Long-term Substantially all, and at least 65%, of total assets in equity securities of companies
Equity capital organized outside the United States or whose securities are principally traded outside the
appreciation. United States. The Fund may employ certain currency management techniques.
-------------------------------------------------------------------------------------------------------------------------------
European Equity Long-term Substantially all, and at least 65%, of total assets in equity securities of European
capital companies. The Fund may employ certain currency management techniques.
appreciation.
-------------------------------------------------------------------------------------------------------------------------------
Japanese Equity Long-term Substantially all, and at least 65%, of total assets in equity securities of Japanese
capital companies. The Fund may employ certain currency management techniques.
appreciation.
-------------------------------------------------------------------------------------------------------------------------------
International Long-term Substantially all, and at least 65%, of total assets in equity securities of companies with
Small Cap capital public stock market capitalizations of $1 billion or less at the time of investment that
appreciation. are organized outside the United States or whose securities are principally traded outside
the United States. The Fund may employ certain currency management techniques.
-------------------------------------------------------------------------------------------------------------------------------
Emerging Long-term Substantially all, and at least 65%, of total assets in equity securities of emerging
Markets Equity capital country issuers. The Fund may employ certain currency management techniques.
appreciation.
-------------------------------------------------------------------------------------------------------------------------------
Asia Growth Long-term Substantially all, and at least 65%, of total assets in equity securities of companies in
capital China, Hong Kong, India, Indonesia, Malaysia, Pakistan, the Philippines, Singapore, South
appreciation. Korea, Sri Lanka, Taiwan and Thailand. The Fund may employ certain currency management
techniques.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
[This page intentionally left blank]
15
<PAGE>
<TABLE>
<CAPTION>
Approximate
Investment Interest Rate
Underlying Fund Objectives Duration or Maturity Sensitivity
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial Square Prime Maximize Maximum Maturity of 3-month
Obligations current income Individual Investments = 13 Treasury bill
to the extent months at time of purchase.
consistent Maximum Dollar-Weighted
with the Average Portfolio Maturity =
maintenance of 90 days
liquidity.
-----------------------------------------------------------------------------------
Adjustable Rate A high level Target Duration = 6-month to 9-month U.S.
Government of current 1-year U.S. Treasury Treasury bill
income, Securities Maximum Duration*=
consistent 2 years
with low
volatility of
principal.
-----------------------------------------------------------------------------------
Short Duration A high level Target Duration = 2 year U.S. 2-year U.S.
Government of current Treasury Security plus or Treasury note
income and minus .5 years Maximum
secondarily, Duration*= 3 years
in seeking
current
income, may
also consider
the potential
for capital
appreciation.
-----------------------------------------------------------------------------------
Government Income A high level Target Duration = Lehman 5-year U.S.
of current Brothers Mutual Fund Treasury note
income, Government/Mortgage Index
consistent plus or minus 1 year Maximum
with safety of Duration*= 6 years
principal.
-----------------------------------------------------------------------------------
Core Fixed Income Total return Target Duration = Lehman 5-year U.S.
consisting of Brothers Aggregate Bond Index Treasury note
capital plus or minus 1 year Maximum
appreciation Duration*= 6 years
and income
that exceeds
the total
return of the
Lehman
Brothers
Aggregate Bond
Index.
-----------------------------------------------------------------------------------
Global Income A high total Target Duration = J.P. Morgan 6-year
return, Global Government Bond Index government
emphasizing (hedged) plus or minus 2.5 bond
current years Maximum Duration*= 7.5
income, and, years
to a lesser
extent,
providing
opportunities
for capital
appreciation.
-----------------------------------------------------------------------------------
High Yield A high level Target Duration = Lehman 6-year U.S.
of current Brothers High Yield Bond Treasury note
income and Index plus or minus 2.5 years
capital Maximum Duration* = 7.5 years
appreciation.
-----------------------------------------------------------------------------------
</TABLE>
* Under normal interest rate conditions.
16
<PAGE>
DESCRIPTION OF THE UNDERLYING FUNDS
<TABLE>
<CAPTION>
Credit
Investment Sector Quality Other Investments
----------------------------------------------------------------------------------------
<S> <C> <C>
Money market High Quality N/A
instruments (short-term
including securities ratings of
issued or guaranteed A-1, P-1 or
by the U.S. comparable
government, its quality).
agencies,
instrumentalities or
sponsored
enterprises ("U.S.
Government
Securities"); U.S.
bank obligations,
commercial paper and
other short-term
obligations of U.S.
corporations,
governmental and
other entities;
asset-backed and
receivables-backed
securities; and
related repurchase
agreements.
----------------------------------------------------------------------------------------
At least 65% of U.S. Fixed-rate mortgage
total assets in U.S. Government pass-through
Government Securities securities and
Securities that are repurchase
adjustable rate agreements
mortgage pass- collateralized by
through securities U.S. Government
and other mortgage Securities.
securities with
periodic interest
rate resets.
----------------------------------------------------------------------------------------
At least 65% of U.S. Mortgage pass-
total assets in U.S. Government through securities
Government Securities and other
Securities and securities
repurchase representing an
agreements interest in or
collateralized by collateralized by
such securities. mortgage loans.
----------------------------------------------------------------------------------------
At least 65% of U.S. Non-government
total assets in U.S. Government mortgage pass-
Government Securities through securities,
Securities, and non-U.S. asset-backed
including mortgage- Government securities and
backed U.S. Securities = corporate fixed-
Government AAA/Aaa income securities.
Securities and
repurchase
agreements
collateralized by
such securities.
----------------------------------------------------------------------------------------
At least 65% of Minimum = Foreign fixed-
total assets in BBB/Baa income, municipal
fixed-income Minimum for and convertible
securities, non-dollar securities, foreign
including U.S. securities = currencies and
Government AA/Aa repurchase
Securities, agreements
corporate, mortgage- collateralized by
backed and asset- U.S. Government
backed securities. Securities.
----------------------------------------------------------------------------------------
Securities of U.S. Minimum = Mortgage-backed and
and foreign BBB/Baa At asset-backed
governments and least 50% = securities, foreign
corporations. AAA/Aaa currencies and
repurchase
agreements
collateralized by
U.S. Government
Securities or
certain foreign
government
securities.
----------------------------------------------------------------------------------------
At least 65% of At least 65% Mortgage-backed and
total assets in = BB/Ba or asset-backed
fixed-income below securities, U.S.
securities rated Government
below investment Securities,
grade, including investment grade
U.S. and non-U.S. corporate fixed-
dollar corporate income securities,
debt, foreign structured
government securities, foreign
securities, currencies and
convertible repurchase
securities and agreements
preferred stock. collateralized by
U.S. Government
Securities.
----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Principal Risks of the Underlying Funds
The following summarizes important risks that apply to the Underlying Funds and
may result in a loss of your investment in a Portfolio. There can be no assur-
ance that an Underlying Fund will achieve its investment objective.
Risks That Apply To All Underlying Funds:
. Interest Rate Risk--The risk that when interest rates increase, fixed-income
securities held by an Underlying Fund will decline in value. Long-term fixed-
income securities will normally have more price volatility because of this
risk than short-term securities.
. Credit/Default Risk--The risk that an issuer or guarantor of fixed-income
securities held by an Underlying Fund (which may have low credit ratings) may
default on its obligation to pay interest and repay principal.
. Market Risk--The risk that the value of the securities in which an Underlying
Fund invests may go up or down in response to the prospects of individual
companies and/or general economic conditions. Price changes may be temporary
or last for extended periods.
. Derivatives Risk--The risk that loss may result from an Underlying Fund's
investments in options, futures, swaps, structured securities and other
derivative instruments. These instruments may be leveraged so that small
changes may produce disproportionate losses to an Underlying Fund.
. Foreign Risk--The risk that when an Underlying Fund invests in foreign
securities, it will be subject to risk of loss not typically associated with
domestic issuers. Loss may result because of less foreign government
regulation, less public information and less economic, political and social
stability. Loss may also result from the imposition of exchange controls,
confiscations and other government restrictions. The Underlying Funds will
also be subject to the risk of negative foreign currency rate fluctuations.
Foreign risks will normally be greatest when an Underlying Fund invests in
issuers located in emerging countries.
. Management Risk--The risk that a strategy used by an investment adviser to the
Underlying Funds may fail to produce the intended results.
. Liquidity Risk--The risk that an Underlying Fund will not be able to pay
redemption proceeds within the time period stated in the Underlying Fund's
Prospectus because of unusual market conditions, an unusually high volume of
redemption requests, or other reasons. Underlying Funds that invest in non-
investment grade fixed-income securities, small capitalization stocks, REITs
or emerging country issuers will be especially subject to the risk that during
certain periods the liquidity of particular issuers or industries, or all
securities within these investment categories, will shrink or disappear
suddenly and without warning as a result of adverse economic, market or
political events, or adverse investor perceptions whether or not accurate.
18
<PAGE>
PRINCIPAL RISKS OF THE UNDERLYING FUNDS
Risks That Apply Primarily To The Underlying Fixed-Income Funds:
. Call Risk--The risk that an issuer will exercise its right to pay principal on
an obligation held by an Underlying Fund (such as a Mortgage-Backed Security)
earlier than expected. This may happen when there is a decline in interest
rates. Under these circumstances, an Underlying Fund may be unable to recoup
all of its initial investment and will also suffer from having to reinvest in
lower yielding securities.
. Extension Risk--The risk that an issuer will exercise its right to pay
principal on an obligation held by an Underlying Fund (such as a Mortgage-
Backed Security) later than expected. This may happen when there is a rise in
interest rates. Under these circumstances, the value of an obligation will
decrease, and an Underlying Fund will also suffer from the inability to invest
in higher yielding securities.
. U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risk That Applies Primarily To The Underlying Equity Funds:
. Stock Risk--The risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high levels.
There is no guarantee that such levels will continue.
19
<PAGE>
Risks That Are Particularly Important For Specific Underlying Funds:
. Geographic Risk--The European Equity Fund invests primarily in equity securi-
ties of European companies. The Japanese Equity Fund invests primarily in
equity securities of Japanese equity companies. The Asia Growth Fund invests
primarily in equity securities of Asian issuers. The Global Income Fund is
non-diversified meaning that it is permitted to invest more of its assets in
fewer issuers than "diversified" mutual funds. Thus, it may be more
susceptible to adverse developments affecting any single issuer held in its
portfolio, and may be more susceptible to greater losses because of these
developments. In addition, the Global Income Fund may invest more than 25% of
its total assets in the securities of corporate and governmental issuers
located in each of Canada, Germany, Japan, and the United Kingdom as well as
in the securities of U.S. issuers. Concentration of the investments of these
or other Underlying Funds in issuers located in a particular country or region
will subject the Underlying Fund, to a greater extent than if investments were
less concentrated, to losses arising from adverse developments affecting those
issuers or countries.
. Emerging Countries Risk--Certain Underlying Funds may invest in emerging coun-
try securities. The securities markets of Asian, Latin American, Eastern Euro-
pean, African and other emerging countries are less liquid, are especially
subject to greater price volatility, have smaller market capitalizations, have
less government regulation and are not subject to as extensive and frequent
accounting, financial and other reporting requirements as the securities mar-
kets of more developed countries. These risks are not normally associated with
investments in more developed countries.
. Small Cap Stock and REIT Risks--Certain Underlying Funds may invest in small
cap stocks and REITs. The securities of small capitalization companies and
REITs involve greater risks than those associated with larger, more estab-
lished companies and may be subject to more abrupt or erratic price movements.
Securities of such issuers may lack sufficient market liquidity to enable an
Underlying Fund to effect sales at an advantageous time or without a substan-
tial drop in price.
. "Junk Bond" Risk--Certain Underlying Funds may invest in non-investment grade
fixed-income securities (commonly known as "junk bonds") that are considered
predominantly speculative by traditional investment standards. Non-investment
grade fixed-income securities and unrated securities of comparable credit
quality are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities may be subject to greater
price volatility due to such factors as specific corporate developments,
interest rate sensitivity, negative perceptions of the junk bond markets gen-
erally and less secondary market liquidity.
20
<PAGE>
DESCRIPTION OF THE UNDERLYING FUNDS
More information about the portfolio securities and investment techniques of
the Underlying Funds, and their associated risks, is provided in Appendix A.
You should consider the investment risks discussed in this section and in
Appendix A. Both are important to your investment choice.
21
<PAGE>
Portfolio Performance
HOW THE PORTFOLIOS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Portfolio by showing: (a) changes in the performance of a Portfo-
lio's Institutional Shares from year to year; and (b) how the average annual
returns of a Portfolio's Institutional Shares compare to those of broad-
based securities market indices. The bar chart and table assume reinvestment
of dividends and distributions. A Portfolio's past performance is not neces-
sarily an indication of how the Portfolio will perform in the future. Per-
formance reflects expense limitations in effect. If expense limitations were
not in place, a Portfolio's performance would have been reduced. The Conser-
vative Strategy Portfolio did not commence operations until February 8,
1999. Since the Portfolio had less than one calendar year's performance as
of December 31, 1999, no performance information is provided in this sec-
tion.
22
<PAGE>
PORTFOLIO PERFORMANCE
Balanced Strategy Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '98 +7.25%
Worst Quarter
Q3 '98 -5.65%
[GRAPH]
6.99% 10.92%
---- -----
1998 1999
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
--------------------------------------------------------------------
<S> <C> <C>
Institutional Shares (Inception 1/2/98) 10.92% 8.95%
S&P 500 Index* 21.04% 24.75%
Two-Year U.S. Treasury Security** 1.89% 4.20%
Lehman Brothers High Yield Bond Index*** 2.39% 2.13%
--------------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks, an
unmanaged index of common stocks. The Index figures do not reflect any fees
or expenses.
** The Two-Year U.S. Treasury security, as reported by Merrill Lynch, does not
reflect any fees or expenses.
*** The Lehman Brothers High Yield Bond Index is a total return performance
benchmark for fixed-income securities having a maximum quality rating of
Ba1, a minimum amount outstanding of $100 million and at least one year to
maturity. The Index is unmanaged and does not reflect any fees or expenses.
23
<PAGE>
Growth and Income Strategy Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '98 +10.34%
Worst Quarter
Q3 '98 -10.09%
[GRAPH]
6.96% 16.14%
----- ------
1998 1999
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
----------------------------------------------------------------------------
<S> <C> <C>
Institutional Shares (Inception 1/2/98) 16.14% 11.47%
S&P 500 Index* 21.04% 24.75%
MSCI Europe, Australasia, Far East (EAFE) Index
(unhedged)** 27.29% 23.76%
Lehman Brothers Aggregate Bond Index*** (0.82)% 3.82%
Lehman Brothers High Yield Bond Index+ 2.39% 2.13%
----------------------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks, an
unmanaged index of common stocks. The Index figures do not reflect any fees
or expenses.
** The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-weighted
composite of securities in 28 developed markets. The Index figures do not
reflect any fees or expenses.
*** The Lehman Brothers Aggregate Bond Index represents a diversified portfolio
of fixed-income securities, including U.S. Treasuries, investment-grade
corporate bonds, and mortgage-backed and asset-backed securities. The Index
figures do not reflect any fees or expenses.
+ The Lehman Brothers High Yield Bond Index is a total return performance
benchmark for fixed-income securities having a maximum quality rating of
Ba1, a minimum amount outstanding of $100 million and at least one year to
maturity. The Index is unmanaged and does not reflect any fees or expenses.
24
<PAGE>
PORTFOLIO PERFORMANCE
Growth Strategy Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 +13.21%
Worst Quarter
Q3 '98 -14.16%
[GRAPH]
4.92% 21.24%
----- ------
1998 1999
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Institutional Shares (Inception 1/2/98) 21.24% 12.80%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI Emerging Markets Free (EMF) Index+ 66.42% 11.47%
------------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks, an
unmanaged index of common stocks. The Index figures do not reflect any fees
or expenses.
** The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-weighted
composite of securities in 20 developed markets. The Index figures do not
reflect any fees or expenses.
*** The Russell 2000 Index is an unmanaged index of common stock prices. The
Index figures do not reflect any fees or expenses.
+ The unmanaged MSCI EMF Index is a market capitalization weighted composite
of securities in over 30 emerging market countries. "Free" indicates an
index that excludes shares in otherwise free markets that are not
purchasable by foreigners. The Index figures do not reflect any fees or
expenses.
25
<PAGE>
Aggressive Growth Strategy Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 +15.93%
Worst Quarter
Q3 '98 -17.19%
[GRAPH]
2.80% 25.74%
----- ------
1998 1999
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Institutional Shares (Inception 1/2/98) 25.74% 13.71%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI EMF Index+ 66.42% 11.47%
------------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks, an
unmanaged index of common stocks. The Index figures do not reflect any fees
or expenses.
** The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-weighted
composite of securities in 20 developed markets. The Index figures do not
reflect any fees or expenses.
*** The Russell 2000 Index is an unmanaged index of common stock prices. The
Index figures do not reflect any fees or expenses.
+ The unmanaged MSCI EMF Index is a market capitalization weighted composite
of securities in over 30 emerging market countries. "Free" indicates an
index that excludes shares in otherwise free markets that are not
purchasable by foreigners. The Index figures do not reflect any fees or
expenses.
26
<PAGE>
[This page intentionally left blank]
27
<PAGE>
Portfolio Fees and Expenses (Institutional Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Institutional Shares of a Portfolio.
<TABLE>
<CAPTION>
Conservative Balanced
Strategy Strategy
Portfolio Portfolio
- ------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases None None
Maximum Deferred Sales Charge (Load) None None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends None None
Redemption Fees None None
Exchange Fees None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):/1/
Management Fees (for asset allocation)/2/ 0.35% 0.35%
Other Expenses/3/ 2.60% 0.30%
Underlying Fund Expenses/1/ 0.55% 0.69%
- ------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 3.15% 0.99%
- ------------------------------------------------------------------------------
Total Portfolio Operating Expenses* 3.50% 1.34%
- ------------------------------------------------------------------------------
</TABLE>
See page 30 for all other footnotes.
* As a result of current waivers and expense limita-
tions, "Other Expenses" and "Total Portfolio Operating
Expenses" of the Portfolio which are actually incurred
are as set forth below. The waivers and expense limi-
tations may be terminated at any time at the option of
the Investment Adviser. If this occurs, "Other
Expenses" and "Total Portfolio Operating Expenses" may
increase without shareholder approval.
<TABLE>
<CAPTION>
Conservative Balanced
Strategy Strategy
Portfolio Portfolio
-------------------------------------------------------------------------------
<S> <C> <C>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):/1/
Management Fees (for asset allocation)/2/ 0.15% 0.15%
Other Expenses/3/ 0.04% 0.04%
Underlying Fund Expenses/1/ 0.55% 0.69%
-------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 0.59% 0.73%
-------------------------------------------------------------------------------
Total Portfolio Operating Expenses (after current
waivers and expense limitations) 0.74% 0.88%
-------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
PORTFOLIO FEES AND EXPENSES
<TABLE>
<CAPTION>
Growth and Aggressive
Income Growth Growth
Strategy Strategy Strategy
Portfolio Portfolio Portfolio
- -----------------------------------------------
<S> <C> <C>
None None None
None None None
None None None
None None None
None None None
0.35% 0.35% 0.35%
0.10% 0.12% 0.25%
0.79% 0.84% 0.90%
- -----------------------------------------------
0.89% 0.96% 1.15%
- -----------------------------------------------
1.24% 1.31% 1.50%
- -----------------------------------------------
<CAPTION>
Growth and Aggressive
Income Growth Growth
Strategy Strategy Strategy
Portfolio Portfolio Portfolio
- -----------------------------------------------
<S> <C> <C>
0.15% 0.15% 0.15%
0.04% 0.04% 0.04%
0.79% 0.84% 0.90%
- -----------------------------------------------
0.83% 0.88% 0.94%
- -----------------------------------------------
0.98% 1.03% 1.09%
- -----------------------------------------------
</TABLE>
29
<PAGE>
Portfolio Fees and Expenses continued
/1/The Portfolios' annual operating expenses have been restated to reflect cur-
rent fees, except for the Conservative Strategy Portfolio, whose expenses are
estimated for the current fiscal year. "Underlying Fund Expenses" for each
Portfolio are based upon the strategic allocation of each Portfolio's invest-
ment in the Underlying Funds and upon the actual total operating expenses of
the Underlying Funds (including any current waivers and expense limitations
of the Underlying Funds). Actual Underlying Fund expenses incurred by each
Portfolio may vary with changes in the allocation of each Portfolio's assets
among the Underlying Funds and with other events that directly affect the
expenses of the Underlying Funds.
/2/The Investment Adviser has voluntarily agreed not to impose a portion of the
management fee on the Portfolios equal to 0.20% of the Portfolios' average
daily net assets. As a result of fee waivers, current management fees of the
Portfolios are 0.15% of each Portfolio's average daily net assets. The
waivers may be terminated at any time at the option of the Investment
Adviser.
/3/"Other Expenses" include transfer agency fees equal to 0.04% of the average
daily net assets of each Portfolio's Institutional Shares plus all other
ordinary expenses not detailed above. The Investment Adviser has voluntarily
agreed to reduce or limit "Other Expenses" (excluding management fees, trans-
fer agency fees, taxes, interest and brokerage fees and litigation, indemni-
fication and other extraordinary expenses) to 0.00% of each Portfolio's aver-
age daily net assets.
30
<PAGE>
PORTFOLIO FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Portfolio (without the waivers and expense limitations) with the cost of
investing in other mutual funds. The Example assumes that you invest $10,000 in
Institutional Shares of a Portfolio for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that a Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Conservative Strategy $353 $1,074 $1,817 $3,774
- -----------------------------------------------------------
Balanced Strategy $136 $ 425 $ 734 $1,613
- -----------------------------------------------------------
Growth and Income Strategy $126 $ 393 $ 681 $1,500
- -----------------------------------------------------------
Growth Strategy $133 $ 415 $ 718 $1,579
- -----------------------------------------------------------
Aggressive Growth Strategy $153 $ 474 $ 818 $1,791
- -----------------------------------------------------------
</TABLE>
Institutions that invest in Institutional Shares on behalf of their customers
may charge other fees directly to their customer accounts in connection with
their investments. You should contact your institution for information regard-
ing such charges. Such fees, if any, may affect the return such customers real-
ize with respect to their investments.
Certain institutions that invest in Institutional Shares may receive other com-
pensation in connection with the sale and distribution of Institutional Shares
or for services to their customers' accounts and/or the Portfolios. For addi-
tional information regarding such compensation, see "Shareholder Guide" in the
Prospectus and "Other Information" in the Additional Statement.
31
<PAGE>
Service Providers
INVESTMENT ADVISERS
<TABLE>
<CAPTION>
Investment Adviser Portfolio
-----------------------------------------------------
<S> <C>
Goldman Sachs Asset
Management ("GSAM") Conservative Strategy
32 Old Slip Balanced Strategy
New York, New York 10005 Growth and Income Strategy
Growth Strategy
Aggressive Growth Strategy
-----------------------------------------------------
</TABLE>
Except as noted below, GSAM also serves as investment adviser to each Under-
lying Fund.
<TABLE>
<CAPTION>
Investment Adviser Underlying Fund
-----------------------------------------------------
<S> <C>
Goldman Sachs Funds
Management, L.P.
("GSFM") CORE U.S. Equity
32 Old Slip Capital Growth
New York, New York 10005 Adjustable Rate Government
Short Duration Government
-----------------------------------------------------
Goldman Sachs Asset
Management International Equity
International ("GSAMI") Japanese Equity
Procession House European Equity
55 Ludgate Hill International Small Cap
London EC4M 7JW Emerging Markets Equity
England Asia Growth
Global Income
-----------------------------------------------------
</TABLE>
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM, GSAMI and GSFM. Goldman Sachs registered as an invest-
ment adviser in 1981. GSAMI, a member of the Investment Management Regula-
tory Organization Limited since 1990 and a registered investment adviser
since 1991, is an affiliate of Goldman Sachs. GSFM, a registered investment
adviser since 1990, is a Delaware limited partnership which is an affiliate
of Goldman Sachs. The Goldman Sachs Group, L.P., which controlled the
Investment Advisers, merged into the Goldman Sachs Group, Inc. as a result
of an initial public offering. As of December 31, 1999, GSAM, GSAMI and
GSFM, along with other units of IMD, had assets under management of $258.5
billion.
32
<PAGE>
SERVICE PROVIDERS
Under an Asset Allocation Management Agreement with each Portfolio, the
Investment Adviser, subject to the general supervision of the Trustees, pro-
vides day-to-day advice as to each Portfolio's investment transactions,
including determinations concerning changes to (a) the Underlying Funds in
which the Portfolios may invest; and (b) the percentage range of assets of
any Portfolio that may be invested in the Underlying Equity Funds and the
Underlying Fixed-Income Funds as separate groups.
The Investment Adviser also performs the following additional services for
the Portfolios:
. Supervises all non-advisory operations of the Portfolios
. Provides personnel to perform necessary executive, administrative and
clerical services to the Portfolios
. Arranges for the preparation of all required tax returns, reports to
shareholders, prospectuses and statements of additional information and
other reports filed with the Securities and Exchange Commission (the
"SEC") and other regulatory authorities
. Maintains the records of each Portfolio
. Provides office space and all necessary office equipment and services
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate
For the Fiscal Year Ended
Portfolio Contractual Rate December 31, 1999
------------------------------------------------------------------------
<S> <C> <C>
Conservative Strategy 0.35% 0.15%
------------------------------------------------------------------------
Balanced Strategy 0.35% 0.15%
------------------------------------------------------------------------
Growth and Income Strategy 0.35% 0.15%
------------------------------------------------------------------------
Growth Strategy 0.35% 0.15%
------------------------------------------------------------------------
Aggressive Growth Strategy 0.35% 0.15%
------------------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Portfolios reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
33
<PAGE>
In addition, each Portfolio, as a shareholder in the Underlying Funds, will
indirectly bear a proportionate share of any investment management fees and
other expenses paid by the Underlying Funds. The following chart shows the
total net operating expense ratios (management fee plus other operating
expenses) of Institutional Shares of each Underlying Fund in which the Portfo-
lios may invest after applicable fee waivers and expense limitations, as of the
end of each Underlying Fund's most recent fiscal year. In addition, the follow-
ing chart shows the contractual investment management fees payable to the
investment adviser and its affiliates by the Underlying Funds (in each case as
an annualized percentage of a Fund's average net assets). Absent voluntary fee
waivers and/or expense reimbursements, which may be discontinued at any time,
the total operating expense ratios of certain Underlying Funds would be higher.
<TABLE>
<CAPTION>
Total Net
Contractual Operating
Management Expense
Underlying Fund Fee Ratio
- ---------------------------------------------------------
<S> <C> <C>
Financial Square Prime Obligations 0.205% 0.18%
- ---------------------------------------------------------
Short Duration Government 0.50% 0.54%
- ---------------------------------------------------------
Adjustable Rate Government 0.40% 0.49%
- ---------------------------------------------------------
Core Fixed Income 0.40% 0.54%
- ---------------------------------------------------------
Government Income 0.65% 0.58%
- ---------------------------------------------------------
Global Income 0.90% 0.69%
- ---------------------------------------------------------
High Yield 0.70% 0.76%
- ---------------------------------------------------------
Growth and Income 0.70% 0.79%
- ---------------------------------------------------------
CORE U.S. Equity 0.75% 0.74%
- ---------------------------------------------------------
CORE Large Cap Growth 0.75% 0.64%
- ---------------------------------------------------------
CORE Large Cap Value 0.60% 0.64%
- ---------------------------------------------------------
CORE Small Cap Equity 0.85% 0.93%
- ---------------------------------------------------------
Capital Growth 1.00% 1.04%
- ---------------------------------------------------------
CORE International Equity 0.85% 1.01%
- ---------------------------------------------------------
Mid Cap Value* 0.75% 0.89%
- ---------------------------------------------------------
Small Cap Value 1.00% 1.10%
- ---------------------------------------------------------
International Equity 1.00% 1.14%
- ---------------------------------------------------------
Japanese Equity 1.00% 1.05%
- ---------------------------------------------------------
European Equity 1.00% 1.14%
- ---------------------------------------------------------
International Small Cap 1.20% 1.40%
- ---------------------------------------------------------
Emerging Markets Equity 1.20% 1.39%
- ---------------------------------------------------------
Asia Growth 1.00% 1.20%
- ---------------------------------------------------------
Real Estate Securities 1.00% 1.04%
- ---------------------------------------------------------
</TABLE>
*Formerly, "Mid Cap Equity."
34
<PAGE>
SERVICE PROVIDERS
PORTFOLIO MANAGERS
Robert B. Litterman, Ph.D., a Managing Director of Goldman Sachs, is the co-
developer, along with the late Fischer Black, of the Black-Litterman Global
Asset Allocation Model, a key tool in IMD's asset allocation process. As
Director of Quantitative Resources, Dr. Litterman oversees Quantitative
Equities, the Quantitative Strategies Group, the Investment Performance &
Valuation Oversight Group, and the Client Research Groups. In total, these
groups include over 120 professionals. Prior to moving to IMD, Dr. Litterman
was the head of the Firmwide Risk department since becoming a Partner in
1994. Preceding his time in the Operations, Technology & Finance Division,
Dr. Litterman spent eight years in the Fixed Income Division's research
department where he was co-director of the research and model development
group.
Quantitative Strategies Group
. The 30-person Quantitative Strategies Group includes eight Ph.Ds, with
extensive academic and practitioner experience
. Disciplined, quantitative models are used to determine the relative
attractiveness of the world's stock, bond and currency markets
. Theory and economic intuition guide the investment process
- --------------------------------------------------------------------------------
Quantitative Strategies Group
<TABLE>
<CAPTION>
Years Primarily
Name and Title Responsible Five Year Employment History
- --------------------------------------------------------------------------------
<C> <C> <S>
Mark M. Carhart, Since Dr. Carhart joined the Investment
Ph.D., CFA Managing 1998 Adviser as a member of the Quantitative
Director, Co-Head Strategies Group in 1997. From August
Quantitative 1995 to September 1997, he was Assistant
Strategies and Senior Professor of Finance at the Marshall
Portfolio Manager School of Business at USC and a Senior
Fellow of the Wharton Financial
Institutions Center. From 1993 to 1995,
he was a lecturer and graduate student
at the University of Chicago Graduate
School of Business.
- --------------------------------------------------------------------------------
Raymond J. Iwanowski Since Mr. Iwanowski joined the Investment
Managing Director, Co- 1998 Adviser as an associate and portfolio
Head Quantitative manager in 1997. From 1993 to 1997, he
Strategies and Senior was a Vice President and head of the
Portfolio Manager Fixed Derivatives Client Research group
at Salomon Brothers.
- --------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
Quantitative Strategies Group
<TABLE>
<CAPTION>
Years Primarily
Name and Title Responsible Five Year Employment History
- --------------------------------------------------------------------------------
<C> <C> <S>
Donald M. Raymond, Since Prior to joining the Investment Adviser
Ph.D. Vice President 1998 in July 1988, Dr. Raymond spent four
and Portfolio Manager years as head of Fixed Income Research
and Chief Strategist for Goldman Sachs
Canada. Prior to joining the Investment
Adviser, Dr. Raymond worked for a
Canadian Investment Bank for three
years, where he developed fixed income
cash and derivative pricing models, and
portfolio arbitrage strategies.
- --------------------------------------------------------------------------------
Giorgio De Santis, Since Dr. DeSantis joined the Investment
Ph.D. Vice President 1998 Adviser in 1998. From 1992 to 1998, he
and Portfolio Manager was Assistant Professor of Finance and
Business Economics at the Marshall
School of Business at USC.
- --------------------------------------------------------------------------------
William J. Fallon, Since Dr. Fallon joined the Investment Adviser
Ph.D. Vice President 1998 in 1998. From 1996 to 1998, he worked in
and Portfolio Manager the Firmwide Risk Group of Goldman
Sachs. From 1991 to 1996, he attended
Columbia University, where he earned a
Ph.D. in Finance.
- --------------------------------------------------------------------------------
Guang-Liang He, Ph.D. Since Dr. He joined the Investment Adviser in
Vice President and 1998 1998. In 1997, he worked in the Firmwide
Portfolio Manager Risk Group of Goldman Sachs. From 1992
to 1997, he worked at Quantitative
Financial Strategies, Inc. where he was
responsible for the research and
development of proprietary trading
models.
- --------------------------------------------------------------------------------
</TABLE>
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Portfolio's shares.
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois, 60606-6372, also serves
as each Portfolio's transfer agent (the "Transfer Agent") and, as such, per-
forms various shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Underlying Funds or Portfolios. Goldman Sachs reserves
the right to redeem at any time some or all of the shares acquired for its
own account.
36
<PAGE>
SERVICE PROVIDERS
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS
The involvement of the Investment Adviser, Goldman Sachs and their affili-
ates in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect
to an Underlying Fund or limit an Underlying Fund's investment activities.
Goldman Sachs and its affiliates engage in proprietary trading and advise
accounts and funds which have investment objectives similar to those of the
Underlying Funds and/or which engage in and compete for transactions in the
same types of securities, currencies and instruments as the Underlying
Funds. Goldman Sachs and its affiliates will not have any obligation to make
available any information regarding their proprietary activities or strate-
gies, or the activities or strategies used for other accounts managed by
them, for the benefit of the management of the Underlying Funds. The results
of an Underlying Fund's investment activities, therefore, may differ from
those of Goldman Sachs and its affiliates, and it is possible that an Under-
lying Fund could sustain losses during periods in which Goldman Sachs and
its affiliates and other accounts achieve significant profits on their trad-
ing for proprietary or other accounts. In addition, the Underlying Funds
may, from time to time, enter into transactions in which other clients of
Goldman Sachs have an adverse interest. An Underlying Fund's activities may
be limited because of regulatory restrictions applicable to Goldman Sachs
and its affiliates, and/or their internal policies designed to comply with
such restrictions.
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology problems associated with the transition to Year 2000 and to
confirm that its service providers did the same. As a result of those
efforts, Goldman Sachs did not experience any material disruptions in its
operations as a result of the transition to the Year 2000.
37
<PAGE>
Dividends
Each Fund pays dividends from its net investment income and capital gain net
income. You may choose to have dividends paid in:
. Cash
. Additional shares of the same class of the same Fund
. Shares of the same or an equivalent class of another Goldman Sachs Fund. Spe-
cial restrictions may apply for certain ILA Portfolios. See the Additional
Statement.
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time before the record date for a
particular dividend. If you do not indicate any choice, dividends will be rein-
vested automatically in the applicable Fund.
The election to reinvest dividends in additional shares will not affect the tax
treatment of such dividends, which will be treated as received by you and then
used to purchase the shares.
Dividends from net investment income and capital gain net income are declared
and paid as follows:
<TABLE>
<CAPTION>
Net Investment Capital Gain
Portfolio Income Net Income
- -------------------------------------------------------
<S> <C> <C>
Conservative Strategy Monthly Annually
- -------------------------------------------------------
Balanced Strategy Quarterly Annually
- -------------------------------------------------------
Growth and Income Strategy Quarterly Annually
- -------------------------------------------------------
Growth Strategy Annually Annually
- -------------------------------------------------------
Aggressive Growth Strategy Annually Annually
- -------------------------------------------------------
</TABLE>
From time to time a portion of a Portfolio's dividends may constitute a return
of capital.
At the time of an investor's purchase of shares of a Portfolio, a portion of
the net asset value ("NAV") per share may be represented by undistributed
income or undistributed realized appreciation of the Portfolio's portfolio
securities. Therefore, subsequent distributions on such shares from such income
or realized appreciation may be taxable to you even if the NAV of the shares
is, as a result of the distributions, reduced below the cost of such shares and
the distributions (or portions thereof) represent a return of a portion of the
purchase price.
38
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Institutional
Shares.
HOW TO BUY SHARES
How Can I Purchase Institutional Shares Of The Funds?
You may purchase Institutional Shares on any business day at their NAV next
determined after receipt of an order. No sales load is charged. You should
place an order with Goldman Sachs at 1-800-621-2550 and either:
. Wire federal funds to The Northern Trust Company ("Northern"), as
subcustodian for State Street Bank and Trust Company ("State Street")
(each Fund's custodian) on the next business day; or
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds--
(Name of Fund and Class of Shares), 4900 Sears Tower--60th Floor, Chicago,
IL 60606-6372. The Fund will not accept a check drawn on a foreign bank or
a third-party check.
In order to make an initial investment in a Fund, you must furnish to the
Fund or Goldman Sachs the Account Application. Purchases of Institutional
Shares must be settled within three business days of receipt of a complete
purchase order.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
How Do I Purchase Shares Through A Financial Institution?
Certain institutions (including banks, trust companies, brokers and invest-
ment advisers) that provide recordkeeping, reporting and processing services
to their customers may be authorized to accept, on behalf of Goldman Sachs
Trust (the "Trust"), purchase, redemption and exchange orders placed by or
on behalf of their customers, and may designate other intermediaries to
accept such orders, if approved by the Trust. In these cases:
. A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized institution or intermediary on a busi-
ness day, and the order will be priced at the Fund's NAV next determined
after such acceptance.
39
<PAGE>
. Authorized institutions and intermediaries will be responsible for trans-
mitting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your institution or intermediary to learn whether it is
authorized to accept orders for the Trust.
These institutions may receive payments from the Funds or Goldman Sachs for
the services provided by them with respect to the Funds' Institutional
Shares. These payments may be in addition to other payments borne by the
Funds.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to certain institutions and other persons in
connection with the sale, distribution and/or servicing of shares of the
Funds and other Goldman Sachs Funds. Additional compensation based on sales
may, but is currently not expected to, exceed 0.50% (annualized) of the
amount invested.
In addition to Institutional Shares, each Fund also offers other classes of
shares to investors. These other share classes are subject to different fees
and expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than Institutional
Shares. Information regarding these other share classes may be obtained from
your sales representative or from Goldman Sachs by calling the number on the
back cover of this Prospectus.
40
<PAGE>
SHAREHOLDER GUIDE
What is My Minimum Investment in the Funds?
<TABLE>
<CAPTION>
Type of Investor Minimum Investment
-------------------------------------------------------------------------------
<S> <C>
. Banks, trust companies or $1,000,000 in Institutional Shares of a Fund
other depository alone or in combination with other assets
institutions investing for under the management of GSAM and its affiliates
their own account or on
behalf of clients
. Pension and profit sharing
plans, pension funds and
other company-sponsored
benefit plans
. State, county, city or any
instrumentality,
department, authority or
agency thereof
. Corporations with at least
$100 million in assets or
in outstanding publicly
traded securities
. "Wrap" account sponsors
(provided they have an
agreement covering the
arrangement with GSAM)
. Registered investment
advisers investing for
accounts for which they
receive asset-based fees
-------------------------------------------------------------------------------
. Individual investors $10,000,000
. Qualified non-profit
organizations, charitable
trusts, foundations and
endowments
. Accounts over which GSAM or
its advisory affiliates
have investment discretion
-------------------------------------------------------------------------------
</TABLE>
The minimum investment requirement may be waived for current and former
officers, partners, directors or employees of Goldman Sachs or any of its
affiliates or for other investors at the discretion of the Trust's officers.
No minimum amount is required for subsequent investments.
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Modify or waive the minimum investment amounts.
. Reject or restrict any purchase or exchange orders by a particular pur-
chaser (or group of related purchasers). This may occur, for example, when
a pattern of frequent purchases, sales or exchanges of Institutional
Shares of a Fund is evident, or if purchases, sales or exchanges are, or a
subsequent abrupt redemption might be, of a size that would disrupt the
management of a Fund.
. Close a Fund to new investors from time to time and reopen any such Fund
whenever it is deemed appropriate by a Fund's Investment Adviser.
41
<PAGE>
The Funds may allow you to purchase shares with securities instead of cash
if consistent with a Fund's investment policies and operations and if
approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Institutional
Shares is determined by a Fund's NAV. The Funds calculate NAV as follows:
<TABLE>
<S> <C>
(Value of Assets of the Class)
NAV = - (Liabilities of the Class)
-----------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
The Funds' investments are valued based on market quotations or, if accurate
quotations are not readily available, the fair value of the Fund's invest-
ments may be determined in good faith under procedures established by the
Trustees.
. NAV per share of each class is calculated by State Street on each business
day as of the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. New York time). Fund shares will not be priced on any
day the New York Stock Exchange is closed.
. When you buy shares, you pay the NAV next calculated after the Funds
receive your order in proper form.
. When you sell shares, you receive the NAV next calculated after the Funds
receive your order in proper form.
Note: The time at which transactions and shares are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
Foreign securities may trade in their local markets on days a Fund is
closed. As a result if the Fund holds foreign securities, its NAV may be
impacted on days when investors may not purchase or redeem Fund shares.
In addition, the impact of events that occur after the publication of market
quotations used by a Fund to price its securities (for example, in foreign
markets), but before the close of regular trading on the New York Stock
Exchange will normally not be reflected in a Fund's next determined NAV
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.
42
<PAGE>
SHAREHOLDER GUIDE
HOW TO SELL SHARES
How Can I Sell Institutional Shares Of The Funds?
You may arrange to take money out of your account by selling (redeeming)
some or all of your shares. Generally, each Fund will redeem its Institu-
tional Shares upon request on any business day at their NAV next determined
after receipt of such request in proper form. You may request that redemp-
tion proceeds be sent to you by check or by wire (if the wire instructions
are on record). Redemptions may be requested in writing or by telephone.
<TABLE>
<CAPTION>
Instructions For
Redemptions:
---------------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund names and Class of Shares
. The dollar amount you want to sell
. How and where to send the proceeds
. Mail your request to:
Goldman Sachs Funds
4900 Sears Tower--60th Floor
Chicago, IL 60606-6372
---------------------------------------------------------------------
By Telephone: If you have elected the telephone
redemption privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
---------------------------------------------------------------------
</TABLE>
Certain institutions and intermediaries are authorized to accept redemption
requests on behalf of the Funds as described under "How Do I Purchase Shares
Through A Financial Institution?"
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing
and signed by an authorized person designated on the Account Application.
The
43
<PAGE>
written request may be confirmed by telephone with both the requesting
party and the designated bank account to verify instructions.
. The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
How Are Redemption Proceeds Paid?
By Wire: You may arrange for your redemption proceeds to be wired as federal
funds to the bank account designated in your Account Application. The fol-
lowing general policies govern wiring redemption proceeds:
. Redemption proceeds will normally be wired on the next business day in
federal funds (for a total of one business day delay), but may be paid up
to three business days following receipt of a properly executed wire
transfer redemption request. If you are selling shares you recently paid
for by check, the Fund will pay you when your check has cleared, which may
take up to 15 days. If the Federal Reserve Bank is closed on the day that
the redemption proceeds would ordinarily be wired, wiring the redemption
proceeds may be delayed one additional business day.
. To change the bank designated on your Account Application, you must send
written instructions signed by an authorized person designated on the
Account Application to the Transfer Agent.
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of your bank or any intermediaries in
the transfer process. If a problem with such performance arises, you
should deal directly with your bank or any such intermediaries.
By Check: You may elect in writing to receive your redemption proceeds by
check. Redemption proceeds paid by check will normally be mailed to the
address of record within three business days of a properly executed redemp-
tion request. If you are selling shares you recently paid for by check, the
Fund will pay you when your check has cleared, which may take up to 15 days.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Institutions (including banks, trust companies, brokers and investment
advisers) are responsible for the timely transmittal of redemption
requests by their customers to the Transfer Agent. In order to facilitate
the timely transmittal of redemption requests, these institutions may set
times by which they must receive
44
<PAGE>
SHAREHOLDER GUIDE
redemption requests. These institutions may also require additional docu-
mentation from you.
The Trust reserves the right to:
. Redeem your shares if your account balance falls below $50 as a result of
earlier redemptions. The Funds will not redeem your shares on this basis
if the value of your account falls below the minimum account balance
solely as a result of market conditions. The Fund will give you 60 days'
prior written notice to allow you to purchase sufficient additional shares
of the Fund in order to avoid such redemption.
. Redeem your shares in other circumstances determined by the Board of
Trustees to be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distribu-
tions be returned to the Fund as undeliverable or remain uncashed for six
months. In addition, that distribution and all future distributions pay-
able to you will be reinvested at NAV in additional Fund shares. No inter-
est will accrue on amounts represented by uncashed distribution or redemp-
tion checks.
Can I Exchange My Investment From One Fund To Another?
You may exchange Institutional Shares of a Fund at NAV for Institutional
Shares of any other Goldman Sachs Fund. The exchange privilege may be mate-
rially modified or withdrawn at any time upon 60 days' written notice to
you.
<TABLE>
<CAPTION>
Instructions For
Exchanging
Shares:
------------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund names and Class of Shares
. The dollar amount to be exchanged
. Mail the request to:
Goldman Sachs Funds
4900 Sears Tower--60th Floor
Chicago, IL 60606-6372
------------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
------------------------------------------------------------------
</TABLE>
45
<PAGE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically regis-
tered account.
. Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized per-
son designated on the Account Application.
. Exchanges are available only in states where exchanges may be legally
made.
. It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I
Need To Know About Telephone Redemption Requests?" in an effort to prevent
unauthorized or fraudulent telephone exchange requests.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
What Types of Reports Will I Be Sent Regarding Investments In Institutional
Shares?
You will receive an annual report containing audited financial statements
and a semi-annual report. To eliminate unnecessary duplication, only one
copy of such reports will be sent to shareholders with the same mailing
address. If you would like a duplicate copy to be mailed to you, please con-
tact Goldman Sachs Funds at 1-800-621-2550. You will also be provided with a
printed confirmation for each transaction in your account and a monthly
account statement. The Funds do not generally provide sub-accounting servic-
es.
46
<PAGE>
Taxation
TAXABILITY OF DISTRIBUTIONS
As with any investment, you should consider how your investment in the Port-
folios will be taxed. The tax information below is provided as general
information. More tax information is available in the Additional Statement.
You should consult your tax adviser about the federal, state, local or for-
eign tax consequences of your investment in the Portfolios.
Unless your investment is an IRA or other tax-advantaged account, you should
consider the possible tax consequences of Portfolio distributions and the
sale of your Portfolio shares.
TAXES ON DISTRIBUTIONS
Distributions you receive from the Portfolios are generally subject to fed-
eral income tax, and may also be subject to state or local taxes. This is
true whether you reinvest your distributions in additional Portfolio shares
or receive them in cash. For federal tax purposes, the Portfolios' income
dividend distributions and short-term capital gain distributions are taxable
to you as ordinary income. Any long-term capital gain distributions are tax-
able as long-term capital gains, no matter how long you have owned your
Portfolio shares.
Although distributions are generally treated as taxable to you in the year
they are paid, distributions declared in October, November or December but
paid in January are taxable as if they were paid in December. A percentage
of the Portfolios' dividends paid to corporate shareholders may be eligible
for the corporate dividends-received deduction. The Portfolios will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
The REIT investments of the underlying Real Estate Securities Fund often do
not provide complete tax information to the Fund until after the calendar
year-end. Consequently, because of the delay, it may be necessary for the
Portfolios to request permission to extend the deadline for issuance of
Forms 1099-DIV beyond January 31.
Each Portfolio may be subject to foreign withholding or other foreign taxes
on income or gain from certain foreign securities. In general, the Portfo-
lios may deduct these taxes in computing their taxable income.
47
<PAGE>
If you buy shares of a Portfolio before it makes a distribution, the distri-
bution will be taxable to you even though it may actually be a return of a
portion of your investment. This is known as "buying a dividend."
TAXABILITY OF SALES AND EXCHANGES
Your sale of Portfolio shares is a taxable transaction for federal income
tax purposes, and may also be subject to state and local taxes. For tax pur-
poses, the exchange of your Portfolio shares for shares of a different
Goldman Sachs Fund is the same as a sale. When you sell your shares, you
will generally recognize a capital gain or loss in an amount equal to the
difference between your adjusted tax basis in the shares and the amount
received. Generally, this gain or loss will be long-term or short-term
depending on whether your holding period for the shares exceeds twelve
months, except that any loss realized on shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gain dividends that were received on the shares.
OTHER INFORMATION
When you open your account, you should provide your social security or tax
identification number on your Account Application. By law, each Portfolio
must withhold 31% of your taxable distributions and any redemption proceeds
if you do not provide your correct taxpayer identification number, or cer-
tify that it is correct, or if the IRS instructs the Portfolio to do so.
Non-U.S. investors may be subject to U.S. withholding and estate tax.
48
<PAGE>
Appendix A
Additional Information on the Underlying Funds
This Appendix provides further information on certain types of securities
and techniques that may be used by the Underlying Funds, including their
associated risks. Additional information is provided in the Additional
Statement, which is available upon request, and in the prospectuses of the
Underlying Funds.
The Underlying Equity Funds invest primarily in common stocks and other
equity securities, including preferred stocks, interests in real estate
investment trusts, convertible debt obligations, convertible preferred
stocks, equity interests in trusts, partnerships, joint ventures, limited
liability companies and similar enterprises, warrants and stock purchase
rights ("equity securities"). The Underlying Fixed-Income Funds invest pri-
marily in fixed-income securities, including senior and subordinated corpo-
rate debt obligations (such as bonds, debentures, notes and commercial
paper), convertible and non-convertible corporate debt obligations, loan
participations and preferred stock.
The Short-Duration Government and Adjustable Rate Government Funds invest in
U.S. Government Securities and related repurchase agreements, and neither of
these Underlying Funds, the Government Income Fund nor the Financial Square
Prime Obligations Fund makes foreign investments. The investments of the
Financial Square Prime Obligations Fund are limited by SEC regulations
applicable to money market funds as described in its prospectus, and do not
include many of the types of investments discussed below that are permitted
for the other Underlying Funds. With these exceptions, and the further
exceptions noted below, the following description applies generally to the
Underlying Funds.
A. General Risks of the Underlying Funds
The Underlying Equity Funds will be subject to the risks associated with
common stocks and other equity securities. In general, stock values fluctu-
ate in response to the activities of individual companies and in response to
general market and economic conditions. Accordingly, the value of the stocks
that an Underlying Fund holds may decline over short or extended periods.
The stock markets tend to be cyclical, with periods when stock prices gener-
ally rise and periods when prices generally decline.
The Underlying Fixed-Income Funds will be subject to the risks associated
with fixed-income securities. These risks include interest rate risk, credit
risk and call/extension risk. In general, interest rate risk involves the
risk that when interest
49
<PAGE>
rates decline, the market value of fixed-income securities tends to increase
than other debt securities (although many mortgage related securities will
have less potential than other debt securities for capital appreciation dur-
ing periods of declining rates). Conversely, when interest rates increase,
the market value of fixed-income securities tends to decline. Credit risk
involves the risk that an issuer could default on its obligations, and an
Underlying Fund will not recover its investment. Call risk and extension
risk are normally present in adjustable rate mortgage loans ("ARMs"), mort-
gage-backed securities. For example, homeowners have the option to prepay
their mortgages. Therefore, the duration of a security backed by home mort-
gages can either shorten (call risk) or lengthen (extension risk). In gener-
al, if interest rates on new mortgage loans fall sufficiently below the
interest rates on existing outstanding mortgage loans, the rate of prepay-
ment would be expected to increase. Conversely, if mortgage loan interest
rates rise above the interest rates on existing outstanding mortgage loans,
the rate of prepayment would be expected to decrease. In either case, a
change in the prepayment rate can result in losses to investors.
The Financial Square Prime Obligations Fund attempts to maintain a stable
NAV of $1.00 per share and values its assets using the amortized cost method
in accordance with SEC regulations. There is no assurance, however, that the
Financial Square Prime Obligations Fund will be successful in maintaining
its per share value at $1.00 on a continuous basis. The per share NAVs of
the other Underlying Funds are expected to fluctuate on a daily basis.
The portfolio turnover rates of the Underlying Funds have ranged from 40% to
280% during their most recent fiscal years. A high rate of portfolio turn-
over (100% or more) involves correspondingly greater expenses which must be
borne by an Underlying Fund and its shareholders, and is also likely to
result in higher short-term capital gains taxable to shareholders. The port-
folio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of an Underlying Fund's portfolio securities, excluding securities
having a maturity at the date of purchase of one year or less. There can be
no assurance that the turnover rates of the Underlying Funds will remain
within this range during subsequent fiscal years. Higher turnover rates may
result in higher brokerage costs and expenses for the Underlying Funds. In
addition, higher turnover rates may result in higher taxable realized gains
for shareholders.
B. Other Risks of the Underlying Funds
Risks of Investing in Small Capitalization Companies and REITs. Certain
Underlying Funds may invest in small capitalization companies and REITs.
Investments in small capitalization companies and REITs involve greater risk
and portfolio
50
<PAGE>
APPENDIX A
price volatility than investments in larger capitalization stocks. Among the
reasons for the greater price volatility of these investments are the less
certain growth prospects of smaller firms and the lower degree of liquidity
in the markets for such securities. Small capitalization companies and REITs
may be thinly traded and may have to be sold at a discount from current mar-
ket prices or in small lots over an extended period of time. In addition,
these securities are subject to the risk that during certain periods the
liquidity of particular issuers or industries, or all securities in these
investment categories, will shrink or disappear suddenly and without warning
as a result of adverse economic or market conditions, or adverse investor
perceptions, whether or not accurate. Because of the lack of sufficient mar-
ket liquidity, an Underlying Fund may incur losses because it will be
required to effect sales at a disadvantageous time and only then at a sub-
stantial drop in price. Small capitalization companies and REITs include
"unseasoned" issuers that do not have an established financial history;
often have limited product lines, markets or financial resources; may depend
on or use a few key personnel for management; and may be susceptible to
losses and risks of bankruptcy. Transaction costs for these investments are
often higher than those for larger capitalization companies. Investments in
small capitalization companies and REITs may be more difficult to price pre-
cisely than other types of securities because of their characteristics and
lower trading volumes.
Risks of Foreign Investments. Certain of the Underlying Funds may invest in
foreign investments. Foreign investments involve special risks that are not
typically associated with U.S. dollar denominated or quoted securities of
U.S. issuers. Foreign investments may be affected by changes in currency
rates, changes in foreign or U.S. laws or restrictions applicable to such
investments and changes in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening
of the currency against the U.S. dollar) in which a portfolio security is
quoted or denominated relative to the U.S. dollar would reduce the value of
the portfolio security. In addition, if the currency in which an Underlying
Fund receives dividends, interest or other payments declines in value
against the U.S. dollar before such income is distributed as dividends to
shareholders or converted to U.S. dollars, the Underlying Fund may have to
sell portfolio securities to obtain sufficient cash to pay such dividends.
The introduction of a single currency, the euro, on January 1, 1999 for par-
ticipating nations in the Economic and Monetary Union presents unique uncer-
tainties, including the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather
than the euro; the establishment and maintenance of exchange rates for cur-
rencies being converted into the euro; the fluctuation of the euro relative
to non-euro currencies during the transition period from January 1, 1999 to
December 31, 2001 and beyond; whether the inter-
51
<PAGE>
est rate, tax and labor regimes of European countries participating in the
euro will converge over time; and whether the conversion of the currencies
of other countries that may in the future become members of the European
Union, may have an impact on the euro. These or other factors, including
political and economic risks, could cause market disruptions, and could
adversely affect the value of securities held by the Underlying Funds.
Because of the number of countries using this single currency, a significant
portion of the foreign assets held by certain of the Underlying Funds may be
denominated in the euro.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the United States. In addition, clearance and settlement procedures
may be different in foreign countries and, in certain markets, such proce-
dures have been unable to keep pace with the volume of securities transac-
tions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less gov-
ernment regulation of foreign markets, companies and securities dealers than
in the United States. Foreign securities markets may have substantially less
volume than U.S. securities markets and securities of many foreign issuers
are less liquid and more volatile than securities of comparable domestic
issuers. Furthermore, with respect to certain foreign countries, there is a
possibility of nationalization, expropriation or confiscatory taxation,
imposition of withholding or other taxes on dividend or interest payments
(or, in some cases, capital gains), limitations on the removal of funds or
other assets of the Underlying Funds, and political or social instability or
diplomatic developments which could affect investments in those countries.
Concentration of an Underlying Fund's assets in one or a few countries and
currencies will subject a Fund to greater risks than if an Underlying Fund's
assets were not geographically concentrated.
Investment in sovereign debt obligations by certain Underlying Funds
involves risks not present in debt obligations of corporate issuers. The
issuer of the debt or the governmental authorities that control the repay-
ment of the debt may be unable or unwilling to repay principal or pay inter-
est when due in accordance with the terms of such debt, and an Underlying
Fund may have limited recourse to compel payment in the event of a default.
Periods of economic uncertainty may result in the volatility of market
prices of sovereign debt, and in turn an Underlying Fund's NAV, to a greater
extent than the volatility inherent in debt obligations of U.S. issuers.
52
<PAGE>
APPENDIX A
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 avail-
ability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the sov-
ereign debtor's policy toward international lenders, and the political
constraints to which a sovereign debtor may be subject.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs"). Certain Underlying Funds may also invest in European
Depository Receipts ("EDRs") or other similar instruments representing secu-
rities of foreign issuers. ADRs represent the right to receive securities of
foreign issuers deposited in a domestic bank or a correspondent bank. Prices
of ADRs are quoted in U.S. dollars, and ADRs are traded in the United
States. EDRs and GDRs are receipts evidencing an arrangement with a non-U.S.
bank. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security.
Risks of Emerging Countries. Certain Underlying Funds may invest in securi-
ties of issuers located in emerging countries. The risks of foreign invest-
ment are heightened when the issuer is located in an emerging country.
Emerging countries are generally located in the Asia-Pacific region, Eastern
Europe, Latin and South America and Africa. An Underlying Fund's purchase
and sale of portfolio securities in certain emerging countries may be con-
strained by limitations as to daily changes in the prices of listed securi-
ties, periodic trading or settlement volume and/or limitations on aggregate
holdings of foreign investors. Such limitations may be computed based on the
aggregate trading volume by or holdings of an Underlying Fund, the invest-
ment adviser, its affiliates and their respective clients and other service
providers. An Underlying Fund may not be able to sell securities in circum-
stances where price, trading or settlement volume limitations have been
reached.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to
only a specified percentage of an issuer's outstanding securities or a spe-
cific class of securities which may have less advantageous terms (including
price) than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportuni-
ties in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by an Underlying Fund. The repatria-
53
<PAGE>
tion of both investment income and capital from certain emerging countries
is subject to restrictions such as the need for governmental consents. Due
to restrictions on direct investment in equity securities in certain Asian
countries, it is anticipated that an Underlying Fund may invest in such
countries through other investment funds in such countries.
Many emerging countries have experienced currency devaluations and substan-
tial (and, in some cases, extremely high) rates of inflation, which have had
a negative effect on the economies and securities markets of such emerging
countries. Economies in emerging countries generally are dependent heavily
upon commodity prices and international trade and, accordingly, have been
and may continue to be affected adversely by the economies of their trading
partners, trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by
the countries with which they trade.
Many emerging countries are subject to a substantial degree of economic,
political and social instability. Governments of some emerging countries are
authoritarian in nature or have been installed or removed as a result of
military coups, while governments in other emerging countries have periodi-
cally used force to suppress civil dissent. Disparities of wealth, the pace
and success of democratization, and ethnic, religious and racial disaffec-
tion, among other factors, have also led to social unrest, violence and/or
labor unrest in some emerging countries. Unanticipated political or social
developments may result in sudden and significant invest-ment losses.
Investing in emerging countries involves greater risk of loss due to expro-
priation, nationalization, confiscation of assets and property or the impo-
sition of restrictions on foreign investments and on repatriation of capital
invested.
An Underlying Fund's investment in emerging countries may also be subject to
withholding or other taxes, which may be significant and may reduce the
return from an investment in such country to the Underlying Fund.
Settlement procedures in emerging countries are frequently less developed
and reliable than those in the United States and often may involve an Under-
lying Fund's delivery of securities before receipt of payment for their
sale. In addition, significant delays are common in certain markets in reg-
istering the transfer of securities. Settlement or registration problems may
make it more difficult for an Underlying Fund to value its portfolio securi-
ties and could cause the Underlying Fund to miss attractive investment
opportunities, to have a portion of its assets uninvested or to incur losses
due to the failure of a counterparty to pay for securities the Underlying
Fund has delivered or the Underlying Fund's inability to complete its con-
tractual obligations. The creditworthiness of the local securities firms
used by an Underlying Fund in emerging countries may not be as sound as the
creditworthiness of firms used in more developed countries. As a result, the
Under-
54
<PAGE>
APPENDIX A
lying Fund may be subject to a greater risk of loss if a securities firm
defaults in the performance of its responsibilities.
The small size and inexperience of the securities markets in certain emerg-
ing countries and the limited volume of trading in securities in those coun-
tries may make an Underlying Fund's investments in such countries less liq-
uid and more volatile than investments in countries with more developed
securities markets (such as the United States, Japan and most Western Euro-
pean countries). An Underlying Fund's investments in emerging countries are
subject to the risk that the liquidity of a particular investment, or
investments generally, in such countries will shrink or disappear suddenly
and without warning as a result of adverse economic, market or political
conditions, or adverse investor perceptions, whether or not accurate.
Because of the lack of sufficient market liquidity, an Underlying Fund may
incur losses because it will be required to effect sales at a disadvanta-
geous time and then only at a substantial drop in price. Investments in
emerging countries may be more difficult to price precisely because of the
characteristics discussed above and lower trading volumes.
An Underlying Fund's use of foreign currency management techniques in emerg-
ing countries may be limited. Due to the limited market for these instru-
ments in emerging countries, the investment adviser does not currently
anticipate that a significant portion of the Underlying Funds' currency
exposure in emerging countries, if any, will be covered by such instruments.
Risks of Derivative Investments. An Underlying Fund's transactions in
options, futures, options on futures, swaps, interest rate caps, floors and
collars, structured securities, inverse floating-rate securities, stripped
mortgage-backed securities and currency transactions involve additional risk
of loss. Loss can result from a lack of correlation between changes in the
value of derivative instruments and the portfolio assets (if any) being
hedged, the potential illiquidity of the markets for derivative instruments,
or the risks arising from margin requirements and related leverage factors
associated with such transactions. The use of these management techniques
also involves the risk of loss if the investment adviser is incorrect in its
expectation of fluctuations in securities prices, interest rates or currency
prices. Certain Underlying Funds may also invest in derivative investments
for non-hedging purposes (that is, to seek to increase total return).
Investing for non-hedging purposes is considered a speculative practice and
presents even greater risk of loss.
Derivative mortgage-backed securities (such as principal-only ("POs"),
interest-only ("IOs") or inverse floating rate securities) are particularly
exposed to call and extension risks. Small changes in mortgage prepayments
can significantly impact the cash flow and the market value of these securi-
ties. In general, the risk of faster
55
<PAGE>
than anticipated prepayments adversely affects IOs, super floaters and pre-
mium priced mortgage-backed securities. The risk of slower than anticipated
prepayments generally adversely affects POs, floating-rate securities subject
to interest rate caps, support tranches and discount priced mortgage-backed
securities. In addition, particular derivative securities may be leveraged such
that their exposure (i.e., price sensitivity) to interest rate and/or
prepayment risk is magnified.
Some floating-rate derivative debt securities can present more complex types
of derivative and interest rate risks. For example, range floaters are subject
to the risk that the coupon will be reduced below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to lower prices in the event of an
unfavorable change in the spread between two designated interest rates.
Risks of Illiquid Securities. The Underlying Funds may invest up to 15% (10%
in the case of the Financial Square Prime Obligations Fund) of their net
assets in illiquid securities which cannot be disposed of in seven days in
the ordinary course of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain municipal leases and participation interests
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of
more than seven days
. Certain over-the-counter options
. Certain structured securities and all swap transactions
. Certain restricted securities, unless it is determined, based upon a review
of the trading markets for a specific restricted security, that the
restricted security is eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 ("144A Securities") and, therefore, is liquid.
Investing in 144A Securities may decrease the liquidity of an Underlying
Fund's portfolio to the extent that qualified institutional buyers become
for a time uninterested in purchasing these restricted securities. The purchase
price and subsequent valuation of restricted and illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Credit Risks. Debt securities purchased by the Underlying Funds may include
securities (including zero coupon bonds) issued by the U.S. government (and
its agencies, instrumentalities and sponsored enterprises), foreign govern-
ments, domestic and foreign corporations, banks and other issuers. Some of
these fixed-income securities are described in the next section below. Fur-
ther information is provided in the Additional Statement.
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APPENDIX A
Debt securities rated BBB or higher by Standard & Poor's Ratings Group
("Standard & Poor's") or Baa or higher by Moody's Investors Services, Inc.
("Moody's") are considered "investment grade." 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. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, determined by the investment
adviser to be of comparable credit quality. If a security satisfies an
Underlying Fund's minimum rating criteria at the time of purchase and is
subsequently downgraded below such rating, the Underlying Fund will not be
required to dispose of such security. If a downgrade occurs, the Underlying
Fund's investment adviser will consider what action, including the sale of
such security, is in the best interest of the Underlying Fund and its share-
holders.
Certain Underlying Funds may invest in fixed-income securities rated BB or
Ba or below (or comparable unrated securities) which are commonly referred
to as "junk bonds." Junk bonds are considered predominantly speculative and
may be questionable as to principal and interest payments.
In some cases, junk bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, invest-
ment in such bonds will present greater speculative risks than those associ-
ated with investment in investment grade bonds. Also, to the extent that the
rating assigned to a security in an Underlying Fund's portfolio is down-
graded by a rating organization, the market price and liquidity of such
security may be adversely affected.
Non-Diversification and Geographic Risks. The Global Income Fund is regis-
tered as a "non-diversified" fund under the Act and is, therefore, more sus-
ceptible to adverse developments affecting any single issuer held in its
portfolio, and may be more susceptible to greater losses because of these
developments. In addition, the Global Income Fund, and certain other Under-
lying Funds, may invest more than 25% of their total assets in the securi-
ties of corporate and governmental issuers located in a particular foreign
country or region. Concentration of the investments of these or other Under-
lying Funds in issuers located in a particular country or region will sub-
ject the Underlying Fund, to a greater extent than if investments were less
concentrated, to losses arising from adverse developments affecting those
issuers or countries.
Temporary Investment Risks. The Underlying Funds may invest a substantial
portion, and in some cases all, of their total assets, in cash equivalents
for temporary
57
<PAGE>
periods. When an Underlying Fund's assets are invested in such instruments,
the Underlying Fund may not be achieving its investment objective.
C. Investment Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Underlying Funds, including
their associated risks. Further information is provided in the Additional
Statement, which is available upon request.
U.S. Government Securities. Each Underlying Fund may invest in U.S. Govern-
ment Securities. U.S. Government Securities include U.S. Treasury obliga-
tions and obligations issued or guaranteed by U.S. government agencies,
instrumentalities or sponsored enterprises. U.S. Government Securities may
be supported by (a) the full faith and credit of the U.S. Treasury (such as
the Government National Mortgage Association ("Ginnie Mae")); (b) the right
of the issuer to borrow from the U.S. Treasury (such as securities of the
Student Loan Marketing Association); (c) the discretionary authority of the
U.S. government to purchase certain obligations of the issuer (such as the
Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan
Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issuer.
U.S. Government Securities also include Treasury receipts, zero coupon bonds
and other stripped U.S. Government Securities, where the interest and prin-
cipal components of stripped U.S. Government Securities are traded indepen-
dently.
Custodial Receipts. Each Underlying Fund may invest in custodial receipts.
Interests in U.S. Government Securities may be purchased in the form of cus-
todial receipts that evidence ownership of future interest payments, princi-
pal payments or both on certain notes or bonds issued or guaranteed as to
principal and interest by the U.S. government, its agencies, instrumentali-
ties, political subdivisions or authorities. For certain securities law pur-
poses, custodial receipts are not considered obligations of the U.S. govern-
ment.
Mortgage-Backed Securities. The Underlying Funds (other than CORE U.S. Equi-
ty, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity and
CORE International Equity Funds (the "CORE Equity Funds")) may invest in
securities that represent direct or indirect participations in, or are col-
lateralized by and payable from, mortgage loans secured by real property
("Mortgage-Backed Securities"). Mortgage-Backed Securities can be backed by
either fixed rate mortgage loans or adjustable rate mortgage loans, and may
be issued by either a governmental or non-governmental entity. Privately
issued Mortgage-Backed Securities are normally structured with one or more
types of "credit enhancement." However, these Mortgage-Backed Securities
typically do not
58
<PAGE>
APPENDIX A
have the same credit standing as U.S. government guaranteed Mortgage-Backed
Securities.
Mortgage-Backed Securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs"), and real estate mortgage
investment conduit ("REMIC") pass-through or participation certificates.
CMOs provide an investor with a specified interest in the cash flow from a
pool of underlying mortgages or of other Mortgage-Backed Securities. CMOs
are issued in multiple classes. In many cases, payments of principal are
applied to the CMO classes in the order of their respective stated maturi-
ties, so that no principal payments will be made on a CMO class until all
other classes having an earlier stated maturity date are paid in full. A
REMIC is a CMO that qualifies for special tax treatment under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code") and invests in
certain mortgages principally secured by interests in real property and
other permitted investments. Mortgage-Backed Securities also include
stripped Mortgage-Backed Securities ("SMBS"), which are derivative multiple
class Mortgage-Backed Securities. SMBS are usually structured with two dif-
ferent classes: one that receives substantially all of the interest payments
and the other that receives substantially all of the principal payments from
a pool of mortgage loans. The market value of SMBS consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on SMBS that receive all or most of the interest
from mortgage loans are generally higher than prevailing market yields on
other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
Asset-Backed Securities. The Underlying Funds (other than the CORE Equity
Funds) may invest in asset-backed securities. Asset-backed securities are
securities whose principal and interest payments are collateralized by pools
of assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Asset-backed 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. According-
ly, an Underlying 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 prin-
cipal at comparable yields is subject to generally prevailing interest rates
at that time. Asset-backed securities present credit risks that are not pre-
sented by Mortgage-Backed Securities. This is because asset-backed securi-
ties generally do not have the benefit of a security interest in collateral
that is comparable in quality to mortgage assets. There is the possibility
that, in some cases, recoveries on repossessed collateral may not be avail-
able to support payments on these securi-
59
<PAGE>
ties. In the event of a default, an Underlying Fund may suffer a loss if it
cannot sell collateral quickly and receive the amount it is owed.
Municipal Securities. Certain Underlying Funds may invest in securities and
instruments issued by state and local governmental issuers. Municipal secu-
rities in which an Underlying Fund may invest consist of bonds, notes, com-
mercial paper and other instruments (including participation interests in
such securities) issued by or on behalf of states, territories and posses-
sions of the United States (including the District of Columbia) and their
political subdivisions, agencies or instrumentalities. Municipal Securities
include both "general" and "revenue" bonds and may be issued to obtain funds
for various public purposes. General obligations are secured by the issuer's
pledge of its full faith, credit and taxing power. Revenue obligations are
payable only from the revenues derived from a particular facility or class
of facilities. Such securities may pay fixed, variable or floating rates of
interest. Municipal securities are often issued to obtain funds for various
public purposes, including the construction of a wide range of public facil-
ities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
municipal securities may be issued include refunding outstanding obliga-
tions, obtaining funds for general operating expenses, and obtaining funds
to lend to other public institutions and facilities. Municipal securities in
which the Underlying Funds may invest include private activity bonds, pre-
refunded municipal securities and auction rate 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 con-
ditions, the power or ability of the issuer to pay when due the principal of
or interest on a Municipal Security may be materially affected.
In addition, Municipal Securities include municipal leases, certificates of
participation and "moral obligation" bonds. A municipal lease is an obliga-
tion issued by a state or local government to acquire equipment or facili-
ties. Certificates of participation represent interests in municipal leases
or other instruments, such as installment purchase agreements. Moral obliga-
tion bonds are supported by a moral commitment, but not a legal obligation,
of a state or local government. Municipal leases, certificates of participa-
tion and moral obligation bonds frequently involve special risks not nor-
mally associated with general obligation or revenue bonds. In particular,
these instruments permit governmental issuers to acquire property and
60
<PAGE>
APPENDIX A
equipment without meeting constitutional and statutory requirements for the
issuance of debt. If, however, the governmental issuer does not periodically
appropriate money to enable it to meet its payment obligations under these
instruments, it cannot be legally compelled to do so. If a default occurs,
it is likely that an Underlying Fund would be unable to obtain another
acceptable source of payment. Some municipal leases, certificates of partic-
ipation and moral obligation bonds may be illiquid.
Municipal Securities may also be in the form of a tender option bond, which
is a Municipal Security (generally held pursuant to a custodial arrangement)
having a relatively long maturity and bearing interest at a fixed rate sub-
stantially higher than prevailing short-term, tax-exempt rates. The bond is
typically issued with the agreement of a third party, such as a bank, bro-
ker-dealer or other financial institution, which grants the security holders
the option, at periodic intervals, to tender their securities to the insti-
tution. After payment of a fee to the financial institution that provides
this option, the security holder effectively holds a demand obligation that
bears interest at the prevailing short-term, tax-exempt rate. An institution
may not be obligated to accept tendered bonds in the event of certain
defaults or a significant downgrading in the credit rating assigned to the
issuer of the bond. The tender option will be taken into account in deter-
mining the maturity of the tender option bonds and an Underlying Fund's
average portfolio maturity. There is risk that an Underlying Fund will not
be considered the owner of a tender option bond for federal income tax pur-
poses, and thus will not be entitled to treat such interest as exempt from
federal income tax. Certain tender option bonds may be illiquid.
Municipal Securities may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial
institutions.The credit quality of these banks and financial institutions
could, therefore, cause a loss to an Underlying Fund that invests in Munici-
pal Securities. Letters of credit and other obligations of foreign banks and
financial institutions may involve risks in addition to those of domestic
obligations because of less publicly available financial and other informa-
tion, less securities regulation, potential imposition of foreign withhold-
ing and other taxes, war, expropriation or other adverse governmental
actions. Foreign banks and their foreign branches are not regulated by U.S.
banking authorities, and are generally not bound by the accounting, auditing
and financial reporting standards applicable to U.S. banks.
Corporate and Bank Obligations; Trust Preferred Securities; Convertible
Securities. Certain Underlying Funds may invest in corporate debt obliga-
tions, trust preferred securities and convertible securities. Corporate debt
obligations include bonds, notes, debentures, commercial paper and other
obligations of U.S. or for-
61
<PAGE>
eign corporations to pay interest and repay principal, and include securi-
ties issued by banks and other financial institutions. Banks are subject to
extensive but different governmental regulations which may limit both the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of financ-
ing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possi-
ble financial difficulties of borrowers play an important part in the opera-
tion of this industry. A trust preferred 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 initiat-
ing a default event. The securities are generally senior in claim to stan-
dard preferred stock but junior to other bondholders.
Convertible securities are preferred stock or debt obligations that are con-
vertible into common stock. Convertible securities generally offer lower
interest or dividend yields than nonconvertible securities of similar quali-
ty. Convertible securities in which an Underlying Fund invests are subject
to the same rating criteria as its other investments in fixed-income securi-
ties. Convertible securities have both equity and fixed-income risk charac-
teristics. Like all fixed-income securities, the value of convertible secu-
rities is susceptible to the risk of market losses attributable to changes
in interest rates. Generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, to increase as
interest rates decline. However, when the market price of the common stock
underlying a convertible security exceeds the conversion price of the con-
vertible security, the convertible security tends to reflect the market
price of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security, like a fixed-income securi-
ty, tends to trade increasingly on a yield basis, and thus may not decline
in price to the same extent as the underlying common stock.
Zero Coupon, Deferred Interest, Pay-In-Kind and Capital Appreciation Bonds.
Certain Underlying Funds may invest in zero coupon, deferred interest, pay-
in-kind and capital appreciation bonds. These securities are issued at a
discount from their face value because interest payments are typically post-
poned until maturity. Pay-in-kind securities are securities that have inter-
est payable by the delivery of additional securities.The market prices of
these 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.
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APPENDIX A
Rating Criteria. Except as noted below, the Underlying Equity Funds (other
than the CORE Equity Funds, which may only invest in debt instruments that
are cash equivalents) may invest in debt securities rated at least invest-
ment grade at the time of investment. Investment grade debt securities are
securities rated BBB or higher by Standard & Poor's or Baa or higher by
Moody's. The Capital Growth, Small Cap Value, International Equity, Japanese
Equity, European Equity, International Small Cap, Emerging Markets Equity,
Asia Growth and Real Estate Securities Funds may invest up to 10%, 35%, 35%,
35%, 35%, 35%, 35%, 35% and 20%, respectively, of their total assets in debt
securities which are rated in the lowest rating categories by Standard &
Poor's or Moody's (i.e., BB or lower by Standard & Poor's or Ba or lower by
Moody's), including securities rated D by Moody's or Standard & Poor's. The
Mid Cap Value Fund may invest up to 10% of its total assets in below invest-
ment grade debt securities rated B or higher by Standard & Poor's or
Moody's. Fixed-income securities rated BB or Ba or below (or comparable
unrated securities) are commonly referred to as "junk bonds," are considered
predominately speculative and may be questionable as to principal and inter-
est payments as described above.
Structured Securities and Inverse Floaters. Certain Underlying Funds may
invest in structured securities. Structured securities are securities whose
value is determined by reference to changes in the value of specific curren-
cies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The
interest rate or the principal amount payable upon maturity or redemption
may be increased or decreased depending upon changes in the applicable Ref-
erence. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or decrease in
the interest rate or value of the security at maturity. In addition, changes
in the interest rates or the value of the security at maturity may be a mul-
tiple of changes in the value of the Reference. Consequently, structured
securities may present a greater degree of market risk than other types of
securities, and may be more volatile, less liquid and more difficult to
price accurately than less complex securities.
Structured securities include, but are not limited to, inverse floating rate
debt securities ("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 vola-
tility of its market value.
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Foreign Currency Transactions. Certain Underlying Funds may, to the extent
consistent with their investment policies, purchase or sell foreign curren-
cies on a cash basis or through forward contracts. A forward contract
involves an obligation to purchase or sell a specific currency at a future
date at a price set at the time of the contract. Certain Underlying Funds
may engage in foreign currency transactions for hedging purposes and to seek
to protect against anticipated changes in future foreign currency exchange
rates. In addition, certain Underlying Funds may also enter into such trans-
actions to seek to increase total return, which is considered a speculative
practice.
Underlying Funds may also engage in cross-hedging by using forward contracts
in a currency different from that in which the hedged security is denomi-
nated or quoted if the investment adviser determines that there is a pattern
of correlation between the two currencies. An Underlying Fund may hold for-
eign currency received in connection with investments in foreign securities
when, in the judgment of the investment adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date (e.g., the invest-
ment adviser may anticipate the foreign currency to appreciate against the
U.S. dollar).
Currency exchange rates may fluctuate significantly over short periods of
time, causing, along with other factors, an Underlying Fund's NAV to fluctu-
ate. Currency exchange rates also can be affected unpredictably by the
intervention of U.S. or foreign governments or central banks, or the failure
to intervene, or by currency controls or political developments in the
United States or abroad.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available
for currency instruments traded on an exchange. Such contracts are subject
to the risk that the counterparty to the contract will default on its obli-
gations. Since these contracts are not guaranteed by an exchange or clear-
inghouse, a default on a contract would deprive an Underlying Fund of
unrealized profits, transaction costs, or the benefits of a currency hedge,
or could force the Underlying Fund to cover its purchase or sale commit-
ments, if any, at the current market price.
Options on Securities, Securities Indices and Foreign Currencies. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) of the option the obligation to buy, the underlying instrument dur-
ing the option period. A call option gives the purchaser of the option the
right to buy, and the writer (seller) of the option the obligation to sell,
the underlying instrument during the option period. Each Underlying Fund may
write (sell) covered call and put options and purchase put and call options
on any securities in which it may invest or on any securities index com-
prised of securities in which it may invest. An
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APPENDIX A
Underlying Fund may also, to the extent that it invests in foreign securi-
ties, purchase and sell (write) put and call options on foreign currencies.
The writing and purchase of options is a highly specialized activity which
involves special investment risks. Options may be used for either hedging or
cross-hedging purposes, or to seek to increase total return (which is con-
sidered a speculative activity). The successful use of options depends in
part on the ability of an investment adviser to manage future price fluctua-
tions and the degree of correlation between the options and securities (or
currency) markets. If an investment adviser is incorrect in its expectation
of changes in market prices or determination of the correlation between the
instruments or indices on which options are written and purchased and the
instruments in an Underlying Fund's investment portfolio, the Underlying
Fund may incur losses that it would not otherwise incur. The use of options
can also increase an Underlying Fund's transaction costs. Options written or
purchased by the Underlying Funds may be traded on either U.S. or foreign
exchanges or over-the-counter. Foreign and over-the-counter options will
present greater possibility of loss because of their greater illiquidity and
credit risks.
Yield Curve Options. Certain Underlying Funds 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 desig-
nated securities rather than the prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profit-
able 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.
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.
Futures Contracts and Options on Futures Contracts. Futures contracts are
standardized, exchange-traded contracts that provide for the sale or pur-
chase of a specified financial instrument or currency at a future time at a
specified price. An option on a futures contract gives the purchaser the
right (and the writer of the option the obligation) to assume a position in
a futures contract at a specified exercise price within a specified period
of time. A futures contract may be based on various securities (such as U.S.
Government Securities), foreign currencies, securities indices and other
financial instruments and indices. Certain Underlying Funds may engage in
futures transactions on both U.S. and foreign exchanges.
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<PAGE>
Certain Underlying Funds may purchase and sell futures contracts, and pur-
chase and write call and put options on futures contracts, in order to seek
to increase total return or to hedge against changes in interest rates,
securities prices or to the extent an Underlying Fund invests in foreign
securities, currency exchange rates, or to otherwise manage its term structure,
sector selection and duration in accordance with its investment objectives and
policies. An Underlying Fund may also enter into closing purchase and sale
transactions with respect to such contracts and options. An Underlying Fund
will engage in futures and related options transactions for bona fide hedging
purposes as defined in regulations of the Commodity Futures Trading Commission
or to seek to increase total return to the extent permitted by such
regulations. An Underlying Fund may not purchase or sell futures contracts or
purchase or sell related options to seek to increase total return, except for
closing purchase or sale transactions, if immediately thereafter the sum of the
amount of initial margin deposits and premiums paid on the Underlying Fund's
outstanding positions in futures and related options entered into for the
purpose of seeking to increase total return would exceed 5% of the market value
of the Underlying Fund's net assets.
Futures contracts and related options present the following risks:
. While an Underlying Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices or
currency exchange rates may result in a poorer overall performance than if
the Underlying Fund had not entered into any futures contracts or options
transactions.
. Because perfect correlation between a futures position and portfolio position
that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and an Underlying Fund may be exposed to
additional risk of loss.
. The loss incurred by an Underlying Fund in entering into futures contracts
and in writing call options on futures is potentially unlimited and may
exceed the amount of the premium received.
. Futures markets are highly volatile and the use of futures may increase the
volatility of an Underlying Fund's NAV.
. As a result of the low margin deposits normally required in futures trading,
a relatively small price movement in a futures contract may result in
substantial losses to an Underlying Fund.
. Futures contracts and options on futures may be illiquid, and exchanges may
limit fluctuations in futures contract prices during a single day.
. Foreign exchanges may not provide the same protection as U.S. exchanges.
Preferred Stock, Warrants and Rights. Certain Underlying Funds may invest in
preferred stock, warrants and rights. Preferred stocks are securities that
represent
66
<PAGE>
APPENDIX A
an ownership interest providing the holder with claims on the issuer's earn-
ings 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
or other non-compliance by the issuer of the preferred stock.
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
or right. 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.
Loan Participations. Certain Underlying Funds may invest in loan participa-
tions. A loan participation is an interest in a loan to a U.S. or foreign
company or other borrower which is administered and sold by a financial
intermediary. Loan participation interests 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 participa-
tion in the seller's share of the loan. When the Underlying Fund acts as co-
lender in connection with a participation interest or when it acquires cer-
tain participation interests, the Underlying Fund will have direct recourse
against the borrower if the borrower fails to pay scheduled principal and
interest. In cases where the Underlying Fund lacks direct recourse, it
will look to an agent for the lenders (the "agent lender") to enforce appro-
priate credit remedies against the borrower. In these cases, the Underlying
Fund may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Underlying Fund had purchased a
direct obligation (such as commercial paper) of such borrower. Moreover,
under the terms of the loan participation, the Underlying Fund may be
regarded as a creditor of the agent lender (rather than of the underlying
corporate borrower), so that the Underlying Fund may also be subject to the
risk that the agent lender may become insolvent.
Real Estate Investment Trusts ("REITs"). The Real Estate Securities Fund
expects to invest a substantial portion of its total assets in REITs, which
are pooled investment vehicles that invest primarily in either real estate
or real estate related loans. In addition, other Underlying Equity Funds may
invest in REITs from time to time. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mort-
gage loans held by the REIT. REITs are dependent upon the ability of the
REITs' managers, and are subject to heavy cash flow dependency, default by
borrowers and the qualification of the REITs under applicable regulatory
requirements for favorable federal income tax treatment. REITs are also sub-
ject to risks generally associated with investments in
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<PAGE>
real estate including possible declines in the value of real estate, general
and local economic conditions, environmental problems and changes in interest
rates. To the extent that assets underlying a REIT are concentrated
geographically, by property type or in certain other respects, these risks may
be heightened. Each Underlying Fund will indirectly bear its proportionate
share of any expenses, including management fees, paid by a REIT in which it
invests.
Other Investment Companies. Certain Underlying Funds may invest in securities
of other investment companies (including SPDRs and WEBS, as described below and
other exchange-traded funds) subject to statutory limitations. These
limitations include a prohibition on any Underlying Fund acquiring more than 3%
of the voting shares of any other investment company, and a prohibition on
investing more than 5% of an Underlying Fund's total assets in securities of
any one investment company or more than 10% of its total assets in securities
of all investment companies. An Underlying Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such
other investment companies. Exchange-traded funds such as SPDRs and WEBS are
shares of unaffiliated investment companies which are traded like traditional
equity securities on a national securities exchange or the NASDAQ National
Market System.
. Standard and Poor's Depository Receipts. The Underlying Equity Funds may,
consistent with their investment policies, purchase Standard & Poor's
Depository Receipts ("SPDRs"). SPDRs are securities traded on the American
Stock Exchange (the "AMEX") that represent ownership in the SPDR Trust, a
trust which has been established to accumulate and hold a portfolio of common
stocks that is intended to track the price performance and dividend yield of
the S&P 500. SPDR Trust is sponsored by a subsidiary of the AMEX. SPDRs may
be used for several reasons, including, but not limited to, facilitating the
handling of cash flows or trading, or reducing transaction costs. The price
movement of SPDRs may not perfectly parallel the price action of the S&P 500.
. World Equity Benchmark Shares. World Equity Benchmark Shares ("WEBS") are
shares of an investment company that invests substantially all of its assets
in securities included in the MSCI indices for specified countries. WEBS are
listed on the AMEX and were initially offered to the public in 1996. The
market prices of WEBS are expected to fluctuate in accordance with both
changes in the NAVs of their underlying indices and supply and demand of WEBS
on the AMEX. To date, WEBS have traded at relatively modest discounts and
premiums to their NAVs. However, WEBS have a limited operating history and
information is lacking regarding the actual performance and trading liquidity
of WEBS for extended periods or over complete market cycles. In addition,
there is no assurance that the requirements of the AMEX necessary to
68
<PAGE>
APPENDIX A
maintain the listing of WEBS will continue to be met or will remain
unchanged. In the event substantial market or other disruptions affecting
WEBS should occur in the future, the liquidity and value of an Underlying
Equity Fund's shares could also be substantially and adversely affected. If
such disruptions were to occur, an Underlying Equity Fund could be required
to reconsider the use of WEBS as part of its investment strategy.
Unseasoned Companies. Certain Underlying Funds may invest in companies (in-
cluding predecessors) which have operated less than three years. The securi-
ties of such companies may have limited liquidity, which can result in their
being priced higher or lower than might otherwise be the case. In addition,
investments in unseasoned companies are more speculative and entail greater
risk than do investments in companies with an established operating record.
Non-Investment Grade Fixed-Income Securities. Non-investment grade fixed-
income securities and unrated securities of comparable credit quality (com-
monly known as "junk bonds") are considered predominantly speculative by
traditional investment standards. In some cases, these obligations may be
highly speculative and have poor prospects for reaching investment grade
standing. Non-investment grade fixed-income securities are subject to the
increased risk of an issuer's inability to meet principal and interest obli-
gations. These securities, also referred to as high yield securities, may be
subject to greater price volatility due to such factors as specific corpo-
rate developments, interest rate sensitivity, negative perceptions of the
junk bond markets generally and less secondary market liquidity.
Non-investment grade fixed-income securities are generally unsecured and are
often subordinated to the rights of other creditors of the issuers of such
securities. Investment by an Underlying Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect of such securities. Even if such securities are held to maturity,
recovery by an Underlying Fund of its initial investment and any anticipated
income or appreciation is uncertain.
Equity Swaps. Each Underlying Equity Fund may invest up to 15% of its net
assets in equity swaps. Equity swaps allow the parties to a swap agreement
to exchange dividend income or other components of return on an equity
investment (for example, a group of equity securities or an index) for a
component of return on another non-equity or equity investment.
An equity swap may be used by an Underlying Fund to invest in a market with-
out owning or taking physical custody of securities in circumstances in
which direct investment may be restricted for legal reasons or is otherwise
impractical. Equity
69
<PAGE>
swaps are derivatives and their value can be very volatile. To the extent
that an investment adviser does not accurately analyze and predict the
potential relative fluctuation of the components swapped with another party,
an Underlying Fund may suffer a loss. The value of some components of an
equity swap (such as the dividends on a common stock) may also be sensitive
to changes in interest rates. Furthermore, an Underlying Fund may suffer a
loss if the counterparty defaults.
When-Issued Securities and Forward Commitments. Each Underlying Fund may
purchase when-issued securities and enter into forward commitments. When-
issued securities are securities that have been authorized, but not yet
issued. When-issued securities are purchased in order to secure what is con-
sidered to be an advantageous price and yield to the Underlying Fund at the
time of entering into the transaction. A forward commitment involves the
entering into a contract to purchase or sell securities for a fixed price at
a future date beyond the customary settlement period.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased
declines before the settlement date. Conversely, the sale of securities on a
forward commitment basis involves the risk that the value of the securities
sold may increase before the settlement date. Although an Underlying Fund
will generally purchase securities on a when-issued or forward commitment
basis with the intention of acquiring the securities for its portfolio, an
Underlying Fund may dispose of when-issued securities or forward commitments
prior to settlement if its investment adviser deems it appropriate.
Repurchase Agreements. Repurchase agreements involve the purchase of securi-
ties subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price. The Underlying Funds may enter into repurchase
agreements with dealers in U.S. Government Securities and member banks of
the Federal Reserve System which furnish collateral at least equal in value
or market price to the amount of their repurchase obligation. Some Under-
lying Funds may also enter into repurchase agreements involving certain for-
eign government securities.
If the other party or "seller" defaults, an Underlying Fund might suffer a
loss to the extent that the proceeds from the sale of the underlying securi-
ties and other collateral held by the Underlying Fund are less than the
repurchase price and the Underlying Fund's costs associated with delay and
enforcement of the repurchase agreement. In addition, in the event of bank-
ruptcy of the seller, an Underlying Fund could suffer additional losses if a
court determines that the Underlying Fund's interest in the collateral is
not enforceable.
70
<PAGE>
APPENDIX A
In evaluating whether to enter into a repurchase agreement, an investment
adviser will carefully consider the creditworthiness of the seller. Certain
Underlying Funds, together with other registered investment companies having
advisory agreements with the investment adviser or any of its 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 agree-
ments.
Lending of Portfolio Securities. Each Underlying Fund may engage in securi-
ties lending. Securities lending involves the lending of securities owned by
an Underlying Fund to financial institutions such as certain broker-dealers.
The borrowers are required to secure their loans continuously with cash,
cash equivalents, U.S. Government Securities or letters of credit in an
amount at least equal to the market value of the securities loaned. Cash
collateral may be invested in cash equivalents. To the extent that cash col-
lateral is invested in other investment securities, such collateral will be
subject to market depreciation or appreciation, and an Underlying Fund will
be responsible for any loss that might result from its investment of the
borrowers' collateral. If an investment adviser determines to make securi-
ties loans, the value of the securities loaned may not exceed 33 1/3% of the
value of the total assets of an Underlying Fund (including the loan collat-
eral).
An Underlying Fund may lend its securities to increase its income. An Under-
lying Fund may, however, experience delay in the recovery of its securities
or a capital loss if the institution with which it has engaged in a portfo-
lio loan transaction breaches its agreement with the Underlying Fund.
Short Sales Against-the-Box. Certain Underlying Funds may make short sales
against-the-box. A short sale against-the-box means that at all times when a
short position is open the Underlying Fund will own an equal amount of secu-
rities sold short, or securities convertible into or exchangeable for, with-
out the payment of any further consideration, an equal amount of the securi-
ties of the same issuer as the securities sold short.
Mortgage Dollar Rolls. Certain Underlying Funds may enter into "mortgage
dollar rolls." In mortgage dollar rolls, an Underlying Fund sells securities
for delivery in the current month and simultaneously contracts with the same
counterparty to repurchase substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During
the roll period, the Underlying Fund loses the right to receive principal
and interest paid on the securities sold. However, the Underlying Fund bene-
fits to the extent of any difference between (a) the price received for the
securities sold and (b) the lower forward price for the future purchase
and/or fee income plus the interest earned on the cash proceeds of the secu-
rities sold. Unless the benefits of a mortgage dollar roll exceed the
income, capital appreciation and gain or loss due to mortgage prepayments
71
<PAGE>
that would have been realized on the securities sold as part of the roll,
the use of this technique will diminish the Underlying Fund's performance.
Successful use of mortgage dollar rolls depends upon an investment adviser's
ability to predict correctly interest rates and mortgage prepayments. If the
investment adviser is incorrect in its prediction, an Underlying Fund may
experience a loss. For financial reporting and tax purposes, the Funds treat
mortgage dollar rolls as two separate transactions: one involving the pur-
chase of a security and a separate transaction involving a sale. The Under-
lying Funds do not currently intend to enter into mortgage dollar rolls that
are accounted for as a financing and do not treat them as borrowings.
Borrowings and Reverse Repurchase Agreements. Each Underlying Fund can bor-
row money from banks, and certain Underlying Funds may enter into reverse
repurchase agreements with banks and other financial institutions in amounts
not exceeding one-third of its total assets. An Underlying Fund may not make
additional investments if borrowings exceed 5% of its total assets. Reverse
repurchase agreements involve the sale of securities held by an Underlying
Fund subject to the Underlying Fund's agreement to repurchase them at a
mutually agreed upon date and price (including interest). These transactions
may be entered into as a temporary measure for emergency purposes or to meet
redemption requests. Reverse repurchase agreements may also be entered into
when the investment adviser expects that the interest income to be earned
from the investment of the transaction proceeds will be greater than the
related interest expense. Borrowings and reverse repurchase agreements
involve leveraging. If the securities held by an Underlying Fund decline in
value while these transactions are outstanding, the NAV of the Underlying
Fund's outstanding shares will decline in value by proportionately more than
the decline in value of the securities. In addition, reverse repurchase
agreements involve the risk that any interest income earned by an Underlying
Fund (from the investment of the proceeds) will be less than the interest
expense of the transaction, that the market value of the securities sold by
an Underlying Fund will decline below the price the Underlying Fund is obli-
gated to pay to repurchase the securities, and that the securities may not
be returned to the Underlying Fund.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps and Inter-
est Rate Caps, Floors and Collars. To the extent consistent with their
investment policies, the Underlying Funds may enter into interest rate
swaps, mortgage swaps, credit swaps, currency swaps and interest rate caps,
floors and collars. Interest rate swaps involve the exchange by an Under-
lying 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
72
<PAGE>
APPENDIX A
similar to interest rate swaps in that they represent commitments to pay and
receive interest. The notional principal amount, however, is tied to a ref-
erence 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 transac-
tion 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 occur-
rence of specified credit events. Currency swaps involve the exchange of the
parties' respective rights to make or receive payments in specified curren-
cies. 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 enti-
tles the purchaser, to the extent that a specified index falls below a pre-
determined 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.
An Underlying Fund may enter into swap transactions for hedging purposes or
to seek to increase total return. 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 transac-
tions. If an investment adviser is incorrect in its forecasts of market val-
ues, interest rates and currency exchange rates, the investment performance
of an Underlying Fund would be less favorable than it would have been if
these investment techniques were not used.
73
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a
Portfolio's financial performance for the past five years (or less if the
Portfolio has been in operation for less than five years). Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate that an investor would have earned or lost on an
investment in a Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Arthur Andersen LLP, whose
report, along with a Portfolio's financial statements, is included in the
Portfolio's annual report (available upon request without charge).
CONSERVATIVE STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Period Ended December 31,/e/
1999 - Class A Shares $10.00 $0.36 $0.18
1999 - Class B Shares 10.00 0.30 0.19
1999 - Class C Shares 10.00 0.29 0.18
1999 - Institutional Shares 10.00 0.40/f/ 0.20/f/
1999 - Service Shares 10.00 0.53 0.02
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on February 8, 1999.
f Calculated based on the average shares outstanding methodology.
74
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period returnb,d (in 000s) net assetsc
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.36) $(0.01) $ -- $0.17 $10.17 5.52% $ 1,697 0.59%
(0.30) (0.01) -- 0.18 10.18 4.92 10,451 1.34
(0.29) (0.01) -- 0.17 10.17 4.79 2,417 1.34
(0.40) (0.02) -- 0.18 10.18 6.04 6 0.19
(0.37) -- -- 0.18 10.18 5.56 14 0.69
- -------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
CONSERVATIVE STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
------------------------------------
Ratio of
net investment Ratio of Ratio of
income expenses to net investment Portfolio
to average average loss to average turnover
net assets/c/ net assets/c/ net assets/c/ rate/d/
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Period Ended
December 31,/e/
1999 - Class A Shares 4.38% 3.46% 1.51% 62.99%
1999 - Class B Shares 3.74 4.21 0.87 62.99
1999 - Class C Shares 3.62 4.21 0.75 62.99
1999 - Institutional
Shares 4.43 3.06 1.56 62.99
1999 - Service Shares 2.39 3.56 (0.48) 62.99
- -----------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on February 8, 1999.
f Calculated based on the average shares outstanding methodology.
76
<PAGE>
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77
<PAGE>
BALANCED STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.31 $0.34 $0.73
1999 - Class B Shares 10.31 0.26 0.72
1999 - Class C Shares 10.32 0.27 0.71
1999 - Institutional Shares 10.32 0.37 0.74
1999 - Service Shares 10.31 0.33 0.73
- -----------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.25 0.38
1998 - Class B Shares 10.00 0.19 0.38
1998 - Class C Shares 10.00 0.19 0.39
1998 - Institutional Shares 10.00 0.30 0.39
1998 - Service Shares 10.00 0.25 0.37
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
78
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b/ (in 000s) net assets
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.34) $(0.05) $ -- $0.68 $10.99 10.58% $39,774 0.59%
(0.26) (0.05) -- 0.67 10.98 9.66 32,932 1.34
(0.27) (0.04) -- 0.67 10.99 9.63 23,354 1.34
(0.37) (0.07) -- 0.67 10.99 10.92 1,753 0.19
(0.33) (0.05) -- 0.68 10.99 10.47 419 0.69
- -------------------------------------------------------------------------------------------------
(0.25) (0.03) (0.04) 0.31 10.31 6.38/d/ 40,237 0.60/c/
(0.19) (0.03) (0.04) 0.31 10.31 5.75/d/ 33,763 1.30/c/
(0.19) (0.03) (0.04) 0.32 10.32 5.83/d/ 24,195 1.30/c/
(0.30) (0.03) (0.04) 0.32 10.32 6.99/d/ 205 0.24/c/
(0.25) (0.02) (0.04) 0.31 10.31 6.30/d/ 456 0.74/c/
- -------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
BALANCED STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
-------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 3.17% 1.05% 2.71% 51.24%
1999 - Class B Shares 2.42 1.80 1.96 51.24
1999 - Class C Shares 2.40 1.80 1.94 51.24
1999 - Institutional
Shares 3.93 0.65 3.47 51.24
1999 - Service Shares 3.04 1.15 2.58 51.24
- ---------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 3.03/c/ 1.46/c/ 2.17/c/ 50.84/d/
1998 - Class B Shares 2.38/c/ 2.08/c/ 1.60/c/ 50.84/d/
1998 - Class C Shares 2.34/c/ 2.08/c/ 1.56/c/ 50.84/d/
1998 - Institutional
Shares 3.55/c/ 1.02/c/ 2.77/c/ 50.84/d/
1998 - Service Shares 2.90/c/ 1.52/c/ 2.12/c/ 50.84/d/
- ---------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
80
<PAGE>
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81
<PAGE>
GROWTH AND INCOME STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.38 $0.22 $1.40
1999 - Class B Shares 10.36 0.14 1.40
1999 - Class C Shares 10.36 0.14 1.40
1999 - Institutional Shares 10.39 0.27 1.39
1999 - Service Shares 10.37 0.20 1.40
- -----------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.18 0.47
1998 - Class B Shares 10.00 0.12 0.46
1998 - Class C Shares 10.00 0.12 0.46
1998 - Institutional Shares 10.00 0.20 0.49
1998 - Service Shares 10.00 0.16 0.48
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
82
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b/ (in 000s) net assets
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.22) $(0.06) $(0.01) $1.33 $11.71 15.79% $195,153 0.59%
(0.14) (0.06) (0.01) 1.33 11.69 14.95 143,686 1.34
(0.14) (0.06) (0.01) 1.33 11.69 14.94 95,523 1.34
(0.27) (0.06) (0.01) 1.32 11.71 16.14 29,200 0.19
(0.20) (0.07) (0.01) 1.32 11.69 15.60 1,856 0.69
- -------------------------------------------------------------------------------------------------
(0.18) (0.04) (0.05) 0.38 10.38 6.55/d/ 181,441 0.60/c/
(0.12) (0.05) (0.05) 0.36 10.36 5.82/d/ 138,914 1.30/c/
(0.12) (0.05) (0.05) 0.36 10.36 5.80/d/ 100,711 1.30/c/
(0.20) (0.05) (0.05) 0.39 10.39 6.96/d/ 9,030 0.23/c/
(0.16) (0.06) (0.05) 0.37 10.37 6.43/d/ 1,354 0.73/c/
- -------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
GROWTH AND INCOME STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
-------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 2.00% 0.85% 1.74% 49.06%
1999 - Class B Shares 1.24 1.60 0.98 49.06
1999 - Class C Shares 1.23 1.60 0.97 49.06
1999 - Institutional
Shares 2.53 0.45 2.27 49.06
1999 - Service Shares 1.91 0.95 1.65 49.06
- -----------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 2.37/c/ 1.05/c/ 1.92/c/ 41.91/d/
1998 - Class B Shares 1.72/c/ 1.68/c/ 1.34/c/ 41.91/d/
1998 - Class C Shares 1.68/c/ 1.68/c/ 1.30/c/ 41.91/d/
1998 - Institutional
Shares 2.97/c/ 0.61/c/ 2.59/c/ 41.91/d/
1998 - Service Shares 2.28/c/ 1.11/c/ 1.90/c/ 41.91/d/
- -----------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
84
<PAGE>
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85
<PAGE>
GROWTH STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.29 $0.11 $2.03
1999 - Class B Shares 10.28 0.02 2.02
1999 - Class C Shares 10.28 0.02 2.03
1999 - Institutional Shares 10.29 0.13 2.05
1999 - Service Shares 10.29 0.09 2.03
- -----------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.10 0.36
1998 - Class B Shares 10.00 0.05 0.35
1998 - Class C Shares 10.00 0.05 0.35
1998 - Institutional Shares 10.00 0.12 0.37
1998 - Service Shares 10.00 0.09 0.35
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
86
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b/ (in 000s) net assets
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.11) $(0.08) $ -- $1.95 $12.24 20.85% $130,322 0.59%
(0.02) (0.09) -- 1.93 12.21 19.87 121,937 1.34
(0.02) (0.09) -- 1.94 12.22 19.96 70,127 1.34
(0.13) (0.11) -- 1.94 12.23 21.24 5,891 0.19
(0.09) (0.10) -- 1.93 12.22 20.62 735 0.69
- -------------------------------------------------------------------------------------------------
(0.10) (0.02) (0.05) 0.29 10.29 4.62/d/ 128,832 0.60/c/
(0.05) (0.02) (0.05) 0.28 10.28 3.98/d/ 109,246 1.30/c/
(0.05) (0.02) (0.05) 0.28 10.28 3.96/d/ 63,925 1.30/c/
(0.12) (0.03) (0.05) 0.29 10.29 4.92/d/ 2,205 0.23/c/
(0.09) (0.01) (0.05) 0.29 10.29 4.45/d/ 378 0.73/c/
- -------------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE>
GROWTH STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 0.90% 0.87% 0.62% 49.52%
1999 - Class B Shares 0.17 1.62 (0.11) 49.52
1999 - Class C Shares 0.16 1.62 (0.12) 49.52
1999 - Institutional
Shares 1.40 0.47 1.12 49.52
1999 - Service Shares 0.87 0.97 0.59 49.52
- -------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 1.50/c/ 1.15/c/ 0.95/c/ 38.43/d/
1998 - Class B Shares 0.83/c/ 1.78/c/ 0.35/c/ 38.43/d/
1998 - Class C Shares 0.79/c/ 1.78/c/ 0.31/c/ 38.43/d/
1998 - Institutional
Shares 2.88/c/ 0.71/c/ 2.40/c/ 38.43/d/
1998 - Service Shares 1.63/c/ 1.21/c/ 1.15/c/ 38.43/d/
- ------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
88
<PAGE>
[This page intentionally left blank]
89
<PAGE>
AGGRESSIVE GROWTH STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income (loss) from
investment operations/a/
----------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income (loss) gain
- --------------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.16 $0.02 $2.56
1999 - Class B Shares 10.14 (0.07) 2.54
1999 - Class C Shares 10.15 (0.06) 2.53
1999 - Institutional Shares 10.16 0.06 2.55
1999 - Service Shares 10.15 -- 2.55
- --------------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.05 0.20
1998 - Class B Shares 10.00 0.01 0.18
1998 - Class C Shares 10.00 0.01 0.19
1998 - Institutional Shares 10.00 0.07 0.20
1998 - Service Shares 10.00 0.04 0.21
- --------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
90
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b/ (in 000s) net assets
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.02) $(0.11) $ -- $2.45 $12.61 25.39% $58,387 0.59%
-- (0.04) -- 2.43 12.57 24.41 47,462 1.34
-- (0.05) -- 2.42 12.57 24.35 28,573 1.34
(0.06) (0.11) -- 2.44 12.60 25.74 3,570 0.19
-- (0.11) -- 2.44 12.59 25.17 137 0.69
- -------------------------------------------------------------------------------------------------
(0.05) -- (0.04) 0.16 10.16 2.57/d/ 47,135 0.60/c/
(0.01) -- (0.04) 0.14 10.14 1.93/d/ 41,204 1.30/c/
(0.01) -- (0.04) 0.15 10.15 2.04/d/ 21,726 1.30/c/
(0.07) -- (0.04) 0.16 10.16 2.80/d/ 124 0.24/c/
(0.04) (0.02) (0.04) 0.15 10.15 2.54/d/ 121 0.74/c/
- -------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
AGGRESSIVE GROWTH STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 0.12% 1.00% (0.29)% 47.34%
1999 - Class B Shares (0.63) 1.75 (1.04) 47.34
1999 - Class C Shares (0.61) 1.75 (1.02) 47.34
1999 - Institutional
Shares 0.66 0.60 0.25 47.34
1999 - Service Shares 0.00 1.10 (0.41) 47.34
- ---------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 0.91/c/ 1.42/c/ 0.09/c/ 26.27/d/
1998 - Class B Shares 0.14/c/ 2.05/c/ (0.61)/c/ 26.27/d/
1998 - Class C Shares 0.16/c/ 2.05/c/ (0.59)/c/ 26.27/d/
1998 - Institutional
Shares 8.17/c/ 0.99/c/ 7.42/c/ 26.27/d/
1998 - Service Shares 0.76/c/ 1.49/c/ 0.01/c/ 26.27/d/
- ---------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
92
<PAGE>
Index
1 General Investment Management Approach
3 Portfolio Investment Objectives and Strategies
3 Goldman Sachs Conservative Strategy Portfolio
4 Goldman Sachs Balanced Strategy Portfolio
5 Goldman Sachs Growth and Income Strategy Portfolio
6 Goldman Sachs Growth Strategy Portfolio
7 Goldman Sachs Aggressive Growth Strategy Portfolio
8 Principal Investment Stategies
10 Principal Risks of the Portfolios
12 Description of the Underlying Funds
18 Principal Risks of the
Underlying Funds
22 Portfolio Performance
28 Portfolio Fees and
Expenses
32 Service Providers
38 Dividends
39 Shareholder Guide
39 How To Buy Shares
43 How To Sell Shares
47 Taxation
49 Appendix A
Additional Information
on the Underlying Funds
74 Appendix B
Financial Highlights
<PAGE>
Asset Allocation Portfolios Prospectus (Institutional Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semi-annual reports to shareholders. In the Portfo-
lios' annual reports, you will find a discussion of the market conditions
and investment strategies that significantly affect the Portfolios' perfor-
mance during the last fiscal year.
Statement of Additional Information
Additional information about the Portfolios and their policies is also
available in the Portfolios' Additional Statement. The Additional Statement
is incorporated by reference into this Prospectus (is legally considered
part of this Prospectus).
The Portfolios' annual and semi-annual reports, and the Additional State-
ment, are available free upon request by calling Goldman Sachs at 1-800-621-
2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Portfolios' documents are
located online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Portfolio documents by visiting the
SEC's Public Reference Room in Washington, D.C. You may also obtain copies
of Portfolio documents, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request to: [email protected]. Information on the operation of the public
reference room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Portfolios' investment company registration number is 811-5349.
CORE/SM/ is a service mark of Goldman, Sachs & Co.
AAPROINST
<PAGE>
Prospectus
GOLDMAN SACHS ASSET ALLOCATION PORTFOLIOS
Class A, B
and C Shares
May 1, 2000
. Goldman Sachs
Conservative
Strategy
Portfolio
. Goldman Sachs
Balanced
Strategy
Portfolio
. Goldman Sachs
Growth and
Income
Strategy
Portfolio
. Goldman Sachs
Growth
Strategy
Portfolio
. Goldman Sachs
Aggressive
Growth
Strategy
Portfolio
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN A FUND
INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
[GRAPHIC]
<PAGE>
NOT FDIC-INSURED May Lose Value No Bank Guarantee
<PAGE>
General Investment
Management Approach
Goldman Sachs Asset Management, a unit of the Investment Management Division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser (the
"Investment Adviser") to five asset allocation portfolios: the Conservative
Strategy Portfolio, Balanced Strategy Portfolio, Growth and Income Strategy
Portfolio, Growth Strategy Portfolio and Aggressive Growth Strategy Portfo-
lio (referred to as the "Portfolios" or the "Funds" interchangeably herein).
The Portfolios are intended for investors who prefer to have their asset
allocation decisions made by professional money managers. Each Portfolio
seeks to achieve its objectives by investing in a combination of underlying
funds for which Goldman Sachs now or in the future acts as investment
adviser or principal underwriter (the "Underlying Funds"). Some of these
Underlying Funds invest primarily in fixed-income or money market securities
(the "Underlying Fixed-Income Funds") and other Underlying Funds invest pri-
marily in equity securities (the "Underlying Equity Funds"). An investor may
choose to invest in one or more of the Portfolios based on individual
investment goals, risk tolerance, and financial circumstances.
The investment objectives and policies of the Portfolios are similar to the
investment objectives and policies of other mutual funds that the Investment
Adviser manages. Although the objectives and policies may be similar, the
investment results of the Portfolios may be higher or lower than the results
of such other mutual funds. The Investment Adviser cannot guarantee, and
makes no representation, that the investment results of similar funds will
be comparable even though the funds have the same Investment Adviser.
Goldman Sachs' Asset Allocation Investment Philosophy:
The Investment Adviser's Quantitative Strategies Group uses disciplined
quantitative models to determine the relative attractiveness of the world's
stock, bond and currency markets. These models use financial and economic
variables to capture fundamental relationships that the Quantitative Strate-
gies Group believes make sense. While the Investment Adviser's process is
rigorous and quantitative, it also incorporates clear economic reasoning
behind each recommendation.
The Asset Allocation Investment Process involves investing a Portfolio's
assets in other Goldman Sachs Funds within specified equity and fixed-income
percentage ranges.
- --------------------------------------------------------------------------------
1
<PAGE>
Each Portfolio starts with a strategic allocation among the various asset
classes. The Investment Adviser then tactically deviates from the strategic
allocations based on forecasts provided by the models. The tactical process
seeks to add value by overweighting attractive markets and underweighting
unattractive markets. Greater deviations from the strategic allocation of a
given Portfolio result in higher risk that the tactical allocation will
underperform the strategic allocation. However, the Investment Adviser's
risk control process balances the amount any asset class can be overweighted
in seeking to achieve higher expected returns against the amount of risk
imposed by that deviation from the strategic allocation. The Investment
Adviser employs Goldman Sachs' proprietary Black-Litterman asset allocation
technique in an effort to optimally balance these two goals.
2
<PAGE>
Portfolio Investment Objectives and Strategies
Goldman Sachs Conservative Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Current income, consistent with the preservation of capi-
tal and secondarily the potential for capital appreciation
Investment Focus: Primarily domestic fixed-income funds (approximately 80%)
focusing on short-term investments and money market funds,
with the balance in domestic stock funds and an allocation
to a global bond fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks current income, consistent with the preservation of cap-
ital and secondarily also considers the potential for capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 80% of the Portfolio's total assets
will be allocated among Underlying Fixed-Income Funds, with a focus on
short-term investments including money market funds. Allocation to Under-
lying Equity Funds is intended to add diversification and enhance returns,
but will also add some volatility. The Investment Adviser expects that the
Portfolio will invest a relatively significant percentage of its assets in
the Global Income Fund, Financial Square Prime Obligations Fund and CORE/SM/
Large Cap Value Fund. It is expected that the Portfolio will invest more
than 25% of its assets in the Short Duration Government Fund. The Portfolio
may not invest in Underlying Equity Funds that invest principally in foreign
equity securities.
3
<PAGE>
Goldman Sachs Balanced Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Current income and long-term capital appreciation
Investment Focus: Domestic fixed-income funds (approximately 60%), with
the remaining balance in domestic and international
stock funds and an allocation to a global bond fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks current income and long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 60% of the Portfolio's total assets
will be allocated among Underlying Fixed-Income Funds. Allocation to Under-
lying Equity Funds is intended to add diversification and enhance returns,
but will also add some volatility. The Investment Adviser expects that the
Portfolio will invest a relatively significant percentage of its equity
allocation in the CORE SM Large Cap Growth, CORE Large Cap Value and CORE/SM/
International Equity Funds and will invest a relatively significant percent-
age of its assets in the Global Income Fund. It is expected that the Portfo-
lio will invest more than 25% of its assets in the Short Duration Government
Fund.
4
<PAGE>
PORTFOLIO INVESTMENT OBJECTIVES AND STRATEGIES
Goldman Sachs Growth and Income Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation and current income
Investment Focus: Domestic and international fixed-income and stock funds
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 60% of the Portfolio's total assets
will be allocated among Underlying Equity Funds, which are intended to pro-
vide the capital appreciation component. Allocation to Underlying Fixed-
Income Funds is intended to provide the income component. The Investment
Adviser expects that the Portfolio will invest a relatively significant per-
centage of its equity allocation in the CORE Large Cap Growth, CORE Large
Cap Value and CORE International Equity Funds and will invest a relatively
significant percentage of its assets in the Core Fixed Income and Global
Income Funds.
5
<PAGE>
Goldman Sachs Growth Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation and secondarily current
income
Investment Focus: Primarily a blend of domestic large cap, small cap and
international stock funds (approximately 80%), with the
balance in domestic fixed-income funds and a global bond
fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation and secondarily current
income.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 80% of the Portfolio's total assets
will be allocated among Underlying Equity Funds, with a blend of domestic
large cap, small cap and international exposure to seek capital apprecia-
tion. Allocation to Underlying Fixed-Income Funds is intended to provide
diversification. The Investment Adviser expects that the Portfolio will
invest a relatively significant percentage of its equity allocation in the
CORE Large Cap Growth, CORE Large Cap Value and CORE International Equity
Funds.
6
<PAGE>
PORTFOLIO INVESTMENT OBJECTIVES AND STRATEGIES
Goldman Sachs Aggressive Growth Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation
Investment Focus: Equity funds, with a greater focus on international and
small cap investments
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, substantially all of the Portfolio's total assets
will be allocated among Underlying Equity Funds, with a greater focus on
small cap and international investments. The Investment Adviser expects that
the Portfolio will invest a relatively significant percentage of its assets
in the CORE Large Cap Growth, CORE Large Cap Value and CORE International
Equity Funds.
7
<PAGE>
Principal Investment Strategies
Each Portfolio seeks to achieve its investment objective by investing within
specified equity and fixed-income ranges among Underlying Funds. The table
below illustrates the current Underlying Equity/Fixed-Income Fund allocation
targets and ranges for each Portfolio:
Equity/Fixed-Income Range (Percentage of Each Portfolio's Total Assets)
<TABLE>
<CAPTION>
Portfolio Target Range
- -------------------------------------------
<S> <C> <C>
Conservative Strategy
Equity 20% 0%-25%
Fixed-Income 80% 75%-100%
- -------------------------------------------
Balanced Strategy
Equity 40% 20%-60%
Fixed-Income 60% 40%-80%
- -------------------------------------------
Growth and Income Strategy
Equity 60% 40%-80%
Fixed-Income 40% 20%-60%
- -------------------------------------------
Growth Strategy
Equity 80% 60%-100%
Fixed-Income 20% 0%-40%
- -------------------------------------------
Aggressive Growth Strategy
Equity 100% 75%-100%
Fixed-Income 0% 0%-25%
- -------------------------------------------
</TABLE>
A Portfolio will invest in particular Underlying Funds based on various crite-
ria. Among other things, the Investment Adviser will analyze the Underlying
Funds' respective investment objectives, policies and investment strategies in
order to determine which Underlying Funds, in combination with other Underlying
Funds, are appropriate in light of a Portfolio's investment objective.
A Portfolio may purchase or sell securities to: (a) accommodate purchases and
sales of its shares; (b) change the percentages of its assets invested in each
of the Underlying Funds in response to economic or market conditions; and (c)
maintain or modify the allocation of its assets among the Underlying Funds
within the percentage ranges described above.
8
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
While each Portfolio can invest in any or all of the Underlying Funds, it is
expected that each Portfolio will normally invest in only some of the Under-
lying Funds at any particular time. Each Portfolio's investment in any of
the Underlying Funds may, and in some cases is expected to, exceed 25% of
such Portfolio's total assets.
THE PARTICULAR UNDERLYING FUNDS IN WHICH EACH PORTFOLIO MAY INVEST, THE
EQUITY/FIXED-INCOME TARGETS AND RANGES AND THE INVESTMENTS IN EACH UNDER-
LYING FUND MAY BE CHANGED FROM TIME TO TIME WITHOUT SHAREHOLDER APPROVAL.
In addition, each Portfolio's investment objectives and all policies not
specifically designated as fundamental in this Prospectus or the Statement
of Additional Information (the "Additional Statement") are non-fundamental
and may be changed without shareholder approval. If there is a change in a
Portfolio's investment objective, you should consider whether that Portfolio
remains an appropriate investment in light of your then current financial
position and needs.
9
<PAGE>
Principal Risks of the Portfolios
Loss of money is a risk of investing in each Portfolio. An investment in a
Portfolio is not a deposit of any bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other governmental agency. While
the Portfolios offer a greater level of diversification than many other types
of mutual funds, a single Portfolio may not provide a complete investment pro-
gram for an investor. The following summarizes important risks that apply to
the Portfolios and may result in a loss of your investment. There can be no
assurance that a Portfolio will achieve its investment objective.
.Investing in the Underlying Funds--The investments of each Portfolio are
concentrated in the Underlying Funds, and each Portfolio's investment
performance is directly related to the investment performance of the
Underlying Funds held by it. The ability of each Portfolio to meet its
investment objective is directly related to the ability of the Underlying
Funds to meet their objectives as well as the allocation among those
Underlying Funds by the Investment Adviser. The value of the Underlying Funds'
investments, and the net asset values ("NAV") of the shares of both the
Portfolios and the Underlying Funds, will fluctuate in response to various
market and economic factors related to the equity and fixed-income markets, as
well as the financial condition and prospects of issuers in which the
Underlying Funds invest. There can be no assurance that the investment
objective of any Portfolio or any Underlying Fund will be achieved.
.Investments of the Underlying Funds--Because the Portfolios invest in the
Underlying Funds, the Portfolios' shareholders will be affected by the
investment policies of the Underlying Funds in direct proportion to the amount
of assets the Portfolios allocate to those Funds. Each Portfolio may invest in
Underlying Funds that in turn invest in small capitalization companies and
foreign issuers and thus are subject to additional risks, including changes in
foreign currency exchange rates and political risk. Foreign investments may
include securities of issuers located in emerging countries in Asia, Latin
America, Eastern Europe and Africa. Each Portfolio may also invest in
Underlying Funds that in turn invest in non-investment grade fixed-income
securities ("junk bonds"), which are considered speculative by traditional
standards. In addition, the Underlying Funds may purchase derivative
securities; enter into forward currency transactions; lend their portfolio
securities; enter into futures contracts and options transactions; purchase
zero coupon bonds and payment-in-kind bonds; purchase securities issued by
real estate investment trusts ("REITs") and other issuers in the real estate
industry; purchase restricted and illiquid securities; purchase securities on
a when-issued or delayed delivery basis; enter into repurchase agreements;
borrow money; and
10
<PAGE>
PRINCIPAL RISKS OF THE PORTFOLIOS
engage in various other investment practices. The risks presented by these
investment practices are discussed in Appendix A to this Prospectus and the
Additional Statement.
.Affiliated Persons--In managing the Portfolios, the Investment Adviser will
have the authority to select and substitute Underlying Funds. The Investment
Adviser is subject to conflicts of interest in allocating Portfolio assets
among the various Underlying Funds both because the fees payable to it and/or
its affiliates by some Underlying Funds are higher than the fees payable by
other Underlying Funds and because the Investment Adviser and its affiliates
are also responsible for managing the Underlying Funds. The Trustees and
officers of the Goldman Sachs Trust may also have conflicting interests in
fulfilling their fiduciary duties to both the Portfolios and the Underlying
Funds.
.Expenses--You may invest in the Underlying Funds directly. By investing in the
Underlying Funds indirectly through a Portfolio, you will incur not only a
proportionate share of the expenses of the Underlying Funds held by the
Portfolio (including operating costs and investment management fees), but also
expenses of the Portfolio.
.Temporary Investments--Although the Portfolios normally seek to remain
substantially invested in the Underlying Funds, each Portfolio may invest a
portion of its assets in high-quality, short-term debt obligations (including
commercial paper, certificates of deposit, bankers' acceptances, repurchase
agreements, debt obligations backed by the full faith and credit of the U.S.
government and demand and time deposits of domestic and foreign banks and
savings and loan associations) to maintain liquidity, to meet shareholder
redemptions and for other short-term cash needs. Also, there may be times
when, in the opinion of the Investment Adviser, abnormal market or economic
conditions warrant that, for temporary defensive purposes, a Portfolio may
invest without limitation in short-term obligations. When a Portfolio's assets
are invested in such investments, the Portfolio may not be achieving its
investment objective.
11
<PAGE>
Description of the Underlying Funds
DESCRIPTION OF THE UNDERLYING FUNDS
The following is a concise description of the investment objectives and
practices for each of the Underlying Funds that are available for investment
by the Portfolios as of the date of this Prospectus. A Portfolio may also
invest in other Underlying Funds not listed below that may become available
for investment in the future at the discretion of the Investment Adviser
without shareholder approval. Additional information regarding the invest-
ment practices of the Underlying Funds is provided in Appendix A to this
Prospectus and the Additional Statement. No offer is made in this Prospectus
of any of the Underlying Funds.
<TABLE>
<CAPTION>
Investment
Underlying Fund Objectives Investment Criteria
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
CORE Large Cap Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Value of capital and foreign issuers traded in the United States. The Fund's investments are selected using both
dividend income. a variety of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the Russell 1000 Value Index.
-------------------------------------------------------------------------------------------------------------------------------
CORESM U.S. Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Equity of capital and foreign issuers traded in the United States. The Fund's investments are selected using both
dividend income. a variety of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the S&P 500 Index.
-------------------------------------------------------------------------------------------------------------------------------
CORE Large Cap Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Growth of capital. foreign issuers traded in the United States. The Fund's investments are selected using both
Dividend a variety of quantitative techniques and fundamental research in seeking to maximize the
income is a Fund's expected return, while maintaining risk, style, capitalization and industry
secondary characteristics similar to the Russell 1000 Growth Index.
consideration.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
DESCRIPTION OF THE UNDERLYING FUNDS
<TABLE>
<CAPTION>
Investment
Underlying Fund Objectives Investment Criteria
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
CORESM Small Long-term growth At least 90% of total assets in equity securities of U.S. issuers, including certain
Cap Equity of capital. foreign issuers traded in the United States. The Fund's investments are selected using both
a variety of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the Russell 2000 Index.
-------------------------------------------------------------------------------------------------------------------------------
Capital Growth Long-term At least 90% of total assets in a diversified portfolio of equity securities. Long-term
capital capital appreciation potential is considered in selecting investments.
growth.
-------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value* Long-term At least 65% of total assets in equity securities of companies with public stock market
capital capitalizations within the range of the market capitalization of companies constituting the
appreciation. Russell Midcap Value Index at the time of the investment (currently between $300 million
and $15 billion).
-------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Long-term At least 65% of total assets in equity securities of companies with public stock market
capital capitalizations of $1 billion or less at the time of investment.
growth.
-------------------------------------------------------------------------------------------------------------------------------
Real Estate Total return Substantially all, and at least 80%, of total assets in a diversified portfolio of equity
Securities comprised securities of issuers that are primarily engaged in or related to the real estate industry.
of long-term The Fund expects that a substantial portion of its total assets will be invested in REITS.
growth of
capital and
dividend income.
-------------------------------------------------------------------------------------------------------------------------------
CORE Long-term growth At least 90% of total assets in equity securities of companies organized outside the United
International of capital. States or whose securities are principally traded outside the United States. The Fund's
Equity investments are selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's expected return, while maintaining risk, style,
capitalization and industry characteristics similar to the unhedged Morgan Stanley Capital
International (MSCI) Europe, Australia and Far East Index (the "EAFE Index"). The Fund may
employ certain currency management techniques.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Formerly, "Mid Cap Equity."
13
<PAGE>
<TABLE>
<CAPTION>
Investment
Underlying Fund Objectives Investment Criteria
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
International Long-term Substantially all, and at least 65%, of total assets in equity securities of companies
Equity capital organized outside the United States or whose securities are principally traded outside the
appreciation. United States. The Fund may employ certain currency management techniques.
-------------------------------------------------------------------------------------------------------------------------------
European Equity Long-term Substantially all, and at least 65%, of total assets in equity securities of European
capital companies. The Fund may employ certain currency management techniques.
appreciation.
-------------------------------------------------------------------------------------------------------------------------------
Japanese Equity Long-term Substantially all, and at least 65%, of total assets in equity securities of Japanese
capital companies. The Fund may employ certain currency management techniques.
appreciation.
-------------------------------------------------------------------------------------------------------------------------------
International Long-term Substantially all, and at least 65%, of total assets in equity securities of companies with
Small Cap capital public stock market capitalizations of $1 billion or less at the time of investment that
appreciation. are organized outside the United States or whose securities are principally traded outside
the United States. The Fund may employ certain currency management techniques.
-------------------------------------------------------------------------------------------------------------------------------
Emerging Long-term Substantially all, and at least 65%, of total assets in equity securities of emerging
Markets Equity capital country issuers. The Fund may employ certain currency management techniques.
appreciation.
-------------------------------------------------------------------------------------------------------------------------------
Asia Growth Long-term Substantially all, and at least 65%, of total assets in equity securities of companies in
capital China, Hong Kong, India, Indonesia, Malaysia, Pakistan, the Philippines, Singapore, South
appreciation. Korea, Sri Lanka, Taiwan and Thailand. The Fund may employ certain currency management
techniques.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
[This page intentionally left blank]
15
<PAGE>
<TABLE>
<CAPTION>
Approximate
Investment Interest Rate
Underlying Fund Objectives Duration or Maturity Sensitivity
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial Square Prime Maximize Maximum Maturity of 3-month
Obligations current income Individual Investments = 13 Treasury bill
to the extent months at time of purchase.
consistent Maximum Dollar-Weighted
with the Average Portfolio Maturity =
maintenance of 90 days
liquidity.
-----------------------------------------------------------------------------------
Adjustable Rate A high level Target Duration = 6-month to 9-month U.S.
Government of current 1-year U.S. Treasury Treasury bill
income, Securities Maximum Duration*=
consistent 2 years
with low
volatility of
principal.
-----------------------------------------------------------------------------------
Short Duration A high level Target Duration = 2 year U.S. 2-year U.S.
Government of current Treasury Security plus or Treasury note
income and minus .5 years Maximum
secondarily, Duration*= 3 years
in seeking
current
income, may
also consider
the potential
for capital
appreciation.
-----------------------------------------------------------------------------------
Government Income A high level Target Duration = Lehman 5-year U.S.
of current Brothers Mutual Fund Treasury note
income, Government/Mortgage Index
consistent plus or minus 1 year Maximum
with safety of Duration*= 6 years
principal.
-----------------------------------------------------------------------------------
Core Fixed Income Total return Target Duration = Lehman 5-year U.S.
consisting of Brothers Aggregate Bond Index Treasury note
capital plus or minus 1 year Maximum
appreciation Duration*= 6 years
and income
that exceeds
the total
return of the
Lehman
Brothers
Aggregate Bond
Index.
-----------------------------------------------------------------------------------
Global Income A high total Target Duration = J.P. Morgan 6-year
return, Global Government Bond Index government
emphasizing (hedged) plus or minus 2.5 bond
current years Maximum Duration*= 7.5
income, and, years
to a lesser
extent,
providing
opportunities
for capital
appreciation.
-----------------------------------------------------------------------------------
High Yield A high level Target Duration = Lehman 6-year U.S.
of current Brothers High Yield Bond Treasury note
income and Index plus or minus 2.5 years
capital Maximum Duration* = 7.5 years
appreciation.
-----------------------------------------------------------------------------------
</TABLE>
* Under normal interest rate conditions.
16
<PAGE>
DESCRIPTION OF THE UNDERLYING FUNDS
<TABLE>
<CAPTION>
Credit
Investment Sector Quality Other Investments
----------------------------------------------------------------------------------------
<S> <C> <C>
Money market High Quality N/A
instruments (short-term
including securities ratings of
issued or guaranteed A-1, P-1 or
by the U.S. comparable
government, its quality).
agencies,
instrumentalities or
sponsored
enterprises ("U.S.
Government
Securities"); U.S.
bank obligations,
commercial paper and
other short-term
obligations of U.S.
corporations,
governmental and
other entities;
asset-backed and
receivables-backed
securities; and
related repurchase
agreements.
----------------------------------------------------------------------------------------
At least 65% of U.S. Fixed-rate mortgage
total assets in U.S. Government pass-through
Government Securities securities and
Securities that are repurchase
adjustable rate agreements
mortgage pass- collateralized by
through securities U.S. Government
and other mortgage Securities.
securities with
periodic interest
rate resets.
----------------------------------------------------------------------------------------
At least 65% of U.S. Mortgage pass-
total assets in U.S. Government through securities
Government Securities and other
Securities and securities
repurchase representing an
agreements interest in or
collateralized by collateralized by
such securities. mortgage loans.
----------------------------------------------------------------------------------------
At least 65% of U.S. Non-government
total assets in U.S. Government mortgage pass-
Government Securities through securities,
Securities, and non-U.S. asset-backed
including mortgage- Government securities and
backed U.S. Securities = corporate fixed-
Government AAA/Aaa income securities.
Securities and
repurchase
agreements
collateralized by
such securities.
----------------------------------------------------------------------------------------
At least 65% of Minimum = Foreign fixed-
total assets in BBB/Baa income, municipal
fixed-income Minimum for and convertible
securities, non-dollar securities, foreign
including U.S. securities = currencies and
Government AA/Aa repurchase
Securities, agreements
corporate, mortgage- collateralized by
backed and asset- U.S. Government
backed securities. Securities.
----------------------------------------------------------------------------------------
Securities of U.S. Minimum = Mortgage-backed and
and foreign BBB/Baa At asset-backed
governments and least 50% = securities, foreign
corporations. AAA/Aaa currencies and
repurchase
agreements
collateralized by
U.S. Government
Securities or
certain foreign
government
securities.
----------------------------------------------------------------------------------------
At least 65% of At least 65% Mortgage-backed and
total assets in = BB/Ba or asset-backed
fixed-income below securities, U.S.
securities rated Government
below investment Securities,
grade, including investment grade
U.S. and non-U.S. corporate fixed-
dollar corporate income securities,
debt, foreign structured
government securities, foreign
securities, currencies and
convertible repurchase
securities and agreements
preferred stock. collateralized by
U.S. Government
Securities.
----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Principal Risks of the Underlying Funds
The following summarizes important risks that apply to the Underlying Funds and
may result in a loss of your investment in a Portfolio. There can be no assur-
ance that an Underlying Fund will achieve its investment objective.
Risks That Apply To All Underlying Funds:
.Interest Rate Risk--The risk that when interest rates increase, fixed-income
securities held by an Underlying Fund will decline in value. Long-term fixed-
income securities will normally have more price volatility because of this
risk than short-term securities.
.Credit/Default Risk--The risk that an issuer or guarantor of fixed-income
securities held by an Underlying Fund (which may have low credit ratings) may
default on its obligation to pay interest and repay principal.
.Market Risk--The risk that the value of the securities in which an Underlying
Fund invests may go up or down in response to the prospects of individual com-
panies and/or general economic conditions. Price changes may be temporary or
last for extended periods.
.Derivatives Risk--The risk that loss may result from an Underlying Fund's
investments in options, futures, swaps, structured securities and other deriv-
ative instruments. These instruments may be leveraged so that small changes
may produce disproportionate losses to an Underlying Fund.
.Foreign Risk--The risk that when an Underlying Fund invests in foreign securi-
ties, it will be subject to risk of loss not typically associated with domes-
tic issuers. Loss may result because of less foreign government regulation,
less public information and less economic, political and social stability.
Loss may also result from the imposition of exchange controls, confiscations
and other government restrictions. The Underlying Funds will also be subject
to the risk of negative foreign currency rate fluctuations. Foreign risks will
normally be greatest when an Underlying Fund invests in issuers located in
emerging countries.
.Management Risk--The risk that a strategy used by an investment adviser to the
Underlying Funds may fail to produce the intended results.
.Liquidity Risk--The risk that an Underlying Fund will not be able to pay
redemption proceeds within the time period stated in the Underlying Fund's
Prospectus because of unusual market conditions, an unusually high volume of
redemption requests, or other reasons. Underlying Funds that invest in non-
investment grade fixed-income securities, small capitalization stocks, REITs
or emerging country issuers will be especially subject to the risk that during
certain periods the liquidity of particular issuers or industries, or all
securities within these investment categories, will shrink or disappear sud-
denly and without warning as a result of adverse economic, market or political
events, or adverse investor perceptions whether or not accurate.
18
<PAGE>
PRINCIPAL RISKS OF THE UNDERLYING FUNDS
Risks That Apply Primarily To The Underlying Fixed-Income Funds:
.Call Risk--The risk that an issuer will exercise its right to pay principal on
an obligation held by an Underlying Fund (such as a Mortgage-Backed Security)
earlier than expected. This may happen when there is a decline in interest
rates. Under these circumstances, an Underlying Fund may be unable to recoup
all of its initial investment and will also suffer from having to reinvest in
lower yielding securities.
.Extension Risk--The risk that an issuer will exercise its right to pay princi-
pal on an obligation held by an Underlying Fund (such as a Mortgage-Backed
Security) later than expected. This may happen when there is a rise in inter-
est rates. Under these circumstances, the value of an obligation will
decrease, and an Underlying Fund will also suffer from the inability to invest
in higher yielding securities.
.U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risk That Applies Primarily To The Underlying Equity Funds:
.Stock Risk--The risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high levels.
There is no guarantee that such levels will continue.
19
<PAGE>
Risks That Are Particularly Important For Specific Underlying Funds:
.Geographic Risk--The European Equity Fund invests primarily in equity securi-
ties of European companies. The Japanese Equity Fund invests primarily in
equity securities of Japanese equity companies. The Asia Growth Fund invests
primarily in equity securities of Asian issuers. The Global Income Fund is
non-diversified meaning that it is permitted to invest more of its assets in
fewer issuers than "diversified" mutual funds. Thus, it may be more suscepti-
ble to adverse developments affecting any single issuer held in its portfolio,
and may be more susceptible to greater losses because of these developments.
In addition, the Global Income Fund may invest more than 25% of its total
assets in the securities of corporate and governmental issuers located in each
of Canada, Germany, Japan, and the United Kingdom as well as in the securities
of U.S. issuers. Concentration of the investments of these or other Underlying
Funds in issuers located in a particular country or region will subject the
Underlying Fund, to a greater extent than if investments were less concen-
trated, to losses arising from adverse developments affecting those issuers or
countries.
.Emerging Countries Risk--Certain Underlying Funds may invest in emerging coun-
try securities. The securities markets of Asian, Latin American, Eastern Euro-
pean, African and other emerging countries are less liquid, are especially
subject to greater price volatility, have smaller market capitalizations, have
less government regulation and are not subject to as extensive and frequent
accounting, financial and other reporting requirements as the securities mar-
kets of more developed countries. These risks are not normally associated with
investments in more developed countries.
.Small Cap Stock and REIT Risks--Certain Underlying Funds may invest in small
cap stocks and REITs. The securities of small capitalization companies and
REITs involve greater risks than those associated with larger, more estab-
lished companies and may be subject to more abrupt or erratic price movements.
Securities of such issuers may lack sufficient market liquidity to enable an
Underlying Fund to effect sales at an advantageous time or without a substan-
tial drop in price.
."Junk Bond" Risk--Certain Underlying Funds may invest in non-investment grade
fixed-income securities (commonly known as "junk bonds") that are considered
predominantly speculative by traditional investment standards. Non-investment
grade fixed-income securities and unrated securities of comparable credit
quality are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities may be subject to greater
price volatility due to such factors as specific corporate developments,
interest rate sensitivity, negative perceptions of the junk bond markets gen-
erally and less secondary market liquidity.
20
<PAGE>
PRINCIPAL RISKS OF THE UNDERLYING FUNDS
More information about the portfolio securities and investment techniques of
the Underlying Funds, and their associated risks, is provided in Appendix A.
You should consider the investment risks discussed in this section and in
Appendix A. Both are important to your investment choice.
21
<PAGE>
Portfolio Performance
HOW THE PORTFOLIOS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of
investing in a Portfolio by showing: (a) changes in the performance of a
Portfolio's Class A Shares from year to year; and (b) how the average annual
returns of a Portfolio's Class A, B and C Shares compare to those of broad-
based securities market indices. The bar chart and table assume reinvestment
of dividends and distributions. A Portfolio's past performance is not
necessarily an indication of how the Portfolio will perform in the future.
The average annual total return calculation reflects a maximum initial sales
charge of 5.5% for Class A Shares, the assumed contingent deferred sales
charge ("CDSC") for Class B Shares (5% maximum declining to 0% after six
years), and the assumed CDSC for Class C Shares (1% if redeemed within 12
months of purchase). The bar chart does not reflect the sales loads
applicable to Class A Shares. If the sales loads were reflected, returns
would be less. Performance reflects expense limitations in effect. If
expense limitations were not in place, a Portfolio's performance would have
been reduced. The Conservative Strategy Portfolio did not commence
operations until February 8, 1999. Since the Portfolio had less than one
calendar year's performance as of December 31, 1999, no performance
information is provided in this section.
22
<PAGE>
PORTFOLIO PERFORMANCE
Balanced Strategy Portfolio
TOTAL RETURN CALENDAR YEAR (CLASS A)
- --------------------------------------------------------------------------------
Best Quarter
Q4 '98 +7.04%
Worst Quarter
Q3 '98 -5.73%
[GRAPH]
6.38% 10.58%
----- ------
1998 1999
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
-----------------------------------------------------------------
<S> <C> <C>
Class A (Inception 1/2/98)
Including Sales Charges 4.50% 5.46%
S&P 500 Index* 21.04% 24.75%
Two-Year U.S. Treasury Security** 1.89% 4.20%
Lehman Brothers High Yield Bond Index*** 2.39% 2.13%
-----------------------------------------------------------------
Class B (Inception 1/2/98)
Including CDSC 4.51% 5.72%
S&P 500 Index* 21.04% 24.75%
Two-Year U.S. Treasury Security** 1.89% 4.20%
Lehman Brothers High Yield Bond Index*** 2.39% 2.13%
-----------------------------------------------------------------
Class C (Inception 1/2/98)
Including CDSC 8.60% 7.72%
S&P 500 Index* 21.04% 24.75%
Two-Year U.S. Treasury Security** 1.89% 4.20%
Lehman Brothers High Yield Bond Index*** 2.39% 2.13%
-----------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks,
an unmanaged index of common stocks. The Index figures do not reflect any
fees or expenses.
** The Two-Year U.S. Treasury Security, as reported by Merrill Lynch, does not
reflect any fees or expenses.
*** The Lehman Brothers High Yield Bond Index is a total return performance
benchmark for fixed-income securities having a maximum quality rating of
Ba1, a minimum amount outstanding of $100 million and at least one year to
maturity. The Index is unmanaged and does not reflect any fees or expenses.
23
<PAGE>
Growth and Income Strategy Portfolio
TOTAL RETURN CALENDAR YEAR (CLASS A)
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 +10.22%
Worst Quarter
Q3 '98 -10.17%
[GRAPH]
6.55% 15.79%
----- ------
1998 1999
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
--------------------------------------------------------------------------
<S> <C> <C>
Class A (Inception 1/2/98)
Including Sales Charges 9.46% 8.00%
S&P 500 Index* 21.04% 24.75%
MSCI Europe, Australasia, Far East (EAFE) Index
(unhedged)** 27.29% 23.76%
Lehman Brothers Aggregate Bond Index*** (0.82)% 3.82%
Lehman Brothers High Yield Bond Index+ 2.39% 2.13%
--------------------------------------------------------------------------
Class B (Inception 1/2/98)
Including CDSC 9.86% 8.40%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Lehman Brothers Aggregate Bond Index*** (0.82)% 3.82%
Lehman Brothers High Yield Bond Index+ 2.39% 2.13%
--------------------------------------------------------------------------
Class C (Inception 1/2/98)
Including CDSC 13.92% 10.29%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Lehman Brothers Aggregate Bond Index*** (0.82)% 3.82%
Lehman Brothers High Yield Bond Index+ 2.39% 2.13%
--------------------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Corporate Index of 500 stocks,
an unmanaged index of common stocks. The Index figures do not reflect any
fees or expenses.
** The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-
weighted composite of securities in 20 developed markets. The Index figures
do not reflect any fees or expenses.
*** The Lehman Brothers Aggregate Bond Index represents a diversified portfolio
of fixed-income securities, including U.S. Treasuries, investment-grade
corporate bonds, and mortgage-backed and asset-backed securities. The Index
figures do not reflect any fees or expenses.
+ The Lehman Brothers High Yield Bond Index is a total return performance
benchmark for fixed-income securities having a maximum quality rating of
Ba1, a minimum amount outstanding of $100 million and at least one year to
maturity. The Index is unmanaged and does not reflect any fees or expenses.
24
<PAGE>
PORTFOLIO PERFORMANCE
Growth Strategy Portfolio
TOTAL RETURN CALENDAR YEAR (CLASS A)
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 +13.16%
Worst Quarter
Q3 '98 -14.23%
[GRAPH]
4.62% 20.85%
----- ------
1998 1999
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
----------------------------------------------------------------
<S> <C> <C>
Class A (Inception 1/2/98)
Including Sales Charges 14.20% 9.33%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI Emerging Markets Free (EMF) Index+ 66.42% 11.47%
----------------------------------------------------------------
Class B (Inception 1/2/98)
Including CDSC 14.82% 9.82%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI EMF Index+ 66.42% 11.47%
----------------------------------------------------------------
Class C (Inception 1/2/98)
Including CDSC 18.95% 11.69%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI EMF Index+ 66.42% 11.47%
----------------------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks,
an unmanaged index of common stocks. The Index figures do not reflect any
fees or expenses.
** The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-
weighted composite of securities in 20 developed markets. The Index figures
do not reflect any fees or expenses.
*** The Russell 2000 Index is an unmanaged index of common stock prices. The
Index figures do not reflect any fees or expenses.
+ The unmanaged MSCI EMF Index is a market capitalization-weighted composite
of securities in over 30 emerging market countries. "Free" indicates an
index that excludes shares in otherwise free markets that are not
purchasable by foreigners. The Index figures do not reflect any fees or
expenses.
25
<PAGE>
Aggressive Growth Strategy Portfolio
TOTAL RETURN CALENDAR YEAR (CLASS A)
- --------------------------------------------------------------------------------
Best Quarter:
Q4 '99 +15.81%
Worst Quarter:
Q3 '98 -17.19%
[GRAPH]
2.57% 25.39%
----- ------
1998 1999
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year Since Inception
-----------------------------------------------------
<S> <C> <C>
Class A (Inception 1/2/98)
Including Sales Charges 18.51% 10.27%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI EMF Index+ 66.42% 11.47%
-----------------------------------------------------
Class B (Inception 1/2/98)
Including CDSC 19.39% 10.82%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI EMF Index+ 66.42% 11.47%
-----------------------------------------------------
Class C (Inception 1/2/98)
Including CDSC 23.35% 12.66%
S&P 500 Index* 21.04% 24.75%
MSCI EAFE Index (unhedged)** 27.29% 23.76%
Russell 2000 Index*** 21.26% 8.70%
MSCI EMF Index+ 66.42% 11.47%
-----------------------------------------------------
</TABLE>
* The S&P 500 Index is the Standard & Poor's Composite Index of 500 stocks,
an unmanaged index of common stocks. The Index figures do not reflect any
fees or expenses.
** The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-
weighted composite of securities in 20 developed markets. The Index figures
do not reflect any fees or expenses.
*** The Russell 2000 Index is an unmanaged index of common stock prices. The
Index figures do not reflect any fees or expenses.
+ The unmanaged MSCI EMF Index is a market capitalization-weighted composite
of securities in over 30 emerging market countries. "Free" indicates an
index that excludes shares in otherwise free markets that are not
purchasable by foreigners. The Index figures do not reflect any fees or
expenses.
26
<PAGE>
Portfolio Fees and Expenses (Class A, B and C Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Class A, Class B, or Class C Shares of a Portfolio.
<TABLE>
<CAPTION>
Conservative Strategy Portfolio
----------------------------------------
Class A Class B Class C
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your
investment):
Maximum Sales Charge (Load)
Imposed on Purchases 5.5%/1/ None None
Maximum Deferred Sales Charge
(Load)/2/ None/1/ 5.0%/3/ 1.0%/4/
Maximum Sales Charge (Load)
Imposed on
Reinvested Dividends None None None
Redemption Fees/5/ None None None
Exchange Fees/5/ None None None
Annual Portfolio Operating
Expenses
(expenses that are deducted from
Portfolio assets):/6/
Management Fees (for asset
allocation)/7/ 0.35% 0.35% 0.35%
Distribution and Service (12b-1)
Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 2.75% 2.75% 2.75%
Underlying Fund Expenses/6/ 0.55% 0.55% 0.55%
- ------------------------------------------------------------------------------
Total Other and Underlying Fund
Expenses 3.30% 3.30% 3.30%
- ------------------------------------------------------------------------------
Total Portfolio Operating
Expenses* 3.90% 4.65% 4.65%
- ------------------------------------------------------------------------------
</TABLE>
See page 32 for all other footnotes.
* As a result of current waivers and expense limitations,
"Other Expenses" and "Total Portfolio Operating
Expenses" of the Portfolio which are actually incurred
are as set forth below. The waivers and expense limita-
tions may be terminated at any time at the option of
the Investment Adviser. If this occurs, "Other
Expenses" and "Total Portfolio Operating Expenses" may
increase without shareholder approval.
<TABLE>
<CAPTION>
Conservative Strategy
Portfolio
-----------------------
Class A Class B Class C
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):/6/
Management Fees (for asset allocation)/7/ 0.15% 0.15% 0.15%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.19% 0.19% 0.19%
Underlying Fund Expenses/6/ 0.55% 0.55% 0.55%
--------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 0.74% 0.74% 0.74%
--------------------------------------------------------------------------------
Total Portfolio Operating Expenses (after current
waivers and expense limitations) 1.14% 1.89% 1.89%
--------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Portfolio Fees and Expenses continued
<TABLE>
<CAPTION>
Balanced Strategy Portfolio
-------------------------------------
Class A Class B Class C
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your
investment):
Maximum Sales Charge (Load) Imposed
on Purchases 5.5%/1/ None None
Maximum Deferred Sales Charge
(Load)/2/ None/1/ 5.0%/3/ 1.0%/4/
Maximum Sales Charge (Load) Imposed
on
Reinvested Dividends None None None
Redemption Fees/5/ None None None
Exchange Fees/5/ None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from
Portfolio assets):/6/
Management Fees (for asset
allocation)/7/ 0.35% 0.35% 0.35%
Distribution and Service (12b-1)
Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.45% 0.45% 0.45%
Underlying Fund Expenses/6/ 0.69% 0.69% 0.69%
- ------------------------------------------------------------------------------
Total Other and Underlying Fund
Expenses 1.14% 1.14% 1.14%
- ------------------------------------------------------------------------------
Total Portfolio Operating Expenses* 1.74% 2.49% 2.49%
- ------------------------------------------------------------------------------
</TABLE>
See page 32 for all other footnotes.
* As a result of current waivers and expense limitations,
"Other Expenses" and "Total Portfolio Operating Expenses" of
the Portfolio which are actually incurred are as set forth
below. The waivers and expense limitations may be terminated
at any time at the option of the Investment Adviser. If this
occurs, "Other Expenses" and "Total Portfolio Operating
Expenses" may increase without shareholder approval.
<TABLE>
<CAPTION>
Balanced Strategy
Portfolio
-----------------------
Class A Class B Class C
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):/6/
Management Fees (for asset allocation)/7/ 0.15% 0.15% 0.15%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.19% 0.19% 0.19%
Underlying Fund Expenses/6/ 0.69% 0.69% 0.69%
--------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 0.88% 0.88% 0.88%
--------------------------------------------------------------------------------
Total Portfolio Operating Expenses (after current
waivers and expense limitations) 1.28% 2.03% 2.03%
--------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
PORTFOLIO FEES AND EXPENSES
<TABLE>
<CAPTION>
Growth and Income
Strategy Portfolio
---------------------------
Class A Class B Class C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases 5.5%/1/ None None
Maximum Deferred Sales Charge (Load)/2/ None/1/ 5.0%/3/ 1.0%/4/
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees/5/ None None None
Exchange Fees/5/ None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio
assets):/6/
Management Fees (for asset allocation)/7/ 0.35% 0.35% 0.35%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.25% 0.25% 0.25%
Underlying Fund Expenses/6/ 0.79% 0.79% 0.79%
- -------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 1.04% 1.04% 1.04%
- -------------------------------------------------------------------------------
Total Portfolio Operating Expenses* 1.64% 2.39% 2.39%
- -------------------------------------------------------------------------------
</TABLE>
See page 32 for all other footnotes.
* As a result of current waivers and expense limitations,
"Other Expenses" and "Total Portfolio Operating Expenses"
of the Portfolio which are actually incurred are as set
forth below. The waivers and expense limitations may be
terminated at any time at the option of the Investment
Adviser. If this occurs, "Other Expenses" and "Total Port-
folio Operating Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
Growth and
Income Strategy
Portfolio
-----------------------
Class A Class B Class C
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):/6/
Management Fees (for asset allocation)/7/ 0.15% 0.15% 0.15%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.19% 0.19% 0.19%
Underlying Fund Expenses/6/ 0.79% 0.79% 0.79%
--------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 0.98% 0.98% 0.98%
--------------------------------------------------------------------------------
Total Portfolio Operating Expenses (after current
waivers and expense limitations) 1.38% 2.13% 2.13%
--------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Portfolio Fees and Expenses continued
<TABLE>
<CAPTION>
Growth Strategy
Portfolio
---------------------------
Class A Class B Class C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases 5.5%/1/ None None
Maximum Deferred Sales Charge (Load)/2/ None/1/ 5.0%/3/ 1.0%/4/
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees/5/ None None None
Exchange Fees/5/ None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio
assets):/6/
Management Fees (for asset allocation)/7/ 0.35% 0.35% 0.35%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.27% 0.27% 0.27%
Underlying Fund Expenses/6/ 0.84% 0.84% 0.84%
- -------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 1.11% 1.11% 1.11%
- -------------------------------------------------------------------------------
Total Portfolio Operating Expenses* 1.71% 2.46% 2.46%
- -------------------------------------------------------------------------------
</TABLE>
See page 32 for all other footnotes.
* As a result of current waivers and expense limitations,
"Other Expenses" and "Total Portfolio Operating Expenses"
of the Portfolio which are actually incurred are as set
forth below. The waivers and expense limitations may be
terminated at any time at the option of the Investment
Adviser. If this occurs, "Other Expenses" and "Total Port-
folio Operating Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
Growth Strategy
Portfolio
-----------------------
Class A Class B Class C
---------------------------------------------------------------------------
<S> <C> <C> <C>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio
assets):/6/
Management Fees (for asset allocation)/7/ 0.15% 0.15% 0.15%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.19% 0.19% 0.19%
Underlying Fund Expenses/6/ 0.84% 0.84% 0.84%
---------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 1.03% 1.03% 1.03%
---------------------------------------------------------------------------
Total Portfolio Operating Expenses (after current
waivers and expense limitations) 1.43% 2.18% 2.18%
---------------------------------------------------------------------------
</TABLE>
30
<PAGE>
PORTFOLIO FEES AND EXPENSES
<TABLE>
<CAPTION>
Aggressive Growth
Strategy Portfolio
-----------------------------
<S> <C> <C> <C>
Class A Class B Class C
- ----------------------------------------------------------------------------
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases 5.5%/1/ None None
Maximum Deferred Sales Charge (Load)/2/ None/1/ 5.0%/3/ 1.0%/4/
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees/5/ None None None
Exchange Fees/5/ None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio
assets):/6/
Management Fees (for asset allocation)/7/ 0.35% 0.35% 0.35%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.40% 0.40% 0.40%
Underlying Fund Expenses/6/ 0.90% 0.90% 0.90%
- ----------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 1.30% 1.30% 1.30%
- ----------------------------------------------------------------------------
Total Portfolio Operating Expenses* 1.90% 2.65% 2.65%
- ----------------------------------------------------------------------------
</TABLE>
See page 32 for all other footnotes.
* As a result of current waivers and expense limitations,
"Other Expenses" and "Total Portfolio Operating Expenses"
of the Portfolio which are actually incurred are as set
forth below. The waivers and expense limitations may be
terminated at any time at the option of the Investment
Adviser. If this occurs, "Other Expenses" and "Total Port-
folio Operating Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
Aggressive Growth
Strategy Portfolio
-----------------------
Class A Class B Class C
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):/6/
Management Fees (for asset allocation)7 0.15% 0.15% 0.15%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.19% 0.19% 0.19%
Underlying Fund Expenses/6/ 0.90% 0.90% 0.90%
--------------------------------------------------------------------------------
Total Other and Underlying Fund Expenses 1.09% 1.09% 1.09%
--------------------------------------------------------------------------------
Total Portfolio Operating Expenses (after current
waivers and expense limitations) 1.49% 2.24% 2.24%
--------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Portfolio Fees and Expenses continued
/1/The maximum sales charge is a percentage of the offering price. A CDSC of 1%
is imposed on certain redemptions (within 18 months of purchase) of Class A
Shares sold without an initial sales charge as part of an investment of $1 mil-
lion or more.
/2/The maximum CDSC is a percentage of the lesser of the net asset value
("NAV") at the time of the redemption or the NAV when the shares were origi-
nally purchased.
/3/A CDSC is imposed upon Class B Shares redeemed within six years of purchase
at a rate of 5% in the first year, declining to 1% in the sixth year, and elim-
inated thereafter.
/4/A CDSC of 1% is imposed on Class C Shares redeemed within 12 months of pur-
chase.
/5/A transaction fee of $7.50 may be charged for redemption proceeds paid by
wire. In addition to free reinvestments of dividends and distributions in
shares of other Goldman Sachs Funds or shares of the Goldman Sachs Institu-
tional Liquid Assets Portfolios (the "ILA Portfolios") and free automatic
exchanges pursuant to the Automatic Exchange Program, six free exchanges are
permitted in each 12-month period. A fee of $12.50 may be charged for each sub-
sequent exchange during such period.
/6/The Portfolios' annual operating expenses have been restated to reflect cur-
rent fees, except for the Conservative Strategy Portfolio, whose expenses are
estimated for the current fiscal year. "Underlying Fund Expenses" for each
Portfolio are based upon the strategic allocation of each Portfolio's invest-
ment in the Underlying Funds and upon the actual total operating expenses of
the Underlying Funds (including any current waivers and expense limitations of
the Underlying Funds). Actual Underlying Fund Expenses incurred by each Portfo-
lio may vary with changes in the allocation of each Portfolio's assets among
the Underlying Funds and with other events that directly affect the expenses of
the Underlying Funds.
/7/The Investment Adviser has voluntarily agreed not to impose a portion of the
management fee on the Portfolios equal to 0.20% of the Portfolios' average
daily net assets. As a result of fee waivers, current management fees of the
Portfolios are 0.15% of each Portfolio's average daily net assets. The waivers
may be terminated at any time at the option of the Investment Adviser.
/8/"Other Expenses" include transfer agency fees equal to 0.19% of the average
daily net assets of each Portfolio's Class A, B and C Shares, plus all other
ordinary expenses not detailed above. The Investment Adviser has voluntarily
agreed to reduce or limit "Other Expenses" (excluding management fees, distri-
bution and service fees, transfer agency fees, taxes, interest and brokerage
fees and litigation, indemnification and other extraordinary expenses) to 0.00%
of each Portfolio's average daily net assets.
32
<PAGE>
PORTFOLIO FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Portfolio (without waivers and expense limitations) with the cost of invest-
ing in other mutual funds. The Example assumes that you invest $10,000 in Class
A, B or C Shares of a Portfolio for the time periods indicated and then redeem
all of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that a Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Conservative Strategy
Class A Shares $921 $1,674 $2,444 $4,445
Class B Shares
- Assuming complete
redemption at end of
period $966 $1,702 $2,545 $4,583
- Assuming no redemption $466 $1,402 $2,345 $4,583
Class C Shares
- Assuming complete
redemption at end of
period $566 $1,402 $2,345 $4,732
- Assuming no redemption $466 $1,402 $2,345 $4,732
- ---------------------------------------------------------
Balanced Strategy
Class A Shares $717 $1,068 $1,442 $2,489
Class B Shares
- Assuming complete
redemption at end of
period $752 $1,076 $1,526 $2,642
- Assuming no redemption $252 $ 776 $1,326 $2,642
Class C Shares
- Assuming complete
redemption at end of
period $352 $ 776 $1,326 $2,826
- Assuming no redemption $252 $ 776 $1,326 $2,826
- ---------------------------------------------------------
Growth and Income
Strategy
Class A Shares $708 $1,039 $1,393 $2,387
Class B Shares
- Assuming complete
redemption at end of
period $742 $1,045 $1,475 $2,540
- Assuming no redemption $242 $ 745 $1,275 $2,540
Class C Shares
- Assuming complete
redemption at end of
period $342 $ 745 $1,275 $2,726
- Assuming no redemption $242 $ 745 $1,275 $2,726
- ---------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Strategy
Class A Shares $714 $1,059 $1,427 $2,458
Class B Shares
- Assuming complete
redemption at end of
period $749 $1,067 $1,511 $2,611
- Assuming no redemption $249 $ 767 $1,311 $2,611
Class C Shares
- Assuming complete
redemption at end of
period $349 $ 767 $1,311 $2,796
- Assuming no redemption $249 $ 767 $1,311 $2,796
- ---------------------------------------------------------
Aggressive Growth
Strategy
Class A Shares $732 $1,114 $1,520 $2,650
Class B Shares
- Assuming complete
redemption at end of
period $768 $1,123 $1,605 $2,802
- Assuming no redemption $268 $ 823 $1,405 $2,802
Class C Shares
- Assuming complete
redemption at end of
period $368 $ 823 $1,405 $2,983
- Assuming no redemption $268 $ 823 $1,405 $2,983
- ---------------------------------------------------------
</TABLE>
The hypothetical example assumes that a CDSC will not apply to redemptions of
Class A Shares within the first 18 months. Class B Shares convert to Class A
Shares eight years after purchase; therefore, Class A expenses are used in the
hypothetical example after year eight.
Certain institutions that sell Portfolio shares and/or their salespersons may
receive other compensation in connection with the sale and distribution of
Class A, Class B and Class C Shares or for services to their customers'
accounts and/or the Portfolios. For additional information regarding such com-
pensation, see "What Should I Know When I Purchase Shares Through An Authorized
Dealer?"
34
<PAGE>
Service Providers
INVESTMENT ADVISERS
<TABLE>
<CAPTION>
Investment Adviser Portfolio
-----------------------------------------------------
<S> <C>
Goldman Sachs Asset
Management ("GSAM") Conservative Strategy
32 Old Slip Balanced Strategy
New York, New York 10005 Growth and Income Strategy
Growth Strategy
Aggressive Growth Strategy
-----------------------------------------------------
</TABLE>
Except as noted below, GSAM also serves as investment adviser to each Under-
lying Fund.
<TABLE>
<CAPTION>
Investment Adviser Underlying Fund
-----------------------------------------------------
<S> <C>
Goldman Sachs Funds
Management, L.P.
("GSFM") CORE U.S. Equity
32 Old Slip Capital Growth
New York, New York 10005 Adjustable Rate Government
Short Duration Government
-----------------------------------------------------
Goldman Sachs Asset
Management International Equity
International ("GSAMI") Japanese Equity
Procession House European Equity
55 Ludgate Hill International Small Cap
London EC4M 7JW Emerging Markets Equity
England Asia Growth
Global Income
-----------------------------------------------------
</TABLE>
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM, GSAMI and GSFM. Goldman Sachs registered as an invest-
ment adviser in 1981. GSAMI, a member of the Investment Management Regula-
tory Organization Limited since 1990 and a registered investment adviser
since 1991, is an affiliate of Goldman Sachs. GSFM, a registered investment
adviser since 1990, is a Delaware limited partnership which is an affiliate
of Goldman Sachs. The Goldman Sachs Group, L.P., which controlled the
Investment Advisers, merged into the Goldman Sachs Group, Inc. as a result
of an initial public offering. As of December 31, 1999, GSAM, GSAMI and
GSFM, along with other units of IMD, had assets under management of $258.5
billion.
35
<PAGE>
Under an Asset Allocation Management Agreement with each Portfolio, the
Investment Adviser, subject to the general supervision of the Trustees, pro-
vides day-to-day advice as to each Portfolio's investment transactions,
including determinations concerning changes to (a) the Underlying Funds in
which the Portfolios may invest; and (b) the percentage range of assets of
any Portfolio that may be invested in the Underlying Equity Funds and the
Underlying Fixed-Income Funds as separate groups.
The Investment Adviser also performs the following additional services for
the Portfolios:
. Supervises all non-advisory operations of the Portfolios
. Provides personnel to perform necessary executive, administrative and
clerical services to the Portfolios
. Arranges for the preparation of all required tax returns, reports to
shareholders, prospectuses and statements of additional information and
other reports filed with the Securities and Exchange Commission (the
"SEC") and other regulatory authorities
. Maintains the records of each Portfolio
. Provides office space and all necessary office equipment and services
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate
For the Fiscal Year Ended
Portfolio Contractual Rate December 31, 1999
------------------------------------------------------------------------
<S> <C> <C>
Conservative Strategy 0.35% 0.15%
------------------------------------------------------------------------
Balanced Strategy 0.35% 0.15%
------------------------------------------------------------------------
Growth and Income Strategy 0.35% 0.15%
------------------------------------------------------------------------
Growth Strategy 0.35% 0.15%
------------------------------------------------------------------------
Aggressive Growth Strategy 0.35% 0.15%
------------------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Portfolios reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
36
<PAGE>
SERVICE PROVIDERS
In addition, each Portfolio, as a shareholder in the Underlying Funds, will
indirectly bear a proportionate share of any investment management fees and
other expenses paid by the Underlying Funds. The following chart shows the
total net operating expense ratios (management fee plus other operating
expenses) of Institutional Shares of each Underlying Fund in which the Portfo-
lios may invest after applicable fee waivers and expense limitations, as of the
end of each Underlying Fund's most recent fiscal year. In addition, the follow-
ing chart shows the contractual investment management fees payable to the
investment adviser and its affiliates by the Underlying Funds (in each case as
an annualized percentage of a Fund's average net assets). Absent voluntary fee
waivers and/or expense reimbursements, which may be discontinued at any time,
the total operating expense ratios of certain Underlying Funds would be higher.
<TABLE>
<CAPTION>
Total Net
Contractual Operating
Management Expense
Underlying Fund Fee Ratio
- ---------------------------------------------------------
<S> <C> <C>
Financial Square Prime Obligations 0.205% 0.18%
- ---------------------------------------------------------
Short Duration Government 0.50% 0.54%
- ---------------------------------------------------------
Adjustable Rate Government 0.40% 0.49%
- ---------------------------------------------------------
Core Fixed Income 0.40% 0.54%
- ---------------------------------------------------------
Government Income 0.65% 0.58%
- ---------------------------------------------------------
Global Income 0.90% 0.69%
- ---------------------------------------------------------
High Yield 0.70% 0.76%
- ---------------------------------------------------------
Growth and Income 0.70% 0.79%
- ---------------------------------------------------------
CORE U.S. Equity 0.75% 0.74%
- ---------------------------------------------------------
CORE Large Cap Growth 0.75% 0.64%
- ---------------------------------------------------------
CORE Large Cap Value 0.60% 0.64%
- ---------------------------------------------------------
CORE Small Cap Equity 0.85% 0.93%
- ---------------------------------------------------------
Capital Growth 1.00% 1.04%
- ---------------------------------------------------------
CORE International Equity 0.85% 1.01%
- ---------------------------------------------------------
Mid Cap Value* 0.75% 0.89%
- ---------------------------------------------------------
Small Cap Value 1.00% 1.10%
- ---------------------------------------------------------
International Equity 1.00% 1.14%
- ---------------------------------------------------------
Japanese Equity 1.00% 1.05%
- ---------------------------------------------------------
European Equity 1.00% 1.14%
- ---------------------------------------------------------
International Small Cap 1.20% 1.40%
- ---------------------------------------------------------
Emerging Markets Equity 1.20% 1.39%
- ---------------------------------------------------------
Asia Growth 1.00% 1.20%
- ---------------------------------------------------------
Real Estate Securities 1.00% 1.04%
- ---------------------------------------------------------
</TABLE>
*Formerly, "Mid Cap Equity."
37
<PAGE>
PORTFOLIO MANAGERS
Robert B. Litterman, Ph.D., a Managing Director of Goldman Sachs, is the co-
developer, along with the late Fischer Black, of the Black-Litterman Global
Asset Allocation Model, a key tool in IMD's asset allocation process. As
Director of Quantitative Resources, Dr. Litterman oversees Quantitative
Equities, the Quantitative Strategies Group, the Investment Performance &
Valuation Oversight Group, and the Client Research Groups. In total, these
groups include over 120 professionals. Prior to moving to IMD, Dr. Litterman
was the head of the Firmwide Risk department since becoming a Partner in
1994. Preceding his time in the Operations, Technology & Finance Division,
Dr. Litterman spent eight years in the Fixed Income Division's research
department where he was co-director of the research and model development
group.
Quantitative Strategies Group
. The 30-person Quantitative Strategies Group includes eight Ph.Ds, with
extensive academic and practitioner experience
. Disciplined, quantitative models are used to determine the relative
attractiveness of the world's stock, bond and currency markets
. Theory and economic intuition guide the investment process
- --------------------------------------------------------------------------------
Quantitative Strategies Group
<TABLE>
<CAPTION>
Years Primarily
Name and Title Responsible Five Year Employment History
- --------------------------------------------------------------------------------
<C> <C> <S>
Mark M. Carhart, Since Dr. Carhart joined the Investment
Ph.D., CFA Managing 1998 Adviser as a member of the Quantitative
Director, Co-Head Strategies Group in 1997. From August
Quantitative 1995 to September 1997, he was Assistant
Strategies and Senior Professor of Finance at the Marshall
Portfolio Manager School of Business at USC and a Senior
Fellow of the Wharton Financial
Institutions Center. From 1993 to 1995,
he was a lecturer and graduate student
at the University of Chicago Graduate
School of Business.
- --------------------------------------------------------------------------------
Raymond J. Iwanowski Since Mr. Iwanowski joined the Investment
Managing Director, Co- 1998 Adviser as an associate and portfolio
Head Quantitative manager in 1997. From 1993 to 1997, he
Strategies and Senior was a Vice President and head of the
Portfolio Manager Fixed Derivatives Client Research group
at Salomon Brothers.
- --------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
SERVICE PROVIDERS
Quantitative Strategies Group
<TABLE>
<CAPTION>
Years Primarily
Name and Title Responsible Five Year Employment History
- --------------------------------------------------------------------------------
<C> <C> <S>
Donald M. Raymond, Since Prior to joining the Investment Adviser
Ph.D. Vice President 1998 in July 1988, Dr. Raymond spent four
and Portfolio Manager years as head of Fixed Income Research
and Chief Strategist for Goldman Sachs
Canada. Prior to joining the Investment
Adviser, Dr. Raymond worked for a
Canadian Investment Bank for three
years, where he developed fixed income
cash and derivative pricing models, and
portfolio arbitrage strategies.
- --------------------------------------------------------------------------------
Giorgio De Santis, Since Dr. DeSantis joined the Investment
Ph.D. Vice President 1998 Adviser in 1998. From 1992 to 1998, he
and Portfolio Manager was Assistant Professor of Finance and
Business Economics at the Marshall
School of Business at USC.
- --------------------------------------------------------------------------------
William J. Fallon, Since Dr. Fallon joined the Investment Adviser
Ph.D. Vice President 1998 in 1998. From 1996 to 1998, he worked in
and Portfolio Manager the Firmwide Risk Group of Goldman
Sachs. From 1991 to 1996, he attended
Columbia University, where he earned a
Ph.D. in Finance.
- --------------------------------------------------------------------------------
Guang-Liang He, Ph.D. Since Dr. He joined the Investment Adviser in
Vice President and 1998 1998. In 1997, he worked in the Firmwide
Portfolio Manager Risk Group of Goldman Sachs. From 1992
to 1997, he worked at Quantitative
Financial Strategies, Inc. where he was
responsible for the research and
development of proprietary trading
models.
- --------------------------------------------------------------------------------
</TABLE>
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Portfolio's shares.
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois, 60606-6372, also serves
as each Portfolio's transfer agent (the "Transfer Agent") and, as such, per-
forms various shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Underlying Funds or Portfolios. Goldman Sachs reserves
the right to redeem at any time some or all of the shares acquired for its
own account.
39
<PAGE>
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS
The involvement of the Investment Adviser, Goldman Sachs and their affili-
ates in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect
to an Underlying Fund or limit an Underlying Fund's investment activities.
Goldman Sachs and its affiliates engage in proprietary trading and advise
accounts and funds which have investment objectives similar to those of the
Underlying Funds and/or which engage in and compete for transactions in the
same types of securities, currencies and instruments as the Underlying
Funds. Goldman Sachs and its affiliates will not have any obligation to make
available any information regarding their proprietary activities or strate-
gies, or the activities or strategies used for other accounts managed by
them, for the benefit of the management of the Underlying Funds. The results
of an Underlying Fund's investment activities, therefore, may differ from
those of Goldman Sachs and its affiliates, and it is possible that an Under-
lying Fund could sustain losses during periods in which Goldman Sachs and
its affiliates and other accounts achieve significant profits on their trad-
ing for proprietary or other accounts. In addition, the Underlying Funds
may, from time to time, enter into transactions in which other clients of
Goldman Sachs have an adverse interest. An Underlying Fund's activities may
be limited because of regulatory restrictions applicable to Goldman Sachs
and its affiliates, and/or their internal policies designed to comply with
such restrictions.
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology problems associated with the transition to Year 2000 and to
confirm that its service providers did the same. As a result of those
efforts, Goldman Sachs did not experience any material disruptions in its
operations as a result of the transition to the Year 2000.
40
<PAGE>
Dividends
Each Fund pays dividends from its net investment income and capital gain net
income. You may choose to have dividends paid in:
. Cash
. Additional shares of the same class of the same Fund
. Shares of the same or an equivalent class of another Goldman Sachs Fund. Spe-
cial restrictions may apply for certain ILA Portfolios. See the Additional
Statement.
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time before the record date for a
particular dividend. If you do not indicate any choice, dividends will be rein-
vested automatically in the applicable Fund.
The election to reinvest dividends in additional shares will not affect the tax
treatment of such dividends, which will be treated as received by you and then
used to purchase the shares.
Dividends from net investment income and capital gain net income are declared
and paid as follows:
<TABLE>
<CAPTION>
Net Investment Capital Gain
Portfolio Income Net Income
- -------------------------------------------------------
<S> <C> <C>
Conservative Strategy Monthly Annually
- -------------------------------------------------------
Balanced Strategy Quarterly Annually
- -------------------------------------------------------
Growth and Income Strategy Quarterly Annually
- -------------------------------------------------------
Growth Strategy Annually Annually
- -------------------------------------------------------
Aggressive Growth Strategy Annually Annually
- -------------------------------------------------------
</TABLE>
From time to time a portion of a Portfolio's dividends may constitute a return
of capital.
At the time of an investor's purchase of shares of a Portfolio, a portion of
the net asset value ("NAV") per share may be represented by undistributed
income or undistributed realized appreciation of the Portfolio's portfolio
securities. Therefore, subsequent distributions on such shares from such income
or realized appreciation may be taxable to you even if the NAV of the shares
is, as a result of the distributions, reduced below the cost of such shares and
the distributions (or portions thereof) represent a return of a portion of the
purchase price.
41
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' shares.
HOW TO BUY SHARES
How Can I Purchase Class A, Class B And Class C Shares Of The Funds?
You may purchase shares of the Funds through:
. Goldman Sachs;
. Authorized Dealers; or
. Directly from Goldman Sachs Trust (the "Trust").
In order to make an initial investment in a Fund, you must furnish to the
Fund, Goldman Sachs or your Authorized Dealer the information in the Account
Application.
To Open an Account:
. Complete the Account Application
. Mail your payment and Account Application to:
Your Authorized Dealer
- Purchases by check or Federal Reserve draft should be made payable to
your Authorized Dealer
- Your Authorized Dealer is responsible for forwarding payment promptly
(within three business days) to the Fund
or
Goldman Sachs Funds c/o National Financial Data Services, Inc. ("NFDS"),
P.O. Box 219711, Kansas City, MO 64121-9711
- Purchases by check or Federal Reserve draft should be made payable to
Goldman Sachs Funds - (Name of Fund and Class of Shares)
- NFDS will not accept a check drawn on a foreign bank, a third-party
check, cash, money orders, travelers checques or credit card checks
- Federal funds wire, Automated Clearing House Network ("ACH") transfer or
bank wires should be sent to State Street Bank and Trust Company ("State
Street") (each Fund's custodian). Please call the Funds at 1-800-526-
7384 to get detailed instructions on how to wire your money.
42
<PAGE>
SHAREHOLDER GUIDE
What Is My Minimum Investment In The Funds?
<TABLE>
<CAPTION>
Initial Additional
------------------------------------------------------------------------------
<S> <C> <C>
Regular Accounts $1,000 $50
------------------------------------------------------------------------------
Tax-Sheltered Retirement Plans (excluding SIMPLE IRAs and
Education IRAs) $250 $50
------------------------------------------------------------------------------
Uniform Gift to Minors Act Accounts/Uniform Transfer to
Minors Act Accounts $250 $50
------------------------------------------------------------------------------
403(b) Plan Accounts $200 $50
------------------------------------------------------------------------------
SIMPLE IRAs and Education IRAs $50 $50
------------------------------------------------------------------------------
Automatic Investment Plan Accounts $50 $50
------------------------------------------------------------------------------
</TABLE>
What Alternative Sales Arrangements Are Available?
The Funds offer three classes of shares through this Prospectus.
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------
Maximum Amount You Can Buy In The Class A No limit
Aggregate Across Funds
------------------------------------------------
Class B $250,000
------------------------------------------------
Class C $1,000,000
------------------------------------------------------------------------
Initial Sales Charge Class A Applies to purchases of less
than $1 million--varies by
size of investment with a
maximum of 5.5%
------------------------------------------------
Class B None
------------------------------------------------
Class C None
------------------------------------------------------------------------
CDSC Class A 1.00% on certain investments
of $1 million or more if you
sell within 18 months
------------------------------------------------
Class B 6 year declining CDSC with a
maximum of 5%
------------------------------------------------
Class C 1% if shares are redeemed
within 12 months of purchase
------------------------------------------------------------------------
Conversion Feature Class A None
------------------------------------------------
Class B Class B Shares convert to
Class A Shares after 8 years
------------------------------------------------
Class C None
------------------------------------------------------------------------
</TABLE>
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Refuse to open an account if you fail to (i) provide a social security
number or other taxpayer identification number; or (ii) certify that such
number is correct (if required to do so under applicable law).
. Reject or restrict any purchase or exchange order by a particular pur-
chaser (or group of related purchasers). This may occur, for example, when
a pattern of
43
<PAGE>
frequent purchases, sales or exchanges of shares of a Fund is evident, or
if purchases, sales or exchanges are, or a subsequent abrupt redemption
might be, of a size that would disrupt management of a Fund.
. Close a Fund to new investors from time to time and reopen any such Fund
whenever it is deemed appropriate by a Fund's Investment Adviser.
. Modify or waive the minimum investment amounts.
. Modify the manner in which shares are offered.
. Modify the sales charge rates applicable to future purchases of shares.
The Funds may allow you to purchase shares with securities instead of cash
if consistent with a Fund's investment policies and operations and if
approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange shares is deter-
mined by a Fund's NAV and share class. Each class calculates its NAV as fol-
lows:
<TABLE>
<S> <C>
(Value of Assets of the Class)
NAV = - (Liabilities of the Class)
-----------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
The Funds' investments are valued based on market quotations or, if accurate
quotations are not readily available, the fair value of the Fund's invest-
ments may be determined in good faith under procedures established by the
Trustees.
. NAV per share of each share class is calculated by the Fund's custodian on
each business day as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time). Fund shares will not be
priced on any day the New York Stock Exchange is closed.
. When you buy shares, you pay the NAV next calculated after the Funds
receive your order in proper form, plus any applicable sales charge.
. When you sell shares, you receive the NAV next calculated after the Funds
receive your order in proper form, less any applicable CDSC.
Note: The time at which transactions and shares are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
Foreign securities may trade in their local markets on days a Fund is
closed. As a result, if the Fund holds foreign securities, its NAV may be
impacted on days when investors may not purchase or redeem Fund shares.
44
<PAGE>
SHAREHOLDER GUIDE
In addition, the impact of events that occur after the publication of market
quotations used by a Fund to price its securities (for example, in foreign
markets) but before the close of regular trading on the New York Stock
Exchange will normally not be reflected in a Fund's next determined NAV
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.
COMMON QUESTIONS ABOUT THE PURCHASE OF CLASS A SHARES
What Is The Offering Price Of Class A Shares?
The offering price of Class A Shares of each Fund is the next determined NAV
per share plus an initial sales charge paid to Goldman Sachs at the time of
purchase of shares. The sales charge varies depending upon the amount you
purchase. In some cases, described below, the initial sales charge may be
eliminated altogether, and the offering price will be the NAV per share. The
current sales charges and commissions paid to Authorized Dealers are as fol-
lows:
<TABLE>
<CAPTION>
Sales Charge Maximum Dealer
Sales Charge as as Percentage Allowance as
Amount of Purchase Percentage of of Net Amount Percentage of
(including sales charge, if any) Offering Price Invested Offering Price*
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
$50,000 up to (but less than)
$100,000 4.75 4.99 4.00
$100,000 up to (but less than)
$250,000 3.75 3.90 3.00
$250,000 up to (but less than)
$500,000 2.75 2.83 2.25
$500,000 up to (but less than)
$1 million 2.00 2.04 1.75
$1 million or more 0.00** 0.00** ***
---------------------------------------------------------------------------------
</TABLE>
* Dealer's allowance may be changed periodically. During special promo-
tions, the entire sales charge may be allowed to Authorized Dealers.
Authorized Dealers to whom substantially the entire sales charge is
allowed may be deemed to be "underwriters" under the Securities Act of
1933.
** No sales charge is payable at the time of purchase of Class A Shares of
$1 million or more, but a CDSC of 1% may be imposed in the event of
certain redemptions within 18 months of purchase.
*** The Distributor pays a one-time commission to Authorized Dealers who
initiate or are responsible for purchases of $1 million or more of
shares of the Funds equal to 1.00% of the amount under $3 million,
0.50% of the next $2 million, and 0.25% thereafter. The Distributor may
also pay, with respect to all or a portion of the amount purchased, a
commission in accordance with the foregoing schedule to Authorized
Dealers who initiate or are responsible for purchases of $500,000 or
more by certain pension and profit sharing plans, pension funds and
other company-sponsored benefit plans investing in the Funds which sat-
isfy the criteria set forth below in "When Are Class A Shares Not Sub-
ject To A Sales Load?" or $1 million or more by certain "wrap"
accounts. Purchases by such plans will be made at NAV with no initial
sales charge, but if all of the shares held are redeemed within 18
months after the end of the calendar month in which such purchase was
made, a CDSC of 1% may be imposed upon the plan sponsor or the third
party administrator. In addition, Authorized Dealers will remit to the
Distributor such payments received in connection with "wrap" accounts
in the event that shares are redeemed within 18 months after the end of
the calendar month in which the purchase was made.
45
<PAGE>
What Else Do I Need To Know About Class A Shares' CDSC?
Purchases of $1 million or more of Class A Shares will be made at NAV with
no initial sales charge. However, if you redeem shares within 18 months
after the end of the calendar month in which the purchase was made, exclud-
ing any period of time in which the shares were exchanged into and remained
invested in an equivalent class of an ILA Portfolio, a CDSC of 1% may be
imposed. The CDSC may not be imposed if your Authorized Dealer enters into
an agreement with the Distributor to return all or an applicable prorated
portion of its commission to the Distributor. The CDSC is waived on redemp-
tions in certain circumstances. See "In What Situations May The CDSC On
Class A, B Or C Shares Be Waived Or Reduced?" below.
When Are Class A Shares Not Subject To A Sales Load?
Class A Shares of the Funds may be sold at NAV without payment of any sales
charge to the following individuals and entities:
. 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 these
individuals;
. Qualified retirement plans of Goldman Sachs;
. Trustees or directors of investment companies for which Goldman Sachs or
an affiliate acts as sponsor;
. Any employee or registered representative of any Authorized Dealer or
their respective spouses, children and parents;
. Banks, trust companies or other types of depository institutions investing
for their own account or investing for discretionary or non-discretionary
accounts;
. Any state, county or city, or any instrumentality, department, authority
or agency thereof, which is prohibited by applicable investment laws from
paying a sales charge or commission in connection with the purchase of
shares of a Fund;
. Pension and profit sharing plans, pension funds and other company-spon-
sored benefit plans that:
. Buy shares of Goldman Sachs Funds worth $500,000 or more; or
. Have 100 or more eligible employees at the time of purchase; or
. Certify that they expect to have annual plan purchases of shares of
Goldman Sachs Funds of $200,000 or more; or
. Are provided administrative services by certain third-party administra-
tors that have entered into a special service arrangement with Goldman
Sachs relating to such plans; or
. Have at the time of purchase aggregate assets of at least $2,000,000;
46
<PAGE>
SHAREHOLDER GUIDE
. "Wrap" accounts for the benefit of clients of broker-dealers, financial
institutions or financial planners, provided they have entered into an
agreement with GSAM specifying aggregate minimums and certain operating
policies and standards;
. Registered investment advisers investing for accounts for which they
receive asset-based fees;
. Accounts over which GSAM or its advisory affiliates have investment dis-
cretion; or
. Shareholders receiving distributions from a qualified retirement plan
invested in the Goldman Sachs Funds and reinvesting such proceeds in a
Goldman Sachs IRA.
You must certify eligibility for any of the above exemptions on your Account
Application and notify the Fund if you no longer are eligible for the exemp-
tion. The Fund will grant you an exemption subject to confirmation of your
entitlement. You may be charged a fee if you effect your transactions
through a broker or agent.
How Can The Sales Charge On Class A Shares Be Reduced?
. Right of Accumulation: When buying Class A Shares in Goldman Sachs Funds,
your current aggregate investment determines the initial sales load you
pay. You may qualify for reduced sales charges when the current market
value of holdings (shares at current offering price), plus new purchases,
reaches $50,000 or more. Class A Shares of any of the Goldman Sachs Funds
may be combined under the Right of Accumulation. To qualify for a reduced
sales load, you or your Authorized Dealer must notify the Funds' Transfer
Agent at the time of investment that a quantity discount is applicable.
Use of this service is subject to a check of appropriate records. The
Additional Statement has more information about the Right of Accumulation.
. Statement of Intention: You may obtain a reduced sales charge by means of
a written Statement of Intention which expresses your non-binding commit-
ment to invest in the aggregate $50,000 or more (not counting reinvest-
ments of dividends and distributions) within a period of 13 months in
Class A Shares of one or more Goldman Sachs Fund. Any investments you make
during the period will receive the discounted sales load based on the full
amount of your investment commitment. If the investment commitment of the
Statement of Intention is not met prior to the expiration of the 13-month
period, the entire amount will be subject to the higher applicable sales
charge. By signing the Statement of Intention, you authorize the Transfer
Agent to escrow and redeem Class A Shares in your account to pay this
additional charge. The Additional Statement has more information about the
Statement of Intention, which you should read carefully.
47
<PAGE>
COMMON QUESTIONS ABOUT THE PURCHASE OF CLASS B SHARES
What Is The Offering Price Of Class B Shares?
You may purchase Class B Shares of the Funds at the next determined NAV
without an initial sales charge. However, Class B Shares redeemed within six
years of purchase will be subject to a CDSC at the rates shown in the table
below based on how long you held your shares.
The CDSC schedule is as follows:
<TABLE>
<CAPTION>
CDSC as a
Percentage of
Dollar Amount
Year Since Purchase Subject to CDSC
----------------------------------------
<S> <C>
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter None
----------------------------------------
</TABLE>
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or in part to defray the Distributor's expenses related to providing
distribution-related services to the Funds in connection with the sale of
Class B Shares, including the payment of compensation to Authorized Dealers.
A commission equal to 4% of the amount invested is paid to Authorized Deal-
ers.
What Should I Know About The Automatic Conversion Of Class B Shares?
Class B Shares of a Fund will automatically convert into Class A Shares of
the same Fund at the end of the calendar quarter that is eight years after
the purchase date.
If you acquire Class B Shares of a Fund by exchange from Class B Shares of
another Goldman Sachs Fund, your Class B Shares will convert into Class A
Shares of such Fund based on the date of the initial purchase and the CDSC
schedule of that purchase.
If you acquire Class B Shares through reinvestment of distributions, your
Class B Shares will convert into Class A Shares based on the date of the
initial purchase of the shares on which the distribution was paid.
The conversion of Class B Shares to Class A Shares will not occur at any
time the Funds are advised that such conversions may constitute taxable
events for federal tax purposes, which the Funds believe is unlikely. If
conversions do not occur as a
48
<PAGE>
SHAREHOLDER GUIDE
result of possible taxability, Class B Shares would continue to be subject
to higher expenses than Class A Shares for an indeterminate period.
A COMMON QUESTION ABOUT THE PURCHASE OF CLASS C SHARES
What Is The Offering Price Of Class C Shares?
You may purchase Class C Shares of the Funds at the next determined NAV
without paying an initial sales charge. However, if you redeem Class C
Shares within 12 months of purchase, a CDSC of 1% will normally be deducted
from the redemption proceeds; provided that in connection with purchases by
pension and profit sharing plans, pension funds and other company-sponsored
benefit plans, where all of the Class C Shares are redeemed within 12 months
of purchase, a CDSC of 1% may be imposed upon the plan sponsor or third
party administrator.
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or in part to defray the Distributor's expenses related to providing
distribution-related services to the Funds in connection with the sale of
Class C Shares, including the payment of compensation to Authorized Dealers.
An amount equal to 1% of the amount invested is normally paid by the Dis-
tributor to Authorized Dealers.
COMMON QUESTIONS APPLICABLE TO THE PURCHASE OF CLASS A, B
AND C SHARES
What Else Do I Need To Know About The CDSC On Class A, B Or C Shares?
. The CDSC is based on the lesser of the NAV of the shares at the time of
redemption or the original offering price (which is the original NAV).
. No CDSC is charged on shares acquired from reinvested dividends or capi-
tal gains distributions.
. No CDSC is charged on the per share appreciation of your account over
the initial purchase price.
. When counting the number of months since a purchase of Class B or Class
C Shares was made, all payments made during a month will be combined and
considered to have been made on the first day of that month.
. To keep your CDSC as low as possible, each time you place a request to
sell shares, the Funds will first sell any shares in your account that do
not carry a CDSC and then the shares in your account that have been held
the longest.
49
<PAGE>
In What Situations May The CDSC On Class A, B Or C Shares Be Waived Or
Reduced?
The CDSC on Class A, Class B and Class C Shares that are subject to a CDSC
may be waived or reduced if the redemption relates to:
. Retirement distributions or loans to participants or beneficiaries from
pension and profit sharing plans, pension funds and other company-spon-
sored benefit plans (each a "Retirement Plan");
. The death or disability (as defined in Section 72(m)(7) of the Internal
Revenue Code of 1986, as amended (the "Code")) of a participant or benefi-
ciary in a Retirement Plan;
. Hardship withdrawals by a participant or beneficiary in a Retirement Plan;
. Satisfying the minimum distribution requirements of the Code;
. Establishing "substantially equal periodic payments" as described under
Section 72(t)(2) of the Code;
. The separation from service by a participant or beneficiary in a Retire-
ment Plan;
. The death or disability (as defined in Section 72(m)(7) of the Code) of a
shareholder if the redemption is made within one year of the event;
. Excess contributions distributed from a Retirement Plan;
. Distributions from a qualified Retirement Plan invested in the Goldman
Sachs Funds which are being rolled over to a Goldman Sachs IRA; or
. Redemption proceeds which are to be reinvested in accounts or non-regis-
tered products over which GSAM or its advisory affiliates have investment
discretion.
In addition, Class A, B and C Shares subject to a systematic withdrawal plan
may be redeemed without a CDSC. The Funds reserve the right to limit such
redemptions, on an annual basis, to 12% each of the value of your Class B
and C Shares and 10% of the value of your Class A Shares.
How Do I Decide Whether To Buy Class A, B Or C Shares?
The decision as to which Class to purchase depends on the amount you invest,
the intended length of the investment and your personal situation.
. Class A Shares. If you are making an investment of $50,000 or more that
qualifies for a reduced sales charge, you should consider purchasing Class
A Shares.
. Class B Shares. If you plan to hold your investment for at least six years
and would prefer not to pay an initial sales charge, you might consider
purchasing Class B Shares. By not paying a front-end sales charge, your
entire investment in Class B Shares is available to work for you from the
time you make your initial investment. However, the distribution and serv-
ice fee paid by Class B
50
<PAGE>
SHAREHOLDER GUIDE
Shares will cause your Class B Shares (until conversion to Class A Shares)
to have a higher expense ratio, and thus lower performance and lower divi-
dend payments (to the extent dividends are paid) than Class A Shares. A
maximum purchase limitation of $250,000 in the aggregate normally applies
to Class B Shares.
. Class C Shares. If you are unsure of the length of your investment or plan
to hold your investment for less than six years and would prefer not to
pay an initial sales charge, you may prefer Class C Shares. By not paying
a front-end sales charge, your entire investment in Class C Shares is
available to work for you from the time you make your initial investment.
However, the distribution and service fee paid by Class C Shares will
cause your Class C Shares to have a higher expense ratio, and thus lower
performance and lower dividend payments (to the extent dividends are paid)
than Class A Shares (or Class B Shares after conversion to Class A
Shares).
Although Class C Shares are subject to a CDSC for only 12 months, Class C
Shares do not have the conversion feature applicable to Class B Shares and
your investment will therefore pay higher distribution fees indefinitely.
A maximum purchase limitation of $1,000,000 in the aggregate normally
applies to purchases of Class C Shares.
Note: Authorized Dealers may receive different compensation for selling
Class A, Class B or Class C Shares.
In addition to Class A, Class B and Class C Shares, each Fund also offers
other classes of shares to investors. These other share classes are subject
to different fees and expenses (which affect performance), have different
minimum investment requirements and are entitled to different services.
Information regarding these other share classes may be obtained from your
sales representative or from Goldman Sachs by calling the number on the back
cover of this Prospectus.
HOW TO SELL SHARES
How Can I Sell Class A, Class B And Class C Shares Of The Funds?
You may arrange to take money out of your account by selling (redeeming)
some or all of your shares. Each Fund will redeem its shares upon request on
any business day at the NAV next determined after receipt of such request in
proper form, subject to any applicable CDSC. You may request that redemption
proceeds be sent to you by check or by wire (if the wire instructions are on
record). Redemptions may be requested in writing or by telephone.
51
<PAGE>
<TABLE>
<CAPTION>
Instructions For Redemptions:
--------------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund names and Class of Shares
. The dollar amount you want to sell
. How and where to send the proceeds
. Obtain a signature guarantee (see details below)
. Mail your request to:
Goldman Sachs Funds
c/o NFDS
P.O. Box 219711
Kansas City, MO 64121-9711
--------------------------------------------------------------------
By Telephone: If you have not declined the telephone redemption
privilege on your Account Application:
. 1-800-526-7384
(8:00 a.m. to 4:00 p.m. New York time)
. You may redeem up to $50,000 of your shares
within any 7 calendar day period
. Proceeds which are sent directly to a Goldman
Sachs brokerage account are not subject to the
$50,000 limit
--------------------------------------------------------------------
</TABLE>
When Do I Need A Signature Guarantee To Redeem Shares?
A signature guarantee is required if:
. You are requesting in writing to redeem shares in an amount over $50,000;
. You would like the redemption proceeds sent to an address that is not your
address of record; or
. You would like to change the bank designated on your Account Application.
A signature guarantee must be obtained from a bank, brokerage firm or other
financial intermediary that is a member of an approved Medallion Guarantee
Program or that is otherwise approved by the Trust. A notary public cannot
provide a signature guarantee. Additional documentation may be required for
executors, trustees or corporations or when deemed appropriate by the Trans-
fer Agent.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
The Trust may accept telephone redemption instructions from any person iden-
tifying himself or herself as the owner of an account or the owner's regis-
tered representative where the owner has not declined in writing to use this
service. Thus, you risk possible losses if a telephone redemption is not
authorized by you.
52
<PAGE>
SHAREHOLDER GUIDE
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs and NFDS each employ reasonable proce-
dures specified by the Trust to confirm that such instructions are genuine.
If reasonable procedures are not employed, the Trust may be liable for any
loss due to unauthorized or fraudulent transactions. The following general
policies are currently in effect:
. All telephone requests are recorded.
. Proceeds of telephone redemption requests will be sent only to your
address of record or authorized bank account designated in the Account
Application (unless you provide written instructions and a signature guar-
antee, indicating another address or account) and exchanges of shares nor-
mally will be made only to an identically registered account.
. Telephone redemptions by check to your address of record will not be
accepted during the 30-day period following any change in your address of
record.
. The telephone redemption option does not apply to shares held in a "street
name" account. "Street name" accounts are accounts maintained and serviced
by your Authorized Dealer. If your account is held in "street name," you
should contact your registered representative of record, who may make tel-
ephone redemptions on your behalf.
. The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
How Are Redemption Proceeds Paid?
By Wire: You may arrange for your redemption proceeds to be wired as federal
funds to the bank account designated in your Account Application. The fol-
lowing general policies govern wiring redemption proceeds:
. Redemption proceeds will normally be wired on the next business day in
federal funds (for a total of one business day delay), but may be paid up
to three business days following receipt of a properly executed wire
transfer redemption request. If you are selling shares you recently paid
for by check, the Fund will pay you when your check has cleared, which may
take up to 15 days. If the Federal Reserve Bank is closed on the day that
the redemption proceeds would ordinarily be wired, wiring the redemption
proceeds may be delayed one additional business day.
. A transaction fee of $7.50 may be charged for payments of redemption pro-
ceeds by wire. Your bank may also charge wiring fees. You should contact
your bank directly to learn whether it charges such fees.
53
<PAGE>
. To change the bank designated on your Account Application, you must send
written instructions (with your signature guaranteed) to the Transfer
Agent.
. Neither the Trust, Goldman Sachs nor any Authorized Dealer assumes any
responsibility for the performance of your bank or any intermediaries in
the transfer process. If a problem with such performance arises, you
should deal directly with your bank or any such intermediaries.
By Check: You may elect to receive your redemption proceeds by check.
Redemption proceeds paid by check will normally be mailed to the address of
record within three business days of a properly executed redemption request.
If you are selling shares you recently paid for by check, the Fund will pay
you when your check has cleared, which may take up to 15 days.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
The Trust reserves the right to:
. Redeem your shares if your account balance is less than $50 as a result of
a redemption. The Funds will not redeem your shares on this basis if the
value of your account falls below the minimum account balance solely as a
result of market conditions. The Funds will give you 60 days' prior writ-
ten notice to allow you to purchase sufficient additional shares of the
Fund in order to avoid such redemption.
. Redeem your shares in other circumstances determined by the Board of
Trustees to be in the best interests of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distribu-
tions be returned to the Fund as undeliverable or remain uncashed for six
months. In addition, that distribution and all future distributions pay-
able to you will be reinvested at NAV in additional Fund shares. No inter-
est will accrue on amounts represented by uncashed distribution or redemp-
tion checks.
Can I Reinvest Redemption Proceeds In The Same Or Another Goldman Sachs
Fund?
You may redeem shares of a Fund and reinvest a portion or all of the redemp-
tion proceeds (plus any additional amounts needed to round off purchases to
the nearest full share) at NAV. To be eligible for this privilege, you must
hold the shares you want to redeem for at least 30 days and you must rein-
vest the share proceeds within 90 days after you redeem. You may reinvest as
follows:
. Class A or B Shares--Class A Shares of the same Fund or any other Goldman
Sachs Fund
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SHAREHOLDER GUIDE
. Class C Shares--Class C Shares of the same Fund or any other Goldman Sachs
Fund
. You should obtain and read the applicable prospectuses before investing in
any other Funds.
. If you pay a CDSC upon redemption of Class A or Class C Shares and then
reinvest in Class A or Class C Shares as described above, your account
will be credited with the amount of the CDSC you paid. The reinvested
shares will, however, continue to be subject to a CDSC. The holding period
of the shares acquired through reinvestment will include the holding
period of the redeemed shares for purposes of computing the CDSC payable
upon a subsequent redemption. For Class B Shares, you may reinvest the
redemption proceeds in Class A Shares at NAV but the amount of the CDSC
paid upon redemption of the Class B Shares will not be credited to your
account.
. The reinvestment privilege may be exercised at any time in connection with
transactions in which the proceeds are reinvested at NAV in a tax-shel-
tered retirement plan. In other cases, the reinvestment privilege may be
exercised once per year upon receipt of a written request.
. You may be subject to tax as a result of a redemption. You should consult
your tax adviser concerning the tax consequences of a redemption and rein-
vestment.
Can I Exchange My Investment From One Fund To Another?
You may exchange shares of a Fund at NAV without the imposition of an ini-
tial sales charge or CDSC at the time of exchange for shares of the same
class or an equivalent class of any other Goldman Sachs Fund. The exchange
privilege may be materially modified or withdrawn at any time upon 60 days'
written notice to you.
<TABLE>
<CAPTION>
Instructions For
Exchanging
Shares:
----------------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund names and Class of Shares
. The dollar amount you want to exchange
. Obtain a signature guarantee (see details above)
. Mail the request to:
Goldman Sachs Funds
c/o NFDS
P.O. Box 219711
Kansas City, MO 64121-9711
or for overnight delivery--
Goldman Sachs Funds
c/o NFDS
330 West 9th St.
Poindexter Bldg., 1st Floor
Kansas City, MO 64105
----------------------------------------------------------------------
By Telephone: If you have not declined the telephone exchange
privilege on your Account Application:
. 1-800-526-7384
(8:00 a.m. to 4:00 p.m. New York time)
----------------------------------------------------------------------
</TABLE>
55
<PAGE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. Six free exchanges are allowed in each 12 month period.
. A $12.50 fee may be charged for each subsequent exchange.
. There is no charge for exchanges made pursuant to the Automatic Exchange
Program.
. The exchanged shares may later be exchanged for shares of the same class
(or an equivalent class) of the original Fund at the next determined NAV
without the imposition of an initial sales charge or CDSC if the amount in
the Fund resulting from such exchanges is less than the largest amount on
which you have previously paid the applicable sales charge.
. When you exchange shares subject to a CDSC, no CDSC will be charged at
that time. The exchanged shares will be subject to the CDSC of the shares
originally held. For purposes of determining the amount of the applicable
CDSC, the length of time you have owned the shares will be measured from
the date you acquired the original shares subject to a CDSC and will not
be affected by a subsequent exchange.
. Eligible investors may exchange certain classes of shares for another
class of shares of the same Fund. For further information, call Goldman
Sachs Funds at 1-800-526-7384.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund.
. Exchanges are available only in states where exchanges may be legally
made.
. It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
. Goldman Sachs and NFDS may use reasonable procedures described under "What
Do I Need to Know About Telephone Redemption Requests?" in an effort to
prevent unauthorized or fraudulent telephone exchange requests.
. Telephone exchanges normally will be made only to an identically regis-
tered account. Shares may be exchanged among accounts with different
names, addresses and social security or other taxpayer identification num-
bers only if the exchange instructions are in writing and accompanied by a
signature guarantee.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
56
<PAGE>
SHAREHOLDER GUIDE
SHAREHOLDER SERVICES
Can I Arrange To Have Automatic Investments Made On A Regular Basis?
You may be able to make systematic cash investments through your bank via
ACH transfer or your checking account via bank draft each month. Forms for
this option are available from Goldman Sachs, your Authorized Dealer or you
may check the appropriate box on the Account Application.
Can My Dividends And Distributions From A Fund Be Invested In Other Funds?
You may elect to cross-reinvest dividends and capital gain distributions
paid by a Fund in shares of the same class or an equivalent class of any
other Goldman Sachs Fund.
. Shares will be purchased at NAV.
. No initial sales charge or CDSC will be imposed.
. You may elect cross-reinvestment into an identically registered account or
an account registered in a different name or with a different address,
social security number or taxpayer identification number provided that the
account has been properly established, appropriate signature guarantees
obtained and the minimum initial investment has been satisfied.
Can I Arrange To Have Automatic Exchanges Made On A Regular Basis?
You may elect to exchange automatically a specified dollar amount of shares
of a Fund for shares of the same class or an equivalent class of any other
Goldman Sachs Fund.
. Shares will be purchased at NAV.
. No initial sales charge is imposed.
. Shares subject to a CDSC acquired under this program may be subject to a
CDSC at the time of redemption from the Fund into which the exchange is
made depending upon the date and value of your original purchase.
. Automatic exchanges are made monthly on the 15th day of each month or the
first business day thereafter.
. Minimum dollar amount: $50 per month.
What Else Should I Know About Cross-Reinvestments And Automatic Exchanges?
Cross-reinvestments and automatic exchanges are subject to the following
conditions:
. You must hold $5,000 or more in the Fund which is paying the dividend or
from which the exchange is being made.
57
<PAGE>
. You must invest an amount in the Fund into which cross-reinvestments or
automatic exchanges are being made that is equal to that Fund's minimum
initial investment or continue to cross-reinvest or to make automatic
exchanges until such minimum initial investment is met.
. You should obtain and read the prospectus of the Fund into which dividends
are invested or automatic exchanges are made.
Can I Have Automatic Withdrawals Made On A Regular Basis?
You may draw on your account systematically via check or ACH transfer in any
amount of $50 or more.
. It is normally undesirable to maintain a systematic withdrawal plan at the
same time that you are purchasing additional Class A, Class B or Class C
Shares because of the sales charge imposed on your purchases of Class A
Shares or the imposition of a CDSC on your redemptions of Class A, Class B
or Class C Shares.
. You must have a minimum balance of $5,000 in a Fund.
. Checks are mailed on or about the 25th day of each month.
. Each systematic withdrawal is a redemption and therefore a taxable trans-
action.
. The CDSC applicable to Class A, Class B or Class C Shares redeemed under
the systematic withdrawal plan may be waived.
What Types of Reports Will I Be Sent Regarding My Investment?
You will be provided with a printed confirmation of each transaction in your
account and an individual quarterly account statement. A year-to-date state-
ment for your account will be provided upon request made to Goldman Sachs.
If your account is held in "street name" you may receive your statement and
confirmations on a different schedule.
You will also receive an annual shareholder report containing audited finan-
cial statements and a semi-annual shareholder report. If you have consented
to the delivery of a single copy of shareholder reports, prospectuses and
other information to all shareholders who share the same mailing address
with your account, you may revoke your consent at any time by contacting
Goldman Sachs Funds by phone at 1-800-526-7384 or by mail at Goldman Sachs
Funds, 4900 Sears Tower--60th Floor, Chicago, IL 60606-6372. The Funds will
begin sending individual copies to you within 30 days after receipt of your
revocation.
The Funds do not generally provide sub-accounting services.
What Should I Know When I Purchase Shares Through An Authorized Dealer?
Authorized Dealers and other financial intermediaries may provide varying
arrangements for their clients to purchase and redeem Fund shares. They may
charge additional fees not described in this Prospectus to their customers
for such services.
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<PAGE>
SHAREHOLDER GUIDE
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distribu-
tions relating to your 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 your transactions, you 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 your 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 you to obtain historical purchase information about the
shares in the account from the Authorized Dealer.
Authorized Dealers and other financial intermediaries may be authorized to
accept, on behalf of the Trust, 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. In these cases:
. A Fund will be deemed to have received an order that is in proper form
when the order is accepted by an Authorized Dealer or intermediary on a
business day, and the order will be priced at the Fund's NAV per share
(adjusted for any applicable sales charge) next determined after such
acceptance.
. Authorized Dealers and intermediaries are responsible for transmitting
accepted orders to the Funds within the time period agreed upon by them.
You should contact your Authorized Dealer or intermediary to learn whether
it is authorized to accept orders for the Trust.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Authorized Dealers and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds. Additional compensation based on
sales may, but is currently not expected to, exceed 0.50% (annualized) of
the amount invested.
DISTRIBUTION SERVICES AND FEES
What Are The Different Distribution And Service Fees Paid By Class A, B and
C Shares?
The Trust has adopted distribution and service plans (each a "Plan") under
which Class A, Class B and Class C Shares bear distribution and service fees
paid to Authorized Dealers and Goldman Sachs. If the fees received by
Goldman Sachs pursuant to the Plans exceed its expenses, Goldman Sachs may
realize a profit from this arrangement. Goldman Sachs pays the distribution
and service fees on a quarterly basis.
59
<PAGE>
Under the Plans, Goldman Sachs is entitled to a monthly fee from each Fund
for distribution services equal, on an annual basis, to 0.25%, 0.75% and
0.75%, respectively, of a Fund's average daily net assets attributed to
Class A, Class B and Class C Shares. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time, these fees will increase the
cost of your investment and may cost you more than paying other types of
such charges.
The distribution fees are subject to the requirements of Rule 12b-1 under
the Act, and may be used (among other things) for:
. Compensation paid to and expenses incurred by Authorized Dealers, Goldman
Sachs and their respective officers, employees and sales representatives;
. Commissions paid to Authorized Dealers;
. Allocable overhead;
. Telephone and travel expenses;
. Interest and other costs associated with the financing of such compensa-
tion and expenses;
. Printing of prospectuses for prospective shareholders;
. Preparation and distribution of sales literature or advertising of any
type; and
. All other expenses incurred in connection with activities primarily
intended to result in the sale of Class A, Class B and Class C Shares.
In connection with the sale of Class C Shares, Goldman Sachs normally begins
paying the 0.75% distribution fee as an ongoing commission to Authorized
Dealers after the shares have been held for one year.
PERSONAL ACCOUNT MAINTENANCE SERVICES AND FEES
Under the Plans, Goldman Sachs is also entitled to receive a separate fee
equal on an annual basis to 0.25% of each Fund's average daily net assets
attributed to Class B or Class C Shares. This fee is for personal and
account maintenance services, and may be used to make payments to Goldman
Sachs, Authorized Dealers and their officers, sales representatives and
employees for responding to inquiries of, and furnishing assistance to,
shareholders regarding ownership of their shares or their accounts or simi-
lar services not otherwise provided on behalf of the Funds. If the fees
received by Goldman Sachs pursuant to the Plans exceed its expenses, Goldman
Sachs may realize a profit from this arrangement.
In connection with the sale of Class C Shares, Goldman Sachs normally begins
paying the 0.25% ongoing service fee to Authorized Dealers after the shares
have been held for one year.
60
<PAGE>
Taxation
TAXABILITY OF DISTRIBUTIONS
As with any investment, you should consider how your investment in the Port-
folios will be taxed. The tax information below is provided as general
information. More tax information is available in the Additional Statement.
You should consult your tax adviser about the federal, state, local or for-
eign tax consequences of your investment in the Portfolios.
Unless your investment is an IRA or other tax-advantaged account, you should
consider the possible tax consequences of Portfolio distributions and the
sale of your Portfolio shares.
TAXES ON DISTRIBUTIONS
Distributions you receive from the Portfolios are generally subject to fed-
eral income tax, and may also be subject to state or local taxes. This is
true whether you reinvest your distributions in additional Portfolio shares
or receive them in cash. For federal tax purposes, the Portfolios' income
dividend distributions and short-term capital gain distributions are taxable
to you as ordinary income. Any long-term capital gain distributions are tax-
able as long-term capital gains, no matter how long you have owned your
Portfolio shares.
Although distributions are generally treated as taxable to you in the year
they are paid, distributions declared in October, November or December but
paid in January are taxable as if they were paid in December. A percentage
of the Portfolios' dividends paid to corporate shareholders may be eligible
for the corporate dividends-received deduction. The Portfolios will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
The REIT investments of the underlying Real Estate Securities Fund often do
not provide complete tax information to the Fund until after the calendar
year-end. Consequently, because of the delay, it may be necessary for the
Portfolios to request permission to extend the deadline for issuance of
Forms 1099-DIV beyond January 31.
Each Portfolio may be subject to foreign withholding or other foreign taxes
on income or gain from certain foreign securities. In general, the Portfo-
lios may deduct these taxes in computing their taxable income.
61
<PAGE>
If you buy shares of a Portfolio before it makes a distribution, the distri-
bution will be taxable to you even though it may actually be a return of a
portion of your investment. This is known as "buying a dividend."
TAXABILITY OF SALES AND EXCHANGES
Your sale of Portfolio shares is a taxable transaction for federal income
tax purposes, and may also be subject to state and local taxes. For tax pur-
poses, the exchange of your Portfolio shares for shares of a different
Goldman Sachs Fund is the same as a sale. When you sell your shares, you
will generally recognize a capital gain or loss in an amount equal to the
difference between your adjusted tax basis in the shares and the amount
received. Generally, this gain or loss will be long-term or short-term
depending on whether your holding period for the shares exceeds twelve
months, except that any loss realized on shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gain dividends that were received on the shares.
OTHER INFORMATION
When you open your account, you should provide your social security or tax
identification number on your Account Application. By law, each Portfolio
must withhold 31% of your taxable distributions and any redemption proceeds
if you do not provide your correct taxpayer identification number, or cer-
tify that it is correct, or if the IRS instructs the Portfolio to do so.
Non-U.S. investors may be subject to U.S. withholding and estate tax.
62
<PAGE>
Appendix A
Additional Information on the Underlying Funds
This Appendix provides further information on certain types of securities
and techniques that may be used by the Underlying Funds, including their
associated risks. Additional information is provided in the Additional
Statement, which is available upon request, and in the prospectuses of the
Underlying Funds.
The Underlying Equity Funds invest primarily in common stocks and other
equity securities, including preferred stocks, interests in real estate
investment trusts, convertible debt obligations, convertible preferred
stocks, equity interests in trusts, partnerships, joint ventures, limited
liability companies and similar enterprises, warrants and stock purchase
rights ("equity securities"). The Underlying Fixed-Income Funds invest pri-
marily in fixed-income securities, including senior and subordinated corpo-
rate debt obligations (such as bonds, debentures, notes and commercial
paper), convertible and non-convertible corporate debt obligations, loan
participations and preferred stock.
The Short-Duration Government and Adjustable Rate Government Funds invest in
U.S. Government Securities and related repurchase agreements, and neither of
these Underlying Funds, the Government Income Fund nor the Financial Square
Prime Obligations Fund makes foreign investments. The investments of the
Financial Square Prime Obligations Fund are limited by SEC regulations
applicable to money market funds as described in its prospectus, and do not
include many of the types of investments discussed below that are permitted
for the other Underlying Funds. With these exceptions, and the further
exceptions noted below, the following description applies generally to the
Underlying Funds.
A. General Risks of the Underlying Funds
The Underlying Equity Funds will be subject to the risks associated with
common stocks and other equity securities. In general, stock values fluctu-
ate in response to the activities of individual companies and in response to
general market and economic conditions. Accordingly, the value of the stocks
that an Underlying Fund holds may decline over short or extended periods.
The stock markets tend to be cyclical, with periods when stock prices gener-
ally rise and periods when prices generally decline.
The Underlying Fixed-Income Funds will be subject to the risks associated
with fixed-income securities. These risks include interest rate risk, credit
risk and call/extension risk. In general, interest rate risk involves the
risk that when interest
63
<PAGE>
rates decline, the market value of fixed-income securities tends to increase
than other debt securities (although many mortgage related securities will
have less potential than other debt securities for capital appreciation dur-
ing periods of declining rates). Conversely, when interest rates increase,
the market value of fixed-income securities tends to decline. Credit risk
involves the risk that an issuer could default on its obligations, and an
Underlying Fund will not recover its investment. Call risk and extension
risk are normally present in adjustable rate mortgage loans ("ARMs"), mort-
gage-backed securities. For example, homeowners have the option to prepay
their mortgages. Therefore, the duration of a security backed by home mort-
gages can either shorten (call risk) or lengthen (extension risk). In gener-
al, if interest rates on new mortgage loans fall sufficiently below the
interest rates on existing outstanding mortgage loans, the rate of prepay-
ment would be expected to increase. Conversely, if mortgage loan interest
rates rise above the interest rates on existing outstanding mortgage loans,
the rate of prepayment would be expected to decrease. In either case, a
change in the prepayment rate can result in losses to investors.
The Financial Square Prime Obligations Fund attempts to maintain a stable
NAV of $1.00 per share and values its assets using the amortized cost method
in accordance with SEC regulations. There is no assurance, however, that the
Financial Square Prime Obligations Fund will be successful in maintaining
its per share value at $1.00 on a continuous basis. The per share NAVs of
the other Underlying Funds are expected to fluctuate on a daily basis.
The portfolio turnover rates of the Underlying Funds have ranged from 40% to
280% during their most recent fiscal years. A high rate of portfolio turn-
over (100% or more) involves correspondingly greater expenses which must be
borne by an Underlying Fund and its shareholders, and is also likely to
result in higher short-term capital gains taxable to shareholders. The port-
folio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of an Underlying Fund's portfolio securities, excluding securities
having a maturity at the date of purchase of one year or less. There can be
no assurance that the turnover rates of the Underlying Funds will remain
within this range during subsequent fiscal years. Higher turnover rates may
result in higher brokerage costs and expenses for the Underlying Funds. In
addition, higher turnover rates may result in higher taxable realized gains
for shareholders.
B. Other Risks of the Underlying Funds
Risks of Investing in Small Capitalization Companies and REITs. Certain
Underlying Funds may invest in small capitalization companies and REITs.
Investments in small capitalization companies and REITs involve greater risk
and portfolio
64
<PAGE>
APPENDIX A
price volatility than investments in larger capitalization stocks. Among the
reasons for the greater price volatility of these investments are the less
certain growth prospects of smaller firms and the lower degree of liquidity
in the markets for such securities. Small capitalization companies and REITs
may be thinly traded and may have to be sold at a discount from current mar-
ket prices or in small lots over an extended period of time. In addition,
these securities are subject to the risk that during certain periods the
liquidity of particular issuers or industries, or all securities in these
investment categories, will shrink or disappear suddenly and without warning
as a result of adverse economic or market conditions, or adverse investor
perceptions, whether or not accurate. Because of the lack of sufficient mar-
ket liquidity, an Underlying Fund may incur losses because it will be
required to effect sales at a disadvantageous time and only then at a sub-
stantial drop in price. Small capitalization companies and REITs include
"unseasoned" issuers that do not have an established financial history;
often have limited product lines, markets or financial resources; may depend
on or use a few key personnel for management; and may be susceptible to
losses and risks of bankruptcy. Transaction costs for these investments are
often higher than those for larger capitalization companies. Investments in
small capitalization companies and REITs may be more difficult to price pre-
cisely than other types of securities because of their characteristics and
lower trading volumes.
Risks of Foreign Investments. Certain of the Underlying Funds may invest in
foreign investments. Foreign investments involve special risks that are not
typically associated with U.S. dollar denominated or quoted securities of
U.S. issuers. Foreign investments may be affected by changes in currency
rates, changes in foreign or U.S. laws or restrictions applicable to such
investments and changes in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening
of the currency against the U.S. dollar) in which a portfolio security is
quoted or denominated relative to the U.S. dollar would reduce the value of
the portfolio security. In addition, if the currency in which an Underlying
Fund receives dividends, interest or other payments declines in value
against the U.S. dollar before such income is distributed as dividends to
shareholders or converted to U.S. dollars, the Underlying Fund may have to
sell portfolio securities to obtain sufficient cash to pay such dividends.
The introduction of a single currency, the euro, on January 1, 1999 for par-
ticipating nations in the Economic and Monetary Union presents unique uncer-
tainties, including the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather
than the euro; the establishment and maintenance of exchange rates for cur-
rencies being converted into the euro; the fluctuation of the euro relative
to non-euro currencies during the transition period from January 1, 1999 to
December 31, 2001 and beyond; whether the inter-
65
<PAGE>
est rate, tax and labor regimes of European countries participating in the
euro will converge over time; and whether the conversion of the currencies
of other countries that may in the future become members of the European
Union, may have an impact on the euro. These or other factors, including
political and economic risks, could cause market disruptions, and could
adversely affect the value of securities held by the Underlying Funds.
Because of the number of countries using this single currency, a significant
portion of the foreign assets held by certain of the Underlying Funds may be
denominated in the euro.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the United States. In addition, clearance and settlement procedures
may be different in foreign countries and, in certain markets, such proce-
dures have been unable to keep pace with the volume of securities transac-
tions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less gov-
ernment regulation of foreign markets, companies and securities dealers than
in the United States. Foreign securities markets may have substantially less
volume than U.S. securities markets and securities of many foreign issuers
are less liquid and more volatile than securities of comparable domestic
issuers. Furthermore, with respect to certain foreign countries, there is a
possibility of nationalization, expropriation or confiscatory taxation,
imposition of withholding or other taxes on dividend or interest payments
(or, in some cases, capital gains), limitations on the removal of funds or
other assets of the Underlying Funds, and political or social instability or
diplomatic developments which could affect investments in those countries.
Concentration of an Underlying Fund's assets in one or a few countries and
currencies will subject a Fund to greater risks than if an Underlying Fund's
assets were not geographically concentrated.
Investment in sovereign debt obligations by certain Underlying Funds
involves risks not present in debt obligations of corporate issuers. The
issuer of the debt or the governmental authorities that control the repay-
ment of the debt may be unable or unwilling to repay principal or pay inter-
est when due in accordance with the terms of such debt, and an Underlying
Fund may have limited recourse to compel payment in the event of a default.
Periods of economic uncertainty may result in the volatility of market
prices of sovereign debt, and in turn an Underlying Fund's NAV, to a greater
extent than the volatility inherent in debt obligations of U.S. issuers.
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APPENDIX A
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 avail-
ability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the sov-
ereign debtor's policy toward international lenders, and the political
constraints to which a sovereign debtor may be subject.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs"). Certain Underlying Funds may also invest in European
Depository Receipts ("EDRs") or other similar instruments representing secu-
rities of foreign issuers. ADRs represent the right to receive securities of
foreign issuers deposited in a domestic bank or a correspondent bank. Prices
of ADRs are quoted in U.S. dollars, and ADRs are traded in the United
States. EDRs and GDRs are receipts evidencing an arrangement with a non-U.S.
bank. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security.
Risks of Emerging Countries. Certain Underlying Funds may invest in securi-
ties of issuers located in emerging countries. The risks of foreign invest-
ment are heightened when the issuer is located in an emerging country.
Emerging countries are generally located in the Asia-Pacific region, Eastern
Europe, Latin and South America and Africa. An Underlying Fund's purchase
and sale of portfolio securities in certain emerging countries may be con-
strained by limitations as to daily changes in the prices of listed securi-
ties, periodic trading or settlement volume and/or limitations on aggregate
holdings of foreign investors. Such limitations may be computed based on the
aggregate trading volume by or holdings of an Underlying Fund, the invest-
ment adviser, its affiliates and their respective clients and other service
providers. An Underlying Fund may not be able to sell securities in circum-
stances where price, trading or settlement volume limitations have been
reached.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to
only a specified percentage of an issuer's outstanding securities or a spe-
cific class of securities which may have less advantageous terms (including
price) than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportuni-
ties in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by an Underlying Fund. The repatria-
67
<PAGE>
tion of both investment income and capital from certain emerging countries
is subject to restrictions such as the need for governmental consents. Due
to restrictions on direct investment in equity securities in certain Asian
countries, it is anticipated that an Underlying Fund may invest in such
countries through other investment funds in such countries.
Many emerging countries have experienced currency devaluations and substan-
tial (and, in some cases, extremely high) rates of inflation, which have had
a negative effect on the economies and securities markets of such emerging
countries. Economies in emerging countries generally are dependent heavily
upon commodity prices and international trade and, accordingly, have been
and may continue to be affected adversely by the economies of their trading
partners, trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by
the countries with which they trade.
Many emerging countries are subject to a substantial degree of economic,
political and social instability. Governments of some emerging countries are
authoritarian in nature or have been installed or removed as a result of
military coups, while governments in other emerging countries have periodi-
cally used force to suppress civil dissent. Disparities of wealth, the pace
and success of democratization, and ethnic, religious and racial disaffec-
tion, among other factors, have also led to social unrest, violence and/or
labor unrest in some emerging countries. Unanticipated political or social
developments may result in sudden and significant invest-ment losses.
Investing in emerging countries involves greater risk of loss due to expro-
priation, nationalization, confiscation of assets and property or the impo-
sition of restrictions on foreign investments and on repatriation of capital
invested.
An Underlying Fund's investment in emerging countries may also be subject to
withholding or other taxes, which may be significant and may reduce the
return from an investment in such country to the Underlying Fund.
Settlement procedures in emerging countries are frequently less developed
and reliable than those in the United States and often may involve an Under-
lying Fund's delivery of securities before receipt of payment for their
sale. In addition, significant delays are common in certain markets in reg-
istering the transfer of securities. Settlement or registration problems may
make it more difficult for an Underlying Fund to value its portfolio securi-
ties and could cause the Underlying Fund to miss attractive investment
opportunities, to have a portion of its assets uninvested or to incur losses
due to the failure of a counterparty to pay for securities the Underlying
Fund has delivered or the Underlying Fund's inability to complete its con-
tractual obligations. The creditworthiness of the local securities firms
used by an Underlying Fund in emerging countries may not be as sound as the
creditworthiness of firms used in more developed countries. As a result, the
Under-
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APPENDIX A
lying Fund may be subject to a greater risk of loss if a securities firm
defaults in the performance of its responsibilities.
The small size and inexperience of the securities markets in certain emerg-
ing countries and the limited volume of trading in securities in those coun-
tries may make an Underlying Fund's investments in such countries less liq-
uid and more volatile than investments in countries with more developed
securities markets (such as the United States, Japan and most Western Euro-
pean countries). An Underlying Fund's investments in emerging countries are
subject to the risk that the liquidity of a particular investment, or
investments generally, in such countries will shrink or disappear suddenly
and without warning as a result of adverse economic, market or political
conditions, or adverse investor perceptions, whether or not accurate.
Because of the lack of sufficient market liquidity, an Underlying Fund may
incur losses because it will be required to effect sales at a disadvanta-
geous time and then only at a substantial drop in price. Investments in
emerging countries may be more difficult to price precisely because of the
characteristics discussed above and lower trading volumes.
An Underlying Fund's use of foreign currency management techniques in emerg-
ing countries may be limited. Due to the limited market for these instru-
ments in emerging countries, the investment adviser does not currently
anticipate that a significant portion of the Underlying Funds' currency
exposure in emerging countries, if any, will be covered by such instruments.
Risks of Derivative Investments. An Underlying Fund's transactions in
options, futures, options on futures, swaps, interest rate caps, floors and
collars, structured securities, inverse floating-rate securities, stripped
mortgage-backed securities and currency transactions involve additional risk
of loss. Loss can result from a lack of correlation between changes in the
value of derivative instruments and the portfolio assets (if any) being
hedged, the potential illiquidity of the markets for derivative instruments,
or the risks arising from margin requirements and related leverage factors
associated with such transactions. The use of these management techniques
also involves the risk of loss if the investment adviser is incorrect in its
expectation of fluctuations in securities prices, interest rates or currency
prices. Certain Underlying Funds may also invest in derivative investments
for non-hedging purposes (that is, to seek to increase total return).
Investing for non-hedging purposes is considered a speculative practice and
presents even greater risk of loss.
Derivative mortgage-backed securities (such as principal-only ("POs"),
interest-only ("IOs") or inverse floating rate securities) are particularly
exposed to call and extension risks. Small changes in mortgage prepayments
can significantly impact the cash flow and the market value of these securi-
ties. In general, the risk of faster
69
<PAGE>
than anticipated prepayments adversely affects IOs, super floaters and pre-
mium priced mortgage-backed securities. The risk of slower than anticipated
prepayments generally adversely affects POs, floating-rate securities sub-
ject to interest rate caps, support tranches and discount priced mortgage-
backed securities. In addition, particular derivative securities may be
leveraged such that their exposure (i.e., price sensitivity) to interest
rate and/or prepayment risk is magnified.
Some floating-rate derivative debt securities can present more complex types
of derivative and interest rate risks. For example, range floaters are sub-
ject to the risk that the coupon will be reduced below market rates if a
designated interest rate floats outside of a specified interest rate band or
collar. Dual index or yield curve floaters are subject to lower prices in
the event of an unfavorable change in the spread between two designated
interest rates.
Risks of Illiquid Securities. The Underlying Funds may invest up to 15% (10%
in the case of the Financial Square Prime Obligations Fund) of their net
assets in illiquid securities which cannot be disposed of in seven days in
the ordinary course of business at fair value. Illiquid securities include:
.Both domestic and foreign securities that are not readily marketable
.Certain municipal leases and participation interests
.Certain stripped mortgage-backed securities
.Repurchase agreements and time deposits with a notice or demand period of
more than seven days
.Certain over-the-counter options
.Certain structured securities and all swap transactions
.Certain restricted securities, unless it is determined, based upon a review
of the trading markets for a specific restricted security, that the
restricted security is eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 ("144A Securities") and, therefore, is liquid.
Investing in 144A Securities may decrease the liquidity of an Underlying
Fund's portfolio to the extent that qualified institutional buyers become
for a time uninterested in purchasing these restricted securities. The pur-
chase price and subsequent valuation of restricted and illiquid securities
normally reflect a discount, which may be significant, from the market price
of comparable securities for which a liquid market exists.
Credit Risks. Debt securities purchased by the Underlying Funds may include
securities (including zero coupon bonds) issued by the U.S. government (and
its agencies, instrumentalities and sponsored enterprises), foreign govern-
ments, domestic and foreign corporations, banks and other issuers. Some of
these fixed-income securities are described in the next section below. Fur-
ther information is provided in the Additional Statement.
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APPENDIX A
Debt securities rated BBB or higher by Standard & Poor's Ratings Group
("Standard & Poor's") or Baa or higher by Moody's Investors Services, Inc.
("Moody's") are considered "investment grade." 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. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, determined by the investment
adviser to be of comparable credit quality. If a security satisfies an
Underlying Fund's minimum rating criteria at the time of purchase and is
subsequently downgraded below such rating, the Underlying Fund will not be
required to dispose of such security. If a downgrade occurs, the Underlying
Fund's investment adviser will consider what action, including the sale of
such security, is in the best interest of the Underlying Fund and its share-
holders.
Certain Underlying Funds may invest in fixed-income securities rated BB or
Ba or below (or comparable unrated securities) which are commonly referred
to as "junk bonds." Junk bonds are considered predominantly speculative and
may be questionable as to principal and interest payments.
In some cases, junk bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, invest-
ment in such bonds will present greater speculative risks than those associ-
ated with investment in investment grade bonds. Also, to the extent that the
rating assigned to a security in an Underlying Fund's portfolio is down-
graded by a rating organization, the market price and liquidity of such
security may be adversely affected.
Non-Diversification and Geographic Risks. The Global Income Fund is regis-
tered as a "non-diversified" fund under the Act and is, therefore, more sus-
ceptible to adverse developments affecting any single issuer held in its
portfolio, and may be more susceptible to greater losses because of these
developments. In addition, the Global Income Fund, and certain other Under-
lying Funds, may invest more than 25% of their total assets in the securi-
ties of corporate and governmental issuers located in a particular foreign
country or region. Concentration of the investments of these or other Under-
lying Funds in issuers located in a particular country or region will sub-
ject the Underlying Fund, to a greater extent than if investments were less
concentrated, to losses arising from adverse developments affecting those
issuers or countries.
Temporary Investment Risks. The Underlying Funds may invest a substantial
portion, and in some cases all, of their total assets, in cash equivalents
for temporary
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<PAGE>
periods. When an Underlying Fund's assets are invested in such instruments,
the Underlying Fund may not be achieving its investment objective.
C. Investment Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Underlying Funds, including
their associated risks. Further information is provided in the Additional
Statement, which is available upon request.
U.S. Government Securities. Each Underlying Fund may invest in U.S. Govern-
ment Securities. U.S. Government Securities include U.S. Treasury obliga-
tions and obligations issued or guaranteed by U.S. government agencies,
instrumentalities or sponsored enterprises. U.S. Government Securities may
be supported by (a) the full faith and credit of the U.S. Treasury (such as
the Government National Mortgage Association ("Ginnie Mae")); (b) the right
of the issuer to borrow from the U.S. Treasury (such as securities of the
Student Loan Marketing Association); (c) the discretionary authority of the
U.S. government to purchase certain obligations of the issuer (such as the
Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan
Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issuer.
U.S. Government Securities also include Treasury receipts, zero coupon bonds
and other stripped U.S. Government Securities, where the interest and prin-
cipal components of stripped U.S. Government Securities are traded indepen-
dently.
Custodial Receipts. Each Underlying Fund may invest in custodial receipts.
Interests in U.S. Government Securities may be purchased in the form of cus-
todial receipts that evidence ownership of future interest payments, princi-
pal payments or both on certain notes or bonds issued or guaranteed as to
principal and interest by the U.S. government, its agencies, instrumentali-
ties, political subdivisions or authorities. For certain securities law pur-
poses, custodial receipts are not considered obligations of the U.S. govern-
ment.
Mortgage-Backed Securities. The Underlying Funds (other than CORE U.S. Equi-
ty, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity and
CORE International Equity Funds (the "CORE Equity Funds")) may invest in
securities that represent direct or indirect participations in, or are col-
lateralized by and payable from, mortgage loans secured by real property
("Mortgage-Backed Securities"). Mortgage-Backed Securities can be backed by
either fixed rate mortgage loans or adjustable rate mortgage loans, and may
be issued by either a governmental or non-governmental entity. Privately
issued Mortgage-Backed Securities are normally structured with one or more
types of "credit enhancement." However, these Mortgage-Backed Securities
typically do not
72
<PAGE>
APPENDIX A
have the same credit standing as U.S. government guaranteed Mortgage-Backed
Securities.
Mortgage-Backed Securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs"), and real estate mortgage
investment conduit ("REMIC") pass-through or participation certificates.
CMOs provide an investor with a specified interest in the cash flow from a
pool of underlying mortgages or of other Mortgage-Backed Securities. CMOs
are issued in multiple classes. In many cases, payments of principal are
applied to the CMO classes in the order of their respective stated maturi-
ties, so that no principal payments will be made on a CMO class until all
other classes having an earlier stated maturity date are paid in full. A
REMIC is a CMO that qualifies for special tax treatment under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code") and invests in
certain mortgages principally secured by interests in real property and
other permitted investments. Mortgage-Backed Securities also include
stripped Mortgage-Backed Securities ("SMBS"), which are derivative multiple
class Mortgage-Backed Securities. SMBS are usually structured with two dif-
ferent classes: one that receives substantially all of the interest payments
and the other that receives substantially all of the principal payments from
a pool of mortgage loans. The market value of SMBS consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on SMBS that receive all or most of the interest
from mortgage loans are generally higher than prevailing market yields on
other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
Asset-Backed Securities. The Underlying Funds (other than the CORE Equity
Funds) may invest in asset-backed securities. Asset-backed securities are
securities whose principal and interest payments are collateralized by pools
of assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Asset-backed 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. According-
ly, an Underlying 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 prin-
cipal at comparable yields is subject to generally prevailing interest rates
at that time. Asset-backed securities present credit risks that are not pre-
sented by Mortgage-Backed Securities. This is because asset-backed securi-
ties generally do not have the benefit of a security interest in collateral
that is comparable in quality to mortgage assets. There is the possibility
that, in some cases, recoveries on repossessed collateral may not be avail-
able to support payments on these securi-
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<PAGE>
ties. In the event of a default, an Underlying Fund may suffer a loss if it
cannot sell collateral quickly and receive the amount it is owed.
Municipal Securities. Certain Underlying Funds may invest in securities and
instruments issued by state and local governmental issuers. Municipal secu-
rities in which an Underlying Fund may invest consist of bonds, notes, com-
mercial paper and other instruments (including participation interests in
such securities) issued by or on behalf of states, territories and posses-
sions of the United States (including the District of Columbia) and their
political subdivisions, agencies or instrumentalities. Municipal Securities
include both "general" and "revenue" bonds and may be issued to obtain funds
for various public purposes. General obligations are secured by the issuer's
pledge of its full faith, credit and taxing power. Revenue obligations are
payable only from the revenues derived from a particular facility or class
of facilities. Such securities may pay fixed, variable or floating rates of
interest. Municipal securities are often issued to obtain funds for various
public purposes, including the construction of a wide range of public facil-
ities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
municipal securities may be issued include refunding outstanding obliga-
tions, obtaining funds for general operating expenses, and obtaining funds
to lend to other public institutions and facilities. Municipal securities in
which the Underlying Funds may invest include private activity bonds, pre-
refunded municipal securities and auction rate 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 con-
ditions, the power or ability of the issuer to pay when due the principal of
or interest on a Municipal Security may be materially affected.
In addition, Municipal Securities include municipal leases, certificates of
participation and "moral obligation" bonds. A municipal lease is an obliga-
tion issued by a state or local government to acquire equipment or facili-
ties. Certificates of participation represent interests in municipal leases
or other instruments, such as installment purchase agreements. Moral obliga-
tion bonds are supported by a moral commitment, but not a legal obligation,
of a state or local government. Municipal leases, certificates of participa-
tion and moral obligation bonds frequently involve special risks not nor-
mally associated with general obligation or revenue bonds. In particular,
these instruments permit governmental issuers to acquire property and
74
<PAGE>
APPENDIX A
equipment without meeting constitutional and statutory requirements for the
issuance of debt. If, however, the governmental issuer does not periodically
appropriate money to enable it to meet its payment obligations under these
instruments, it cannot be legally compelled to do so. If a default occurs,
it is likely that an Underlying Fund would be unable to obtain another
acceptable source of payment. Some municipal leases, certificates of partic-
ipation and moral obligation bonds may be illiquid.
Municipal Securities may also be in the form of a tender option bond, which
is a Municipal Security (generally held pursuant to a custodial arrangement)
having a relatively long maturity and bearing interest at a fixed rate sub-
stantially higher than prevailing short-term, tax-exempt rates. The bond is
typically issued with the agreement of a third party, such as a bank, bro-
ker-dealer or other financial institution, which grants the security holders
the option, at periodic intervals, to tender their securities to the insti-
tution. After payment of a fee to the financial institution that provides
this option, the security holder effectively holds a demand obligation that
bears interest at the prevailing short-term, tax-exempt rate. An institution
may not be obligated to accept tendered bonds in the event of certain
defaults or a significant downgrading in the credit rating assigned to the
issuer of the bond. The tender option will be taken into account in deter-
mining the maturity of the tender option bonds and an Underlying Fund's
average portfolio maturity. There is risk that an Underlying Fund will not
be considered the owner of a tender option bond for federal income tax pur-
poses, and thus will not be entitled to treat such interest as exempt from
federal income tax. Certain tender option bonds may be illiquid.
Municipal Securities may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial
institutions.The credit quality of these banks and financial institutions
could, therefore, cause a loss to an Underlying Fund that invests in Munici-
pal Securities. Letters of credit and other obligations of foreign banks and
financial institutions may involve risks in addition to those of domestic
obligations because of less publicly available financial and other informa-
tion, less securities regulation, potential imposition of foreign withhold-
ing and other taxes, war, expropriation or other adverse governmental
actions. Foreign banks and their foreign branches are not regulated by U.S.
banking authorities, and are generally not bound by the accounting, auditing
and financial reporting standards applicable to U.S. banks.
Corporate and Bank Obligations; Trust Preferred Securities; Convertible
Securities. Certain Underlying Funds may invest in corporate debt obliga-
tions, trust preferred securities and convertible securities. Corporate debt
obligations include bonds, notes, debentures, commercial paper and other
obligations of U.S. or for-
75
<PAGE>
eign corporations to pay interest and repay principal, and include securi-
ties issued by banks and other financial institutions. Banks are subject to
extensive but different governmental regulations which may limit both the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of financ-
ing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possi-
ble financial difficulties of borrowers play an important part in the opera-
tion of this industry. A trust preferred 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 initiat-
ing a default event. The securities are generally senior in claim to stan-
dard preferred stock but junior to other bondholders.
Convertible securities are preferred stock or debt obligations that are con-
vertible into common stock. Convertible securities generally offer lower
interest or dividend yields than nonconvertible securities of similar quali-
ty. Convertible securities in which an Underlying Fund invests are subject
to the same rating criteria as its other investments in fixed-income securi-
ties. Convertible securities have both equity and fixed-income risk charac-
teristics. Like all fixed-income securities, the value of convertible secu-
rities is susceptible to the risk of market losses attributable to changes
in interest rates. Generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, to increase as
interest rates decline. However, when the market price of the common stock
underlying a convertible security exceeds the conversion price of the con-
vertible security, the convertible security tends to reflect the market
price of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security, like a fixed-income securi-
ty, tends to trade increasingly on a yield basis, and thus may not decline
in price to the same extent as the underlying common stock.
Zero Coupon, Deferred Interest, Pay-In-Kind and Capital Appreciation Bonds.
Certain Underlying Funds may invest in zero coupon, deferred interest, pay-
in-kind and capital appreciation bonds. These securities are issued at a
discount from their face value because interest payments are typically post-
poned until maturity. Pay-in-kind securities are securities that have inter-
est payable by the delivery of additional securities.The market prices of
these 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.
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APPENDIX A
Rating Criteria. Except as noted below, the Underlying Equity Funds (other
than the CORE Equity Funds, which may only invest in debt instruments that
are cash equivalents) may invest in debt securities rated at least invest-
ment grade at the time of investment. Investment grade debt securities are
securities rated BBB or higher by Standard & Poor's or Baa or higher by
Moody's. The Capital Growth, Small Cap Value, International Equity, Japanese
Equity, European Equity, International Small Cap, Emerging Markets Equity,
Asia Growth and Real Estate Securities Funds may invest up to 10%, 35%, 35%,
35%, 35%, 35%, 35%, 35% and 20%, respectively, of their total assets in debt
securities which are rated in the lowest rating categories by Standard &
Poor's or Moody's (i.e., BB or lower by Standard & Poor's or Ba or lower by
Moody's), including securities rated D by Moody's or Standard & Poor's. The
Mid Cap Value Fund may invest up to 10% of its total assets in below invest-
ment grade debt securities rated B or higher by Standard & Poor's or
Moody's. Fixed-income securities rated BB or Ba or below (or comparable
unrated securities) are commonly referred to as "junk bonds," are considered
predominately speculative and may be questionable as to principal and inter-
est payments as described above.
Structured Securities and Inverse Floaters. Certain Underlying Funds may
invest in structured securities. Structured securities are securities whose
value is determined by reference to changes in the value of specific curren-
cies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The
interest rate or the principal amount payable upon maturity or redemption
may be increased or decreased depending upon changes in the applicable Ref-
erence. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or decrease in
the interest rate or value of the security at maturity. In addition, changes
in the interest rates or the value of the security at maturity may be a mul-
tiple of changes in the value of the Reference. Consequently, structured
securities may present a greater degree of market risk than other types of
securities, and may be more volatile, less liquid and more difficult to
price accurately than less complex securities.
Structured securities include, but are not limited to, inverse floating rate
debt securities ("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 vola-
tility of its market value.
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<PAGE>
Foreign Currency Transactions. Certain Underlying Funds may, to the extent
consistent with their investment policies, purchase or sell foreign curren-
cies on a cash basis or through forward contracts. A forward contract
involves an obligation to purchase or sell a specific currency at a future
date at a price set at the time of the contract. Certain Underlying Funds
may engage in foreign currency transactions for hedging purposes and to seek
to protect against anticipated changes in future foreign currency exchange
rates. In addition, certain Underlying Funds may also enter into such trans-
actions to seek to increase total return, which is considered a speculative
practice.
Underlying Funds may also engage in cross-hedging by using forward contracts
in a currency different from that in which the hedged security is denomi-
nated or quoted if the investment adviser determines that there is a pattern
of correlation between the two currencies. An Underlying Fund may hold for-
eign currency received in connection with investments in foreign securities
when, in the judgment of the investment adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date (e.g., the invest-
ment adviser may anticipate the foreign currency to appreciate against the
U.S. dollar).
Currency exchange rates may fluctuate significantly over short periods of
time, causing, along with other factors, an Underlying Fund's NAV to fluctu-
ate. Currency exchange rates also can be affected unpredictably by the
intervention of U.S. or foreign governments or central banks, or the failure
to intervene, or by currency controls or political developments in the
United States or abroad.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available
for currency instruments traded on an exchange. Such contracts are subject
to the risk that the counterparty to the contract will default on its obli-
gations. Since these contracts are not guaranteed by an exchange or clear-
inghouse, a default on a contract would deprive an Underlying Fund of
unrealized profits, transaction costs, or the benefits of a currency hedge,
or could force the Underlying Fund to cover its purchase or sale commit-
ments, if any, at the current market price.
Options on Securities, Securities Indices and Foreign Currencies. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) of the option the obligation to buy, the underlying instrument dur-
ing the option period. A call option gives the purchaser of the option the
right to buy, and the writer (seller) of the option the obligation to sell,
the underlying instrument during the option period. Each Underlying Fund may
write (sell) covered call and put options and purchase put and call options
on any securities in which it may invest or on any securities index com-
prised of securities in which it may invest. An
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APPENDIX A
Underlying Fund may also, to the extent that it invests in foreign securi-
ties, purchase and sell (write) put and call options on foreign currencies.
The writing and purchase of options is a highly specialized activity which
involves special investment risks. Options may be used for either hedging or
cross-hedging purposes, or to seek to increase total return (which is con-
sidered a speculative activity). The successful use of options depends in
part on the ability of an investment adviser to manage future price fluctua-
tions and the degree of correlation between the options and securities (or
currency) markets. If an investment adviser is incorrect in its expectation
of changes in market prices or determination of the correlation between the
instruments or indices on which options are written and purchased and the
instruments in an Underlying Fund's investment portfolio, the Underlying
Fund may incur losses that it would not otherwise incur. The use of options
can also increase an Underlying Fund's transaction costs. Options written or
purchased by the Underlying Funds may be traded on either U.S. or foreign
exchanges or over-the-counter. Foreign and over-the-counter options will
present greater possibility of loss because of their greater illiquidity and
credit risks.
Yield Curve Options. Certain Underlying Funds 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 desig-
nated securities rather than the prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profit-
able 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.
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.
Futures Contracts and Options on Futures Contracts. Futures contracts are
standardized, exchange-traded contracts that provide for the sale or pur-
chase of a specified financial instrument or currency at a future time at a
specified price. An option on a futures contract gives the purchaser the
right (and the writer of the option the obligation) to assume a position in
a futures contract at a specified exercise price within a specified period
of time. A futures contract may be based on various securities (such as U.S.
Government Securities), foreign currencies, securities indices and other
financial instruments and indices. Certain Underlying Funds may engage in
futures transactions on both U.S. and foreign exchanges.
79
<PAGE>
Certain Underlying Funds may purchase and sell futures contracts, and pur-
chase and write call and put options on futures contracts, in order to seek
to increase total return or to hedge against changes in interest rates,
securities prices or to the extent an Underlying Fund invests in foreign
securities, currency exchange rates, or to otherwise manage its term struc-
ture, sector selection and duration in accordance with its investment objec-
tives and policies. An Underlying Fund may also enter into closing purchase
and sale transactions with respect to such contracts and options. An Under-
lying Fund will engage in futures and related options transactions for bona
fide hedging purposes as defined in regulations of the Commodity Futures
Trading Commission or to seek to increase total return to the extent permit-
ted by such regulations. An Underlying Fund may not purchase or sell futures
contracts or purchase or sell related options to seek to increase total
return, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of initial margin deposits and premiums
paid on the Underlying Fund's outstanding positions in futures and related
options entered into for the purpose of seeking to increase total return
would exceed 5% of the market value of the Underlying Fund's net assets.
Futures contracts and related options present the following risks:
.While an Underlying Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices or cur-
rency exchange rates may result in a poorer overall performance than if the
Underlying Fund had not entered into any futures contracts or options
transactions.
.Because perfect correlation between a futures position and portfolio posi-
tion that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and an Underlying Fund may be exposed to
additional risk of loss.
.The loss incurred by an Underlying Fund in entering into futures contracts
and in writing call options on futures is potentially unlimited and may
exceed the amount of the premium received.
.Futures markets are highly volatile and the use of futures may increase the
volatility of an Underlying Fund's NAV.
.As a result of the low margin deposits normally required in futures trad-
ing, a relatively small price movement in a futures contract may result in
substantial losses to an Underlying Fund.
.Futures contracts and options on futures may be illiquid, and exchanges may
limit fluctuations in futures contract prices during a single day.
.Foreign exchanges may not provide the same protection as U.S. exchanges.
Preferred Stock, Warrants and Rights. Certain Underlying Funds may invest in
preferred stock, warrants and rights. Preferred stocks are securities that
represent
80
<PAGE>
APPENDIX A
an ownership interest providing the holder with claims on the issuer's earn-
ings 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
or other non-compliance by the issuer of the preferred stock.
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
or right. 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.
Loan Participations. Certain Underlying Funds may invest in loan participa-
tions. A loan participation is an interest in a loan to a U.S. or foreign
company or other borrower which is administered and sold by a financial
intermediary. Loan participation interests 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 participa-
tion in the seller's share of the loan. When the Underlying Fund acts as co-
lender in connection with a participation interest or when it acquires cer-
tain participation interests, the Underlying Fund will have direct recourse
against the borrower if the borrower fails to pay scheduled principal and
interest. In cases where the Underlying Fund lacks direct recourse, it
will look to an agent for the lenders (the "agent lender") to enforce appro-
priate credit remedies against the borrower. In these cases, the Underlying
Fund may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Underlying Fund had purchased a
direct obligation (such as commercial paper) of such borrower. Moreover,
under the terms of the loan participation, the Underlying Fund may be
regarded as a creditor of the agent lender (rather than of the underlying
corporate borrower), so that the Underlying Fund may also be subject to the
risk that the agent lender may become insolvent.
Real Estate Investment Trusts ("REITs"). The Real Estate Securities Fund
expects to invest a substantial portion of its total assets in REITs, which
are pooled investment vehicles that invest primarily in either real estate
or real estate related loans. In addition, other Underlying Equity Funds may
invest in REITs from time to time. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mort-
gage loans held by the REIT. REITs are dependent upon the ability of the
REITs' managers, and are subject to heavy cash flow dependency, default by
borrowers and the qualification of the REITs under applicable regulatory
requirements for favorable federal income tax treatment. REITs are also sub-
ject to risks generally associated with investments in
81
<PAGE>
real estate including possible declines in the value of real estate, general
and local economic conditions, environmental problems and changes in inter-
est rates. To the extent that assets underlying a REIT are concentrated geo-
graphically, by property type or in certain other respects, these risks may
be heightened. Each Underlying Fund will indirectly bear its proportionate
share of any expenses, including management fees, paid by a REIT in which it
invests.
Other Investment Companies. Certain Underlying Funds may invest in securi-
ties of other investment companies (including SPDRs and WEBS, as described
below and other exchange-traded funds) subject to statutory limitations.
These limitations include a prohibition on any Underlying Fund acquiring
more than 3% of the voting shares of any other investment company, and a
prohibition on investing more than 5% of an Underlying Fund's total assets
in securities of any one investment company or more than 10% of its total
assets in securities of all investment companies. An Underlying Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Exchange-traded funds such
as SPDRs and WEBS are shares of unaffiliated investment companies which are
traded like traditional equity securities on a national securities exchange
or the NASDAQ National Market System.
.Standard and Poor's Depository Receipts. The Underlying Equity Funds may,
consistent with their investment policies, purchase Standard & Poor's
Depository Receipts ("SPDRs"). SPDRs are securities traded on the American
Stock Exchange (the "AMEX") that represent ownership in the SPDR Trust, a
trust which has been established to accumulate and hold a portfolio of com-
mon stocks that is intended to track the price performance and dividend
yield of the S&P 500. SPDR Trust is sponsored by a subsidiary of the AMEX.
SPDRs may be used for several reasons, including, but not limited to,
facilitating the handling of cash flows or trading, or reducing transaction
costs. The price movement of SPDRs may not perfectly parallel the price
action of the S&P 500.
.World Equity Benchmark Shares. World Equity Benchmark Shares ("WEBS") are
shares of an investment company that invests substantially all of its
assets in securities included in the MSCI indices for specified countries.
WEBS are listed on the AMEX and were initially offered to the public in
1996. The market prices of WEBS are expected to fluctuate in accordance
with both changes in the NAVs of their underlying indices and supply and
demand of WEBS on the AMEX. To date, WEBS have traded at relatively modest
discounts and premiums to their NAVs. However, WEBS have a limited operat-
ing history and information is lacking regarding the actual performance and
trading liquidity of WEBS for extended periods or over complete market
cycles. In addition, there is no assurance that the requirements of the
AMEX necessary to
82
<PAGE>
APPENDIX A
maintain the listing of WEBS will continue to be met or will remain
unchanged. In the event substantial market or other disruptions affecting
WEBS should occur in the future, the liquidity and value of an Underlying
Equity Fund's shares could also be substantially and adversely affected. If
such disruptions were to occur, an Underlying Equity Fund could be required
to reconsider the use of WEBS as part of its investment strategy.
Unseasoned Companies. Certain Underlying Funds may invest in companies (in-
cluding predecessors) which have operated less than three years. The securi-
ties of such companies may have limited liquidity, which can result in their
being priced higher or lower than might otherwise be the case. In addition,
investments in unseasoned companies are more speculative and entail greater
risk than do investments in companies with an established operating record.
Non-Investment Grade Fixed-Income Securities. Non-investment grade fixed-
income securities and unrated securities of comparable credit quality (com-
monly known as "junk bonds") are considered predominantly speculative by
traditional investment standards. In some cases, these obligations may be
highly speculative and have poor prospects for reaching investment grade
standing. Non-investment grade fixed-income securities are subject to the
increased risk of an issuer's inability to meet principal and interest obli-
gations. These securities, also referred to as high yield securities, may be
subject to greater price volatility due to such factors as specific corpo-
rate developments, interest rate sensitivity, negative perceptions of the
junk bond markets generally and less secondary market liquidity.
Non-investment grade fixed-income securities are generally unsecured and are
often subordinated to the rights of other creditors of the issuers of such
securities. Investment by an Underlying Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect of such securities. Even if such securities are held to maturity,
recovery by an Underlying Fund of its initial investment and any anticipated
income or appreciation is uncertain.
Equity Swaps. Each Underlying Equity Fund may invest up to 15% of its net
assets in equity swaps. Equity swaps allow the parties to a swap agreement
to exchange dividend income or other components of return on an equity
investment (for example, a group of equity securities or an index) for a
component of return on another non-equity or equity investment.
An equity swap may be used by an Underlying Fund to invest in a market with-
out owning or taking physical custody of securities in circumstances in
which direct investment may be restricted for legal reasons or is otherwise
impractical. Equity
83
<PAGE>
swaps are derivatives and their value can be very volatile. To the extent
that an investment adviser does not accurately analyze and predict the
potential relative fluctuation of the components swapped with another party,
an Underlying Fund may suffer a loss. The value of some components of an
equity swap (such as the dividends on a common stock) may also be sensitive
to changes in interest rates. Furthermore, an Underlying Fund may suffer a
loss if the counterparty defaults.
When-Issued Securities and Forward Commitments. Each Underlying Fund may
purchase when-issued securities and enter into forward commitments. When-
issued securities are securities that have been authorized, but not yet
issued. When-issued securities are purchased in order to secure what is con-
sidered to be an advantageous price and yield to the Underlying Fund at the
time of entering into the transaction. A forward commitment involves the
entering into a contract to purchase or sell securities for a fixed price at
a future date beyond the customary settlement period.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased
declines before the settlement date. Conversely, the sale of securities on a
forward commitment basis involves the risk that the value of the securities
sold may increase before the settlement date. Although an Underlying Fund
will generally purchase securities on a when-issued or forward commitment
basis with the intention of acquiring the securities for its portfolio, an
Underlying Fund may dispose of when-issued securities or forward commitments
prior to settlement if its investment adviser deems it appropriate.
Repurchase Agreements. Repurchase agreements involve the purchase of securi-
ties subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price. The Underlying Funds may enter into repurchase
agreements with dealers in U.S. Government Securities and member banks of
the Federal Reserve System which furnish collateral at least equal in value
or market price to the amount of their repurchase obligation. Some Under-
lying Funds may also enter into repurchase agreements involving certain for-
eign government securities.
If the other party or "seller" defaults, an Underlying Fund might suffer a
loss to the extent that the proceeds from the sale of the underlying securi-
ties and other collateral held by the Underlying Fund are less than the
repurchase price and the Underlying Fund's costs associated with delay and
enforcement of the repurchase agreement. In addition, in the event of bank-
ruptcy of the seller, an Underlying Fund could suffer additional losses if a
court determines that the Underlying Fund's interest in the collateral is
not enforceable.
84
<PAGE>
APPENDIX A
In evaluating whether to enter into a repurchase agreement, an investment
adviser will carefully consider the creditworthiness of the seller. Certain
Underlying Funds, together with other registered investment companies having
advisory agreements with the investment adviser or any of its 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 agree-
ments.
Lending of Portfolio Securities. Each Underlying Fund may engage in securi-
ties lending. Securities lending involves the lending of securities owned by
an Underlying Fund to financial institutions such as certain broker-dealers.
The borrowers are required to secure their loans continuously with cash,
cash equivalents, U.S. Government Securities or letters of credit in an
amount at least equal to the market value of the securities loaned. Cash
collateral may be invested in cash equivalents. To the extent that cash col-
lateral is invested in other investment securities, such collateral will be
subject to market depreciation or appreciation, and an Underlying Fund will
be responsible for any loss that might result from its investment of the
borrowers' collateral. If an investment adviser determines to make securi-
ties loans, the value of the securities loaned may not exceed 33 1/3% of the
value of the total assets of an Underlying Fund (including the loan collat-
eral).
An Underlying Fund may lend its securities to increase its income. An Under-
lying Fund may, however, experience delay in the recovery of its securities
or a capital loss if the institution with which it has engaged in a portfo-
lio loan transaction breaches its agreement with the Underlying Fund.
Short Sales Against-the-Box. Certain Underlying Funds may make short sales
against-the-box. A short sale against-the-box means that at all times when a
short position is open the Underlying Fund will own an equal amount of secu-
rities sold short, or securities convertible into or exchangeable for, with-
out the payment of any further consideration, an equal amount of the securi-
ties of the same issuer as the securities sold short.
Mortgage Dollar Rolls. Certain Underlying Funds may enter into "mortgage
dollar rolls." In mortgage dollar rolls, an Underlying Fund sells securities
for delivery in the current month and simultaneously contracts with the same
counterparty to repurchase substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During
the roll period, the Underlying Fund loses the right to receive principal
and interest paid on the securities sold. However, the Underlying Fund bene-
fits to the extent of any difference between (a) the price received for the
securities sold and (b) the lower forward price for the future purchase
and/or fee income plus the interest earned on the cash proceeds of the secu-
rities sold. Unless the benefits of a mortgage dollar roll exceed the
income, capital appreciation and gain or loss due to mortgage prepayments
85
<PAGE>
that would have been realized on the securities sold as part of the roll,
the use of this technique will diminish the Underlying Fund's performance.
Successful use of mortgage dollar rolls depends upon an investment adviser's
ability to predict correctly interest rates and mortgage prepayments. If the
investment adviser is incorrect in its prediction, an Underlying Fund may
experience a loss. For financial reporting and tax purposes, the Funds treat
mortgage dollar rolls as two separate transactions: one involving the pur-
chase of a security and a separate transaction involving a sale. The Under-
lying Funds do not currently intend to enter into mortgage dollar rolls that
are accounted for as a financing and do not treat them as borrowings.
Borrowings and Reverse Repurchase Agreements. Each Underlying Fund can bor-
row money from banks, and certain Underlying Funds may enter into reverse
repurchase agreements with banks and other financial institutions in amounts
not exceeding one-third of its total assets. An Underlying Fund may not make
additional investments if borrowings exceed 5% of its total assets. Reverse
repurchase agreements involve the sale of securities held by an Underlying
Fund subject to the Underlying Fund's agreement to repurchase them at a
mutually agreed upon date and price (including interest). These transactions
may be entered into as a temporary measure for emergency purposes or to meet
redemption requests. Reverse repurchase agreements may also be entered into
when the investment adviser expects that the interest income to be earned
from the investment of the transaction proceeds will be greater than the
related interest expense. Borrowings and reverse repurchase agreements
involve leveraging. If the securities held by an Underlying Fund decline in
value while these transactions are outstanding, the NAV of the Underlying
Fund's outstanding shares will decline in value by proportionately more than
the decline in value of the securities. In addition, reverse repurchase
agreements involve the risk that any interest income earned by an Underlying
Fund (from the investment of the proceeds) will be less than the interest
expense of the transaction, that the market value of the securities sold by
an Underlying Fund will decline below the price the Underlying Fund is obli-
gated to pay to repurchase the securities, and that the securities may not
be returned to the Underlying Fund.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps and Inter-
est Rate Caps, Floors and Collars. To the extent consistent with their
investment policies, the Underlying Funds may enter into interest rate
swaps, mortgage swaps, credit swaps, currency swaps and interest rate caps,
floors and collars. Interest rate swaps involve the exchange by an Under-
lying 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
86
<PAGE>
APPENDIX A
similar to interest rate swaps in that they represent commitments to pay and
receive interest. The notional principal amount, however, is tied to a ref-
erence 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 transac-
tion 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 occur-
rence of specified credit events. Currency swaps involve the exchange of the
parties' respective rights to make or receive payments in specified curren-
cies. 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 enti-
tles the purchaser, to the extent that a specified index falls below a pre-
determined 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.
An Underlying Fund may enter into swap transactions for hedging purposes or
to seek to increase total return. 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 transac-
tions. If an investment adviser is incorrect in its forecasts of market val-
ues, interest rates and currency exchange rates, the investment performance
of an Underlying Fund would be less favorable than it would have been if
these investment techniques were not used.
87
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Port-
folio's financial performance for the past five years (or less if the Port-
folio has been in operation for less than five years). Certain information
reflects financial results for a single Portfolio share. The total returns
in the table represent the rate that an investor would have earned or lost
on an investment in a Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Arthur Andersen LLP,
whose report, along with a Portfolio's financial statements, is included in
the Portfolio's annual report (available upon request without charge).
CONSERVATIVE STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Period Ended December 31,e
1999 - Class A Shares $10.00 $0.36 $0.18
1999 - Class B Shares 10.00 0.30 0.19
1999 - Class C Shares 10.00 0.29 0.18
1999 - Institutional Shares 10.00 0.40/f/ 0.20/f/
1999 - Service Shares 10.00 0.53 0.02
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on February 8, 1999.
f Calculated based on the average shares outstanding methodology.
88
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period returnb,d (in 000s) net assetsc
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.36) $(0.01) $ -- $0.17 $10.17 5.52% $ 1,697 0.59%
(0.30) (0.01) -- 0.18 10.18 4.92 10,451 1.34
(0.29) (0.01) -- 0.17 10.17 4.79 2,417 1.34
(0.40) (0.02) -- 0.18 10.18 6.04 6 0.19
(0.37) -- -- 0.18 10.18 5.56 14 0.69
- -------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
CONSERVATIVE STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
------------------------------------
Ratio of
net investment Ratio of Ratio of
income expenses to net investment Portfolio
to average average loss to average turnover
net assetsc net assetsc net assetsc rated
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Period Ended
December 31,e
1999 - Class A Shares 4.38% 3.46% 1.51% 62.99%
1999 - Class B Shares 3.74 4.21 0.87 62.99
1999 - Class C Shares 3.62 4.21 0.75 62.99
1999 - Institutional
Shares 4.43 3.06 1.56 62.99
1999 - Service Shares 2.39 3.56 (0.48) 62.99
- -----------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on February 8, 1999.
f Calculated based on the average shares outstanding methodology.
90
<PAGE>
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91
<PAGE>
BALANCED STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.31 $0.34 $0.73
1999 - Class B Shares 10.31 0.26 0.72
1999 - Class C Shares 10.32 0.27 0.71
1999 - Institutional Shares 10.32 0.37 0.74
1999 - Service Shares 10.31 0.33 0.73
- -----------------------------------------------------------------------
For The Period Ended December 31,e
1998 - Class A Shares 10.00 0.25 0.38
1998 - Class B Shares 10.00 0.19 0.38
1998 - Class C Shares 10.00 0.19 0.39
1998 - Institutional Shares 10.00 0.30 0.39
1998 - Service Shares 10.00 0.25 0.37
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
92
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period return/b/(in 000s) net assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.34) $(0.05) $ -- $0.68 $10.99 10.58% $39,774 0.59%
(0.26) (0.05) -- 0.67 10.98 9.66 32,932 1.34
(0.27) (0.04) -- 0.67 10.99 9.63 23,354 1.34
(0.37) (0.07) -- 0.67 10.99 10.92 1,753 0.19
(0.33) (0.05) -- 0.68 10.99 10.47 419 0.69
- -----------------------------------------------------------------------------------------------
(0.25) (0.03) (0.04) 0.31 10.31 6.38d 40,237 0.60c
(0.19) (0.03) (0.04) 0.31 10.31 5.75d 33,763 1.30c
(0.19) (0.03) (0.04) 0.32 10.32 5.83d 24,195 1.30c
(0.30) (0.03) (0.04) 0.32 10.32 6.99d 205 0.24c
(0.25) (0.02) (0.04) 0.31 10.31 6.30d 456 0.74c
- -----------------------------------------------------------------------------------------------
</TABLE>
93
<PAGE>
BALANCED STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
-------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 3.17% 1.05% 2.71% 51.24%
1999 - Class B Shares 2.42 1.80 1.96 51.24
1999 - Class C Shares 2.40 1.80 1.94 51.24
1999 - Institutional
Shares 3.93 0.65 3.47 51.24
1999 - Service Shares 3.04 1.15 2.58 51.24
- ------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 3.03/c/ 1.46/c/ 2.17/c/ 50.84/d/
1998 - Class B Shares 2.38/c/ 2.08/c/ 1.60/c/ 50.84/d/
1998 - Class C Shares 2.34/c/ 2.08/c/ 1.56/c/ 50.84/d/
1998 - Institutional
Shares 3.55/c/ 1.02/c/ 2.77/c/ 50.84/d/
1998 - Service Shares 2.90/c/ 1.52/c/ 2.12/c/ 50.84/d/
- ------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
94
<PAGE>
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95
<PAGE>
GROWTH AND INCOME STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.38 $0.22 $1.40
1999 - Class B Shares 10.36 0.14 1.40
1999 - Class C Shares 10.36 0.14 1.40
1999 - Institutional Shares 10.39 0.27 1.39
1999 - Service Shares 10.37 0.20 1.40
- -----------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.18 0.47
1998 - Class B Shares 10.00 0.12 0.46
1998 - Class C Shares 10.00 0.12 0.46
1998 - Institutional Shares 10.00 0.20 0.49
1998 - Service Shares 10.00 0.16 0.48
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
96
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period returnb (in 000s) net assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.22) $(0.06) $(0.01) $1.33 $11.71 15.79% $195,153 0.59%
(0.14) (0.06) (0.01) 1.33 11.69 14.95 143,686 1.34
(0.14) (0.06) (0.01) 1.33 11.69 14.94 95,523 1.34
(0.27) (0.06) (0.01) 1.32 11.71 16.14 29,200 0.19
(0.20) (0.07) (0.01) 1.32 11.69 15.60 1,856 0.69
- -----------------------------------------------------------------------------------------------
(0.18) (0.04) (0.05) 0.38 10.38 6.55/d/ 181,441 0.60/c/
(0.12) (0.05) (0.05) 0.36 10.36 5.82/d/ 138,914 1.30/c/
(0.12) (0.05) (0.05) 0.36 10.36 5.80/d/ 100,711 1.30/c/
(0.20) (0.05) (0.05) 0.39 10.39 6.96/d/ 9,030 0.23/c/
(0.16) (0.06) (0.05) 0.37 10.37 6.43/d/ 1,354 0.73/c/
- -----------------------------------------------------------------------------------------------
</TABLE>
97
<PAGE>
GROWTH AND INCOME STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
-------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 2.00% 0.85% 1.74% 49.06%
1999 - Class B Shares 1.24 1.60 0.98 49.06
1999 - Class C Shares 1.23 1.60 0.97 49.06
1999 - Institutional
Shares 2.53 0.45 2.27 49.06
1999 - Service Shares 1.91 0.95 1.65 49.06
- ------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 2.37/c/ 1.05/c/ 1.92/c/ 41.91/d/
1998 - Class B Shares 1.72/c/ 1.68/c/ 1.34/c/ 41.91/d/
1998 - Class C Shares 1.68/c/ 1.68/c/ 1.30/c/ 41.91/d/
1998 - Institutional
Shares 2.97/c/ 0.61/c/ 2.59/c/ 41.91/d/
1998 - Service Shares 2.28/c/ 1.11/c/ 1.90/c/ 41.91/d/
- ------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
98
<PAGE>
[This page intentionally left blank]
99
<PAGE>
GROWTH STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income gain
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.29 $0.11 $2.03
1999 - Class B Shares 10.28 0.02 2.02
1999 - Class C Shares 10.28 0.02 2.03
1999 - Institutional Shares 10.29 0.13 2.05
1999 - Service Shares 10.29 0.09 2.03
- -----------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.10 0.36
1998 - Class B Shares 10.00 0.05 0.35
1998 - Class C Shares 10.00 0.05 0.35
1998 - Institutional Shares 10.00 0.12 0.37
1998 - Service Shares 10.00 0.09 0.35
- -----------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
100
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period returnb (in 000s) net assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.11) $(0.08) $ -- $1.95 $12.24 20.85% $130,322 0.59%
(0.02) (0.09) -- 1.93 12.21 19.87 121,937 1.34
(0.02) (0.09) -- 1.94 12.22 19.96 70,127 1.34
(0.13) (0.11) -- 1.94 12.23 21.24 5,891 0.19
(0.09) (0.10) -- 1.93 12.22 20.62 735 0.69
- -----------------------------------------------------------------------------------------------
(0.10) (0.02) (0.05) 0.29 10.29 4.62/d/ 128,832 0.60/c/
(0.05) (0.02) (0.05) 0.28 10.28 3.98/d/ 109,246 1.30/c/
(0.05) (0.02) (0.05) 0.28 10.28 3.96/d/ 63,925 1.30/c/
(0.12) (0.03) (0.05) 0.29 10.29 4.92/d/ 2,205 0.23/c/
(0.09) (0.01) (0.05) 0.29 10.29 4.45/d/ 378 0.73/c/
- -----------------------------------------------------------------------------------------------
</TABLE>
101
<PAGE>
GROWTH STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 0.90% 0.87% 0.62% 49.52%
1999 - Class B Shares 0.17 1.62 (0.11) 49.52
1999 - Class C Shares 0.16 1.62 (0.12) 49.52
1999 - Institutional
Shares 1.40 0.47 1.12 49.52
1999 - Service Shares 0.87 0.97 0.59 49.52
- -----------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 1.50/c/ 1.15/c/ 0.95/c/ 38.43/d/
1998 - Class B Shares 0.83/c/ 1.78/c/ 0.35/c/ 38.43/d/
1998 - Class C Shares 0.79/c/ 1.78/c/ 0.31/c/ 38.43/d/
1998 - Institutional
Shares 2.88/c/ 0.71/c/ 2.40/c/ 38.43/d/
1998 - Service Shares 1.63/c/ 1.21/c/ 1.15/c/ 38.43/d/
- -----------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
102
<PAGE>
[This page intentionally left blank]
103
<PAGE>
AGGRESSIVE GROWTH STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
Income (loss) from
investment operations/a/
----------------------------
Net asset
value, Net Net realized
beginning investment and unrealized
of period income (loss) gain
- --------------------------------------------------------------------------
<S> <C> <C> <C>
For The Year Ended December 31,
1999 - Class A Shares $10.16 $0.02 $2.56
1999 - Class B Shares 10.14 (0.07) 2.54
1999 - Class C Shares 10.15 (0.06) 2.53
1999 - Institutional Shares 10.16 0.06 2.55
1999 - Service Shares 10.15 -- 2.55
- --------------------------------------------------------------------------
For The Period Ended December 31,/e/
1998 - Class A Shares 10.00 0.05 0.20
1998 - Class B Shares 10.00 0.01 0.18
1998 - Class C Shares 10.00 0.01 0.19
1998 - Institutional Shares 10.00 0.07 0.20
1998 - Service Shares 10.00 0.04 0.21
- --------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
104
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------------
In excess Net assets Ratio of
From net of net Net increase Net asset at end of net expenses
investment investment From net in net asset value, end Total period to average
income income realized gain value of period returnb (in 000s) net assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.02) $(0.11) $ -- $2.45 $12.61 25.39% $58,387 0.59%
-- (0.04) -- 2.43 12.57 24.41 47,462 1.34
-- (0.05) -- 2.42 12.57 24.35 28,573 1.34
(0.06) (0.11) -- 2.44 12.60 25.74 3,570 0.19
-- (0.11) -- 2.44 12.59 25.17 137 0.69
- -----------------------------------------------------------------------------------------------
(0.05) -- (0.04) 0.16 10.16 2.57/d/ 47,135 0.60/c/
(0.01) -- (0.04) 0.14 10.14 1.93/d/ 41,204 1.30/c/
(0.01) -- (0.04) 0.15 10.15 2.04/d/ 21,726 1.30/c/
(0.07) -- (0.04) 0.16 10.16 2.80/d/ 124 0.24/c/
(0.04) (0.02) (0.04) 0.15 10.15 2.54/d/ 121 0.74/c/
- -----------------------------------------------------------------------------------------------
</TABLE>
105
<PAGE>
AGGRESSIVE GROWTH STRATEGY PORTFOLIO (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or expense limitations
------------------------------------
Ratio of Ratio of
net investment Ratio of net investment
income expenses to income to Portfolio
to average average average turnover
net assets net assets net assets rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For The Year Ended
December 31,
1999 - Class A Shares 0.12% 1.00% (0.29)% 47.34%
1999 - Class B Shares (0.63) 1.75 (1.04) 47.34
1999 - Class C Shares (0.61) 1.75 (1.02) 47.34
1999 - Institutional
Shares 0.66 0.60 0.25 47.34
1999 - Service Shares 0.00 1.10 (0.41) 47.34
- ------------------------------------------------------------------------------------------
For The Period Ended
December 31,/e/
1998 - Class A Shares 0.91/c/ 1.42/c/ 0.09/c/ 26.27/d/
1998 - Class B Shares 0.14/c/ 2.05/c/ (0.61)/c/ 26.27/d/
1998 - Class C Shares 0.16/c/ 2.05/c/ (0.59)/c/ 26.27/d/
1998 - Institutional
Shares 8.17/c/ 0.99/c/ 7.42/c/ 26.27/d/
1998 - Service Shares 0.76/c/ 1.49/c/ 0.01/c/ 26.27/d/
- ------------------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if sales or redemption
charges were taken into account.
c Annualized.
d Not annualized.
e Class A, Class B, Class C, Institutional and Service Share activity commenced
on January 2, 1998.
106
<PAGE>
Index
<TABLE>
<C> <C> <S>
1 General Investment
Management Approach
3 Portfolio Investment
Objectives and Strategies
3 Goldman Sachs Conservative
Strategy Portfolio
4 Goldman Sachs Balanced
Strategy Portfolio
5 Goldman Sachs Growth and Income Strategy Portfolio
6 Goldman Sachs Growth
Strategy Portfolio
7 Goldman Sachs Aggressive
Growth Strategy Portfolio
8 Principal Investment
Strategies
10 Principal Risks of the
Portfolios
12 Description of the Underlying Funds
</TABLE>
<TABLE>
<C> <C> <S>
18 Principal Risks of the
Underlying Funds
22 Portfolio Performance
27 Portfolio Fees and
Expenses
35 Service Providers
41 Dividends
42 Shareholder Guide
42 How To Buy Shares
51 How To Sell Shares
61 Taxation
63 Appendix A
Additional Information on
the Underlying Funds
88 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Asset Allocation Portfolios
Prospectus (Class A, B and C Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semi-annual reports to shareholders. In the Portfo-
lios' annual reports, you will find a discussion of the market conditions
and investment strategies that significantly affected the Portfolios' per-
formance during the last fiscal year.
Statement Of Additional Information
Additional information about the Portfolios and their policies is also
available in the Portfolios' Additional Statement. The Additional Statement
is incorporated by reference into this Prospectus (is legally considered
part of this Prospectus).
The Portfolios' annual and semi-annual reports, and the Additional State-
ment, are available free upon request by calling Goldman Sachs at 1-800-526-
7384.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-526-7384
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago,
IL 60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Portfolios' documents are
located online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
Goldman Sachs - http://www.gs.com (Prospectus only)
You may review and obtain copies of Portfolio documents by visiting the
SEC's Public Reference Room in Washington, D.C. You may also obtain copies
of Portfolio documents, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request to: [email protected]. Information on the operation of the public
reference room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Portfolios' investment company registration number is 811-5349.
CORESM is a service mark of Goldman, Sachs & Co.
AAPRO
513487
<PAGE>
Prospectus
Service
Shares
May 1, 2000
GOLDMAN SACHS SPECIALTY FUNDS
. Goldman Sachs Internet
Tollkeeper Fund/SM/
. Goldman Sachs Real
Estate Securities Fund
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN A FUND
INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
[GRAPHIC]
<PAGE>
NOT FDIC-INSURED May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management, a unit of the Investment Management Division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to
the Internet Tollkeeper and Real Estate Securities Funds. Goldman Sachs
Asset Management is referred to in this Prospectus as the "Investment
Adviser."
GROWTH STYLE FUNDS--INTERNET TOLLKEEPER FUND
THE FUND INVESTS IN "INTERNET TOLLKEEPER" COMPANIES,
AND ITS NET ASSET VALUE (NAV) MAY FLUCTUATE
SUBSTANTIALLY OVER TIME. BECAUSE THE FUND CONCENTRATES
ITS INVESTMENTS IN INTERNET TOLLKEEPER COMPANIES, THE
FUND'S PERFORMANCE MAY BE SUBSTANTIALLY DIFFERENT FROM
THE RETURNS OF THE BROADER STOCK MARKET AND OF "PURE"
INTERNET FUNDS. PAST PERFORMANCE IS NOT AN INDICATION
OF FUTURE RETURNS AND, DEPENDING ON THE TIMING OF YOUR
INVESTMENT, YOU MAY LOSE MONEY EVEN IF THE FUND'S PAST
RETURNS HAVE BEEN POSITIVE. THE FUND'S PARTICIPATION IN
THE INITIAL PUBLIC OFFERING (IPO) MARKET DURING ITS
INITIAL START-UP PHASE MAY HAVE HAD A MAGNIFIED IMPACT
ON THE FUND'S PERFORMANCE BECAUSE OF ITS RELATIVELY
SMALL ASSET BASE. AS THE FUND'S ASSETS GROW, IT IS
PROBABLE THAT THE EFFECT OF IPO INVESTMENTS ON THE
FUND'S FUTURE PERFORMANCE WILL NOT BE AS SIGNIFICANT.
Goldman Sachs' Growth Investment Philosophy:
1. Invest as if buying the company/business, not simply trading its stock:
. Understand the business, management, products and competition.
. Perform intensive, hands-on fundamental research.
. Seek businesses with strategic competitive advantages.
. Over the long-term, expect each company's stock price ultimately to track
the growth in the value of the business.
2. Buy high-quality growth businesses that possess strong business franchises,
favorable long-term prospects and excellent management.
3. Purchase superior long-term growth companies at a favorable price--seek
to purchase at a fair valuation, giving the investor the potential to
fully capture returns from above-average growth rates.
1
<PAGE>
Growth companies have earnings expectations that exceed those of the stock
market as a whole.
- --------------------------------------------------------------------------------
REAL ESTATE SECURITIES FUND
Goldman Sachs' Real Estate Securities Investment Philosophy:
When choosing the Fund's securities, the Investment Adviser:
. Selects stocks based on quality of assets, experienced management and a
sustainable competitive advantage.
. Seeks to buy securities at a discount to the intrinsic value of the busi-
ness (assets and management).
. Seeks a team approach to decision making.
Over time, REITs (which stands for Real Estate Investment Trusts) have
offered investors important diversification and competitive total returns
versus the broad equity market.
- --------------------------------------------------------------------------------
2
<PAGE>
Fund Investment Objectives and Strategies
Goldman Sachs
Internet Tollkeeper Fund
FUND FACTS
- --------------------------------------------------------------------------------
Objective: Long-term growth of capital
Investment Focus: U.S. equity securities that offer long-term capital
appreciation with a primary focus on the media,
telecommunications, technology and Internet sectors
Investment Style: Growth
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, at least
90% of its total assets in equity securities and at least 65% of its total
assets in equity securities of "Internet Tollkeeper" companies (as described
below), which are companies in the media, telecommunications, technology and
Internet sectors which provide access, infrastructure, content and services
to Internet companies and Internet users. The Fund seeks to achieve its
investment objective by investing in equity securities of companies that the
Investment Adviser believes will benefit from the growth of the Internet by
providing access, infrastructure, content and services to Internet companies
and customers. The Fund may also invest up to 35% of its total assets in
other companies whose rapid adoption of an Internet strategy is expected to
improve their cost structure, revenue opportunities or competitive advantage
and Internet-based companies that the Investment Adviser believes exhibit a
sustainable business model. Although the Fund invests primarily in publicly
traded U.S. securities, it may invest up to 25% of its total assets in for-
eign securities, including securities of issuers in emerging markets or
countries ("emerging countries") and securities quoted in foreign
currencies.
3
<PAGE>
The Internet. The Internet is a global collection of connected computers
that allows commercial and professional organizations, educational institu-
tions, government agencies, and individuals to communicate electronically,
access and share information, and conduct business.
The Internet has had, and is expected to continue to have, a significant
impact on the global economy, as it changes the way many companies operate.
Benefits of the Internet for businesses may include global scalability,
acquisition of new clients, new revenue sources and increased efficiencies.
Internet Tollkeepers. The Fund intends to invest a substantial portion of
its assets in companies the Investment Adviser describes as Internet Toll-
keepers. In general, the Investment Adviser defines a tollkeeper as a com-
pany with predictable, sustainable or recurring revenue streams. Like a toll
collector for a highway or bridge, these tollkeeper companies may grow reve-
nue by increasing "traffic," or customers and sales, and raising "tolls," or
prices. The Investment Adviser believes that the characteristics of many of
these tollkeepers, including dominant market share and strong brand name,
should enable them to consistently grow their business. An Internet Toll-
keeper is a company that has developed or is seeking to develop predictable,
sustainable or recurring revenue streams by applying the above characteris-
tics to the growth of the Internet. The Investment Adviser does not define
companies that merely have an Internet site or sell some products over the
Internet as Internet Tollkeepers (although the Investment Adviser may invest
in such companies as part of the Fund's 35% basket of securities which are
not or may not be Internet Tollkeepers).
Internet Tollkeepers are media, telecommunications, technology and Internet
companies which provide access, infrastructure, content and services to
Internet companies and Internet users. The following represent examples of
each of these types of companies, but should not be construed to exclude
other types of Internet Tollkeepers:
. Access providers enable individuals and businesses to connect to the
Internet through, for example, cable systems or the telephone network.
. Infrastructure companies provide items such as servers, routers, software
and storage necessary for companies to participate in the Internet.
. Media content providers own copyrights, distribution networks and/or pro-
gramming. Traditional media companies stand to benefit from an increase in
advertising spending by Internet companies. Copyright owners stand to ben-
efit from a new distribution channel for their music and video properties.
They also will benefit from increasing demand for traditional items like
CD's and DVD's driven by aggressive competition among Internet retailers.
. Service providers may facilitate transactions, communications, security,
computer programming and back-office functions for Internet businesses.
For
4
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
example, Internet companies may contract out advertising sales or credit
card clearing to service providers.
Our Approach to Investing in the Internet. While the Internet is clearly a
significant force in shaping businesses and driving the economy, the Invest-
ment Adviser believes that many Internet-based companies may not have sus-
tainable growth. Many Internet-based companies that are engaged in elec-
tronic commerce are focused on driving sales volume and competing with other
Internet-based companies. Often, this competition is based on price, and if
these companies do not own strong franchises, then the Investment Adviser
believes there could be significant uncertainty regarding their long-term
profitability.
The Investment Adviser believes that another attractive way to invest in the
Internet sector is to invest in businesses participating in the growth of
the Internet that potentially have long-lasting strategic advantages. Char-
acteristics of these companies may include: dominant market share, strong
brand names, recurring revenue streams, cost advantages, economies of scale,
financial strength, technological advantages and strong, experienced manage-
ment teams.
Beneficiaries of the Internet that may meet the above criteria include those
companies (Internet Tollkeepers) providing access, infrastructure, content,
and services to Internet companies and Internet users. The Fund will also
invest in companies whose rapid adoption of an Internet strategy is expected
to improve their cost structure or competitive advantage. Internet-based
companies that exhibit a sustainable business model may also be candidates
for purchase by the Fund. The Investment Adviser pays careful attention to
the stock prices of these companies, seeking to purchase them at a discount
to their intrinsic value.
Because of its narrow industry focus, the Fund's investment performance will
be closely tied to many factors which affect the Internet and Internet-
related industries. These factors include intense competition, consumer
preferences, problems with product compatibility and government regulation.
Internet and Internet-related securities may experience significant price
movements caused by disproportionate investor optimism or pessimism with
little or no basis in fundamental economic conditions. As a result, the
Fund's NAV is more likely to have greater fluctuations than that of a Fund
which invests in other industries.
5
<PAGE>
Goldman Sachs
Real Estate Securities Fund
FUND FACTS
- --------------------------------------------------------------------------------
Objective: Total return comprised of long-term growth of capital
and dividend income
Benchmark: Wilshire Real Estate Securities Index
Investment Focus: REITs and real estate industry companies
Investment Style: Growth at a discount
INVESTMENT OBJECTIVE
The Fund seeks total return comprised of long-term growth of capital and
dividend income.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, substan-
tially all and at least 80% of its total assets in a diversified portfolio
of equity securities of issuers that are primarily engaged in or related to
the real estate industry. The Fund expects that a substantial portion of its
assets will be invested in REITs and real estate industry companies.
A "real estate industry company" is a company that derives at least 50% of
its gross revenues or net profits from the ownership, development, construc-
tion, financing, management or sale of commercial, industrial or residential
real estate or interests therein.
The Fund's investment strategy is based on the premise that property market
fundamentals are the primary determinant of growth, underlying the success
of companies in the real estate industry. The Investment Adviser focuses on
companies that can achieve sustainable growth in cash flow and dividend pay-
ing capability. The Investment Adviser attempts to purchase securities so
that its underlying portfolio will be diversified geographically and by
property type. Although the Fund will invest primarily in publicly traded
U.S. securities, it may invest up to 15% of its total assets in foreign
securities, including securities of issuers in emerging countries and secu-
rities quoted in foreign currencies.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity
REITs may be affected by changes in the value of the underlying property
owned by the REITs. Mortgage REITs may be affected by the quality of any
credit extended. REITs are dependent upon management skill, may not be
diversified, and are subject to heavy cash flow dependency, default by bor-
rowers and self-liquidation. REITs are also subject to the possibilities of
failing to qualify for tax free pass-through of income and failing to main-
tain their exemptions from investment company registration. REITs whose
underlying properties are concentrated in a particular industry or geo-
graphic region are also subject to risks affecting such industries and
regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected
to decline. In contrast, as interest rates on adjustable rate mortgage loans
are reset periodically, yields on a REIT's investment in such loans will
gradually align themselves to reflect changes in market interest rates,
causing the value of such investments to fluctuate less dramatically in
response to interest rate fluctuations than would investments in fixed rate
obligations.
The REIT investments of the Real Estate Securities Fund often do not provide
complete tax information to the Fund until after the calendar year-end. Con-
sequently, because of the delay, it may be necessary for the Fund to request
permission to extend the deadline for issuance of Forms 1099-DIV beyond Jan-
uary 31.
Other. The Fund may invest up to 20% of its total assets in fixed-income
securities, such as government, corporate debt and bank obligations, that
offer the potential to further the Fund's investment objective.
7
<PAGE>
Other Investment Practices and Securities
The table below identifies some of the investment techniques that may (but are
not required to) be used by the Funds in seeking to achieve their investment
objectives. The table also highlights the differences among the Funds in their
use of these techniques and other investment practices and investment
securities. Numbers in this table show allowable usage only; for actual usage,
consult the Funds' annual and semi-annual reports. For more information see
Appendix A.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No specific percentage limitation on usage;limited only by the objectives
and strategies of the Fund
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
- -- Not permitted
- ---------------------------------------------------------------------------
<S> <C> <C>
Investment Practices
Borrowings 33 1/3/ 33 1/3/
Credit, currency, index, interest rate and mortgage
swaps* -- 15
Cross Hedging of Currencies . .
Custodial receipts . .
Equity Swaps* 15 15
Foreign Currency Transactions** . .
Futures Contracts and Options on Futures Contracts . .
Interest rate caps, floors and collars -- .
Investment Company Securities (including exchange-
traded funds) 10 10
Mortgage Dollar Rolls -- .
Options on Foreign Currencies/1/ . .
Options on Securities and Securities Indices/2/ . .
Repurchase Agreements . .
Securities Lending 33 1/3/ 33 1/3/
Short Sales Against the Box 25 25
Unseasoned Companies . .
Warrants and Stock Purchase Rights . .
When-Issued Securities and Forward Commitments . .
- ---------------------------------------------------------------------------
</TABLE>
* Limited to 15% of net assets (together with other illiquid securities) for
all structured securities which are not deemed to be liquid and all swap
transactions.
** Limited by the amount each Fund may invest in foreign securities.
1 The Funds may purchase and sell call and put options.
2 The Funds may sell covered call and put options and purchase call and put
options.
8
<PAGE>
OTHER INVESTMENT PRACTICES AND SECURITIES
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No specific percentage
limitation on usage;
limited only by the
objectives andstrategies
of the Fund
- -- Not permitted
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
- --------------------------------------------------------------------------
<S> <C> <C>
Investment Securities
American, European and Global Depository Receipts . .
Asset-Backed and Mortgage-Backed Securities/3/ . .
Bank Obligations/3/ . .
Convertible Securities/4/ . .
Corporate Debt Obligations/3/ . .
Equity Securities 90+ 80+
Emerging Country Securities/5/ 25 15
Fixed Income Securities 10 20
Foreign Securities/5/ 25 15
Non-Investment Grade Fixed Income Securities 10/6/ 20/6/
Real Estate Investment Trusts . .
Stripped Mortgage-Backed Securities*,/3/ -- .
Structured Securities/3/ . .
Temporary Investments 100 100
U.S. Government Securities/3/ . .
Yield Curve Options and Inverse Floating Rate
Securities -- .
- --------------------------------------------------------------------------
</TABLE>
* Limited to 15% of net assets (together with other illiquid securities) for
all structured securities which are not deemed to be liquid and all swap
transactions.
3 Limited by the amount the Fund invests in fixed-income securities.
4 Convertible securities purchased by the Funds use the same rating criteria
for convertible and non-convertible debt securities.
5 The Internet Tollkeeper and Real Estate Securities Funds may invest in the
aggregate up to 25% and 15%, respectively, of their total assets in foreign
securities, including emerging country securities.
6 May be BB or lower by Standard & Poor's or Ba or lower by Moody's.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other governmental agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Real
Internet Estate
. Applicable Tollkeeper Securities
- -- Not applicable Fund Fund
- ---------------------------------------------
<S> <C> <C>
Credit/Default . .
Foreign . .
Emerging Countries . .
Industry Concentration . .
Stock . .
Derivatives . .
Interest Rate . .
Management . .
Market . .
Liquidity . .
REIT Risk . .
Internet . --
- ---------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
All Funds:
. Credit/Default Risk--The risk that an issuer or guarantor of fixed-income
securities held by a Fund (which may have low credit ratings) may default on
its obligation to pay interest and repay principal.
. Foreign Risk--The risk that when a Fund invests in foreign securities, it
will be subject to risk of loss not typically associated with domestic
issuers. Loss may result because of less foreign government regulation, less
public information and less economic, political and social stability. Loss
may also result from the imposition of exchange controls, confiscations and
other government restrictions. A Fund will also be subject to the risk of
negative foreign currency rate fluctuations. Foreign risks will normally be
greatest when a Fund invests in issuers located in emerging countries.
. Emerging Countries Risk--The securities markets of Asian, Latin American,
Eastern European, African and other emerging countries are less liquid, are
especially subject to greater price volatility, have smaller market capital-
izations, have less government regulation and are not subject to as extensive
and frequent accounting, financial and other reporting requirements as the
securities markets of more developed countries. Further, investment in equity
securities of issuers located in Russia and certain other emerging countries
involves risk of loss resulting from problems in share registration and cus-
tody and substantial economic and political disruptions. These risks are not
normally associated with investments in more developed countries.
. Industry Concentration Risk--The risk that each of the Funds concentrates its
investments in specific industry sectors that have historically experienced
substantial price volatility. Each Fund is subject to greater risk of loss as
a result of adverse economic, business or other developments than if its
investments were diversified across different industry sectors. Securities of
issuers held by the Funds may lack sufficient market liquidity to enable a
Fund to sell the securities at an advantageous time or without a substantial
drop in price.
. Stock Risk--The risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high levels.
There is no guarantee that such levels will continue.
. Derivatives Risk--The risk that loss may result from a Fund's investments in
options, futures, swaps, structured securities and other derivative instru-
ments. These instruments may be leveraged so that small changes may produce
disproportionate losses to a Fund.
11
<PAGE>
. Interest Rate Risk--The risk that when interest rates increase, fixed-income
securities held by a Fund will decline in value. Long-term fixed-income secu-
rities will normally have more price volatility because of this risk than
short-term securities.
. Management Risk--The risk that a strategy used by the Investment Adviser may
fail to produce the intended results.
. Market Risk--The risk that the value of the securities in which a Fund
invests may go up or down in response to the prospects of individual compa-
nies and/or general economic conditions. Price changes may be temporary or
last for extended periods.
. Liquidity Risk--The risk that a Fund will not be able to pay redemption pro-
ceeds within the time period stated in this Prospectus because of unusual
market conditions, an unusually high volume of redemption requests, or other
reasons. Funds that invest in non-investment grade fixed-income securities,
small capitalization stocks, REITs and emerging country issuers will be espe-
cially subject to the risk that during certain periods the liquidity of par-
ticular issuers or industries, or all securities within these investment cat-
egories, will shrink or disappear suddenly and without warning as a result of
adverse economic, market or political events, or adverse investor perceptions
whether or not accurate. The Goldman Sachs Asset Allocation Portfolios (the
"Asset Allocation Portfolios") expect to invest a significant percentage of
their assets in the Real Estate Securities Fund and other funds for which
Goldman Sachs now or in the future acts as investment adviser or underwriter.
Redemptions by an Asset Allocation Portfolio of its position in a Fund may
further increase liquidity risk and may impact a Fund's NAV.
. REIT Risk--Investing in REITs involves certain unique risks in addition to
those risks associated with investing in the real estate industry in general.
REITs whose underlying properties are concentrated in a particular industry
or geographic region are also subject to risks affecting such industries and
regions. The securities of REITs involve greater risks than those associated
with larger, more established companies and may be subject to more abrupt or
erratic price movements. Securities of such issuers may lack sufficient mar-
ket liquidity to enable a Fund to effect sales of an advantageous time or
without a substantial drop in price.
Internet Tollkeeper Fund:
. Internet Risk--The risk that the stock prices of Internet and Internet-
related companies will experience significant price movements as a result of
intense worldwide competition, consumer preferences, product compatibility,
product obsolescence, government regulation, excessive investor optimism or
pessimism, or other factors.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
12
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's Service
Shares from year to year; and (b) how the average annual returns of a Fund's
Service Shares compare to those of broad-based securities market indices.
The bar chart and table assume reinvestment of dividends and distributions.
A Fund's past performance is not necessarily an indication of how the Fund
will perform in the future. Performance reflects expense limitations in
effect. If expense limitations were not in place, a Fund's performance would
have been reduced. The Internet Tollkeeper Fund commenced operations on
October 1, 1999. Since the Internet Tollkeeper Fund does not have at least
one full calendar year's performance for the period ending December 31,
1999, no performance information is provided in this section.
13
<PAGE>
Real Estate Securities Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '99 +12.88%
Worst Quarter
Q3 '99 -10.18%
[BAR CHART]
1999 -1.12%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
-----------------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 7/27/98) (1.12)% (5.38)%
Wilshire Real Estate Securities Index* (3.16)% (9.45)%
-----------------------------------------------------------------
</TABLE>
* The unmanaged Wilshire Real Estate Securities Index is an unmanaged index
of publicly traded REITs and real estate operating companies. The Index
figures do not reflect any fees or expenses.
14
<PAGE>
Fund Fees and Expenses (Service Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Service Shares of a Fund.
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
- -------------------------------------------------------------------------
<S> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed
on Purchases None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/1/
Management Fees 1.00% 1.00%
Service Fees/2/ 0.50% 0.50%
Other Expenses/3/ 0.20% 0.31%
- -------------------------------------------------------------------------
Total Fund Operating Expenses* 1.70% 1.81%
- -------------------------------------------------------------------------
</TABLE>
See page 16 for all other footnotes.
* As a result of current expense limitations, "Other
Expenses" and "Total Fund Operating Expenses" of the
Funds which are actually incurred are as set forth
below. The expense limitations may be terminated at
any time at the option of the Investment Adviser. If
this occurs, "Other Expenses" and "Total Fund
Operating Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
---------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/1/
Management Fees 1.00% 1.00%
Service Fees/2/ 0.50% 0.50%
Other Expenses/3/ 0.10% 0.04%
---------------------------------------------------------------------------
Total Fund Operating Expenses (after current expense
limitations) 1.60% 1.54%
---------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Fund Fees and Expenses continued
/1/The Real Estate Securities Fund's annual operating expenses are based on
actual expenses. The Internet Tollkeeper Fund's expenses are estimated for
the current fiscal year.
/2/Service Organizations may charge other fees to their customers who are
beneficial owners of Service Shares in connection with their customers'
accounts. Such fees may affect the return customers realize with respect
to their investments.
/3/"Other Expenses" include transfer agency fees equal to 0.04% of the aver-
age daily net assets of each Fund's Service Shares, plus all other ordi-
nary expenses not detailed above. The Investment Adviser has voluntarily
agreed to reduce or limit "Other Expenses" (excluding management fees,
transfer agency fees, service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses) to the fol-
lowing percentages of each Fund's average daily net assets:
<TABLE>
<CAPTION>
Other
Fund Expenses
--------------------------
<S> <C>
Internet
Tollkeeper 0.06%
Real Estate
Securities 0.00%
</TABLE>
16
<PAGE>
FUND FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the expense limitations) with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in Service Shares of
a Fund for the time periods indicated and then redeem all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that a Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Internet Tollkeeper $173 $536 N/A N/A
- -------------------------------------------------------
Real Estate Securities $184 $569 $980 $2,127
- -------------------------------------------------------
</TABLE>
Service Organizations that invest in Service Shares on behalf of their custom-
ers may charge other fees directly to their customer accounts in connection
with their investments. You should contact your Service Organization for infor-
mation regarding such charges. Such fees, if any, may affect the return such
customers realize with respect to their investments.
Certain Service Organizations that invest in Service Shares may receive other
compensation in connection with the sale and distribution of Service Shares or
for services to their customers' accounts and/or the Funds. For additional
information regarding such compensation, see "Shareholder Guide" in the Pro-
spectus and "Other Information" in the Statement of Additional Information
("Additional Statement").
17
<PAGE>
Service Providers
INVESTMENT ADVISER
<TABLE>
<CAPTION>
Investment Adviser
---------------------------------------------
<S> <C>
Goldman Sachs Asset Management ("GSAM")
32 Old Slip
New York, New York 10005
---------------------------------------------
</TABLE>
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. Goldman Sachs registered as an investment adviser in
1981. The Goldman Sachs Group, L.P., which controlled the Investment Advis-
er, merged into The Goldman Sachs Group, Inc. as a result of an initial pub-
lic offering. As of December 31, 1999, GSAM, along with other units of IMD,
had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser makes the investment decisions
for the Funds and places purchase and sale orders for the Funds' portfolio
transactions in U.S. and foreign markets. As permitted by applicable law,
these orders may be directed to any brokers, including Goldman Sachs and its
affiliates. While the Investment Adviser is ultimately responsible for the
management of the Funds, it is able to draw upon the research and expertise
of its asset management affiliates for portfolio decisions and management
with respect to certain portfolio securities. In addition, the Investment
Adviser has access to the research and certain proprietary technical models
developed by Goldman Sachs, and will apply quantitative and qualitative
analysis in determining the appropriate allocations among categories of
issuers and types of securities.
The Investment Adviser also performs the following additional services for
the Funds:
. Supervises all non-advisory operations of the Funds
. Provides personnel to perform necessary executive, administrative and
clerical services to the Funds
. Arranges for the preparation of all required tax returns, reports to
shareholders, prospectuses and statements of additional information and
other reports filed with the Securities and Exchange Commission (the
"SEC") and other regulatory authorities
. Maintains the records of each Fund
. Provides office space and all necessary office equipment and services
18
<PAGE>
SERVICE PROVIDERS
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates (as a percentage of each respective
Fund's average daily net assets) listed below:
<TABLE>
<CAPTION>
Actual Rate
For the Fiscal Year
or Period Ended
Contractual Rate December 31, 1999
-------------------------------------------------------------
<S> <C> <C>
Internet Tollkeeper 1.00% 1.00%
-------------------------------------------------------------
Real Estate Securities 1.00% 1.00%
-------------------------------------------------------------
</TABLE>
FUND MANAGERS
M. Roch Hillenbrand, a Managing Director of Goldman Sachs since 1997, is the
Head of Global Equities for GSAM, overseeing the United States, Europe,
Japan, and non-Japan Asia. In this capacity, he is responsible for managing
the group as it defines and implements global portfolio management processes
that are consistent, reliable and predictable. Since 1981, Mr. Hillenbrand
has been President of Commodities Corporation LLC, of which Goldman Sachs is
the parent company. Over the course of his 19-year career at Commodities
Corporation, Mr. Hillenbrand has had extensive experience in dealing with
internal and external investment managers who have managed a range of
futures and equities strategies across multiple markets, using a variety of
styles.
Growth Equity Investment Team
. 19-year consistent investment style applied through diverse and complete
market cycles
. More than $20 billion in equities currently under management
. More than 300 client account relationships
. A portfolio management and analytical team with more than 160 years com-
bined investment experience
19
<PAGE>
- --------------------------------------------------------------------------------
Growth Equity Investment Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
George D. Adler Senior Portfolio Manager-- Since Mr. Adler joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as
a portfolio manager
in 1997. From 1990 to
1997, he was a
portfolio manager at
Liberty Investment
Management, Inc.
("Liberty") and its
predecessor firm,
Eagle Asset
Management ("Eagle").
- ------------------------------------------------------------------------------------------------
Steve Barry Senior Portfolio Manager-- Since Mr. Barry joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as
a portfolio manager
in 1999. From 1988 to
1999, he was a
portfolio manager at
Alliance Capital
Management.
- ------------------------------------------------------------------------------------------------
Robert G. Senior Portfolio Manager-- Since Mr. Collins joined
Collins Internet Tollkeeper 1999 the Investment
Vice President Adviser as a
portfolio manager and
Co-Chair of the
Growth Equity
Investment Committee
in 1997. From 1991 to
1997, he was a
portfolio manager at
Liberty and its
predecessor firm,
Eagle.
- ------------------------------------------------------------------------------------------------
Herbert E. Senior Portfolio Manager-- Since Mr. Ehlers joined the
Ehlers Internet Tollkeeper 1999 Investment Adviser as
Managing a senior portfolio
Director manager and Chief
Investment Officer of
the Growth Equity
team in 1997. From
1994 to 1997, he was
the Chief Investment
Officer and Chairman
of Liberty. From 1984
to 1994, he was a
portfolio manager and
President at
Liberty's predecessor
firm, Eagle.
- ------------------------------------------------------------------------------------------------
Gregory H. Senior Portfolio Manager-- Since Mr. Ekizian joined
Ekizian Internet Tollkeeper 1999 the Investment
Vice President Adviser as a
portfolio manager and
Co-Chair of the
Growth Equity
Investment Committee
in 1997. From 1990 to
1997, he was a
portfolio manager at
Liberty and its
predecessor firm,
Eagle.
- ------------------------------------------------------------------------------------------------
Scott Kolar Portfolio Manager-- Since Mr. Kolar joined the
Associate Internet Tollkeeper 1999 Investment Adviser as
an equity analyst in
1997 and became a
portfolio manager in
1999. From 1994 to
1997, he was an
equity analyst and
information systems
specialist at
Liberty.
- ------------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Senior Portfolio Manager-- Since Mr. Segundo joined
Vice President Internet Tollkeeper 1999 the Investment
Adviser as a
portfolio manager in
1997. From 1992 to
1997, he was a
portfolio manager at
Liberty and its
predecessor firm,
Eagle.
- ------------------------------------------------------------------------------------------------
David G. Shell Senior Portfolio Manager-- Since Mr. Shell joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as
a portfolio manager
in 1997. From 1987 to
1997, he was a
portfolio manager at
Liberty and its
predecessor firm,
Eagle.
- ------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
SERVICE PROVIDERS
- --------------------------------------------------------------------------------
Real Estate Securities Team
The Real Estate Securities portfolio management team includes individuals
with backgrounds in:
. Fundamental real estate acquisition, development and operations
. Real estate capital markets
. Mergers and acquisitions
. Asset management
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
- ---------------------------------------------------------------------------------
<C> <C> <C> <S>
Herbert E. Senior Portfolio Since Mr. Ehlers joined the
Ehlers Manager-- Investment Adviser as a senior
Managing Real Estate 1998 portfolio manager and Chief
Director Securities Investment Officer of the
Growth Equity team in 1997.
From 1994 to 1997, he was the
Chief Investment Officer and
Chairman of Liberty. From 1984
to 1994, he was a portfolio
manager and President at
Liberty's predecessor firm,
Eagle.
- ---------------------------------------------------------------------------------
Mark Howard- Senior Portfolio Since Mr. Howard-Johnson joined the
Johnson Manager-- Investment Adviser as a
Vice President Real Estate 1998 portfolio manager in 1998. His
Securities previous experience includes 15
years in the real estate
finance business. From 1996 to
1998, he was the senior equity
analyst for Boston Financial,
responsible for the Pioneer
Real Estate Shares Fund. Prior
to joining Boston Financial,
from 1994 to 1996, Mr. Howard-
Johnson was a real estate
securities analyst for The
Penobscot Group, Inc., one of
only two independent research
firms in the public real estate
securities business.
- ---------------------------------------------------------------------------------
Greg Poole Portfolio Since Mr. Poole joined the Investment
Associate Manager-- 2000 Adviser as a real estate
Real Estate securities analyst in 1998 and
Securities became portfolio manager in
2000. His previous experience
includes investment analysis
and financial structuring for
the Real Estate Principal
Investment Group of the
Investment Banking Division of
Goldman Sachs, which he joined
in 1996. He received his B.A.
in Honours Economics from the
University of Western Ontario
in 1996.
- ---------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS
The involvement of the Investment Adviser, Goldman Sachs and their affili-
ates in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect
to a Fund or limit a Fund's investment activities. Goldman Sachs and its
affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Funds and/or which engage
in and compete for transactions in the same types of securities, currencies
and instruments as the Funds. Goldman Sachs and its affiliates will not have
any obligation to make available any information regarding their proprietary
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the Funds.
The results of a Fund's investment activities, therefore, may differ from
those of Goldman Sachs and its affiliates, and it is possible that a Fund
could sustain losses during periods in which Goldman Sachs and its affili-
ates and other accounts achieve significant profits on their trading for
proprietary or other accounts. In addition, the Funds may, from time to
time, enter into transactions in which other clients of Goldman Sachs have
an adverse interest. A Fund's activities may be limited because of regula-
tory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions.
22
<PAGE>
SERVICE PROVIDERS
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
23
<PAGE>
Dividends
Each Fund pays dividends from its net investment income and capital gain net
income. You may choose to have dividends paid in:
. Cash
. Additional shares of the same class of the same Fund
. Shares of the same or an equivalent class of another Goldman Sachs Fund. Spe-
cial restrictions may apply for certain ILA Portfolios. See the Additional
Statement.
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time before the record date for a
particular dividend. If you do not indicate any choice, dividends will be rein-
vested automatically in the applicable Fund.
The election to reinvest dividends in additional shares will not affect the tax
treatment of such dividends, which will be treated as received by you and then
used to purchase the shares.
Dividends from net investment income and capital gain net income are declared
and paid as follows:
<TABLE>
<CAPTION>
Net
Investment Capital Gain
Fund Income Net Income
- -----------------------------------------------
<S> <C> <C>
Internet Tollkeeper Annually Annually
- -----------------------------------------------
Real Estate Securities Quarterly Annually
- -----------------------------------------------
</TABLE>
From time to time a portion of a Fund's dividends may constitute a return of
capital.
At the time of an investor's purchase of shares of a Fund, a portion of the NAV
per share may be represented by undistributed income or undistributed realized
appreciation of the Fund's portfolio securities. Therefore, subsequent distri-
butions on such shares from such income or realized appreciation may be taxable
to you even if the NAV of the shares is, as a result of the distributions,
reduced below the cost of such shares and the distributions (or portions there-
of) represent a return of a portion of the purchase price.
24
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Service
Shares.
HOW TO BUY SHARES
How Can I Purchase Service Shares Of The Funds?
Generally, Service Shares may be purchased only through institutions that
have agreed to provide account administration and personal and account
maintenance services to their customers who are the beneficial owners of
Service Shares. These institutions are called "Service Organizations."
Customers of a Service Organization will normally give their purchase
instructions to the Service Organization, and the Service Organization will, in
turn, place purchase orders with Goldman Sachs. Service Organizations will set
times by which purchase orders and payments must be received by them from their
customers. Generally, Service Shares may be purchased from the Funds on any
business day at their NAV next determined after receipt of an order by Goldman
Sachs from a Service Organization. No sales load is charged. Purchases of
Service Shares must be settled within three business days of receipt of a
complete purchase order.
Service Organizations are responsible for transmitting purchase orders and
payments to Goldman Sachs in a timely fashion. Service Organizations should
place an order with Goldman Sachs at 1-800-621-2550 and either:
. Wire federal funds to The Northern Trust Company ("Northern"), as
subcustodian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian) on the next business day; or
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds--(Name
of Fund and Class of Shares), 4900 Sears Tower--60th Floor, Chicago, IL
60606-6372. The Fund will not accept a check drawn on a foreign bank or a
third-party check.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guarantees
must be obtained from a bank, brokerage firm or other financial intermediary
that is a member of an approved Medallion Guarantee Program or that is
otherwise approved by the Trust. A notary public cannot provide a signature
guarantee.
What Do I Need To Know About Service Organizations?
Service Organizations may provide the following services in connection with
their customers' investments in Service Shares:
. Acting, directly or through an agent, as the sole shareholder of record
. Maintaining account records for customers
25
<PAGE>
. Processing orders to purchase, redeem or exchange shares for customers
. Responding to inquiries from prospective and existing shareholders
. Assisting customers with investment procedures
In addition, some (but not all) Service Organizations are authorized to
accept, on behalf of Goldman Sachs Trust (the "Trust"), purchase, redemption
and exchange orders placed by or on behalf of their customers, and may des-
ignate other intermediaries to accept such orders, if approved by the Trust.
In these cases:
. A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized Service Organization or intermediary on
a business day, and the order will be priced at the Fund's NAV next
determined after such acceptance.
. Service Organizations or intermediaries will be responsible for
transmitting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your Service Organization directly to learn whether it is
authorized to accept orders for the Trust.
Pursuant to a service plan adopted by the Trust's Board of Trustees, Service
Organizations are entitled to receive payment for their services from the
Trust of up to 0.50% (on an annualized basis) of the average daily net
assets of the Service Shares of the Funds, which are attributable to or held
in the name of the Service Organization for its customers.
The Investment Adviser, Distributor and/or their affiliates may pay additional
compensation from time to time, out of their assets and not as an additional
charge to the Funds, to selected Service Organizations and other persons in
connection with the sale, distribution and/or servicing of shares of the Funds
and other Goldman Sachs Funds. Additional compensation based on sales may, but
is currently not expected to, exceed 0.50% (annualized) of the amount invested.
In addition to Service Shares, each Fund also offers other classes of shares
to investors. These other share classes are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than Service Shares.
Information regarding these other share classes may be obtained from your
sales representative or from Goldman Sachs by calling the number on the back
cover of this Prospectus.
What Is My Minimum Investment In The Funds?
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance. A Service
26
<PAGE>
SHAREHOLDER GUIDE
Organization may redeem Service Shares held by non-complying accounts, and
may impose a charge for any special services.
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Reject or restrict any purchase or exchange orders by a particular pur-
chaser (or group of related purchasers). This may occur, for example, when
a pattern of frequent purchases, sales or exchanges of Service Shares of a
Fund is evident, or if purchases, sales or exchanges are, or a subsequent
abrupt redemption might be, of a size that would disrupt the management of
a Fund.
. Close a Fund to new investors from time to time and reopen any such Fund
whenever it is deemed appropriate by a Fund's Investment Adviser.
The Funds may allow Service Organizations to purchase shares with securities
instead of cash if consistent with a Fund's investment policies and opera-
tions and if approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Service Shares
is determined by a Fund's NAV. The Funds calculate NAV as follows:
<TABLE>
<S> <C>
(Value of Assets of the
Class)
NAV = - (Liabilities of the Class)
----------------------------
Number of Outstanding Shares
of the Class
</TABLE>
The Funds' investments are valued based on market quotations or, if accurate
quotations are not readily available, the fair value of the Fund's invest-
ments may be determined in good faith under procedures established by the
Trustees.
. NAV per share of each class is calculated by State Street on each business
day as of the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. New York time). Fund shares will not be priced on any
day the New York Stock Exchange is closed.
. When you buy shares, you pay the NAV next calculated after the Funds
receive your order in proper form.
. When you sell shares, you receive the NAV next calculated after the Funds
receive your order in proper form.
Note: The time at which transactions and shares are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
Foreign securities may trade in their local markets on days a Fund is
closed. As a result, if the Fund holds foreign securities its NAV may be
impacted on days when investors may not purchase or redeem Fund shares.
27
<PAGE>
In addition, the impact of events that occur after the publication of market
quotations used by a Fund to price its securities (for example, in foreign
markets), but before the close of regular trading on the New York Stock
Exchange will normally not be reflected in a Fund's next determined NAV
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.
HOW TO SELL SHARES
How Can I Sell Service Shares Of The Funds?
Generally, Service Shares may be sold (redeemed) only through Service Orga-
nizations. Customers of a Service Organization will normally give their
redemption instructions to the Service Organization, and the Service Organi-
zation will, in turn, place redemption orders with the Funds. Generally,
each Fund will redeem its Service Shares upon request on any business day at
their NAV next determined after receipt of such request in proper form.
Redemption proceeds may be sent to recordholders by check or by wire (if the
wire instructions are on record).
A Service Organization may request redemptions in writing or by telephone if
the optional telephone redemption privilege is elected on the Account
Application.
<TABLE>
<S> <C>
-----------------------------------------------------------------
By Writing: Goldman Sachs Funds
4900 Sears Tower--60th Floor
Chicago, IL 60606-6372
-----------------------------------------------------------------
By Telephone: If you have elected the telephone
redemption privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
-----------------------------------------------------------------
</TABLE>
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing
and signed by an authorized person designated on the Account Application.
The
28
<PAGE>
SHAREHOLDER GUIDE
written request may be confirmed by telephone with both the requesting
party and the designated bank account to verify instructions.
. The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
How Are Redemption Proceeds Paid?
By Wire: The Funds will arrange for redemption proceeds to be wired as fed-
eral funds to the bank account designated in the recordholder's Account
Application. The following general policies govern wiring redemption pro-
ceeds:
. Redemption proceeds will normally be wired on the next business day in fed-
eral funds (for a total of one business day delay), but may be paid up to
three business days following receipt of a properly executed wire transfer
redemption request. If the shares to be sold were recently paid for by check,
the Fund will pay the redemption proceeds when the check has cleared, which
may take up to 15 days. If the Federal Reserve Bank is closed on the day that
the redemption proceeds would ordinarily be wired, wiring the redemption
proceeds may be delayed one additional business day.
. To change the bank designated on your Account Application, you must send
written instructions signed by an authorized person designated on the
Account Application to the Service Organization.
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of intermediaries or your Service
Organization in the transfer process. If a problem with such performance
arises, you should deal directly with such intermediaries or Service
Organization.
By Check: A recordholder may elect in writing to receive redemption proceeds
by check. Redemption proceeds paid by check will normally be mailed to the
address of record within three business days of receipt of a properly
executed redemption request. If the shares to be sold were recently paid for by
check, the Fund will pay the redemption proceeds when the check has cleared,
which may take up to 15 days.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate the timely transmittal of redemption requests, Service Organi-
zations may set times by which they must receive redemption requests.
Service Organizations may also require additional documentation from you.
29
<PAGE>
The Trust reserves the right to:
. Redeem the Service Shares of any Service Organization whose account bal-
ance falls below $50 as a result of a redemption. The Funds will not
redeem Service Shares on this basis if the value of the account falls
below the minimum account balance solely as a result of market conditions.
The Fund will give 60 days' prior written notice to allow a Service Organ-
ization to purchase sufficient additional shares of the Fund in order to
avoid such redemption.
. Redeem the shares in other circumstances determined by the Board of Trust-
ees to be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distribu-
tions be returned to the Fund as undeliverable or remain uncashed for six
months. In addition, that distribution and all future distributions pay-
able to you will be reinvested at NAV in additional Fund shares. No inter-
est will accrue on amounts represented by uncashed distribution or redemp-
tion checks.
Can I Exchange My Investment From One Fund To Another?
A Service Organization may exchange Service Shares of a Fund at NAV for
Service Shares of any other Goldman Sachs Fund. The exchange privilege may
be materially modified or withdrawn at any time upon 60 days' written
notice.
<TABLE>
<CAPTION>
Instructions For
Exchanging
Shares:
-----------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. The recordholder name(s) and signature(s)
. The account number
. The Fund names and Class of Shares
. The dollar amount to be exchanged
. Mail the request to:
Goldman Sachs Funds
4900 Sears Tower--60th Floor
Chicago, IL 60606-6372
-----------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
-----------------------------------------------------------------
</TABLE>
30
<PAGE>
SHAREHOLDER GUIDE
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically registered
account.
. Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized person
designated on the Account Application.
. Exchanges are available only in states where exchanges may be legally made.
. It may be difficult to make telephone exchanges in times of drastic economic
or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I Need
To Know About Telephone Redemption Requests?" in an effort to prevent unau-
thorized or fraudulent telephone exchange requests.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should consult
your tax adviser concerning the tax consequences of an exchange.
What Types Of Reports Will Be Sent Regarding Investments In Service Shares?
Service Organizations will receive from the Funds annual reports containing
audited financial statements and semi-annual reports. Service Organizations
will also be provided with a printed confirmation for each transaction in
their account and a monthly account statement. Service Organizations are
responsible for providing these or other reports to their customers who are
the beneficial owners of Service Shares in accordance with the rules that
apply to their accounts with the Service Organizations.
31
<PAGE>
Taxation
TAXABILITY OF DISTRIBUTIONS
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should
consult your tax adviser about the federal, state, local or foreign tax con-
sequences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged account, you should
consider the possible tax consequences of Fund distributions and the sale of
your Fund shares.
TAXES ON DISTRIBUTIONS
Distributions you receive from the Funds are generally subject to federal
income tax, and may also be subject to state or local taxes. This is true
whether you reinvest your distributions in additional Fund shares or receive
them in cash. For federal tax purposes, the Funds' income dividend distribu-
tions and short-term capital gain distributions are taxable to you as ordi-
nary income. Any long-term capital gain distributions are taxable as long-
term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year
they are paid, distributions declared in October, November or December but
paid in January are taxable as if they were paid in December. A percentage
of the Funds' dividends paid to corporate shareholders may be eligible for
the corporate dividends-received deduction. The Funds will inform sharehold-
ers of the character and tax status of all distributions promptly after the
close of each calendar year.
Each Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. In general, the Funds may
deduct these taxes in computing their taxable income.
If you buy shares of a Fund before it makes a distribution, the distribution
will be taxable to you even though it may actually be a return of a portion
of your investment. This is known as "buying a dividend."
32
<PAGE>
TAXATION
TAXABILITY OF SALES AND EXCHANGES
Your sale of Fund shares is a taxable transaction for federal income tax
purposes, and may also be subject to state and local taxes. For tax purpos-
es, the exchange of your Fund shares for shares of a different Goldman Sachs
Fund is the same as a sale. When you sell your shares, you will generally
recognize a capital gain or loss in an amount equal to the difference
between your adjusted tax basis in the shares and the amount received. Gen-
erally, this gain or loss is long-term or short-term depending on whether
your holding period exceeds twelve months, except that any loss realized on
shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gain dividends that were
received on the shares.
OTHER INFORMATION
When you open your account, you should provide your social security or tax
identification number on your Account Application. By law, each Fund must
withhold 31% of your taxable distributions and any redemption proceeds if
you do not provide your correct taxpayer identification number, or certify
that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
33
<PAGE>
Appendix A
Additional Information on Portfolio Risks, Securities and Techniques
A. General Portfolio Risks
The Funds will be subject to the risks associated with equity securities.
"Equity securities" may include common stocks, preferred stocks, interests
in real estate investment trusts, convertible debt obligations, convertible
preferred stocks, equity interests in trusts, partnerships, joint ventures,
limited liability companies and similar enterprises, warrants and stock pur-
chase rights. In general, stock values fluctuate in response to the activi-
ties of individual companies and in response to general market and economic
conditions. Accordingly, the value of the stocks that a Fund holds may
decline over short or extended periods. The stock markets tend to be cycli-
cal, with periods when stock prices generally rise and periods when prices
generally decline. The volatility of equity securities means that the value
of your investment in the Funds may increase or decrease. As of the date of
this Prospectus, certain stock markets were trading at or close to record
high levels and there can be no guarantee that such levels will continue.
To the extent that a Fund invests in fixed-income securities, that Fund will
also be subject to the risks associated with its fixed-income securities.
These risks include interest rate risk, credit risk and call/extension risk.
In general, interest rate risk involves the risk that when interest rates
decline, the market value of fixed-income securities tends to increase (al-
though many mortgage related securities will have less potential than other
debt securities for capital appreciation during periods of declining rates).
Conversely, when interest rates increase, the market value of fixed-income
securities tends to decline. Credit risk involves the risk that an issuer
could default on its obligations, and a Fund will not recover its invest-
ment. Call risk and extension risk are normally present in mortgage-backed
securities and asset-backed securities. For example, homeowners have the
option to prepay their mortgages. Therefore, the duration of a security
backed by home mortgages can either shorten (call risk) or lengthen (exten-
sion risk). In general, if interest rates on new mortgage loans fall suffi-
ciently below the interest rates on existing outstanding mortgage loans, the
rate of prepayment would be expected to increase. Conversely, if mortgage
loan interest rates rise above the interest rates on existing outstanding
mortgage loans, the rate of prepayment would be expected to decrease. In
either case, a change in the prepayment rate can result in losses to invest-
ors.
34
<PAGE>
APPENDIX A
The Investment Adviser will not consider the portfolio turnover rate a lim-
iting factor in making investment decisions for a Fund. A high rate of port-
folio turnover (100% or more) involves correspondingly greater expenses
which must be borne by a Fund and its shareholders, and is also likely to
result in higher short-term capital gains taxable to shareholders. The port-
folio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of a Fund's portfolio securities, excluding securities having a matu-
rity at the date of purchase of one year or less. See "Financial Highlights"
in Appendix B for a statement of the Funds' historical portfolio turnover
rates.
The following sections provide further information on certain types of secu-
rities and investment techniques that may be used by the Funds, including
their associated risks. Additional information is provided in the Additional
Statement, which is available upon request. Among other things, the Addi-
tional Statement describes certain fundamental investment restrictions that
cannot be changed without shareholder approval. You should note, however,
that all investment objectives and policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objective, you should
consider whether that Fund remains an appropriate investment in light of
your then current financial position and needs.
B. Other Portfolio Risks
Risks of Investing In Internet and Internet-Related Companies. Internet and
Internet-related companies are generally subject to a rate of change in
technology which is higher than other industries and often requires exten-
sive and sustained investment in research and development. As a result,
Internet and Internet-related companies are exposed to the risk of rapid
product obsolescence. Changes in governmental policies, such as telephone
and cable regulations and anti-trust enforcement, and the need for regula-
tory approvals may have an adverse effect on the products, services and
securities of Internet and Internet-related companies. Internet and
Internet-related companies may also produce or use products or services that
prove commercially unsuccessful. In addition, intense worldwide competitive
pressures and changing demand, evolving industry standards, challenges in
achieving product capability, loss of patent protection or proprietary
rights, reduction or interruption in the supply of key components, changes
in strategic alliances, frequent mergers or acquisitions or other factors
can have a significant effect on the financial conditions of companies in
these industries. Competitive pressures in the Internet and Internet-related
industries may affect negatively the financial condition of Internet and
Internet-related companies. Internet and Internet-related companies are also
subject to the risk of service disruptions and
35
<PAGE>
the risk of losses arising out of litigation related to these disruptions.
Many Internet companies have exceptionally high price-to-earnings ratios
with little or no earnings histories, and many Internet companies are cur-
rently operating at a loss and may never be profitable. In certain instanc-
es, Internet and Internet-related securities may experience significant
price movements caused by disproportionate investor optimism or pessimism
with little or no basis in fundamental economic conditions. As a result of
these and other reasons, investments in the Internet and Internet-related
industry can experience sudden and rapid appreciation and depreciation.
Risks of Investing in Small Capitalization Companies and REITs. Each Fund
may invest in small capitalization companies and REITs. Investments in small
capitalization companies and REITs involve greater risk and portfolio price
volatility than investments in larger capitalization stocks. Among the rea-
sons for the greater price volatility of these investments are the less cer-
tain growth prospects of smaller firms and the lower degree of liquidity in
the markets for such securities. Small capitalization companies and REITs
may be thinly traded and may have to be sold at a discount from current mar-
ket prices or in small lots over an extended period of time. In addition,
these securities are subject to the risk that during certain periods the
liquidity of particular issuers or industries, or all securities in these
investment categories, will shrink or disappear suddenly and without warning
as a result of adverse economic or market conditions, or adverse investor
perceptions whether or not accurate. Because of the lack of sufficient mar-
ket liquidity, a Fund may incur losses because it will be required to effect
sales at a disadvantageous time and only then at a substantial drop in
price. Small capitalization companies and REITs include "unseasoned" issuers
that do not have an established financial history; often have limited prod-
uct lines, markets or financial resources; may depend on or use a few key
personnel for management; and may be susceptible to losses and risks of
bankruptcy. Transaction costs for these investments are often higher than
those of larger capitalization companies. Investments in small capitaliza-
tion companies and REITs may be more difficult to price precisely than other
types of securities because of their characteristics and lower trading vol-
umes.
Risks of Foreign Investments. Each Fund may invest in foreign investments.
Foreign investments involve special risks that are not typically associated
with U.S. dollar denominated or quoted securities of U.S. issuers. Foreign
investments may be affected by changes in currency rates, changes in foreign
or U.S. laws or restrictions applicable to such investments and changes in
exchange control regulations (e.g., currency blockage). A decline in the
exchange rate of the currency (i.e., weakening of the currency against the
U.S. dollar) in which a portfolio security is quoted or denominated relative
to the U.S. dollar would reduce the value of the
36
<PAGE>
APPENDIX A
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends.
The introduction of a single currency, the euro, on January 1, 1999 for par-
ticipating nations in the European Economic and Monetary Union presents
unique uncertainties, including the legal treatment of certain outstanding
financial contracts after January 1, 1999 that refer to existing currencies
rather than the euro; the establishment and maintenance of exchange rates
for currencies being converted into the euro; the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2001 and beyond; whether the interest rate, tax and
labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other countries
that now are or may in the future become members of the European Union
("EU"), may have an impact on the euro. These or other factors, including
political and economic risks, could cause market disruptions, and could
adversely affect the value of securities held by the Funds. Because of the
number of countries using this single currency, a significant portion of the
foreign assets held by the Funds may be denominated in the euro.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the United States. In addition, clearance and settlement procedures
may be different in foreign countries and, in certain markets, such proce-
dures have been unable to keep pace with the volume of securities transac-
tions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less gov-
ernment regulation of foreign markets, companies and securities dealers than
in the United States. Foreign securities markets may have substantially less
volume than U.S. securities markets and securities of many foreign issuers
are less liquid and more volatile than securities of comparable domestic
issuers. Furthermore, with respect to certain foreign countries, there is a
possibility of nationalization, expropriation or confiscatory taxation,
imposition of withholding or other taxes on dividend or interest payments
(or, in some cases, capital gains), limitations on the removal of funds or
other assets of the Funds, and political or social instability or diplomatic
developments which could affect investments in those countries.
37
<PAGE>
Concentration of a Fund's assets in one or a few countries and currencies
will subject a Fund to greater risks than if a Fund's assets were not geo-
graphically concentrated.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs"), Global Depository
Receipts ("GDRs") and European Depository Receipts ("EDRs") or other similar
instruments representing securities of foreign issuers. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank
or a correspondent bank. Prices of ADRs are quoted in U.S. dollars, and ADRs
are traded in the United States. EDRs and GDRs are receipts evidencing an
arrangement with a non-U.S. bank. EDRs and GDRs are not necessarily quoted
in the same currency as the underlying security.
Risks of Emerging Countries. The Funds may invest in securities of issuers
located in emerging countries. The risks of foreign investment are height-
ened when the issuer is located in an emerging country. Emerging countries
are generally located in the Asia-Pacific region, Eastern Europe, Latin and
South America and Africa. 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 may be computed based on the aggregate trading volume by or
holdings of a Fund, the Investment Adviser, its affiliates and their respec-
tive clients and other service providers. A Fund may not be able to sell
securities in circumstances where price, trading or settlement volume limi-
tations have been reached.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to
only a specified percentage of an issuer's outstanding securities or a spe-
cific class of securities which may have less advantageous terms (including
price) than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportuni-
ties in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by a Fund. The repatriation of both investment income
and capital from certain emerging countries is subject to restrictions such
as the need for governmental consents. Due to restrictions on direct invest-
ment in equity securities in certain Asian countries, it is anticipated
38
<PAGE>
APPENDIX A
that a Fund may invest in such countries through other investment funds in
such countries.
Many emerging countries have experienced currency devaluations and substan-
tial (and, in some cases, extremely high) rates of inflation, which have had
a negative effect on the economies and securities markets of such emerging
countries. Economies in emerging countries generally are dependent heavily
upon commodity prices and international trade and, accordingly, have been
and may continue to be affected adversely by the economies of their trading
partners, trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by
the countries with which they trade.
Many emerging countries are subject to a substantial degree of economic,
political and social instability. Governments of some emerging countries are
authoritarian in nature or have been installed or removed as a result of
military coups, while governments in other emerging countries have periodi-
cally used force to suppress civil dissent. Disparities of wealth, the pace
and success of democratization, and ethnic, religious and racial disaffec-
tion, among other factors, have also led to social unrest, violence and/or
labor unrest in some emerging countries. Unanticipated political or social
developments may result in sudden and significant investment losses. Invest-
ing in emerging countries involves greater risk of loss due to expropria-
tion, nationalization, confiscation of assets and property or the imposition
of restrictions on foreign investments and on repatriation of capital
invested.
A Fund's investment in emerging countries may also be subject to withholding
or other taxes, which may be significant and may reduce the return from an
investment in such country to the Fund.
Settlement procedures in emerging countries are frequently less developed
and reliable than those in the United States and often may involve a Fund's
delivery of securities before receipt of payment for their sale. In addi-
tion, significant delays are common in certain markets in registering the
transfer of securities. Settlement or registration problems may make it more
difficult for a Fund to value its portfolio securities and could cause the
Fund to miss attractive investment opportunities, to have a portion of its
assets uninvested or to incur losses due to the failure of a counterparty to
pay for securities the Fund has delivered or the Fund's inability to com-
plete its contractual obligations. The creditworthiness of the local securi-
ties firms used by a Fund in emerging countries may not be as sound as the
creditworthiness of firms used in more developed countries. As a result, the
Fund may be subject to a greater risk of loss if a securities firm defaults
in the performance of its responsibilities.
39
<PAGE>
The small size and inexperience of the securities markets in certain emerg-
ing countries and the limited volume of trading in securities in those coun-
tries may make a Fund's investments in such countries less liquid and more
volatile than investments in countries with more developed securities mar-
kets (such as the United States, Japan and most Western European countries).
A Fund's investments in emerging countries are subject to the risk that the
liquidity of a particular investment, or investments generally, in such
countries will shrink or disappear suddenly and without warning as a result
of adverse economic, market or political conditions or adverse investor per-
ceptions, whether or not accurate. Because of the lack of sufficient market
liquidity, a Fund may incur losses because it will be required to effect
sales at a disadvantageous time and only then at a substantial drop in
price. Investments in emerging countries may be more difficult to price pre-
cisely because of the characteristics discussed above and lower trading vol-
umes.
A Fund's use of foreign currency management techniques in emerging countries
may be limited. Due to the limited market for these instruments in emerging
countries, the Investment Adviser does not currently anticipate that a sig-
nificant portion of the Funds' currency exposure in emerging countries, if
any, will be covered by such instruments.
Risks of Derivative Investments. A Fund's transactions in options, futures,
options on futures, swaps, interest rate caps, floors and collars, struc-
tured securities and currency transactions involve additional risk of loss.
Loss can result from a lack of correlation between changes in the value of
derivative instruments and the portfolio assets (if any) being hedged, the
potential illiquidity of the markets for derivative instruments, or the
risks arising from margin requirements and related leverage factors associ-
ated with such transactions. The use of these management techniques also
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices, interest rates or currency
prices. Each Fund may also invest in derivative investments for non-hedging
purposes (that is, to seek to increase total return). Investing for non-
hedging purposes is considered a speculative practice and presents even
greater risk of loss.
Risks of Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities which cannot be disposed of in seven days in
the ordinary course of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of
more than seven days
. Certain over-the-counter options
40
<PAGE>
APPENDIX A
. Certain structured securities and all swap transactions
. Certain restricted securities, unless it is determined, based upon a
review of the trading markets for a specific restricted security, that
such restricted security is eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 ("144A Securities") and, therefore, is
liquid.
Investing in 144A Securities may decrease the liquidity of a Fund's portfo-
lio to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities. The purchase price
and subsequent valuation of restricted and illiquid securities normally
reflect a discount, which may be significant, from the market price of com-
parable securities for which a liquid market exists.
Credit Risks. Debt securities purchased by the Funds may include securities
(including zero coupon bonds) issued by the U.S. government (and its agen-
cies, instrumentalities and sponsored enterprises), domestic and foreign
corporations, banks and other issuers. Further information is provided in
the Additional Statement.
Debt securities rated BBB or higher by Standard & Poor's or Baa or higher by
Moody's are considered "investment grade." 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. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, determined by the Investment
Adviser to be of comparable credit quality.
The Funds may invest in fixed-income securities rated BB or Ba or below (or
comparable unrated securities) which are commonly referred to as "junk
bonds." Junk bonds are considered predominantly speculative and may be ques-
tionable as to principal and interest payments.
In some cases, junk bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, invest-
ment in such bonds will present greater speculative risks than those associ-
ated with investment in investment grade bonds. Also, to the extent that the
rating assigned to a security in a Fund's portfolio is downgraded by a rat-
ing organization, the market price and liquidity of such security may be
adversely affected.
Temporary Investment Risks. Each Fund may, for temporary defensive purposes,
invest a certain percentage of its total assets in:
. U.S. government securities
41
<PAGE>
. Commercial paper rated at least A-2 by Standard & Poor's or P-2 by Moody's
. Certificates of deposit
. Bankers' acceptances
. Repurchase agreements
. Non-convertible preferred stocks and non-convertible corporate bonds with
a remaining maturity of less than one year
When a Fund's assets are invested in such instruments, the Fund may not be
achieving its investment objective.
C. Portfolio Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associ-
ated risks. Further information is provided in the Additional Statement,
which is available upon request.
Convertible Securities. Each Fund may invest in convertible securities. Con-
vertible securities are preferred stock or debt obligations that are con-
vertible into common stock. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar qual-
ity. Convertible securities in which a Fund invests are subject to the same
rating criteria as its other investments in fixed-income securities. Con-
vertible securities have both equity and fixed-income risk characteristics.
Like all fixed-income securities, the value of convertible securities is
susceptible to the risk of market losses attributable to changes in interest
rates. Generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. However, when the market price of the common stock underlying
a convertible security exceeds the conversion price of the convertible secu-
rity, the convertible security tends to reflect the market price of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security, like a fixed-income security, tends to
trade increasingly on a yield basis, and thus may not decline in price to
the same extent as the underlying common stock.
Foreign Currency Transactions. A Fund may, to the extent consistent with its
investment policies, purchase or sell foreign currencies on a cash basis or
through forward contracts. A forward contract involves an obligation to pur-
chase or sell a specific currency at a future date at a price set at the
time of the contract. A Fund may engage in foreign currency transactions for
hedging purposes and to seek to protect against anticipated changes in
future foreign currency exchange rates. In addition, certain Funds may also
enter into such transactions to seek to increase total return, which is con-
sidered a speculative practice.
42
<PAGE>
APPENDIX A
Each Fund may also engage in cross-hedging by using forward contracts in a
currency different from that in which the hedged security is denominated or
quoted if the Investment Adviser determines that there is a pattern of cor-
relation between the two currencies. A Fund may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Investment Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date (e.g. the Investment Adviser may
anticipate the foreign currency to appreciate against the U.S. dollar).
Currency exchange rates may fluctuate significantly over short periods of
time, causing, along with other factors, a Fund's NAV to fluctuate (when the
Fund's NAV fluctuates, the value of your shares may go up or down). Currency
exchange rates also can be affected unpredictably by the intervention of
U.S. or foreign governments or central banks, or the failure to intervene,
or by currency controls or political developments in the United States or
abroad.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available
for currency instruments traded on an exchange. Such contracts are subject
to the risk that the counterparty to the contract will default on its obli-
gations. Since these contracts are not guaranteed by an exchange or clear-
inghouse, a default on a contract would deprive a Fund of unrealized prof-
its, transaction costs or the benefits of a currency hedge or could force
the Fund to cover its purchase or sale commitments, if any, at the current
market price.
Structured Securities. Each Fund may invest in structured securities. Struc-
tured securities are securities whose value is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indices or other financial indicators (the "Reference") or the relative
change in two or more References. The interest rate or the principal amount
payable upon maturity or redemption may be increased or decreased depending
upon changes in the applicable Reference. Structured securities may be posi-
tively or negatively indexed, so that appreciation of the Reference may pro-
duce an increase or decrease in the interest rate or value of the security
at maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the Refer-
ence. Consequently, structured securities may present a greater degree of
market risk than other types of securities and may be more volatile, less
liquid and more difficult to price accurately than less complex securities.
REITs. Each Fund may invest in REITs. REITs are pooled investment vehicles
that invest primarily in either real estate or real estate related loans.
The value of a REIT is affected by changes in the value of the properties
owned by the REIT
43
<PAGE>
or securing mortgage loans held by the REIT. REITs are dependent upon the
ability of the REITs' managers, and are subject to heavy cash flow dependen-
cy, default by borrowers and the qualification of the REITs under applicable
regulatory requirements for favorable income tax treatment. REITs are also
subject to risks generally associated with investments in real estate
including possible declines in the value of real estate, general and local
economic conditions, environmental problems and changes in interest rates.
To the extent that assets underlying a REIT are concentrated geographically,
by property type or in certain other respects, these risks may be height-
ened. A Fund will indirectly bear its proportionate share of any expenses,
including management fees, paid by a REIT in which it invests.
Options on Securities, Securities Indices and Foreign Currencies. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) of the option the obligation to buy, the underlying instrument dur-
ing the option period. A call option gives the purchaser of the option the
right to buy, and the writer (seller) of the option the obligation to sell,
the underlying instrument during the option period. Each Fund may write
(sell) covered call and put options and purchase put and call options on any
securities in which it may invest or on any securities index comprised of
securities in which it may invest. A Fund may also, to the extent that it
invests in foreign securities, purchase and sell (write) put and call
options on foreign currencies.
The writing and purchase of options is a highly specialized activity which
involves special investment risks. Options may be used for either hedging or
cross-hedging purposes, or to seek to increase total return (which is con-
sidered a speculative activity). The successful use of options depends in
part on the ability of the Investment Adviser to manage future price fluctu-
ations and the degree of correlation between the options and securities (or
currency) markets. If the Investment Adviser is incorrect in its expectation
of changes in market prices or determination of the correlation between the
instruments or indices on which options are written and purchased and the
instruments in a Fund's investment portfolio, the Fund may incur losses that
it would not otherwise incur. The use of options can also increase a Fund's
transaction costs. Options written or purchased by the Funds may be traded
on either U.S. or foreign exchanges or over-the-counter. Foreign and over-
the-counter options will present greater possibility of loss because of
their greater illiquidity and credit risks.
Futures Contracts and Options on Futures Contracts. Futures contracts are
standardized, exchange-traded contracts that provide for the sale or pur-
chase of a specified financial instrument or currency at a future time at a
specified price. An option on a futures contract gives the purchaser the
right (and the writer of the
44
<PAGE>
APPENDIX A
option the obligation) to assume a position in a futures contract at a spec-
ified exercise price within a specified period of time. A futures contract
may be based on various securities (such as U.S. government securities),
foreign currencies, securities indices and other financial instruments and
indices. The Funds may engage in futures transactions on both U.S. and for-
eign exchanges.
Each Fund may purchase and sell futures contracts, and purchase and write
call and put options on futures contracts, in order to seek to increase
total return or to hedge against changes in interest rates, securities
prices or, to the extent a Fund invests in foreign securities, currency
exchange rates, or to otherwise manage its term structure, sector selection
and duration in accordance with its investment objectives and policies. Each
Fund may also enter into closing purchase and sale transactions with respect
to such contracts and options. A Fund will engage in futures and related
options transactions for bona fide hedging purposes as defined in regula-
tions of the Commodity Futures Trading Commission or to seek to increase
total return to the extent permitted by such regulations. A Fund may not
purchase or sell futures contracts or purchase or sell related options to
seek to increase total return, except for closing purchase or sale transac-
tions, if immediately thereafter the sum of the amount of initial margin
deposits and premiums paid on the Fund's outstanding positions in futures
and related options entered into for the purpose of seeking to increase
total return would exceed 5% of the market value of the Fund's net assets.
Futures contracts and related options present the following risks:
. While a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in poorer overall performance than if the Fund
had not entered into any futures contracts or options transactions.
. Because perfect correlation between a futures position and portfolio posi-
tion that is intended to be protected is impossible to achieve, the
desired protection may not be obtained and a Fund may be exposed to addi-
tional risk of loss.
. The loss incurred by a Fund in entering into futures contracts and in
writing call options on futures is potentially unlimited and may exceed
the amount of the premium received.
. Futures markets are highly volatile and the use of futures may increase
the volatility of a Fund's NAV.
. As a result of the low margin deposits normally required in futures trad-
ing, a relatively small price movement in a futures contract may result in
substantial losses to a Fund.
. Futures contracts and options on futures may be illiquid, and exchanges
may limit fluctuations in futures contract prices during a single day.
. Foreign exchanges may not provide the same protection as U.S. exchanges.
45
<PAGE>
Equity Swaps. Each Fund may invest in equity swaps. Equity swaps allow the
parties to a swap agreement to exchange the dividend income or other compo-
nents of return on an equity investment (for example, a group of equity
securities or an index) for a component of return on another non-equity or
equity investment.
An equity swap may be used by a Fund to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment may be restricted for legal reasons or is otherwise impractical.
Equity swaps are derivatives and their value can be very volatile. To the
extent that the Investment Adviser does not accurately analyze and predict
the potential relative fluctuation of the components swapped with another
party, a Fund may suffer a loss. The value of some components of an equity
swap (such as the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, a Fund may suffer a loss if the
counterparty defaults.
When-Issued Securities and Forward Commitments. Each Fund may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued
securities are purchased in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. A forward commitment involves the entering into a contract to
purchase or sell securities for a fixed price at a future date beyond the
customary settlement period.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased
declines before the settlement date. Conversely, the sale of securities on a
forward commitment basis involves the risk that the value of the securities
sold may increase before the settlement date. Although a Fund will generally
purchase securities on a when-issued or forward commitment basis with the
intention of acquiring the securities for its portfolio, a Fund may dispose
of when-issued securities or forward commitments prior to settlement if the
Investment Adviser deems it appropriate.
Repurchase Agreements. Repurchase agreements involve the purchase of securi-
ties subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price. Each Fund may enter into repurchase agreements
with dealers in U.S. government securities and member banks of the Federal
Reserve System which furnish collateral at least equal in value or market
price to the amount of their repurchase obligation.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and
other collateral held by the Fund are less than the repurchase price and the
Fund's costs associated with
46
<PAGE>
APPENDIX A
delay and enforcement of the repurchase agreement. In addition, in the event
of bankruptcy of the seller, a Fund could suffer additional losses if a
court determines that the Fund's interest in the collateral is not enforce-
able.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Certain
Funds, together with other registered investment companies having advisory
agreements with the Investment Adviser or any of its affiliates, may trans-
fer uninvested cash balances into a single joint account, the daily aggre-
gate balance of which will be invested in one or more repurchase agreements.
Lending of Portfolio Securities. Each Fund may engage in securities lending.
Securities lending involves the lending of securities owned by a Fund to
financial institutions such as certain broker-dealers. The borrowers are
required to secure their loan continuously with cash, cash equivalents, U.S.
government securities or letters of credit in an amount at least equal to
the market value of the securities loaned. Cash collateral may be invested
in cash equivalents. To the extent that cash collateral is invested in other
investment securities, such collateral will be subject to market deprecia-
tion or appreciation, and a Fund will be responsible for any loss that might
result from its investment of the borrowers' collateral. If the Investment
Adviser determines to make securities loans, the value of the securities
loaned may not exceed 33 1/3% of the value of the total assets of a Fund
(including the loan collateral).
A Fund may lend its securities to increase its income. A Fund may, however,
experience delay in the recovery of its securities, or a capital loss, if
the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Fund.
Short Sales Against-the-Box. Each Fund may make short sales against-the-box.
A short sale against-the-box means that at all times when a short position
is open the Fund will own an equal amount of securities sold short, or secu-
rities convertible into or exchangeable for, without payment of any further
consideration, an equal amount of the securities of the same issuer as the
securities sold short.
Preferred Stock, Warrants and Rights. Each 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 earn-
ings 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
or other non-compliance by the issuer of the preferred stock.
47
<PAGE>
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
or right. 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.
Other Investment Companies. Each Fund may invest in securities of other
investment companies (including SPDRs and WEBS, as defined below and other
exchange-traded funds) subject to statutory limitations prescribed by the
Act. These limitations include a prohibition on any Fund acquiring more than
3% of the voting shares of any other investment company, and a prohibition
on investing more than 5% of a Fund's total assets in securities of any one
investment company or more than 10% of its total assets in securities of all
investment companies. A Fund will indirectly bear its proportionate share of
any management fees and other expenses paid by such other investment compa-
nies. Exchange-traded funds such as SPDRs and WEBS are shares of unaffili-
ated investment companies which are traded like traditional equity securi-
ties on a national securities exchange or the NASDAQ National Market System.
. Standard & Poor's Depository Receipts. The Funds may, consistent with
their investment policies, purchase Standard & Poor's Depository Receipts
("SPDRs"). SPDRs are securities traded on the American Stock Exchange
("AMEX") that represent ownership in the SPDR Trust, a trust which has
been established to accumulate and hold a portfolio of common stocks that
is intended to track the price performance and dividend yield of the S&P
500. The SPDR Trust is sponsored by a subsidiary of the AMEX. SPDRs may be
used for several reasons, including, but not limited to, facilitating the
handling of cash flows or trading, or reducing transaction costs. The
price movement of SPDRs may not perfectly parallel the price action of the
S&P 500.
. World Equity Benchmark Shares. World Equity Benchmark Shares ("WEBS") are
shares of an investment company that invests substantially all of its
assets in securities included in the MSCI indices for specified countries.
WEBS are listed on the AMEX and were initially offered to the public in
1996. The market prices of WEBS are expected to fluctuate in accordance
with both changes in the NAVs of their underlying indices and supply and
demand of WEBS on the AMEX. To date, WEBS have traded at relatively modest
discounts and premiums to their NAVs. However, WEBS have a limited operat-
ing history and information is lacking regarding the actual performance
and trading liquidity of WEBS for extended periods or over complete market
cycles. In addition, there is no assurance that the requirements of the
AMEX necessary to maintain the listing of WEBS will continue to be met or
will remain unchanged. In the event substantial market or other disrup-
tions affecting WEBS
48
<PAGE>
APPENDIX A
should occur in the future, the liquidity and value of a Fund's shares
could also be substantially and adversely affected. If such disruptions
were to occur, a Fund could be required to reconsider the use of WEBS as
part of its investment strategy.
Unseasoned Companies. Each Fund may invest in companies (including predeces-
sors) which have operated less than three years. The securities of such com-
panies may have limited liquidity, which can result in their being priced
higher or lower than might otherwise be the case. In addition, investments
in unseasoned companies are more speculative and entail greater risk than do
investments in companies with an established operating record.
Corporate Debt Obligations. Corporate debt obligations include bonds, notes,
debentures, commercial paper and other obligations of corporations to pay
interest and repay principal, and include securities issued by banks and
other financial institutions. Each Fund may invest in corporate debt obliga-
tions issued by U.S. and certain non-U.S. issuers which issue securities
denominated in the U.S. dollar (including Yankee and Euro obligations). In
addition to obligations of corporations, corporate debt obligations include
securities issued by banks and other financial institutions and suprana-
tional entities (i.e., the World Bank, the International Monetary Fund,
etc.).
Bank Obligations. Each Fund may invest in obligations issued or guaranteed
by U.S. or foreign banks. Bank obligations, including without limitations,
time deposits, bankers' acceptances and certificates of deposit, may be gen-
eral obligations of the parent bank or may be limited to the issuing branch
by the terms of the specific obligations or by government regulations. Banks
are subject to extensive but different governmental regulations which may
limit both the amount and types of loans which may be made and interest
rates which may be charged. 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 operation of this industry.
U.S. Government Securities. Each Fund may invest in U.S. government securi-
ties. U.S. government securities include U.S. Treasury obligations and obli-
gations issued or guaranteed by U.S. government agencies, instrumentalities
or sponsored enterprises. U.S. government securities may be supported by (a)
the full faith and credit of the U.S. Treasury (such as the Government
National Mortgage Association ("Ginnie Mae")); (b) the right of the issuer
to borrow from the U.S. Treasury (such as securities of the Student Loan
Marketing Association); (c) the discretionary authority of the U.S. govern-
ment to purchase certain obligations of the
49
<PAGE>
issuer (such as the Federal National Mortgage Association ("Fannie Mae") and
Federal Home Loan Mortgage Corporation ("Freddie Mac")); or (d) only the
credit of the issuer. U.S. government securities also include Treasury
receipts, zero coupon bonds and other stripped U.S. government securities,
where the interest and principal components of stripped U.S. government
securities are traded independently.
Custodial Receipts. Each Fund may invest in custodial receipts. Interests in
U.S. government securities may be purchased in the form of custodial
receipts that evidence ownership of future interest payments, principal pay-
ments or both on certain notes or bonds issued or guaranteed as to principal
and interest by the U.S. government, its agencies, instrumentalities, polit-
ical subdivisions or authorities. For certain securities law purposes, cus-
todial receipts are not considered obligations of the U.S. government.
Mortgage-Backed Securities. Each Fund may invest in mortgage-backed securi-
ties. Mortgage-backed securities represent direct or indirect participations
in, or are collateralized by and payable from, mortgage loans secured by
real property. Mortgage-backed securities can be backed by either fixed rate
mortgage loans or adjustable rate mortgage loans, and may be issued by
either a governmental or non-governmental entity. Privately issued mortgage-
backed securities are normally structured with one or more types of "credit
enhancement." However, these mortgage-backed securities typically do not
have the same credit standing as U.S. government guaranteed mortgage-backed
securities.
Mortgage-backed securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs") and Real Estate Mortgage
Investment Conduit ("REMIC") pass-through or participation certificates.
CMOs provide an investor with a specified interest in the cash flow from a
pool of underlying mortgages or of other mortgage-backed securities. CMOs
are issued in multiple classes. In many cases, payments of principal are
applied to the CMO classes in the order of their respective stated maturi-
ties, so that no principal payments will be made on a CMO class until all
other classes having an earlier stated maturity date are paid in full. A
REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages principally secured by interests in real prop-
erty and other permitted investments.
Mortgaged-backed securities also include stripped mortgage-backed securities
("SMBS"), which are derivative multiple class mortgage-backed securities.
SMBS are usually structured with two different classes: one that receives
substantially all of the interest payments and the other that receives sub-
stantially all of the principal payments from a pool of mortgage loans. The
market value of SMBS consisting entirely of principal payments generally is
unusually volatile in response to
50
<PAGE>
APPENDIX A
changes in interest rates. The yields on SMBS that receive all or most of
the interest from mortgage loans are generally higher than prevailing market
yields on other mortgage-backed securities because their cash flow patterns
are more volatile and there is a greater risk that the initial investment
will not be fully recouped.
Asset-Backed Securities. Each Fund may invest in asset-backed securities.
Asset-backed securities are securities whose principal and interest payments
are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-
backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of pre-
payments 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 posi-
tions 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 gener-
ally prevailing interest rates at that time. Asset-backed securities present
credit risks that are not presented by mortgage-backed securities. This is
because asset-backed securities generally do not have the benefit of a secu-
rity interest in collateral that is comparable to mortgage assets. There is
the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event
of a default, a Fund may suffer a loss if it cannot sell collateral quickly
and receive the amount it is owed.
Borrowings. Each Fund can borrow money from banks and other financial insti-
tutions in amounts not exceeding one-third of its total assets for temporary
or emergency purposes. A Fund may not make additional investments if
borrowings exceed 5% of its total assets.
Mortgage Dollar Rolls. The Real Estate Securities Fund may enter into mort-
gage dollar rolls. A mortgage dollar roll involves the sale by a Fund of
securities for delivery in the current month. The Fund simultaneously con-
tracts with the same counterparty to repurchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified
future date. During the roll period, the Fund loses the right to receive
principal and interest paid on the securities sold. However, the Fund bene-
fits to the extent of any difference between (a) the price received for the
securities sold and (b) the lower forward price for the future purchase
and/or fee income plus the interest earned on the cash proceeds of the secu-
rities sold. Unless the benefits of a mortgage dollar roll 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 roll,
the use of this technique will diminish the Fund's performance.
51
<PAGE>
Successful use of mortgage dollar rolls depends upon the Investment Advis-
er's ability to predict correctly interest rates and mortgage prepayments.
If the Investment Adviser is incorrect in its prediction, a Fund may experi-
ence a loss. For financial reporting and tax purposes, the Fund treats mort-
gage dollar rolls as two separate transactions: one involving the purchase
of a security and a separate transaction involving a sale. The Fund does not
currently intend to enter into mortgage dollar rolls that are accounted for
as a financing and does not treat them as borrowings.
Yield Curve Options. The Real Estate Securities Fund may enter into options
on the yield "spread" or differential between two securities. Such transac-
tions 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.
The trading of yield curve options is subject to all of the risks associated
with the trading of other types of options. In addition, such options pres-
ent 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.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps and Inter-
est Rate Caps, Floors and Collars. 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 princi-
pal 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
52
<PAGE>
APPENDIX A
and a floor that preserves a certain return within a predetermined range of
interest rates.
The Real Estate Securities Fund may enter into swap transactions for hedging
purposes or to seek to increase total return. 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 fore-
casts 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 these investment techniques were not used.
Inverse Floaters. The Real Estate Securities Fund may invest in inverse
floating rate debt securities ("inverse floaters"). The interest rate on
inverse floaters resets in the opposite direction from the market rate of
interest to which an 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.
53
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). The
information for the period ended December 31, 1999 has been audited by
Arthur Andersen LLP, whose report, along with a Fund's financial statements,
is included in the Funds' annual report (available upon request).
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net realized
Net asset and unrealized
value, Net gain (loss) on
beginning investment investment
of period income transactions
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - Class A Shares $ 9.20 $0.38/e/ $(0.48)/e/
1999 - Class B Shares 9.27 0.28/e/ (0.45)/e/
1999 - Class C Shares 9.21 0.30/e/ (0.48)/e/
1999 - Institutional Shares 9.21 0.40/e/ (0.47)/e/
1999 - Service Shares 9.21 0.38/e/ (0.49)/e/
- ------------------------------------------------------------------------------
1998 - Class A Shares (commenced July 27) 10.00 0.15 (0.80)
1998 - Class B Shares (commenced July 27) 10.00 0.14/e/ (0.83)/e/
1998 - Class C Shares (commenced July 27) 10.00 0.22/e/ (0.91)/e/
1998 - Institutional Shares (commenced
July 27) 10.00 0.31/e/ (0.95)/e/
1998 - Service Shares (commenced July 27) 10.00 0.25/e/ (0.91)/e/
- ------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or redemp-
tion charge were taken into account.
c Annualized.
d Not annualized.
e Calculated based on the average shares outstanding methodology.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------
In excess Net Increase Net assets Ratio of
From net of net (Decrease) Net asset at end of net expenses
investment investment From in net asset value, end Total period to average
income income capital value of period return/b/(in 000s) net assets
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.38) $(0.02) $(0.02) $(0.52) $8.68 (1.02)% $93,443 1.44%
(0.28) (0.07) (0.02) (0.54) 8.73 (1.73) 457 2.19
(0.30) (0.05) (0.02) (0.55) 8.66 (1.80) 697 2.19
(0.40) (0.03) (0.02) (0.52) 8.69 (0.64) 42,790 1.04
(0.38) (0.01) (0.02) (0.52) 8.69 (1.12) 1 1.54
- -------------------------------------------------------------------------------------------
(0.15) -- -- (0.80) 9.20 (6.53)/d/ 19,961 1.47/c/
(0.04) -- -- (0.73) 9.27 (6.88)/d/ 2 2.19/c/
(0.10) -- -- (0.79) 9.21 (6.85)/d/ 1 2.19/c/
(0.15) -- -- (0.79) 9.21 (6.37)/d/ 47,516 1.04/c/
(0.13) -- -- (0.79) 9.21 (6.56)/d/ 1 1.54/c/
- -------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
REAL ESTATE SECURITIES FUND (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees
or expense limitations
--------------------------
Ratio of Ratio of
net investment Ratio of net investment
income to expenses to income Portfolio
average average net to average turnover
net assets assets net assets rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 - Class A Shares 4.14% 1.96% 3.62% 37.43%
1999 - Class B Shares 3.21 2.46 2.94 37.43
1999 - Class C Shares 3.38 2.46 3.11 37.43
1999 - Institutional
Shares 4.43 1.31 4.16 37.43
1999 - Service Shares 4.17 1.81 3.90 37.43
- --------------------------------------------------------------------------------
1998 - Class A Shares
(commenced July 27) 23.52/c/ 3.52/c/ 21.47/c/ 6.03/d/
1998 - Class B Shares
(commenced July 27) 3.60/c/ 4.02/c/ 1.77/c/ 6.03/d/
1998 - Class C Shares
(commenced July 27) 5.49/c/ 4.02/c/ 3.66/c/ 6.03/d/
1998 - Institutional
Shares (commenced July 27) 8.05/c/ 2.87/c/ 6.22/c/ 6.03/d/
1998 - Service Shares
(commenced July 27) 6.29/c/ 3.37/c/ 4.46/c/ 6.03/d/
- --------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or redemp-
tion charge were taken into account.
c Annualized.
d Not annualized.
e Calculated based on the average shares outstanding methodology.
56
<PAGE>
[This page intentionally left blank]
57
<PAGE>
INTERNET TOLLKEEPER FUND
<TABLE>
<CAPTION>
Income from
investment operations/a/
-----------------------------------
Net asset
value, Net Net realized Net increase
beginning investment and unrealized in net asset
of period loss/e/ gain/e/ value
- -----------------------------------------------------------------------------
For the Period Ended December 31,
<S> <C> <C> <C> <C>
1999 - Class A Shares
(Commenced October 1) $10.00 $(0.05) $9.30 $9.25
1999 - Class B Shares
(Commenced October 1) 10.00 (0.08) 9.28 9.20
1999 - Class C Shares
(Commenced October 1) 10.00 (0.08) 9.27 9.19
1999 - Institutional Shares
(Commenced October 1) 10.00 (0.03) 9.28 9.25
1999 - Service Shares
(Commenced October 1) 10.00 (0.05) 9.28 9.23
- -----------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if a sales or redemption
charge were taken into account.
c Annualized.
d Not annualized.
e Calculated based on the average shares outstanding methodology.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming
no expense limitations
---------------------------
Net assets Ratio of Ratio of Ratio of Ratio of
Net asset at end of net expenses net investment expenses to net investment Portfolio
value, end Total period to average loss to average average loss to average turnover
of period return/b,d/ (in 000s) net assets/c/ net assets/c/ net assets/c/ net assets/c/ rated
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$19.25 92.50% $575,535 1.50% (1.29)% 1.79% (1.58)% 16.16%
19.20 92.00 537,282 2.25 (2.04) 2.54 (2.33) 16.16
19.19 91.90 329,135 2.25 (2.05) 2.54 (2.34) 16.16
19.25 92.50 68,275 1.10 (0.88) 1.39 (1.17) 16.16
19.23 92.30 53 1.60 (1.35) 1.89 (1.64) 16.16
- -------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
Index
<TABLE>
<C> <S>
1 General Investment
Management Approach
3 Fund Investment Objectives
and Strategies
3 Goldman Sachs Internet Tollkeeper Fund
6 Goldman Sachs Real Estate
Securities Fund
8 Other Investment Practices
and Securities
10 Principal Risks of the Funds
13 Fund Performance
15 Fund Fees and Expenses
18 Service Providers
24 Dividends
25 Shareholder Guide
25 How To Buy Shares
28 How To Sell Shares
32 Taxation
34 Appendix A
Additional Information on Portfolio Risks, Securities and Techniques
54 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Specialty Funds
Prospectus (Service Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders. In the Funds' annual
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during the
last fiscal year.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Additional Statement. The Additional Statement is incorporated
by reference into this Prospectus (is legally considered part of this Pro-
spectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of Fund
documents, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request to:
[email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
Goldman Sachs Internet Tollkeeper FundSM is a service mark of Goldman, Sachs
& Co.
SPECPROSVC
<PAGE>
Prospectus
GOLDMAN SACHS SPECIALTY FUNDS
Institutional
Shares
May 1, 2000
. Goldman Sachs
Internet
Tollkeeper
Fund SM
. Goldman Sachs
Real Estate
Securities
Fund
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN A FUND
INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
[GRAPHIC]
<PAGE>
NOT FDIC-INSURED May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management, a unit of the Investment Management Division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to
the Internet Tollkeeper and Real Estate Securities Funds. Goldman Sachs
Asset Management is referred to in this Prospectus as the "Investment
Adviser."
GROWTH STYLE FUNDS--INTERNET TOLLKEEPER FUND
THE FUND INVESTS IN "INTERNET TOLLKEEPER" COMPANIES, AND ITS NET ASSET VALUE
(NAV) MAY FLUCTUATE SUBSTANTIALLY OVER TIME. BECAUSE THE FUND CONCENTRATES ITS
INVESTMENTS IN INTERNET TOLLKEEPER COMPANIES, THE FUND'S PERFORMANCE MAY BE
SUBSTANTIALLY DIFFERENT FROM THE RETURNS OF THE BROADER STOCK MARKET AND OF
"PURE" INTERNET FUNDS. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS
AND, DEPENDING ON THE TIMING OF YOUR INVESTMENT, YOU MAY LOSE MONEY EVEN IF THE
FUND'S PAST RETURNS HAVE BEEN POSITIVE. THE FUND'S PARTICIPATION IN THE INITIAL
PUBLIC OFFERING (IPO) MARKET DURING ITS INITIAL START-UP PHASE MAY HAVE HAD A
MAGNIFIED IMPACT ON THE FUND'S PERFORMANCE BECAUSE OF ITS RELATIVELY SMALL
ASSET BASE. AS THE FUND'S ASSETS GROW, IT IS PROBABLE THAT THE EFFECT OF IPO
INVESTMENTS ON THE FUND'S FUTURE PERFORMANCE WILL NOT BE AS SIGNIFICANT.
Goldman Sachs' Growth Investment Philosophy:
1. Invest as if buying the company/business, not simply trading its stock:
. Understand the business, management, products and competition.
. Perform intensive, hands-on fundamental research.
. Seek businesses with strategic competitive advantages.
. Over the long-term, expect each company's stock price ultimately to track
the growth in the value of the business.
2. Buy high-quality growth businesses that possess strong business fran-
chises, favorable long-term prospects and excellent management.
3. Purchase superior long-term growth companies at a favorable price--seek
to purchase at a fair valuation, giving the investor the potential to
fully capture returns from above-average growth rates.
1
<PAGE>
Growth companies have earnings expectations that exceed those of the stock
market as a whole.
- --------------------------------------------------------------------------------
REAL ESTATE SECURITIES FUND
Goldman Sachs' Real Estate Securities Investment Philosophy:
When choosing the Fund's securities, the Investment Adviser:
. Selects stocks based on quality of assets, experienced management and a
sustainable competitive advantage.
. Seeks to buy securities at a discount to the intrinsic value of the busi-
ness (assets and management).
. Seeks a team approach to decision making.
Over time, REITs (which stands for Real Estate Investment Trusts) have
offered investors important diversification and competitive total returns
versus the broad equity market.
- --------------------------------------------------------------------------------
2
<PAGE>
Fund Investment Objectives and Strategies
Goldman Sachs
Internet Tollkeeper Fund
FUND FACTS
- --------------------------------------------------------------------------------
Objective: Long-term growth of capital
Investment Focus: U.S. equity securities that offer long-term capital
appreciation with a primary focus on the media,
telecommunications, technology and Internet sectors
Investment Style: Growth
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, at least
90% of its total assets in equity securities and at least 65% of its total
assets in equity securities of "Internet Tollkeeper" companies (as described
below), which are companies in the media, telecommunications, technology and
Internet sectors which provide access, infrastructure, content and services
to Internet companies and Internet users. The Fund seeks to achieve its
investment objective by investing in equity securities of companies that the
Investment Adviser believes will benefit from the growth of the Internet by
providing access, infrastructure, content and services to Internet companies
and customers. The Fund may also invest up to 35% of its total assets in
other companies whose rapid adoption of an Internet strategy is expected to
improve their cost structure, revenue opportunities or competitive advantage
and Internet-based companies that the Investment Adviser believes exhibit a
sustainable business model. Although the Fund invests primarily in publicly
traded U.S. securities, it may invest up to 25% of its total assets in for-
eign securities, including securities of issuers in emerging markets or
countries ("emerging countries") and securities quoted in foreign
currencies.
3
<PAGE>
The Internet. The Internet is a global collection of connected computers
that allows commercial and professional organizations, educational institu-
tions, government agencies, and individuals to communicate electronically,
access and share information, and conduct business.
The Internet has had, and is expected to continue to have, a significant
impact on the global economy, as it changes the way many companies operate.
Benefits of the Internet for businesses may include global scalability,
acquisition of new clients, new revenue sources and increased efficiencies.
Internet Tollkeepers. The Fund intends to invest a substantial portion of
its assets in companies the Investment Adviser describes as Internet Toll-
keepers. In general, the Investment Adviser defines a tollkeeper as a com-
pany with predictable, sustainable or recurring revenue streams. Like a toll
collector for a highway or bridge, these tollkeeper companies may grow reve-
nue by increasing "traffic," or customers and sales, and raising "tolls," or
prices. The Investment Adviser believes that the characteristics of many of
these tollkeepers, including dominant market share and strong brand name,
should enable them to consistently grow their business. An Internet Toll-
keeper is a company that has developed or is seeking to develop predictable,
sustainable or recurring revenue streams by applying the above characteris-
tics to the growth of the Internet. The Investment Adviser does not define
companies that merely have an Internet site or sell some products over the
Internet as Internet Tollkeepers (although the Investment Adviser may invest
in such companies as part of the Fund's 35% basket of securities which are
not or may not be Internet Tollkeepers).
Internet Tollkeepers are media, telecommunications, technology and Internet
companies which provide access, infrastructure, content and services to
Internet companies and Internet users. The following represent examples of
each of these types of companies, but should not be construed to exclude
other types of Internet Tollkeepers:
. Access providers enable individuals and businesses to connect to the
Internet through, for example, cable systems or the telephone network.
. Infrastructure companies provide items such as servers, routers, software
and storage necessary for companies to participate in the Internet.
. Media content providers own copyrights, distribution networks and/or pro-
gramming. Traditional media companies stand to benefit from an increase in
advertising spending by Internet companies. Copyright owners stand to ben-
efit from a new distribution channel for their music and video properties.
They also will benefit from increasing demand for traditional items like
CD's and DVD's driven by aggressive competition among Internet retailers.
. Service providers may facilitate transactions, communications, security,
computer programming and back-office functions for Internet businesses.
For
4
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
example, Internet companies may contract out advertising sales or credit
card clearing to service providers.
Our Approach to Investing in the Internet. While the Internet is clearly a
significant force in shaping businesses and driving the economy, the Invest-
ment Adviser believes that many Internet-based companies may not have sus-
tainable growth. Many Internet-based companies that are engaged in elec-
tronic commerce are focused on driving sales volume and competing with other
Internet-based companies. Often, this competition is based on price, and if
these companies do not own strong franchises, then the Investment Adviser
believes there could be significant uncertainty regarding their long-term
profitability.
The Investment Adviser believes that another attractive way to invest in the
Internet sector is to invest in businesses participating in the growth of
the Internet that potentially have long-lasting strategic advantages. Char-
acteristics of these companies may include: dominant market share, strong
brand names, recurring revenue streams, cost advantages, economies of scale,
financial strength, technological advantages and strong, experienced manage-
ment teams.
Beneficiaries of the Internet that may meet the above criteria include those
companies (Internet Tollkeepers) providing access, infrastructure, content,
and services to Internet companies and Internet users. The Fund will also
invest in companies whose rapid adoption of an Internet strategy is expected
to improve their cost structure or competitive advantage. Internet-based
companies that exhibit a sustainable business model may also be candidates
for purchase by the Fund. The Investment Adviser pays careful attention to
the stock prices of these companies, seeking to purchase them at a discount
to their intrinsic value.
Because of its narrow industry focus, the Fund's investment performance will
be closely tied to many factors which affect the Internet and Internet-
related industries. These factors include intense competition, consumer
preferences, problems with product compatibility and government regulation.
Internet and Internet-related securities may experience significant price
movements caused by disproportionate investor optimism or pessimism with
little or no basis in fundamental economic conditions. As a result, the
Fund's NAV is more likely to have greater fluctuations than that of a Fund
which invests in other industries.
5
<PAGE>
Goldman Sachs
Real Estate Securities Fund
FUND FACTS
- --------------------------------------------------------------------------------
Objective: Total return comprised of long-term growth of capital
and dividend income
Benchmark: Wilshire Real Estate Securities Index
Investment Focus: REITs and real estate industry companies
Investment Style: Growth at a discount
INVESTMENT OBJECTIVE
The Fund seeks total return comprised of long-term growth of capital and
dividend income.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, substan-
tially all and at least 80% of its total assets in a diversified portfolio
of equity securities of issuers that are primarily engaged in or related to
the real estate industry. The Fund expects that a substantial portion of its
assets will be invested in REITs and real estate industry companies.
A "real estate industry company" is a company that derives at least 50% of
its gross revenues or net profits from the ownership, development, construc-
tion, financing, management or sale of commercial, industrial or residential
real estate or interests therein.
The Fund's investment strategy is based on the premise that property market
fundamentals are the primary determinant of growth, underlying the success
of companies in the real estate industry. The Investment Adviser focuses on
companies that can achieve sustainable growth in cash flow and dividend pay-
ing capability. The Investment Adviser attempts to purchase securities so
that its underlying portfolio will be diversified geographically and by
property type. Although the Fund will invest primarily in publicly traded
U.S. securities, it may invest up to 15% of its total assets in foreign
securities, including securities of issuers in emerging countries and secu-
rities quoted in foreign currencies.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity
REITs may be affected by changes in the value of the underlying property
owned by the REITs. Mortgage REITs may be affected by the quality of any
credit extended. REITs are dependent upon management skill, may not be
diversified, and are subject to heavy cash flow dependency, default by bor-
rowers and self-liquidation. REITs are also subject to the possibilities of
failing to qualify for tax free pass-through of income and failing to main-
tain their exemptions from investment company registration. REITs whose
underlying properties are concentrated in a particular industry or geo-
graphic region are also subject to risks affecting such industries and
regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected
to decline. In contrast, as interest rates on adjustable rate mortgage loans
are reset periodically, yields on a REIT's investment in such loans will
gradually align themselves to reflect changes in market interest rates,
causing the value of such investments to fluctuate less dramatically in
response to interest rate fluctuations than would investments in fixed rate
obligations.
The REIT investments of the Real Estate Securities Fund often do not provide
complete tax information to the Fund until after the calendar year-end. Con-
sequently, because of the delay, it may be necessary for the Fund to request
permission to extend the deadline for issuance of Forms 1099-DIV beyond Jan-
uary 31.
Other. The Fund may invest up to 20% of its total assets in fixed-income
securities, such as government, corporate debt and bank obligations, that
offer the potential to further the Fund's investment objective.
7
<PAGE>
Other Investment Practices and Securities
The table below identifies some of the investment techniques that may (but are
not required to) be used by the Funds in seeking to achieve their investment
objectives. The table also highlights the differences among the Funds in their
use of these techniques and other investment practices and investment securi-
ties. Numbers in this table show allowable usage only; for actual usage, con-
sult the Funds' annual and semi-annual reports. For more information see Appen-
dix A.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No specific percentage limitation on usage;limited only by the objectives
and strategies of the Fund
- -- Not permitted
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
- ---------------------------------------------------------------------------
<S> <C> <C>
Investment Practices
Borrowings 33 1/3 33 1/3
Credit, currency, index, interest rate and mortgage
swaps* -- 15
Cross Hedging of Currencies . .
Custodial receipts . .
Equity Swaps* 15 15
Foreign Currency Transactions** . .
Futures Contracts and Options on Futures Contracts . .
Interest rate caps, floors and collars -- .
Investment Company Securities (including exchange-
traded funds) 10 10
Mortgage Dollar Rolls -- .
Options on Foreign Currencies/1/ . .
Options on Securities and Securities Indices/2/ . .
Repurchase Agreements . .
Securities Lending 33 1/3 33 1/3
Short Sales Against the Box 25 25
Unseasoned Companies . .
Warrants and Stock Purchase Rights . .
When-Issued Securities and Forward Commitments . .
- ---------------------------------------------------------------------------
</TABLE>
* Limited to 15% of net assets (together with other illiquid securities) for
all structured securities which are not deemed to be liquid and all swap
transactions.
** Limited by the amount each Fund may invest in foreign securities.
1 The Funds may purchase and sell call and put options.
2 The Funds may sell covered call and put options and purchase call and put
options.
8
<PAGE>
OTHER INVESTMENT PRACTICES AND SECURITIES
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No specific percentage
limitation on usage;
limited only by the
objectives and strategies
of the Fund
- -- Not permitted
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
- ------------------------------------------------
<S> <C> <C>
Investment Securities
American, European and
Global Depository
Receipts . .
Asset-Backed and
Mortgage-Backed
Securities/3/ . .
Bank Obligations/3/ . .
Convertible
Securities/4/ . .
Corporate Debt
Obligations/3/ . .
Equity Securities 90+ 80+
Emerging Country
Securities/5/ 25 15
Fixed Income Securities 10 20
Foreign Securities/5/ 25 15
Non-Investment Grade
Fixed Income Securities 10/6/ 20/6/
Real Estate Investment
Trusts . .
Stripped Mortgage-Backed
Securities*,/3/ -- .
Structured Securities/3/ . .
Temporary Investments 100 100
U.S. Government
Securities/3/ . .
Yield Curve Options and
Inverse Floating Rate
Securities -- .
- ------------------------------------------------
</TABLE>
* Limited to 15% of net assets (together with other illiquid securities) for
all structured securities which are not deemed to be liquid and all swap
transactions.
3 Limited by the amount the Fund invests in fixed-income securities.
4 Convertible securities purchased by the Funds use the same rating criteria
for convertible and non-convertible debt securities.
5 The Internet Tollkeeper and Real Estate Securities Funds may invest in the
aggregate up to 25% and 15%, respectively, of their total assets in foreign
securities, including emerging country securities.
6 May be BB or lower by Standard & Poor's or Ba or lower by Moody's.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other governmental agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Real
Internet Estate
. Applicable Tollkeeper Securities
- -- Not applicable Fund Fund
- ---------------------------------------------
<S> <C> <C>
Credit/Default . .
Foreign . .
Emerging Countries . .
Industry Concentration . .
Stock . .
Derivatives . .
Interest Rate . .
Management . .
Market . .
Liquidity . .
REIT Risk . .
Internet . --
- ---------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
All Funds:
. Credit/Default Risk--The risk that an issuer or guarantor of fixed-income
securities held by a Fund (which may have low credit ratings) may default on
its obligation to pay interest and repay principal.
. Foreign Risk--The risk that when a Fund invests in foreign securities, it
will be subject to risk of loss not typically associated with domestic
issuers. Loss may result because of less foreign government regulation, less
public information and less economic, political and social stability. Loss
may also result from the imposition of exchange controls, confiscations and
other government restrictions. A Fund will also be subject to the risk of
negative foreign currency rate fluctuations. Foreign risks will normally be
greatest when a Fund invests in issuers located in emerging countries.
. Emerging Countries Risk--The securities markets of Asian, Latin American,
Eastern European, African and other emerging countries are less liquid, are
especially subject to greater price volatility, have smaller market capital-
izations, have less government regulation and are not subject to as extensive
and frequent accounting, financial and other reporting requirements as the
securities markets of more developed countries. Further, investment in equity
securities of issuers located in Russia and certain other emerging countries
involves risk of loss resulting from problems in share registration and cus-
tody and substantial economic and political disruptions. These risks are not
normally associated with investments in more developed countries.
. Industry Concentration Risk--The risk that each of the Funds concentrates its
investments in specific industry sectors that have historically experienced
substantial price volatility. Each Fund is subject to greater risk of loss as
a result of adverse economic, business or other developments than if its
investments were diversified across different industry sectors. Securities of
issuers held by the Funds may lack sufficient market liquidity to enable a
Fund to sell the securities at an advantageous time or without a substantial
drop in price.
. Stock Risk--The risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high levels.
There is no guarantee that such levels will continue.
. Derivatives Risk--The risk that loss may result from a Fund's investments in
options, futures, swaps, structured securities and other derivative instru-
ments. These instruments may be leveraged so that small changes may produce
disproportionate losses to a Fund.
11
<PAGE>
. Interest Rate Risk--The risk that when interest rates increase, fixed-income
securities held by a Fund will decline in value. Long-term fixed-income secu-
rities will normally have more price volatility because of this risk than
short-term securities.
. Management Risk--The risk that a strategy used by the Investment Adviser may
fail to produce the intended results.
. Market Risk--The risk that the value of the securities in which a Fund
invests may go up or down in response to the prospects of individual compa-
nies and/or general economic conditions. Price changes may be temporary or
last for extended periods.
. Liquidity Risk--The risk that a Fund will not be able to pay redemption pro-
ceeds within the time period stated in this Prospectus because of unusual
market conditions, an unusually high volume of redemption requests, or other
reasons. Funds that invest in non-investment grade fixed-income securities,
small capitalization stocks, REITs and emerging country issuers will be espe-
cially subject to the risk that during certain periods the liquidity of par-
ticular issuers or industries, or all securities within these investment cat-
egories, will shrink or disappear suddenly and without warning as a result of
adverse economic, market or political events, or adverse investor perceptions
whether or not accurate. The Goldman Sachs Asset Allocation Portfolios (the
"Asset Allocation Portfolios") expect to invest a significant percentage of
their assets in the Real Estate Securities Fund and other funds for which
Goldman Sachs now or in the future acts as investment adviser or underwriter.
Redemptions by an Asset Allocation Portfolio of its position in a Fund may
further increase liquidity risk and may impact a Fund's NAV.
. REIT Risk--Investing in REITs involves certain unique risks in addition to
those risks associated with investing in the real estate industry in general.
REITs whose underlying properties are concentrated in a particular industry
or geographic region are also subject to risks affecting such industries and
regions. The securities of REITs involve greater risks than those associated
with larger, more established companies and may be subject to more abrupt or
erratic price movements. Securities of such issuers may lack sufficient mar-
ket liquidity to enable a Fund to effect sales of an advantageous time or
without a substantial drop in price.
Internet Tollkeeper Fund:
. Internet Risk--The risk that the stock prices of Internet and Internet-
related companies will experience significant price movements as a result of
intense worldwide competition, consumer preferences, product compatibility,
product obsolescence, government regulation, excessive investor optimism or
pessimism, or other factors.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
12
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's Insti-
tutional Shares from year to year; and (b) how the average annual returns of
a Fund's Institutional Shares compare to those of broad-based securities
market indices. The bar chart and table assume reinvestment of dividends and
distributions. A Fund's past performance is not necessarily an indication of
how the Fund will perform in the future. Performance reflects expense limi-
tations in effect. If expense limitations were not in place, a Fund's per-
formance would have been reduced. The Internet Tollkeeper Fund commenced
operations on October 1, 1999. Since the Internet Tollkeeper Fund does not
have at least one full calendar year's performance for the period ending
December 31, 1999, no performance information is provided in this section.
13
<PAGE>
Real Estate Securities Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter [BAR CHART]
Q2 '99 +13.01%
1999 - .64%
Worst Quarter
Q3 '99 -10.07%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Institutional Shares (Inception 7/27/98) (0.64)% (4.91)%
Wilshire Real Estate Securities Index* (3.16)% (9.45)%
------------------------------------------------------------------
</TABLE>
* The Wilshire Real Estate Securities Index is an unmanaged index of publicly
traded REITs and real estate operating companies. The Index figures do not
reflect any fees or expenses.
14
<PAGE>
Fund Fees and Expenses (Institutional Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Institutional Shares of a Fund.
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
- -------------------------------------------------------------------------
<S> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases None None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends None None
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/1/
Management Fees 1.00% 1.00%
Distribution and Service (12b-1) Fees None None
Other Expenses2 0.20% 0.31%
- -------------------------------------------------------------------------
Total Fund Operating Expenses* 1.20% 1.31%
- -------------------------------------------------------------------------
</TABLE>
See page 16 for all other footnotes.
* As a result of current expense limitations, "Other
Expenses" and "Total Fund Operating Expenses" of the
Funds which are actually incurred are as set forth
below. The expense limitations may be terminated at
any time at the option of the Investment Adviser. If
this occurs, "Other Expenses" and "Total Fund Operat-
ing Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/1/
Management Fees 1.00% 1.00%
Distribution and Services (12b-1) Fees None None
Other Expenses2 0.10% 0.04%
------------------------------------------------------------------------
Total Fund Operating Expenses (after
current expense limitations) 1.10% 1.04%
------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Fund Fees and Expenses continued
/1/The Real Estate Securities Fund's annual operating expenses are based on
actual expenses. The Internet Tollkeeper Fund's expenses are estimated for the
current fiscal year.
/2/"Other Expenses" include transfer agency fees equal to 0.04% of the average
daily net assets of each Fund's Institutional Shares plus all other ordinary
expenses not detailed above. The Investment Adviser has voluntarily agreed to
reduce or limit "Other Expenses"(excluding management fees, transfer agency
fees, taxes, interest and brokerage fees and litigation, indemnification and
other extraordinary expenses) to the following percentages of each Fund's aver-
age daily net assets:
<TABLE>
<CAPTION>
Other
Fund Expenses
- -------------------------
<S> <C>
Internet
Tollkeeper 0.06%
Real Estate
Securities 0.00%
</TABLE>
16
<PAGE>
FUND FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the expense limitations) with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in Institutional
Shares of a Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your invest-
ment has a 5% return each year and that a Fund's operating expenses remain the
same. Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Internet Tollkeeper $122 $381 N/A N/A
- -------------------------------------------------------
Real Estate Securities $133 $415 $718 $1,579
- -------------------------------------------------------
</TABLE>
Institutions that invest in Institutional Shares on behalf of their customers
may charge other fees directly to their customer accounts in connection with
their investments. You should contact your institution for information regard-
ing such charges. Such fees, if any, may affect the return such customers real-
ize with respect to their investments.
Certain institutions that invest in Institutional Shares on behalf of their
customers may receive other compensation in connection with the sale and dis-
tribution of Institutional Shares or for services to their customers' accounts
and/or the Funds. For additional information regarding such compensation, see
"Shareholder Guide" in the Prospectus and "Other Information" in the Statement
of Additional Information ("Additional Statement").
17
<PAGE>
Service Providers
INVESTMENT ADVISER
Investment Adviser
---------------------------------------------
Goldman Sachs Asset Management ("GSAM")
32 Old Slip
New York, New York 10005
---------------------------------------------
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. Goldman Sachs registered as an investment adviser in
1981. The Goldman Sachs Group, L.P., which controlled the Investment Advis-
er, merged into The Goldman Sachs Group, Inc. as a result of an initial pub-
lic offering. As of December 31, 1999, GSAM, along with other units of IMD,
had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser makes the investment decisions
for the Funds and places purchase and sale orders for the Funds' portfolio
transactions in U.S. and foreign markets. As permitted by applicable law,
these orders may be directed to any brokers, including Goldman Sachs and its
affiliates. While the Investment Adviser is ultimately responsible for the
management of the Funds, it is able to draw upon the research and expertise
of its asset management affiliates for portfolio decisions and management
with respect to certain portfolio securities. In addition, the Investment
Adviser has access to the research and certain proprietary technical models
developed by Goldman Sachs, and will apply quantitative and qualitative
analysis in determining the appropriate allocations among categories of
issuers and types of securities.
The Investment Adviser also performs the following additional services for
the Funds:
. Supervises all non-advisory operations of the Funds
. Provides personnel to perform necessary executive, administrative and
clerical services to the Funds
. Arranges for the preparation of all required tax returns, reports to
shareholders, prospectuses and statements of additional information and
other reports filed with the Securities and Exchange Commission (the
"SEC") and other regulatory authorities
. Maintains the records of each Fund
. Provides office space and all necessary office equipment and services
18
<PAGE>
SERVICE PROVIDERS
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates (as a percentage of each respective
Fund's average daily net assets) listed below:
<TABLE>
<CAPTION>
Actual Rate
For the Fiscal Year
or Period Ended
Contractual Rate December 31, 1999
-------------------------------------------------------------
<S> <C> <C>
Internet Tollkeeper 1.00% 1.00%
-------------------------------------------------------------
Real Estate Securities 1.00% 1.00%
-------------------------------------------------------------
</TABLE>
FUND MANAGERS
M. Roch Hillenbrand, a Managing Director of Goldman Sachs since 1997, is the
Head of Global Equities for GSAM, overseeing the United States, Europe,
Japan, and non-Japan Asia. In this capacity, he is responsible for managing
the group as it defines and implements global portfolio management processes
that are consistent, reliable and predictable. Since 1981, Mr. Hillenbrand
has been President of Commodities Corporation LLC, of which Goldman Sachs is
the parent company. Over the course of his 19-year career at Commodities
Corporation, Mr. Hillenbrand has had extensive experience in dealing with
internal and external investment managers who have managed a range of
futures and equities strategies across multiple markets, using a variety of
styles.
Growth Equity Investment Team
. 19-year consistent investment style applied through diverse and complete
market cycles
. More than $20 billion in equities currently under management
. More than 300 client account relationships
. A portfolio management and analytical team with more than 160 years com-
bined investment experience
19
<PAGE>
- --------------------------------------------------------------------------------
Growth Equity Investment Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
- ------------------------------------------------------------------------------------------------
<C> <C> <C> <S>
George D. Adler Senior Portfolio Manager-- Since Mr. Adler joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager in
1997. From 1990 to 1997,
he was a portfolio
manager at Liberty
Investment Management,
Inc. ("Liberty") and its
predecessor firm, Eagle
Asset Management
("Eagle").
- ------------------------------------------------------------------------------------------------
Steve Barry Senior Portfolio Manager-- Since Mr. Barry joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager in
1999. From 1988 to 1999,
he was a portfolio
manager at Alliance
Capital Management.
- ------------------------------------------------------------------------------------------------
Robert G. Collins Senior Portfolio Manager-- Since Mr. Collins joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager and
Co-Chair of the Growth
Equity Investment
Committee in 1997. From
1991 to 1997, he was a
portfolio manager at
Liberty and its
predecessor firm, Eagle.
- ------------------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the
Managing Director Internet Tollkeeper 1999 Investment Adviser as a
senior portfolio manager
and Chief Investment
Officer of the Growth
Equity team in 1997.
From 1994 to 1997, he
was the Chief Investment
Officer and Chairman of
Liberty. From 1984 to
1994, he was a portfolio
manager and President at
Liberty's predecessor
firm, Eagle.
- ------------------------------------------------------------------------------------------------
Gregory H. Ekizian Senior Portfolio Manager-- Since Mr. Ekizian joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager and
Co-Chair of the Growth
Equity Investment
Committee in 1997. From
1990 to 1997, he was a
portfolio manager at
Liberty and its
predecessor firm, Eagle.
- ------------------------------------------------------------------------------------------------
Scott Kolar Portfolio Manager-- Since Mr. Kolar joined the
Associate Internet Tollkeeper 1999 Investment Adviser as an
equity analyst in 1997
and became a portfolio
manager in 1999. From
1994 to 1997, he was an
equity analyst and
information systems
specialist at Liberty.
- ------------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Senior Portfolio Manager-- Since Mr. Segundo joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager in
1997. From 1992 to 1997,
he was a portfolio
manager at Liberty and
its predecessor firm,
Eagle.
- ------------------------------------------------------------------------------------------------
David G. Shell Senior Portfolio Manager-- Since Mr. Shell joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager in
1997. From 1987 to 1997,
he was a portfolio
manager at Liberty and
its predecessor firm,
Eagle.
- ------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
SERVICE PROVIDERS
- --------------------------------------------------------------------------------
Real Estate Securities Team
The Real Estate Securities portfolio management team includes individuals
with backgrounds in:
. Fundamental real estate acquisition, development and operations
. Real estate capital markets
. Mergers and acquisitions
. Asset management
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
- ---------------------------------------------------------------------------------
<C> <C> <C> <S>
Herbert E. Senior Portfolio Since Mr. Ehlers joined the
Ehlers Manager-- Investment Adviser as a senior
Managing Real Estate 1998 portfolio manager and Chief
Director Securities Investment Officer of the
Growth Equity team in 1997.
From 1994 to 1997, he was the
Chief Investment Officer and
Chairman of Liberty. From 1984
to 1994, he was a portfolio
manager and President at
Liberty's predecessor firm,
Eagle.
- ---------------------------------------------------------------------------------
Mark Howard- Senior Portfolio Since Mr. Howard-Johnson joined the
Johnson Manager-- Investment Adviser as a
Vice President Real Estate 1998 portfolio manager in 1998. His
Securities previous experience includes 15
years in the real estate
finance business. From 1996 to
1998, he was the senior equity
analyst for Boston Financial,
responsible for the Pioneer
Real Estate Shares Fund. Prior
to joining Boston Financial,
from 1994 to 1996, Mr. Howard-
Johnson was a real estate
securities analyst for The
Penobscot Group, Inc., one of
only two independent research
firms in the public real estate
securities business.
- ---------------------------------------------------------------------------------
Greg Poole Portfolio Since Mr. Poole joined the Investment
Associate Manager-- 2000 Adviser as a real estate
Real Estate securities analyst in 1998 and
Securities became portfolio manager in
2000. His previous experience
includes investment analysis
and financial structuring for
the Real Estate Principal
Investment Group of the
Investment Banking Division of
Goldman Sachs, which he joined
in 1996. He received his B.A.
in Honours Economics from the
University of Western Ontario
in 1996.
- ---------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS
The involvement of the Investment Adviser, Goldman Sachs and their affili-
ates in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect
to a Fund or limit a Fund's investment activities. Goldman Sachs and its
affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Funds and/or which engage
in and compete for transactions in the same types of securities, currencies
and instruments as the Funds. Goldman Sachs and its affiliates will not have
any obligation to make available any information regarding their proprietary
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the Funds.
The results of a Fund's investment activities, therefore, may differ from
those of Goldman Sachs and its affiliates, and it is possible that a Fund
could sustain losses during periods in which Goldman Sachs and its affili-
ates and other accounts achieve significant profits on their trading for
proprietary or other accounts. In addition, the Funds may, from time to
time, enter into transactions in which other clients of Goldman Sachs have
an adverse interest. A Fund's activities may be limited because of regula-
tory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions.
22
<PAGE>
SERVICE PROVIDERS
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
23
<PAGE>
Dividends
Each Fund pays dividends from its net investment income and capital gain net
income. You may choose to have dividends paid in:
. Cash
. Additional shares of the same class of the same Fund
. Shares of the same or an equivalent class of another Goldman Sachs Fund. Spe-
cial restrictions may apply for certain ILA Portfolios. See the Additional
Statement.
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time before the record date for a
particular dividend. If you do not indicate any choice, dividends will be rein-
vested automatically in the applicable Fund.
The election to reinvest dividends in additional shares will not affect the tax
treatment of such dividends, which will be treated as received by you and then
used to purchase the shares.
Dividends from net investment income and capital gain net income are declared
and paid as follows:
<TABLE>
<CAPTION>
Net
Investment Capital Gain
Fund Income Net Income
- -----------------------------------------------
<S> <C> <C>
Internet Tollkeeper Annually Annually
- -----------------------------------------------
Real Estate Securities Quarterly Annually
- -----------------------------------------------
</TABLE>
From time to time a portion of a Fund's dividends may constitute a return of
capital.
At the time of an investor's purchase of shares of a Fund, a portion of the NAV
per share may be represented by undistributed income or undistributed realized
appreciation of the Fund's portfolio securities. Therefore, subsequent distri-
butions on such shares from such income or realized appreciation may be taxable
to you even if the NAV of the shares is, as a result of the distributions,
reduced below the cost of such shares and the distributions (or portions there-
of) represent a return of a portion of the purchase price.
24
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Institutional
Shares.
HOW TO BUY SHARES
How Can I Purchase Institutional Shares Of The Funds?
You may purchase Institutional Shares on any business day at their NAV next
determined after receipt of an order. No sales load is charged. You should
place an order with Goldman Sachs at 1-800-621-2550 and either:
. Wire federal funds to The Northern Trust Company ("Northern"), as
subcustodian for State Street Bank and Trust Company ("State Street")
(each Fund's custodian) on the next business day; or
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds--
(Name of Fund and Class of Shares), 4900 Sears Tower--60th Floor, Chicago,
IL 60606-6372. The Fund will not accept a check drawn on a foreign bank or
a third-party check.
In order to make an initial investment in a Fund, you must furnish to the
Fund or Goldman Sachs the Account Application. Purchases of Institutional
Shares must be settled within three business days of receipt of a complete
purchase order.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
How Do I Purchase Shares Through A Financial Institution?
Certain institutions (including banks, trust companies, brokers and invest-
ment advisers) that provide recordkeeping, reporting and processing services
to their customers may be authorized to accept, on behalf of Goldman Sachs
Trust (the "Trust"), purchase, redemption and exchange orders placed by or
on behalf of their customers, and may designate other intermediaries to
accept such orders, if approved by the Trust. In these cases:
. A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized institution or intermediary on a busi-
ness day, and the order will be priced at the Fund's NAV next determined
after such acceptance.
25
<PAGE>
. Authorized institutions and intermediaries will be responsible for trans-
mitting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your institution or intermediary to learn whether it is
authorized to accept orders for the Trust.
These institutions may receive payments from the Funds or Goldman Sachs for
the services provided by them with respect to the Funds' Institutional
Shares. These payments may be in addition to other payments borne by the
Funds.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to certain institutions and other persons in
connection with the sale, distribution and/or servicing of shares of the
Funds and other Goldman Sachs Funds. Additional compensation based on sales
may, but is currently not expected to, exceed 0.50% (annualized) of the
amount invested.
In addition to Institutional Shares, each Fund also offers other classes of
shares to investors. These other share classes are subject to different fees
and expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than Institutional
Shares. Information regarding these other share classes may be obtained from
your sales representative or from Goldman Sachs by calling the number on the
back cover of this Prospectus.
26
<PAGE>
SHAREHOLDER GUIDE
What is My Minimum Investment in the Funds?
<TABLE>
<CAPTION>
Type of Investor Minimum Investment
-------------------------------------------------------------------------------
<S> <C>
. Banks, trust companies or $1,000,000 in Institutional Shares of a Fund
other depository alone or in combination with other assets
institutions investing for under the management of GSAM and its affiliates
their own account or on
behalf of clients
. Pension and profit sharing
plans, pension funds and
other company-sponsored
benefit plans
. State, county, city or any
instrumentality,
department, authority or
agency thereof
. Corporations with at least
$100 million in assets or
in outstanding publicly
traded securities
. "Wrap" account sponsors
(provided they have an
agreement covering the
arrangement with GSAM)
. Registered investment
advisers investing for
accounts for which they
receive asset-based fees
-------------------------------------------------------------------------------
. Individual investors $10,000,000
. Qualified non-profit
organizations, charitable
trusts, foundations and
endowments
. Accounts over which GSAM or
its advisory affiliates
have investment discretion
-------------------------------------------------------------------------------
</TABLE>
The minimum investment requirement may be waived for current and former
officers, partners, directors or employees of Goldman Sachs or any of its
affiliates or for other investors at the discretion of the Trust's officers.
No minimum amount is required for subsequent investments.
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Modify or waive the minimum investment amounts.
. Reject or restrict any purchase or exchange orders by a particular pur-
chaser (or group of related purchasers). This may occur, for example, when
a pattern of frequent purchases, sales or exchanges of Institutional
Shares of a Fund is evident, or if purchases, sales or exchanges are, or a
subsequent abrupt redemption might be, of a size that would disrupt the
management of a Fund.
. Close a Fund to new investors from time to time and reopen any such Fund
whenever it is deemed appropriate by a Fund's Investment Adviser.
27
<PAGE>
The Funds may allow you to purchase shares with securities instead of cash
if consistent with a Fund's investment policies and operations and if
approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Institutional
Shares is determined by a Fund's NAV. The Funds calculate NAV as follows:
(Value of Assets of the Class)
NAV = - (Liabilities of the Class)
-----------------------------------------
Number of Outstanding Shares of the Class
The Funds' investments are valued based on market quotations or, if accurate
quotations are not readily available, the fair value of the Fund's invest-
ments may be determined in good faith under procedures established by the
Trustees.
. NAV per share of each class is calculated by State Street on each business
day as of the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. New York time). Fund shares will not be priced on any
day the New York Stock Exchange is closed.
. When you buy shares, you pay the NAV next calculated after the Funds
receive your order in proper form.
. When you sell shares, you receive the NAV next calculated after the Funds
receive your order in proper form.
Note: The time at which transactions and shares are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
Foreign securities may trade in their local markets on days a Fund is
closed. As a result if the Fund holds foreign securities, its NAV may be
impacted on days when investors may not purchase or redeem Fund shares.
In addition, the impact of events that occur after the publication of market
quotations used by a Fund to price its securities (for example, in foreign
markets), but before the close of regular trading on the New York Stock
Exchange will normally not be reflected in a Fund's next determined NAV
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.
28
<PAGE>
SHAREHOLDER GUIDE
HOW TO SELL SHARES
How Can I Sell Institutional Shares Of The Funds?
You may arrange to take money out of your account by selling (redeeming)
some or all of your shares. Generally, each Fund will redeem its Institu-
tional Shares upon request on any business day at their NAV next determined
after receipt of such request in proper form. You may request that redemp-
tion proceeds be sent to you by check or by wire (if the wire instructions
are on record). Redemptions may be requested in writing or by telephone.
<TABLE>
<CAPTION>
Instructions For
Redemptions:
---------------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund names and Class of Shares
. The dollar amount you want to sell
. How and where to send the proceeds
. Mail your request to:
Goldman Sachs Funds
4900 Sears Tower--60th Floor
Chicago, IL 60606-6372
---------------------------------------------------------------------
By Telephone: If you have elected the telephone
redemption privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
---------------------------------------------------------------------
</TABLE>
Certain institutions and intermediaries are authorized to accept redemption
requests on behalf of the Funds as described under "How Do I Purchase Shares
Through A Financial Institution?"
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing
and signed by an authorized person designated on the Account Application.
The
29
<PAGE>
written request may be confirmed by telephone with both the requesting
party and the designated bank account to verify instructions.
. The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
How Are Redemption Proceeds Paid?
By Wire: You may arrange for your redemption proceeds to be wired as federal
funds to the bank account designated in your Account Application. The fol-
lowing general policies govern wiring redemption proceeds:
. Redemption proceeds will normally be wired on the next business day in
federal funds (for a total of one business day delay), but may be paid up
to three business days following receipt of a properly executed wire
transfer redemption request. If you are selling shares you recently paid
for by check, the Fund will pay you when your check has cleared, which may
take up to 15 days. If the Federal Reserve Bank is closed on the day that
the redemption proceeds would ordinarily be wired, wiring the redemption
proceeds may be delayed one additional business day.
. To change the bank designated on your Account Application, you must send
written instructions signed by an authorized person designated on the
Account Application to the Transfer Agent.
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of your bank or any intermediaries in
the transfer process. If a problem with such performance arises, you
should deal directly with your bank or any such intermediaries.
By Check: You may elect in writing to receive your redemption proceeds by
check. Redemption proceeds paid by check will normally be mailed to the
address of record within three business days of a properly executed redemp-
tion request. If you are selling shares you recently paid for by check, the
Fund will pay you when your check has cleared, which may take up to 15 days.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Institutions (including banks, trust companies, brokers and investment
advisers) are responsible for the timely transmittal of redemption
requests by their customers to the Transfer Agent. In order to facilitate
the timely transmittal of redemption requests, these institutions may set
times by which they must receive
30
<PAGE>
SHAREHOLDER GUIDE
redemption requests. These institutions may also require additional docu-
mentation from you.
The Trust reserves the right to:
. Redeem your shares if your account balance falls below $50 as a result of
earlier redemptions. The Funds will not redeem your shares on this basis
if the value of your account falls below the minimum account balance
solely as a result of market conditions. The Fund will give you 60 days'
prior written notice to allow you to purchase sufficient additional shares
of the Fund in order to avoid such redemption.
. Redeem your shares in other circumstances determined by the Board of
Trustees to be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distribu-
tions be returned to the Fund as undeliverable or remain uncashed for six
months. In addition, that distribution and all future distributions pay-
able to you will be reinvested at NAV in additional Fund shares. No inter-
est will accrue on amounts represented by uncashed distribution or redemp-
tion checks.
Can I Exchange My Investment From One Fund To Another?
You may exchange Institutional Shares of a Fund at NAV for Institutional
Shares of any other Goldman Sachs Fund. The exchange privilege may be mate-
rially modified or withdrawn at any time upon 60 days' written notice to
you.
<TABLE>
<CAPTION>
Instructions For
Exchanging
Shares:
------------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund names and Class of Shares
. The dollar amount to be exchanged
. Mail the request to:
Goldman Sachs Funds
4900 Sears Tower--60th Floor
Chicago, IL 60606-6372
------------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
------------------------------------------------------------------
</TABLE>
31
<PAGE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically regis-
tered account.
. Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized per-
son designated on the Account Application.
. Exchanges are available only in states where exchanges may be legally
made.
. It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I
Need To Know About Telephone Redemption Requests?" in an effort to prevent
unauthorized or fraudulent telephone exchange requests.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
What Types of Reports Will I Be Sent Regarding Investments In Institutional
Shares?
You will receive an annual report containing audited financial statements
and a semi-annual report. To eliminate unnecessary duplication, only one
copy of such reports will be sent to shareholders with the same mailing
address. If you would like a duplicate copy to be mailed to you, please con-
tact Goldman Sachs Funds at 1-800-621-2550. You will also be provided with a
printed confirmation for each transaction in your account and a monthly
account statement. The Funds do not generally provide sub-accounting servic-
es.
32
<PAGE>
Taxation
TAXABILITY OF DISTRIBUTIONS
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should
consult your tax adviser about the federal, state, local or foreign tax con-
sequences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged account, you should
consider the possible tax consequences of Fund distributions and the sale of
your Fund shares.
TAXES ON DISTRIBUTIONS
Distributions you receive from the Funds are generally subject to federal
income tax, and may also be subject to state or local taxes. This is true
whether you reinvest your distributions in additional Fund shares or receive
them in cash. For federal tax purposes, the Funds' income dividend distribu-
tions and short-term capital gain distributions are taxable to you as ordi-
nary income. Any long-term capital gain distributions are taxable as long-
term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year
they are paid, distributions declared in October, November or December but
paid in January are taxable as if they were paid in December. A percentage
of the Funds' dividends paid to corporate shareholders may be eligible for
the corporate dividends-received deduction. The Funds will inform sharehold-
ers of the character and tax status of all distributions promptly after the
close of each calendar year.
Each Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. In general, the Funds may
deduct these taxes in computing their taxable income.
If you buy shares of a Fund before it makes a distribution, the distribution
will be taxable to you even though it may actually be a return of a portion
of your investment. This is known as "buying a dividend."
33
<PAGE>
TAXABILITY OF SALES AND EXCHANGES
Your sale of Fund shares is a taxable transaction for federal income tax
purposes, and may also be subject to state and local taxes. For tax purpos-
es, the exchange of your Fund shares for shares of a different Goldman Sachs
Fund is the same as a sale. When you sell your shares, you will generally
recognize a capital gain or loss in an amount equal to the difference
between your adjusted tax basis in the shares and the amount received. Gen-
erally, this gain or loss is long-term or short-term depending on whether
your holding period exceeds twelve months, except that any loss realized on
shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gain dividends that were
received on the shares.
OTHER INFORMATION
When you open your account, you should provide your social security or tax
identification number on your Account Application. By law, each Fund must
withhold 31% of your taxable distributions and any redemption proceeds if
you do not provide your correct taxpayer identification number, or certify
that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
34
<PAGE>
Appendix A
Additional Information on Portfolio Risks, Securities and Techniques
A. General Portfolio Risks
The Funds will be subject to the risks associated with equity securities.
"Equity securities" may include common stocks, preferred stocks, interests
in real estate investment trusts, convertible debt obligations, convertible
preferred stocks, equity interests in trusts, partnerships, joint ventures,
limited liability companies and similar enterprises, warrants and stock pur-
chase rights. In general, stock values fluctuate in response to the activi-
ties of individual companies and in response to general market and economic
conditions. Accordingly, the value of the stocks that a Fund holds may
decline over short or extended periods. The stock markets tend to be cycli-
cal, with periods when stock prices generally rise and periods when prices
generally decline. The volatility of equity securities means that the value
of your investment in the Funds may increase or decrease. As of the date of
this Prospectus, certain stock markets were trading at or close to record
high levels and there can be no guarantee that such levels will continue.
To the extent that a Fund invests in fixed-income securities, that Fund will
also be subject to the risks associated with its fixed-income securities.
These risks include interest rate risk, credit risk and call/extension risk.
In general, interest rate risk involves the risk that when interest rates
decline, the market value of fixed-income securities tends to increase (al-
though many mortgage related securities will have less potential than other
debt securities for capital appreciation during periods of declining rates).
Conversely, when interest rates increase, the market value of fixed-income
securities tends to decline. Credit risk involves the risk that an issuer
could default on its obligations, and a Fund will not recover its invest-
ment. Call risk and extension risk are normally present in mortgage-backed
securities and asset-backed securities. For example, homeowners have the
option to prepay their mortgages. Therefore, the duration of a security
backed by home mortgages can either shorten (call risk) or lengthen (exten-
sion risk). In general, if interest rates on new mortgage loans fall suffi-
ciently below the interest rates on existing outstanding mortgage loans, the
rate of prepayment would be expected to increase. Conversely, if mortgage
loan interest rates rise above the interest rates on existing outstanding
mortgage loans, the rate of prepayment would be expected to decrease. In
either case, a change in the prepayment rate can result in losses to invest-
ors.
35
<PAGE>
The Investment Adviser will not consider the portfolio turnover rate a lim-
iting factor in making investment decisions for a Fund. A high rate of port-
folio turnover (100% or more) involves correspondingly greater expenses
which must be borne by a Fund and its shareholders, and is also likely to
result in higher short-term capital gains taxable to shareholders. The port-
folio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of a Fund's portfolio securities, excluding securities having a matu-
rity at the date of purchase of one year or less. See "Financial Highlights"
in Appendix B for a statement of the Funds' historical portfolio turnover
rates.
The following sections provide further information on certain types of secu-
rities and investment techniques that may be used by the Funds, including
their associated risks. Additional information is provided in the Additional
Statement, which is available upon request. Among other things, the Addi-
tional Statement describes certain fundamental investment restrictions that
cannot be changed without shareholder approval. You should note, however,
that all investment objectives and policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objective, you should
consider whether that Fund remains an appropriate investment in light of
your then current financial position and needs.
B. Other Portfolio Risks
Risks of Investing In Internet and Internet-Related Companies. Internet and
Internet-related companies are generally subject to a rate of change in
technology which is higher than other industries and often requires exten-
sive and sustained investment in research and development. As a result,
Internet and Internet-related companies are exposed to the risk of rapid
product obsolescence. Changes in governmental policies, such as telephone
and cable regulations and anti-trust enforcement, and the need for regula-
tory approvals may have an adverse effect on the products, services and
securities of Internet and Internet-related companies. Internet and
Internet-related companies may also produce or use products or services that
prove commercially unsuccessful. In addition, intense worldwide competitive
pressures and changing demand, evolving industry standards, challenges in
achieving product capability, loss of patent protection or proprietary
rights, reduction or interruption in the supply of key components, changes
in strategic alliances, frequent mergers or acquisitions or other factors
can have a significant effect on the financial conditions of companies in
these industries. Competitive pressures in the Internet and Internet-related
industries may affect negatively the financial condition of Internet and
Internet-related companies. Internet and Internet-related companies are also
subject to the risk of service disruptions and
36
<PAGE>
APPENDIX A
the risk of losses arising out of litigation related to these disruptions.
Many Internet companies have exceptionally high price-to-earnings ratios
with little or no earnings histories, and many Internet companies are cur-
rently operating at a loss and may never be profitable. In certain instanc-
es, Internet and Internet-related securities may experience significant
price movements caused by disproportionate investor optimism or pessimism
with little or no basis in fundamental economic conditions. As a result of
these and other reasons, investments in the Internet and Internet-related
industry can experience sudden and rapid appreciation and depreciation.
Risks of Investing in Small Capitalization Companies and REITs. Each Fund
may invest in small capitalization companies and REITs. Investments in small
capitalization companies and REITs involve greater risk and portfolio price
volatility than investments in larger capitalization stocks. Among the rea-
sons for the greater price volatility of these investments are the less cer-
tain growth prospects of smaller firms and the lower degree of liquidity in
the markets for such securities. Small capitalization companies and REITs
may be thinly traded and may have to be sold at a discount from current mar-
ket prices or in small lots over an extended period of time. In addition,
these securities are subject to the risk that during certain periods the
liquidity of particular issuers or industries, or all securities in these
investment categories, will shrink or disappear suddenly and without warning
as a result of adverse economic or market conditions, or adverse investor
perceptions whether or not accurate. Because of the lack of sufficient mar-
ket liquidity, a Fund may incur losses because it will be required to effect
sales at a disadvantageous time and only then at a substantial drop in
price. Small capitalization companies and REITs include "unseasoned" issuers
that do not have an established financial history; often have limited prod-
uct lines, markets or financial resources; may depend on or use a few key
personnel for management; and may be susceptible to losses and risks of
bankruptcy. Transaction costs for these investments are often higher than
those of larger capitalization companies. Investments in small capitaliza-
tion companies and REITs may be more difficult to price precisely than other
types of securities because of their characteristics and lower trading vol-
umes.
Risks of Foreign Investments. Each Fund may invest in foreign investments.
Foreign investments involve special risks that are not typically associated
with U.S. dollar denominated or quoted securities of U.S. issuers. Foreign
investments may be affected by changes in currency rates, changes in foreign
or U.S. laws or restrictions applicable to such investments and changes in
exchange control regulations (e.g., currency blockage). A decline in the
exchange rate of the currency (i.e., weakening of the currency against the
U.S. dollar) in which a portfolio security is quoted or denominated relative
to the U.S. dollar would reduce the value of the
37
<PAGE>
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends.
The introduction of a single currency, the euro, on January 1, 1999 for par-
ticipating nations in the European Economic and Monetary Union presents
unique uncertainties, including the legal treatment of certain outstanding
financial contracts after January 1, 1999 that refer to existing currencies
rather than the euro; the establishment and maintenance of exchange rates
for currencies being converted into the euro; the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2001 and beyond; whether the interest rate, tax and
labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other countries
that now are or may in the future become members of the European Union
("EU"), may have an impact on the euro. These or other factors, including
political and economic risks, could cause market disruptions, and could
adversely affect the value of securities held by the Funds. Because of the
number of countries using this single currency, a significant portion of the
foreign assets held by the Funds may be denominated in the euro.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the United States. In addition, clearance and settlement procedures
may be different in foreign countries and, in certain markets, such proce-
dures have been unable to keep pace with the volume of securities transac-
tions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less gov-
ernment regulation of foreign markets, companies and securities dealers than
in the United States. Foreign securities markets may have substantially less
volume than U.S. securities markets and securities of many foreign issuers
are less liquid and more volatile than securities of comparable domestic
issuers. Furthermore, with respect to certain foreign countries, there is a
possibility of nationalization, expropriation or confiscatory taxation,
imposition of withholding or other taxes on dividend or interest payments
(or, in some cases, capital gains), limitations on the removal of funds or
other assets of the Funds, and political or social instability or diplomatic
developments which could affect investments in those countries.
38
<PAGE>
APPENDIX A
Concentration of a Fund's assets in one or a few countries and currencies
will subject a Fund to greater risks than if a Fund's assets were not geo-
graphically concentrated.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs"), Global Depository
Receipts ("GDRs") and European Depository Receipts ("EDRs") or other similar
instruments representing securities of foreign issuers. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank
or a correspondent bank. Prices of ADRs are quoted in U.S. dollars, and ADRs
are traded in the United States. EDRs and GDRs are receipts evidencing an
arrangement with a non-U.S. bank. EDRs and GDRs are not necessarily quoted
in the same currency as the underlying security.
Risks of Emerging Countries. The Funds may invest in securities of issuers
located in emerging countries. The risks of foreign investment are height-
ened when the issuer is located in an emerging country. Emerging countries
are generally located in the Asia-Pacific region, Eastern Europe, Latin and
South America and Africa. 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 may be computed based on the aggregate trading volume by or
holdings of a Fund, the Investment Adviser, its affiliates and their respec-
tive clients and other service providers. A Fund may not be able to sell
securities in circumstances where price, trading or settlement volume limi-
tations have been reached.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to
only a specified percentage of an issuer's outstanding securities or a spe-
cific class of securities which may have less advantageous terms (including
price) than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportuni-
ties in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by a Fund. The repatriation of both investment income
and capital from certain emerging countries is subject to restrictions such
as the need for governmental consents. Due to restrictions on direct invest-
ment in equity securities in certain Asian countries, it is anticipated
39
<PAGE>
that a Fund may invest in such countries through other investment funds in
such countries.
Many emerging countries have experienced currency devaluations and substan-
tial (and, in some cases, extremely high) rates of inflation, which have had
a negative effect on the economies and securities markets of such emerging
countries. Economies in emerging countries generally are dependent heavily
upon commodity prices and international trade and, accordingly, have been
and may continue to be affected adversely by the economies of their trading
partners, trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by
the countries with which they trade.
Many emerging countries are subject to a substantial degree of economic,
political and social instability. Governments of some emerging countries are
authoritarian in nature or have been installed or removed as a result of
military coups, while governments in other emerging countries have periodi-
cally used force to suppress civil dissent. Disparities of wealth, the pace
and success of democratization, and ethnic, religious and racial disaffec-
tion, among other factors, have also led to social unrest, violence and/or
labor unrest in some emerging countries. Unanticipated political or social
developments may result in sudden and significant investment losses. Invest-
ing in emerging countries involves greater risk of loss due to expropria-
tion, nationalization, confiscation of assets and property or the imposition
of restrictions on foreign investments and on repatriation of capital
invested.
A Fund's investment in emerging countries may also be subject to withholding
or other taxes, which may be significant and may reduce the return from an
investment in such country to the Fund.
Settlement procedures in emerging countries are frequently less developed
and reliable than those in the United States and often may involve a Fund's
delivery of securities before receipt of payment for their sale. In addi-
tion, significant delays are common in certain markets in registering the
transfer of securities. Settlement or registration problems may make it more
difficult for a Fund to value its portfolio securities and could cause the
Fund to miss attractive investment opportunities, to have a portion of its
assets uninvested or to incur losses due to the failure of a counterparty to
pay for securities the Fund has delivered or the Fund's inability to com-
plete its contractual obligations. The creditworthiness of the local securi-
ties firms used by a Fund in emerging countries may not be as sound as the
creditworthiness of firms used in more developed countries. As a result, the
Fund may be subject to a greater risk of loss if a securities firm defaults
in the performance of its responsibilities.
40
<PAGE>
APPENDIX A
The small size and inexperience of the securities markets in certain emerg-
ing countries and the limited volume of trading in securities in those coun-
tries may make a Fund's investments in such countries less liquid and more
volatile than investments in countries with more developed securities mar-
kets (such as the United States, Japan and most Western European countries).
A Fund's investments in emerging countries are subject to the risk that the
liquidity of a particular investment, or investments generally, in such
countries will shrink or disappear suddenly and without warning as a result
of adverse economic, market or political conditions or adverse investor per-
ceptions, whether or not accurate. Because of the lack of sufficient market
liquidity, a Fund may incur losses because it will be required to effect
sales at a disadvantageous time and only then at a substantial drop in
price. Investments in emerging countries may be more difficult to price pre-
cisely because of the characteristics discussed above and lower trading vol-
umes.
A Fund's use of foreign currency management techniques in emerging countries
may be limited. Due to the limited market for these instruments in emerging
countries, the Investment Adviser does not currently anticipate that a sig-
nificant portion of the Funds' currency exposure in emerging countries, if
any, will be covered by such instruments.
Risks of Derivative Investments. A Fund's transactions in options, futures,
options on futures, swaps, interest rate caps, floors and collars, struc-
tured securities and currency transactions involve additional risk of loss.
Loss can result from a lack of correlation between changes in the value of
derivative instruments and the portfolio assets (if any) being hedged, the
potential illiquidity of the markets for derivative instruments, or the
risks arising from margin requirements and related leverage factors associ-
ated with such transactions. The use of these management techniques also
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices, interest rates or currency
prices. Each Fund may also invest in derivative investments for non-hedging
purposes (that is, to seek to increase total return). Investing for non-
hedging purposes is considered a speculative practice and presents even
greater risk of loss.
Risks of Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities which cannot be disposed of in seven days in
the ordinary course of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of
more than seven days
. Certain over-the-counter options
41
<PAGE>
. Certain structured securities and all swap transactions
. Certain restricted securities, unless it is determined, based upon a
review of the trading markets for a specific restricted security, that
such restricted security is eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 ("144A Securities") and, therefore, is
liquid.
Investing in 144A Securities may decrease the liquidity of a Fund's portfo-
lio to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities. The purchase price
and subsequent valuation of restricted and illiquid securities normally
reflect a discount, which may be significant, from the market price of com-
parable securities for which a liquid market exists.
Credit Risks. Debt securities purchased by the Funds may include securities
(including zero coupon bonds) issued by the U.S. government (and its agen-
cies, instrumentalities and sponsored enterprises), domestic and foreign
corporations, banks and other issuers. Further information is provided in
the Additional Statement.
Debt securities rated BBB or higher by Standard & Poor's or Baa or higher by
Moody's are considered "investment grade." 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. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, determined by the Investment
Adviser to be of comparable credit quality.
The Funds may invest in fixed-income securities rated BB or Ba or below (or
comparable unrated securities) which are commonly referred to as "junk
bonds." Junk bonds are considered predominantly speculative and may be ques-
tionable as to principal and interest payments.
In some cases, junk bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, invest-
ment in such bonds will present greater speculative risks than those associ-
ated with investment in investment grade bonds. Also, to the extent that the
rating assigned to a security in a Fund's portfolio is downgraded by a rat-
ing organization, the market price and liquidity of such security may be
adversely affected.
Temporary Investment Risks. Each Fund may, for temporary defensive purposes,
invest a certain percentage of its total assets in:
. U.S. government securities
42
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APPENDIX A
. Commercial paper rated at least A-2 by Standard & Poor's or P-2 by Moody's
. Certificates of deposit
. Bankers' acceptances
. Repurchase agreements
. Non-convertible preferred stocks and non-convertible corporate bonds with
a remaining maturity of less than one year
When a Fund's assets are invested in such instruments, the Fund may not be
achieving its investment objective.
C. Portfolio Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associ-
ated risks. Further information is provided in the Additional Statement,
which is available upon request.
Convertible Securities. Each Fund may invest in convertible securities. Con-
vertible securities are preferred stock or debt obligations that are con-
vertible into common stock. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar qual-
ity. Convertible securities in which a Fund invests are subject to the same
rating criteria as its other investments in fixed-income securities. Con-
vertible securities have both equity and fixed-income risk characteristics.
Like all fixed-income securities, the value of convertible securities is
susceptible to the risk of market losses attributable to changes in interest
rates. Generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. However, when the market price of the common stock underlying
a convertible security exceeds the conversion price of the convertible secu-
rity, the convertible security tends to reflect the market price of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security, like a fixed-income security, tends to
trade increasingly on a yield basis, and thus may not decline in price to
the same extent as the underlying common stock.
Foreign Currency Transactions. A Fund may, to the extent consistent with its
investment policies, purchase or sell foreign currencies on a cash basis or
through forward contracts. A forward contract involves an obligation to pur-
chase or sell a specific currency at a future date at a price set at the
time of the contract. A Fund may engage in foreign currency transactions for
hedging purposes and to seek to protect against anticipated changes in
future foreign currency exchange rates. In addition, certain Funds may also
enter into such transactions to seek to increase total return, which is con-
sidered a speculative practice.
43
<PAGE>
Each Fund may also engage in cross-hedging by using forward contracts in a
currency different from that in which the hedged security is denominated or
quoted if the Investment Adviser determines that there is a pattern of cor-
relation between the two currencies. A Fund may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Investment Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date (e.g. the Investment Adviser may
anticipate the foreign currency to appreciate against the U.S. dollar).
Currency exchange rates may fluctuate significantly over short periods of
time, causing, along with other factors, a Fund's NAV to fluctuate (when the
Fund's NAV fluctuates, the value of your shares may go up or down). Currency
exchange rates also can be affected unpredictably by the intervention of
U.S. or foreign governments or central banks, or the failure to intervene,
or by currency controls or political developments in the United States or
abroad.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available
for currency instruments traded on an exchange. Such contracts are subject
to the risk that the counterparty to the contract will default on its obli-
gations. Since these contracts are not guaranteed by an exchange or clear-
inghouse, a default on a contract would deprive a Fund of unrealized prof-
its, transaction costs or the benefits of a currency hedge or could force
the Fund to cover its purchase or sale commitments, if any, at the current
market price.
Structured Securities. Each Fund may invest in structured securities. Struc-
tured securities are securities whose value is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indices or other financial indicators (the "Reference") or the relative
change in two or more References. The interest rate or the principal amount
payable upon maturity or redemption may be increased or decreased depending
upon changes in the applicable Reference. Structured securities may be posi-
tively or negatively indexed, so that appreciation of the Reference may pro-
duce an increase or decrease in the interest rate or value of the security
at maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the Refer-
ence. Consequently, structured securities may present a greater degree of
market risk than other types of securities and may be more volatile, less
liquid and more difficult to price accurately than less complex securities.
REITs. Each Fund may invest in REITs. REITs are pooled investment vehicles
that invest primarily in either real estate or real estate related loans.
The value of a REIT is affected by changes in the value of the properties
owned by the REIT
44
<PAGE>
APPENDIX A
or securing mortgage loans held by the REIT. REITs are dependent upon the
ability of the REITs' managers, and are subject to heavy cash flow dependen-
cy, default by borrowers and the qualification of the REITs under applicable
regulatory requirements for favorable income tax treatment. REITs are also
subject to risks generally associated with investments in real estate
including possible declines in the value of real estate, general and local
economic conditions, environmental problems and changes in interest rates.
To the extent that assets underlying a REIT are concentrated geographically,
by property type or in certain other respects, these risks may be height-
ened. A Fund will indirectly bear its proportionate share of any expenses,
including management fees, paid by a REIT in which it invests.
Options on Securities, Securities Indices and Foreign Currencies. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) of the option the obligation to buy, the underlying instrument dur-
ing the option period. A call option gives the purchaser of the option the
right to buy, and the writer (seller) of the option the obligation to sell,
the underlying instrument during the option period. Each Fund may write
(sell) covered call and put options and purchase put and call options on any
securities in which it may invest or on any securities index comprised of
securities in which it may invest. A Fund may also, to the extent that it
invests in foreign securities, purchase and sell (write) put and call
options on foreign currencies.
The writing and purchase of options is a highly specialized activity which
involves special investment risks. Options may be used for either hedging or
cross-hedging purposes, or to seek to increase total return (which is con-
sidered a speculative activity). The successful use of options depends in
part on the ability of the Investment Adviser to manage future price fluctu-
ations and the degree of correlation between the options and securities (or
currency) markets. If the Investment Adviser is incorrect in its expectation
of changes in market prices or determination of the correlation between the
instruments or indices on which options are written and purchased and the
instruments in a Fund's investment portfolio, the Fund may incur losses that
it would not otherwise incur. The use of options can also increase a Fund's
transaction costs. Options written or purchased by the Funds may be traded
on either U.S. or foreign exchanges or over-the-counter. Foreign and over-
the-counter options will present greater possibility of loss because of
their greater illiquidity and credit risks.
Futures Contracts and Options on Futures Contracts. Futures contracts are
standardized, exchange-traded contracts that provide for the sale or pur-
chase of a specified financial instrument or currency at a future time at a
specified price. An option on a futures contract gives the purchaser the
right (and the writer of the
45
<PAGE>
option the obligation) to assume a position in a futures contract at a spec-
ified exercise price within a specified period of time. A futures contract
may be based on various securities (such as U.S. government securities),
foreign currencies, securities indices and other financial instruments and
indices. The Funds may engage in futures transactions on both U.S. and for-
eign exchanges.
Each Fund may purchase and sell futures contracts, and purchase and write
call and put options on futures contracts, in order to seek to increase
total return or to hedge against changes in interest rates, securities
prices or, to the extent a Fund invests in foreign securities, currency
exchange rates, or to otherwise manage its term structure, sector selection
and duration in accordance with its investment objectives and policies. Each
Fund may also enter into closing purchase and sale transactions with respect
to such contracts and options. A Fund will engage in futures and related
options transactions for bona fide hedging purposes as defined in regula-
tions of the Commodity Futures Trading Commission or to seek to increase
total return to the extent permitted by such regulations. A Fund may not
purchase or sell futures contracts or purchase or sell related options to
seek to increase total return, except for closing purchase or sale transac-
tions, if immediately thereafter the sum of the amount of initial margin
deposits and premiums paid on the Fund's outstanding positions in futures
and related options entered into for the purpose of seeking to increase
total return would exceed 5% of the market value of the Fund's net assets.
Futures contracts and related options present the following risks:
. While a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in poorer overall performance than if the Fund
had not entered into any futures contracts or options transactions.
. Because perfect correlation between a futures position and portfolio posi-
tion that is intended to be protected is impossible to achieve, the
desired protection may not be obtained and a Fund may be exposed to addi-
tional risk of loss.
. The loss incurred by a Fund in entering into futures contracts and in
writing call options on futures is potentially unlimited and may exceed
the amount of the premium received.
. Futures markets are highly volatile and the use of futures may increase
the volatility of a Fund's NAV.
. As a result of the low margin deposits normally required in futures trad-
ing, a relatively small price movement in a futures contract may result in
substantial losses to a Fund.
. Futures contracts and options on futures may be illiquid, and exchanges
may limit fluctuations in futures contract prices during a single day.
. Foreign exchanges may not provide the same protection as U.S. exchanges.
46
<PAGE>
APPENDIX A
Equity Swaps. Each Fund may invest in equity swaps. Equity swaps allow the
parties to a swap agreement to exchange the dividend income or other compo-
nents of return on an equity investment (for example, a group of equity
securities or an index) for a component of return on another non-equity or
equity investment.
An equity swap may be used by a Fund to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment may be restricted for legal reasons or is otherwise impractical.
Equity swaps are derivatives and their value can be very volatile. To the
extent that the Investment Adviser does not accurately analyze and predict
the potential relative fluctuation of the components swapped with another
party, a Fund may suffer a loss. The value of some components of an equity
swap (such as the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, a Fund may suffer a loss if the
counterparty defaults.
When-Issued Securities and Forward Commitments. Each Fund may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued
securities are purchased in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. A forward commitment involves the entering into a contract to
purchase or sell securities for a fixed price at a future date beyond the
customary settlement period.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased
declines before the settlement date. Conversely, the sale of securities on a
forward commitment basis involves the risk that the value of the securities
sold may increase before the settlement date. Although a Fund will generally
purchase securities on a when-issued or forward commitment basis with the
intention of acquiring the securities for its portfolio, a Fund may dispose
of when-issued securities or forward commitments prior to settlement if the
Investment Adviser deems it appropriate.
Repurchase Agreements. Repurchase agreements involve the purchase of securi-
ties subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price. Each Fund may enter into repurchase agreements
with dealers in U.S. government securities and member banks of the Federal
Reserve System which furnish collateral at least equal in value or market
price to the amount of their repurchase obligation.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and
other collateral held by the Fund are less than the repurchase price and the
Fund's costs associated with
47
<PAGE>
delay and enforcement of the repurchase agreement. In addition, in the event
of bankruptcy of the seller, a Fund could suffer additional losses if a
court determines that the Fund's interest in the collateral is not enforce-
able.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Certain
Funds, together with other registered investment companies having advisory
agreements with the Investment Adviser or any of its affiliates, may trans-
fer uninvested cash balances into a single joint account, the daily aggre-
gate balance of which will be invested in one or more repurchase agreements.
Lending of Portfolio Securities. Each Fund may engage in securities lending.
Securities lending involves the lending of securities owned by a Fund to
financial institutions such as certain broker-dealers. The borrowers are
required to secure their loan continuously with cash, cash equivalents, U.S.
government securities or letters of credit in an amount at least equal to
the market value of the securities loaned. Cash collateral may be invested
in cash equivalents. To the extent that cash collateral is invested in other
investment securities, such collateral will be subject to market deprecia-
tion or appreciation, and a Fund will be responsible for any loss that might
result from its investment of the borrowers' collateral. If the Investment
Adviser determines to make securities loans, the value of the securities
loaned may not exceed 33 1/3% of the value of the total assets of a Fund
(including the loan collateral).
A Fund may lend its securities to increase its income. A Fund may, however,
experience delay in the recovery of its securities, or a capital loss, if
the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Fund.
Short Sales Against-the-Box. Each Fund may make short sales against-the-box.
A short sale against-the-box means that at all times when a short position
is open the Fund will own an equal amount of securities sold short, or secu-
rities convertible into or exchangeable for, without payment of any further
consideration, an equal amount of the securities of the same issuer as the
securities sold short.
Preferred Stock, Warrants and Rights. Each 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 earn-
ings 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
or other non-compliance by the issuer of the preferred stock.
48
<PAGE>
APPENDIX A
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
or right. 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.
Other Investment Companies. Each Fund may invest in securities of other
investment companies (including SPDRs and WEBS, as defined below and other
exchange-traded funds) subject to statutory limitations prescribed by the
Act. These limitations include a prohibition on any Fund acquiring more than
3% of the voting shares of any other investment company, and a prohibition
on investing more than 5% of a Fund's total assets in securities of any one
investment company or more than 10% of its total assets in securities of all
investment companies. A Fund will indirectly bear its proportionate share of
any management fees and other expenses paid by such other investment compa-
nies. Exchange-traded funds such as SPDRs and WEBS are shares of unaffili-
ated investment companies which are traded like traditional equity securi-
ties on a national securities exchange or the NASDAQ National Market System.
. Standard & Poor's Depository Receipts. The Funds may, consistent with
their investment policies, purchase Standard & Poor's Depository Receipts
("SPDRs"). SPDRs are securities traded on the American Stock Exchange
("AMEX") that represent ownership in the SPDR Trust, a trust which has
been established to accumulate and hold a portfolio of common stocks that
is intended to track the price performance and dividend yield of the S&P
500. The SPDR Trust is sponsored by a subsidiary of the AMEX. SPDRs may be
used for several reasons, including, but not limited to, facilitating the
handling of cash flows or trading, or reducing transaction costs. The
price movement of SPDRs may not perfectly parallel the price action of the
S&P 500.
. World Equity Benchmark Shares. World Equity Benchmark Shares ("WEBS") are
shares of an investment company that invests substantially all of its
assets in securities included in the MSCI indices for specified countries.
WEBS are listed on the AMEX and were initially offered to the public in
1996. The market prices of WEBS are expected to fluctuate in accordance
with both changes in the NAVs of their underlying indices and supply and
demand of WEBS on the AMEX. To date, WEBS have traded at relatively modest
discounts and premiums to their NAVs. However, WEBS have a limited operat-
ing history and information is lacking regarding the actual performance
and trading liquidity of WEBS for extended periods or over complete market
cycles. In addition, there is no assurance that the requirements of the
AMEX necessary to maintain the listing of WEBS will continue to be met or
will remain unchanged. In the event substantial market or other disrup-
tions affecting WEBS
49
<PAGE>
should occur in the future, the liquidity and value of a Fund's shares
could also be substantially and adversely affected. If such disruptions
were to occur, a Fund could be required to reconsider the use of WEBS as
part of its investment strategy.
Unseasoned Companies. Each Fund may invest in companies (including predeces-
sors) which have operated less than three years. The securities of such com-
panies may have limited liquidity, which can result in their being priced
higher or lower than might otherwise be the case. In addition, investments
in unseasoned companies are more speculative and entail greater risk than do
investments in companies with an established operating record.
Corporate Debt Obligations. Corporate debt obligations include bonds, notes,
debentures, commercial paper and other obligations of corporations to pay
interest and repay principal, and include securities issued by banks and
other financial institutions. Each Fund may invest in corporate debt obliga-
tions issued by U.S. and certain non-U.S. issuers which issue securities
denominated in the U.S. dollar (including Yankee and Euro obligations). In
addition to obligations of corporations, corporate debt obligations include
securities issued by banks and other financial institutions and suprana-
tional entities (i.e., the World Bank, the International Monetary Fund,
etc.).
Bank Obligations. Each Fund may invest in obligations issued or guaranteed
by U.S. or foreign banks. Bank obligations, including without limitations,
time deposits, bankers' acceptances and certificates of deposit, may be gen-
eral obligations of the parent bank or may be limited to the issuing branch
by the terms of the specific obligations or by government regulations. Banks
are subject to extensive but different governmental regulations which may
limit both the amount and types of loans which may be made and interest
rates which may be charged. 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 operation of this industry.
U.S. Government Securities. Each Fund may invest in U.S. government securi-
ties. U.S. government securities include U.S. Treasury obligations and obli-
gations issued or guaranteed by U.S. government agencies, instrumentalities
or sponsored enterprises. U.S. government securities may be supported by (a)
the full faith and credit of the U.S. Treasury (such as the Government
National Mortgage Association ("Ginnie Mae")); (b) the right of the issuer
to borrow from the U.S. Treasury (such as securities of the Student Loan
Marketing Association); (c) the discretionary authority of the U.S. govern-
ment to purchase certain obligations of the
50
<PAGE>
APPENDIX A
issuer (such as the Federal National Mortgage Association ("Fannie Mae") and
Federal Home Loan Mortgage Corporation ("Freddie Mac")); or (d) only the
credit of the issuer. U.S. government securities also include Treasury
receipts, zero coupon bonds and other stripped U.S. government securities,
where the interest and principal components of stripped U.S. government
securities are traded independently.
Custodial Receipts. Each Fund may invest in custodial receipts. Interests in
U.S. government securities may be purchased in the form of custodial
receipts that evidence ownership of future interest payments, principal pay-
ments or both on certain notes or bonds issued or guaranteed as to principal
and interest by the U.S. government, its agencies, instrumentalities, polit-
ical subdivisions or authorities. For certain securities law purposes, cus-
todial receipts are not considered obligations of the U.S. government.
Mortgage-Backed Securities. Each Fund may invest in mortgage-backed securi-
ties. Mortgage-backed securities represent direct or indirect participations
in, or are collateralized by and payable from, mortgage loans secured by
real property. Mortgage-backed securities can be backed by either fixed rate
mortgage loans or adjustable rate mortgage loans, and may be issued by
either a governmental or non-governmental entity. Privately issued mortgage-
backed securities are normally structured with one or more types of "credit
enhancement." However, these mortgage-backed securities typically do not
have the same credit standing as U.S. government guaranteed mortgage-backed
securities.
Mortgage-backed securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs") and Real Estate Mortgage
Investment Conduit ("REMIC") pass-through or participation certificates.
CMOs provide an investor with a specified interest in the cash flow from a
pool of underlying mortgages or of other mortgage-backed securities. CMOs
are issued in multiple classes. In many cases, payments of principal are
applied to the CMO classes in the order of their respective stated maturi-
ties, so that no principal payments will be made on a CMO class until all
other classes having an earlier stated maturity date are paid in full. A
REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages principally secured by interests in real prop-
erty and other permitted investments.
Mortgaged-backed securities also include stripped mortgage-backed securities
("SMBS"), which are derivative multiple class mortgage-backed securities.
SMBS are usually structured with two different classes: one that receives
substantially all of the interest payments and the other that receives sub-
stantially all of the principal payments from a pool of mortgage loans. The
market value of SMBS consisting entirely of principal payments generally is
unusually volatile in response to
51
<PAGE>
changes in interest rates. The yields on SMBS that receive all or most of
the interest from mortgage loans are generally higher than prevailing market
yields on other mortgage-backed securities because their cash flow patterns
are more volatile and there is a greater risk that the initial investment
will not be fully recouped.
Asset-Backed Securities. Each Fund may invest in asset-backed securities.
Asset-backed securities are securities whose principal and interest payments
are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-
backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of pre-
payments 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 posi-
tions 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 gener-
ally prevailing interest rates at that time. Asset-backed securities present
credit risks that are not presented by mortgage-backed securities. This is
because asset-backed securities generally do not have the benefit of a secu-
rity interest in collateral that is comparable to mortgage assets. There is
the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event
of a default, a Fund may suffer a loss if it cannot sell collateral quickly
and receive the amount it is owed.
Borrowings. Each Fund can borrow money from banks and other financial insti-
tutions in amounts not exceeding one-third of its total assets for temporary
or emergency purposes. A Fund may not make additional investments if
borrowings exceed 5% of its total assets.
Mortgage Dollar Rolls. The Real Estate Securities Fund may enter into mort-
gage dollar rolls. A mortgage dollar roll involves the sale by a Fund of
securities for delivery in the current month. The Fund simultaneously con-
tracts with the same counterparty to repurchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified
future date. During the roll period, the Fund loses the right to receive
principal and interest paid on the securities sold. However, the Fund bene-
fits to the extent of any difference between (a) the price received for the
securities sold and (b) the lower forward price for the future purchase
and/or fee income plus the interest earned on the cash proceeds of the secu-
rities sold. Unless the benefits of a mortgage dollar roll 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 roll,
the use of this technique will diminish the Fund's performance.
52
<PAGE>
APPENDIX A
Successful use of mortgage dollar rolls depends upon the Investment Advis-
er's ability to predict correctly interest rates and mortgage prepayments.
If the Investment Adviser is incorrect in its prediction, a Fund may experi-
ence a loss. For financial reporting and tax purposes, the Fund treats mort-
gage dollar rolls as two separate transactions: one involving the purchase
of a security and a separate transaction involving a sale. The Fund does not
currently intend to enter into mortgage dollar rolls that are accounted for
as a financing and does not treat them as borrowings.
Yield Curve Options. The Real Estate Securities Fund may enter into options
on the yield "spread" or differential between two securities. Such transac-
tions 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.
The trading of yield curve options is subject to all of the risks associated
with the trading of other types of options. In addition, such options pres-
ent 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.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps and Inter-
est Rate Caps, Floors and Collars. 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 princi-
pal 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
53
<PAGE>
and a floor that preserves a certain return within a predetermined range of
interest rates.
The Real Estate Securities Fund may enter into swap transactions for hedging
purposes or to seek to increase total return. 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 fore-
casts 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 these investment techniques were not used.
Inverse Floaters. The Real Estate Securities Fund may invest in inverse
floating rate debt securities ("inverse floaters"). The interest rate on
inverse floaters resets in the opposite direction from the market rate of
interest to which an 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.
54
<PAGE>
[This page intentionally left blank]
55
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). The
information for the period ended December 31, 1999 has been audited by
Arthur Andersen LLP, whose report, along with a Fund's financial statements,
is included in the Funds' annual report (available upon request).
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net realized
Net asset and unrealized
value, Net gain (loss) on
beginning investment investment
of period income transactions
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - Class A Shares $ 9.20 $0.38/e/ $(0.48)/e/
1999 - Class B Shares 9.27 0.28/e/ (0.45)/e/
1999 - Class C Shares 9.21 0.30/e/ (0.48)/e/
1999 - Institutional Shares 9.21 0.40/e/ (0.47)/e/
1999 - Service Shares 9.21 0.38/e/ (0.49)/e/
- ------------------------------------------------------------------------------
1998 - Class A Shares (commenced July 27) 10.00 0.15 (0.80)
1998 - Class B Shares (commenced July 27) 10.00 0.14/e/ (0.83)/e/
1998 - Class C Shares (commenced July 27) 10.00 0.22/e/ (0.91)/e/
1998 - Institutional Shares (commenced
July 27) 10.00 0.31/e/ (0.95)/e/
1998 - Service Shares (commenced July 27) 10.00 0.25/e/ (0.91)/e/
- ------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or redemp-
tion charge were taken into account.
c Annualized.
d Not annualized.
e Calculated based on the average shares outstanding methodology.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------
In excess Net Increase Net assets Ratio of
From net of net (Decrease) Net asset at end of net expenses
investment investment From in net asset value, end Total period to average
income income capital value of period return/b/ (in 000s) net assets
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.38) $(0.02) $(0.02) $(0.52) $8.68 (1.02)% $93,443 1.44%
(0.28) (0.07) (0.02) (0.54) 8.73 (1.73) 457 2.19
(0.30) (0.05) (0.02) (0.55) 8.66 (1.80) 697 2.19
(0.40) (0.03) (0.02) (0.52) 8.69 (0.64) 42,790 1.04
(0.38) (0.01) (0.02) (0.52) 8.69 (1.12) 1 1.54
- -------------------------------------------------------------------------------------------
(0.15) -- -- (0.80) 9.20 (6.53)d 19,961 1.47c
(0.04) -- -- (0.73) 9.27 (6.88)d 2 2.19c
(0.10) -- -- (0.79) 9.21 (6.85)d 1 2.19c
(0.15) -- -- (0.79) 9.21 (6.37)d 47,516 1.04c
(0.13) -- -- (0.79) 9.21 (6.56)d 1 1.54c
- -------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
REAL ESTATE SECURITIES FUND (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees
or expense limitations
--------------------------
Ratio of Ratio of
net investment Ratio of net investment
income to expenses to income Portfolio
average average net to average turnover
net assets assets net assets rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 - Class A Shares 4.14% 1.96% 3.62% 37.43%
1999 - Class B Shares 3.21 2.46 2.94 37.43
1999 - Class C Shares 3.38 2.46 3.11 37.43
1999 - Institutional
Shares 4.43 1.31 4.16 37.43
1999 - Service Shares 4.17 1.81 3.90 37.43
- --------------------------------------------------------------------------------
1998 - Class A Shares
(commenced July 27) 23.52c 3.52c 21.47/c/ 6.03/d/
1998 - Class B Shares
(commenced July 27) 3.60c 4.02c 1.77/c/ 6.03/d/
1998 - Class C Shares
(commenced July 27) 5.49c 4.02c 3.66/c/ 6.03/d/
1998 - Institutional
Shares (commenced July 27) 8.05c 2.87c 6.22/c/ 6.03/d/
1998 - Service Shares
(commenced July 27) 6.29c 3.37c 4.46/c/ 6.03/d/
- --------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or redemp-
tion charge were taken into account.
c Annualized.
d Not annualized.
e Calculated based on the average shares outstanding methodology.
58
<PAGE>
[This page intentionally left blank]
59
<PAGE>
INTERNET TOLLKEEPER FUND
<TABLE>
<CAPTION>
Income from
investment operations/a/
-----------------------------------
Net asset
value, Net Net realized Net increase
beginning investment and unrealized in net asset
of period loss/e/ gain/e/ value
- -----------------------------------------------------------------------------
For the Period Ended December 31,
<S> <C> <C> <C> <C>
1999 - Class A Shares
(Commenced October 1) $10.00 $(0.05) $9.30 $9.25
1999 - Class B Shares
(Commenced October 1) 10.00 (0.08) 9.28 9.20
1999 - Class C Shares
(Commenced October 1) 10.00 (0.08) 9.27 9.19
1999 - Institutional Shares
(Commenced October 1) 10.00 (0.03) 9.28 9.25
1999 - Service Shares
(Commenced October 1) 10.00 (0.05) 9.28 9.23
- -----------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if a sales or redemption
charge were taken into account.
c Annualized.
d Not annualized.
e Calculated based on the average shares outstanding methodology.
60
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming
no expense limitations
---------------------------
Net assets Ratio of Ratio of Ratio of Ratio of
Net asset at end of net expenses net investment expenses to net investment Portfolio
value, end Total period to average loss to average average loss to average turnover
of period return/b,d/ (in 000s) net assets/c/ net assets/c/ net assets/c/ net assets/c/ rate/d/
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$19.25 92.50% $575,535 1.50% (1.29)% 1.79% (1.58)% 16.16%
19.20 92.00 537,282 2.25 (2.04) 2.54 (2.33) 16.16
19.19 91.90 329,135 2.25 (2.05) 2.54 (2.34) 16.16
19.25 92.50 68,275 1.10 (0.88) 1.39 (1.17) 16.16
19.23 92.30 53 1.60 (1.35) 1.89 (1.64) 16.16
- --------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
Index
1 General Investment
Management Approach
3 Fund Investment Objectives
and Strategies
3 Goldman Sachs Internet Tollkeeper Fund
6 Goldman Sachs Real Estate
Securities Fund
8 Other Investment Practices and Securities
10 Principal Risks of the Funds
13 Fund Performance
15 Fund Fees and Expenses
18 Service Providers
24 Dividends
25 Shareholder Guide
25 How To Buy Shares
29 How To Sell Shares
33 Taxation
35 Appendix A
Additional Information
on Portfolio Risks,
Securities and
Techniques
56 Appendix B
Financial Highlights
<PAGE>
Specialty Funds
Prospectus (Institutional Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders. In the Funds' annual
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during the
last fiscal year.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Additional Statement. The Additional Statement is incorporated
by reference into this Prospectus (is legally considered part of this Pro-
spectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of Fund
documents, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request to:
[email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
Goldman Sachs Internet Tollkeeper FundSM is a service mark of Goldman, Sachs &
Co.
SPECPROINST
<PAGE>
Prospectus
GOLDMAN SACHS SPECIALTY FUNDS
Class A, B
and C Shares
May 1, 2000
. Goldman Sachs Internet
Tollkeeper Fund/SM/
. Goldman Sachs Real
Estate Securities Fund
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN A FUND
INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
[GRAPHIC]
<PAGE>
NOT FDIC-INSURED May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management, a unit of the Investment Management Division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to
the Internet Tollkeeper and Real Estate Securities Funds. Goldman Sachs
Asset Management is referred to in this Prospectus as the "Investment
Adviser."
GROWTH STYLE FUNDS--INTERNET TOLLKEEPER FUND
THE FUND INVESTS IN "INTERNET TOLLKEEPER" COMPANIES,
AND ITS NET ASSET VALUE (NAV) MAY FLUCTUATE
SUBSTANTIALLY OVER TIME. BECAUSE THE FUND CONCENTRATES
ITS INVESTMENTS IN INTERNET TOLLKEEPER COMPANIES, THE
FUND'S PERFORMANCE MAY BE SUBSTANTIALLY DIFFERENT FROM
THE RETURNS OF THE BROADER STOCK MARKET AND OF "PURE"
INTERNET FUNDS. PAST PERFORMANCE IS NOT AN INDICATION
OF FUTURE RETURNS AND, DEPENDING ON THE TIMING OF YOUR
INVESTMENT, YOU MAY LOSE MONEY EVEN IF THE FUND'S PAST
RETURNS HAVE BEEN POSITIVE. THE FUND'S PARTICIPATION IN
THE INITIAL PUBLIC OFFERING (IPO) MARKET DURING ITS
INITIAL START-UP PHASE MAY HAVE HAD A MAGNIFIED IMPACT
ON THE FUND'S PERFORMANCE BECAUSE OF ITS RELATIVELY
SMALL ASSET BASE. AS THE FUND'S ASSETS GROW, IT IS
PROBABLE THAT THE EFFECT OF IPO INVESTMENTS ON THE
FUND'S FUTURE PERFORMANCE WILL NOT BE AS SIGNIFICANT.
Goldman Sachs' Growth Investment Philosophy:
1. Invest as if buying the company/business, not simply trading its stock:
. Understand the business, management, products and competition.
. Perform intensive, hands-on fundamental research.
. Seek businesses with strategic competitive advantages.
. Over the long-term, expect each company's stock price ultimately to track
the growth in the value of the business.
2. Buy high-quality growth businesses that possess strong business franchises,
favorable long-term prospects and excellent management.
3. Purchase superior long-term growth companies at a favorable price--seek
to purchase at a fair valuation, giving the investor the potential to
fully capture returns from above-average growth rates.
1
<PAGE>
Growth companies have earnings expectations that exceed those of the stock
market as a whole.
- --------------------------------------------------------------------------------
REAL ESTATE SECURITIES FUND
Goldman Sachs' Real Estate Securities Investment Philosophy:
When choosing the Fund's securities, the Investment Adviser:
. Selects stocks based on quality of assets, experienced management and a
sustainable competitive advantage.
. Seeks to buy securities at a discount to the intrinsic value of the busi-
ness (assets and management).
. Seeks a team approach to decision making.
Over time, REITs (which stands for Real Estate Investment Trusts) have
offered investors important diversification and competitive total returns
versus the broad equity market.
- --------------------------------------------------------------------------------
2
<PAGE>
Fund Investment Objectives and Strategies
Goldman Sachs
Internet Tollkeeper Fund
FUND FACTS
- --------------------------------------------------------------------------------
Objective: Long-term growth of capital
Investment Focus: U.S. equity securities that offer long-term capital
appreciation with a primary focus on the media,
telecommunications, technology and Internet sectors
Investment Style: Growth
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, at least
90% of its total assets in equity securities and at least 65% of its total
assets in equity securities of "Internet Tollkeeper" companies (as described
below), which are companies in the media, telecommunications, technology and
Internet sectors which provide access, infrastructure, content and services
to Internet companies and Internet users. The Fund seeks to achieve its
investment objective by investing in equity securities of companies that the
Investment Adviser believes will benefit from the growth of the Internet by
providing access, infrastructure, content and services to Internet companies
and customers. The Fund may also invest up to 35% of its total assets in
other companies whose rapid adoption of an Internet strategy is expected to
improve their cost structure, revenue opportunities or competitive advantage
and Internet-based companies that the Investment Adviser believes exhibit a
sustainable business model. Although the Fund invests primarily in publicly
traded U.S. securities, it may invest up to 25% of its total assets in for-
eign securities, including securities of issuers in emerging markets or
countries ("emerging countries") and securities quoted in foreign
currencies.
3
<PAGE>
The Internet. The Internet is a global collection of connected computers
that allows commercial and professional organizations, educational institu-
tions, government agencies, and individuals to communicate electronically,
access and share information, and conduct business.
The Internet has had, and is expected to continue to have, a significant
impact on the global economy, as it changes the way many companies operate.
Benefits of the Internet for businesses may include global scalability,
acquisition of new clients, new revenue sources and increased efficiencies.
Internet Tollkeepers. The Fund intends to invest a substantial portion of
its assets in companies the Investment Adviser describes as Internet Toll-
keepers. In general, the Investment Adviser defines a tollkeeper as a com-
pany with predictable, sustainable or recurring revenue streams. Like a toll
collector for a highway or bridge, these tollkeeper companies may grow reve-
nue by increasing "traffic," or customers and sales, and raising "tolls," or
prices. The Investment Adviser believes that the characteristics of many of
these tollkeepers, including dominant market share and strong brand name,
should enable them to consistently grow their business. An Internet Toll-
keeper is a company that has developed or is seeking to develop predictable,
sustainable or recurring revenue streams by applying the above characteris-
tics to the growth of the Internet. The Investment Adviser does not define
companies that merely have an Internet site or sell some products over the
Internet as Internet Tollkeepers (although the Investment Adviser may invest
in such companies as part of the Fund's 35% basket of securities which are
not or may not be Internet Tollkeepers).
Internet Tollkeepers are media, telecommunications, technology and Internet
companies which provide access, infrastructure, content and services to
Internet companies and Internet users. The following represent examples of
each of these types of companies, but should not be construed to exclude
other types of Internet Tollkeepers:
. Access providers enable individuals and businesses to connect to the
Internet through, for example, cable systems or the telephone network.
. Infrastructure companies provide items such as servers, routers, software
and storage necessary for companies to participate in the Internet.
. Media content providers own copyrights, distribution networks and/or pro-
gramming. Traditional media companies stand to benefit from an increase in
advertising spending by Internet companies. Copyright owners stand to ben-
efit from a new distribution channel for their music and video properties.
They also will benefit from increasing demand for traditional items like
CD's and DVD's driven by aggressive competition among Internet retailers.
. Service providers may facilitate transactions, communications, security,
computer programming and back-office functions for Internet businesses.
For
4
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
example, Internet companies may contract out advertising sales or credit
card clearing to service providers.
Our Approach to Investing in the Internet. While the Internet is clearly a
significant force in shaping businesses and driving the economy, the Invest-
ment Adviser believes that many Internet-based companies may not have sus-
tainable growth. Many Internet-based companies that are engaged in elec-
tronic commerce are focused on driving sales volume and competing with other
Internet-based companies. Often, this competition is based on price, and if
these companies do not own strong franchises, then the Investment Adviser
believes there could be significant uncertainty regarding their long-term
profitability.
The Investment Adviser believes that another attractive way to invest in the
Internet sector is to invest in businesses participating in the growth of
the Internet that potentially have long-lasting strategic advantages. Char-
acteristics of these companies may include: dominant market share, strong
brand names, recurring revenue streams, cost advantages, economies of scale,
financial strength, technological advantages and strong, experienced manage-
ment teams.
Beneficiaries of the Internet that may meet the above criteria include those
companies (Internet Tollkeepers) providing access, infrastructure, content,
and services to Internet companies and Internet users. The Fund will also
invest in companies whose rapid adoption of an Internet strategy is expected
to improve their cost structure or competitive advantage. Internet-based
companies that exhibit a sustainable business model may also be candidates
for purchase by the Fund. The Investment Adviser pays careful attention to
the stock prices of these companies, seeking to purchase them at a discount
to their intrinsic value.
Because of its narrow industry focus, the Fund's investment performance will
be closely tied to many factors which affect the Internet and Internet-
related industries. These factors include intense competition, consumer
preferences, problems with product compatibility and government regulation.
Internet and Internet-related securities may experience significant price
movements caused by disproportionate investor optimism or pessimism with
little or no basis in fundamental economic conditions. As a result, the
Fund's NAV is more likely to have greater fluctuations than that of a Fund
which invests in other industries.
5
<PAGE>
Goldman Sachs
Real Estate Securities Fund
FUND FACTS
- --------------------------------------------------------------------------------
Objective: Total return comprised of long-term growth of capital
and dividend income
Benchmark: Wilshire Real Estate Securities Index
Investment Focus: REITs and real estate industry companies
Investment Style: Growth at a discount
INVESTMENT OBJECTIVE
The Fund seeks total return comprised of long-term growth of capital and
dividend income.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, substan-
tially all and at least 80% of its total assets in a diversified portfolio
of equity securities of issuers that are primarily engaged in or related to
the real estate industry. The Fund expects that a substantial portion of its
assets will be invested in REITs and real estate industry companies.
A "real estate industry company" is a company that derives at least 50% of
its gross revenues or net profits from the ownership, development, construc-
tion, financing, management or sale of commercial, industrial or residential
real estate or interests therein.
The Fund's investment strategy is based on the premise that property market
fundamentals are the primary determinant of growth, underlying the success
of companies in the real estate industry. The Investment Adviser focuses on
companies that can achieve sustainable growth in cash flow and dividend pay-
ing capability. The Investment Adviser attempts to purchase securities so
that its underlying portfolio will be diversified geographically and by
property type. Although the Fund will invest primarily in publicly traded
U.S. securities, it may invest up to 15% of its total assets in foreign
securities, including securities of issuers in emerging countries and secu-
rities quoted in foreign currencies.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity
REITs may be affected by changes in the value of the underlying property
owned by the REITs. Mortgage REITs may be affected by the quality of any
credit extended. REITs are dependent upon management skill, may not be
diversified, and are subject to heavy cash flow dependency, default by bor-
rowers and self-liquidation. REITs are also subject to the possibilities of
failing to qualify for tax free pass-through of income and failing to main-
tain their exemptions from investment company registration. REITs whose
underlying properties are concentrated in a particular industry or geo-
graphic region are also subject to risks affecting such industries and
regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected
to decline. In contrast, as interest rates on adjustable rate mortgage loans
are reset periodically, yields on a REIT's investment in such loans will
gradually align themselves to reflect changes in market interest rates,
causing the value of such investments to fluctuate less dramatically in
response to interest rate fluctuations than would investments in fixed rate
obligations.
The REIT investments of the Real Estate Securities Fund often do not provide
complete tax information to the Fund until after the calendar year-end. Con-
sequently, because of the delay, it may be necessary for the Fund to request
permission to extend the deadline for issuance of Forms 1099-DIV beyond Jan-
uary 31.
Other. The Fund may invest up to 20% of its total assets in fixed-income
securities, such as government, corporate debt and bank obligations, that
offer the potential to further the Fund's investment objective.
7
<PAGE>
Other Investment Practices and Securities
The table below identifies some of the investment techniques that may (but are
not required to) be used by the Funds in seeking to achieve their investment
objectives. The table also highlights the differences among the Funds in their
use of these techniques and other investment practices and investment
securities. Numbers in this table show allowable usage only; for actual usage,
consult the Funds' annual and semi-annual reports. For more information see
Appendix A.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No specific percentage limitation on usage;limited only by the objectives
and strategies of the Fund
- -- Not permitted
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
- ---------------------------------------------------------------------------
<S> <C> <C>
Investment Practices
Borrowings 33 1/3 33 1/3
Credit, currency, index, interest rate and mortgage
swaps* -- 15
Cross Hedging of Currencies . .
Custodial receipts . .
Equity Swaps* 15 15
Foreign Currency Transactions** . .
Futures Contracts and Options on Futures Contracts . .
Interest rate caps, floors and collars -- .
Investment Company Securities (including exchange-
traded funds) 10 10
Mortgage Dollar Rolls -- .
Options on Foreign Currencies/1/ . .
Options on Securities and Securities Indices/2/ . .
Repurchase Agreements . .
Securities Lending 33 1/3 33 1/3
Short Sales Against the Box 25 25
Unseasoned Companies . .
Warrants and Stock Purchase Rights . .
When-Issued Securities and Forward Commitments . .
- ---------------------------------------------------------------------------
</TABLE>
* Limited to 15% of net assets (together with other illiquid securities) for
all structured securities which are not deemed to be liquid and all swap
transactions.
** Limited by the amount each Fund may invest in foreign securities.
1 The Funds may purchase and sell call and put options.
2 The Funds may sell covered call and put options and purchase call and put
options.
8
<PAGE>
OTHER INVESTMENT PRACTICES AND SECURITIES
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No specific percentage
limitation on usage;
limited only by the
objectives and strategies
of the Fund
- -- Not permitted
<TABLE>
<CAPTION>
Internet Real Estate
Tollkeeper Securities
Fund Fund
- ------------------------------------------------
<S> <C> <C>
Investment Securities
American, European and
Global Depository
Receipts . .
Asset-Backed and
Mortgage-Backed
Securities/3/ . .
Bank Obligations/3/ . .
Convertible
Securities/4/ . .
Corporate Debt
Obligations/3/ . .
Equity Securities 90+ 80+
Emerging Country
Securities/5/ 25 15
Fixed Income Securities 10 20
Foreign Securities/5/ 25 15
Non-Investment Grade
Fixed Income Securities 10/6/ 20/6/
Real Estate Investment
Trusts . .
Stripped Mortgage-Backed
Securities*,/3/ -- .
Structured Securities/3/ . .
Temporary Investments 100 100
U.S. Government
Securities/3/ . .
Yield Curve Options and
Inverse Floating Rate
Securities -- .
- ------------------------------------------------
</TABLE>
* Limited to 15% of net assets (together with other illiquid securities) for
all structured securities which are not deemed to be liquid and all swap
transactions.
3 Limited by the amount the Fund invests in fixed-income securities.
4 Convertible securities purchased by the Funds use the same rating criteria
for convertible and non-convertible debt securities.
5 The Internet Tollkeeper and Real Estate Securities Funds may invest in the
aggregate up to 25% and 15%, respectively, of their total assets in foreign
securities, including emerging country securities.
6 May be BB or lower by Standard & Poor's or Ba or lower by Moody's.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other governmental agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Real
Internet Estate
. Applicable Tollkeeper Securities
- -- Not applicable Fund Fund
- ---------------------------------------------
<S> <C> <C>
Credit/Default . .
Foreign . .
Emerging Countries . .
Industry Concentration . .
Stock . .
Derivatives . .
Interest Rate . .
Management . .
Market . .
Liquidity . .
REIT Risk . .
Internet . --
- ---------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
All Funds:
. Credit/Default Risk--The risk that an issuer or guarantor of fixed-income
securities held by a Fund (which may have low credit ratings) may default on
its obligation to pay interest and repay principal.
. Foreign Risk--The risk that when a Fund invests in foreign securities, it
will be subject to risk of loss not typically associated with domestic
issuers. Loss may result because of less foreign government regulation, less
public information and less economic, political and social stability. Loss
may also result from the imposition of exchange controls, confiscations and
other government restrictions. A Fund will also be subject to the risk of
negative foreign currency rate fluctuations. Foreign risks will normally be
greatest when a Fund invests in issuers located in emerging countries.
. Emerging Countries Risk--The securities markets of Asian, Latin American,
Eastern European, African and other emerging countries are less liquid, are
especially subject to greater price volatility, have smaller market capital-
izations, have less government regulation and are not subject to as extensive
and frequent accounting, financial and other reporting requirements as the
securities markets of more developed countries. Further, investment in equity
securities of issuers located in Russia and certain other emerging countries
involves risk of loss resulting from problems in share registration and cus-
tody and substantial economic and political disruptions. These risks are not
normally associated with investments in more developed countries.
. Industry Concentration Risk--The risk that each of the Funds concentrates its
investments in specific industry sectors that have historically experienced
substantial price volatility. Each Fund is subject to greater risk of loss as
a result of adverse economic, business or other developments than if its
investments were diversified across different industry sectors. Securities of
issuers held by the Funds may lack sufficient market liquidity to enable a
Fund to sell the securities at an advantageous time or without a substantial
drop in price.
. Stock Risk--The risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high levels.
There is no guarantee that such levels will continue.
. Derivatives Risk--The risk that loss may result from a Fund's investments in
options, futures, swaps, structured securities and other derivative instru-
ments. These instruments may be leveraged so that small changes may produce
disproportionate losses to a Fund.
11
<PAGE>
. Interest Rate Risk--The risk that when interest rates increase, fixed-income
securities held by a Fund will decline in value. Long-term fixed-income secu-
rities will normally have more price volatility because of this risk than
short-term securities.
. Management Risk--The risk that a strategy used by the Investment Adviser may
fail to produce the intended results.
. Market Risk--The risk that the value of the securities in which a Fund
invests may go up or down in response to the prospects of individual compa-
nies and/or general economic conditions. Price changes may be temporary or
last for extended periods.
. Liquidity Risk--The risk that a Fund will not be able to pay redemption pro-
ceeds within the time period stated in this Prospectus because of unusual
market conditions, an unusually high volume of redemption requests, or other
reasons. Funds that invest in non-investment grade fixed-income securities,
small capitalization stocks, REITs and emerging country issuers will be espe-
cially subject to the risk that during certain periods the liquidity of par-
ticular issuers or industries, or all securities within these investment cat-
egories, will shrink or disappear suddenly and without warning as a result of
adverse economic, market or political events, or adverse investor perceptions
whether or not accurate. The Goldman Sachs Asset Allocation Portfolios (the
"Asset Allocation Portfolios") expect to invest a significant percentage of
their assets in the Real Estate Securities Fund and other funds for which
Goldman Sachs now or in the future acts as investment adviser or underwriter.
Redemptions by an Asset Allocation Portfolio of its position in a Fund may
further increase liquidity risk and may impact a Fund's NAV.
. REIT Risk--Investing in REITs involves certain unique risks in addition to
those risks associated with investing in the real estate industry in general.
REITs whose underlying properties are concentrated in a particular industry
or geographic region are also subject to risks affecting such industries and
regions. The securities of REITs involve greater risks than those associated
with larger, more established companies and may be subject to more abrupt or
erratic price movements. Securities of such issuers may lack sufficient mar-
ket liquidity to enable a Fund to effect sales of an advantageous time or
without a substantial drop in price.
Internet Tollkeeper Fund:
. Internet Risk--The risk that the stock prices of Internet and Internet-
related companies will experience significant price movements as a result of
intense worldwide competition, consumer preferences, product compatibility,
product obsolescence, government regulation, excessive investor optimism or
pessimism, or other factors.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
12
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's Class A
Shares from year to year; and (b) how the average annual returns of a Fund's
Class A, B and C Shares compare to those of broad-based securities market
indices. The bar chart and table assume reinvestment of dividends and dis-
tributions. A Fund's past performance is not necessarily an indication of
how the Fund will perform in the future. The average annual total return
calculation reflects a maximum initial sales charge of 5.5% for Class A
Shares, the assumed contingent deferred sales charge ("CDSC") for Class B
Shares (5% maximum declining to 0% after six years), and the assumed CDSC
for Class C Shares (1% if redeemed within 12 months of purchase). The bar
chart does not reflect the sales loads applicable to Class A Shares. If the
sales loads were reflected, returns would be less. Performance reflects
expense limitations in effect. If expense limitations were not in place, a
Fund's performance would have been reduced. The Internet Tollkeeper Fund
commenced operations on October 1, 1999. Since the Internet Tollkeeper Fund
does not have at least one full calendar year's performance for the period
ending December 31, 1999, no performance information is provided in this
section.
13
<PAGE>
Real Estate Securities Fund
TOTAL RETURN CALENDAR YEAR (CLASS A)
- --------------------------------------------------------------------------------
Best Quarter
Q2 '99 +12.80%
Worst Quarter
Q3 '99 -10.19%
[BAR CHART]
1999 -1.02%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Class A (Inception 7/27/98)
Including Sales Charges (6.51)% (8.94)%
Wilshire Real Estate Securities Index* (3.16)% (9.45)%
------------------------------------------------------------------
Class B (Inception 7/27/98)
Including CDSC (6.65)% (8.65)%
Wilshire Real Estate Securities Index* (3.16)% (9.45)%
------------------------------------------------------------------
Class C (Inception 7/27/98)
Including CDSC (2.79)% (6.03)%
Wilshire Real Estate Securities Index* (3.16)% (9.45)%
------------------------------------------------------------------
</TABLE>
* The Wilshire Real Estate Securities Index is an unmanaged index of publicly
traded REITs and real estate operating companies. The Index figures do not
reflect any fees or expenses.
14
<PAGE>
Fund Fees and Expenses (Class A, B and C Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Class A, Class B, or Class C Shares of a Fund.
<TABLE>
<CAPTION>
Internet Tollkeeper
Fund
-----------------------
Class A Class B Class C
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases 5.5%/1/ None None
Maximum Deferred Sales Charge (Load)/2/ None/1/ 5.0%/3/ 1.0%/4/
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends None None None
Redemption Fees/5/ None None None
Exchange Fees/5/ None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/6/
Management Fees 1.00% 1.00% 1.00%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.35% 0.35% 0.35%
- --------------------------------------------------------------------------
Total Fund Operating Expenses* 1.60% 2.35% 2.35%
- --------------------------------------------------------------------------
</TABLE>
See page 17 for all other footnotes.
* As a result of the current expense limitations,
"Other Expenses" and "Total Fund Operating Expenses"
of the Fund which are actually incurred are as set
forth below. The expense limitations may be
terminated at any time at the option of the
Investment Adviser. If this occurs, "Other Expenses"
and "Total Fund Operating Expenses" may increase
without shareholder approval.
<TABLE>
<CAPTION>
Internet Tollkeeper
Fund
-----------------------
Class A Class B Class C
------------------------------------------------------------------------------
<S> <C> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/6/
Management Fees 1.00% 1.00% 1.00%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses/8/ 0.25% 0.25% 0.25%
------------------------------------------------------------------------------
Total Fund Operating Expenses (after current expense
limitations) 1.50% 2.25% 2.25%
------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Fund Fees and Expenses continued
<TABLE>
<CAPTION>
Real Estate Securities
Fund
-----------------------
Class A Class B Class C
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases 5.5%/1/ None None
Maximum Deferred Sales Charge (Load)/2/ None/1/ 5.0%/3/ 1.0%/4/
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends None None None
Redemption Fees/5/ None None None
Exchange Fees/5/ None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/6/
Management Fees 1.00% 1.00% 1.00%
Distribution and Service (12b-1) Fees 0.25%/7/1.00% 1.00%
Other Expenses/8/ 0.46% 0.46% 0.46%
- --------------------------------------------------------------------------
Total Fund Operating Expenses* 1.71% 2.46% 2.46%
- --------------------------------------------------------------------------
</TABLE>
See page 17 for all other footnotes.
* As a result of the current waivers and expense
limitations, "Other Expenses" and "Total Fund
Operating Expenses" of the Fund which are actually
incurred are as set forth below. The waivers and
expense limitations may be terminated at any time at
the option of the Investment Adviser. If this occurs,
"Other Expenses" and "Total Fund Operating Expenses"
may increase without shareholder approval.
<TABLE>
<CAPTION>
Real Estate Securities
Fund
-----------------------
Class A Class B Class C
------------------------------------------------------------------------------
<S> <C> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/6/
Management Fees 1.00% 1.00% 1.00%
Distribution and Service (12b-1) Fees 0.25%/7/1.00% 1.00%
Other Expenses/8/ 0.19% 0.19% 0.19%
------------------------------------------------------------------------------
Total Fund Operating Expenses (after current waivers
and expense limitations) 1.44% 2.19% 2.19%
------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
FUND FEES AND EXPENSES
/1/The maximum sales charge is a percentage of the offering price. A contin-
gent deferred sales charge ("CDSC") of 1% is imposed on certain redemptions
(within 18 months of purchase) of Class A Shares sold without an initial
sales charge as part of an investment of $1 million or more.
/2/The maximum CDSC is a percentage of the lesser of the NAV at the time of
the redemption or the NAV when the shares were originally purchased.
/3/A CDSC is imposed upon Class B Shares redeemed within six years of purchase
at a rate of 5% in the first year, declining to 1% in the sixth year, and
eliminated thereafter.
/4/A CDSC of 1% is imposed on Class C Shares redeemed within 12 months of pur-
chase.
/5/A transaction fee of $7.50 may be charged for redemption proceeds paid by
wire. In addition to free reinvestments of dividends and distributions in
shares of other Goldman Sachs Funds or shares of the Goldman Sachs Institu-
tional Liquid Assets Portfolios (the "ILA Portfolios") and free automatic
exchanges pursuant to the Automatic Exchange Program, six free exchanges
are permitted in each 12-month period. A fee of $12.50 may be charged for
each subsequent exchange during such period.
/6/The Real Estate Securities Fund's annual operating expenses are based on
actual expenses. The Internet Tollkeeper Fund's expenses are estimated for
the current fiscal year.
/7/The Distributor has voluntarily agreed not to impose a portion of the dis-
tribution and service fee on Class A Shares of the Real Estate Securities
Fund equal to 0.25% of the Fund's Class A average daily net assets. The
waiver may be terminated at any time at the option of the Distributor. If
this occurs, the distribution and service fee of the Fund's Class A Shares
will increase to 0.50% of average daily net assets.
/8/"Other Expenses" include transfer agency fees equal, on an annualized
basis, to 0.19% of the average daily net assets of each Fund's Class A, B
and C Shares, plus all other ordinary expenses not detailed above. The
Investment Adviser has voluntarily agreed to reduce or limit "Other
Expenses" (excluding management fees, distribution and service fees, trans-
fer agency fees, taxes, interest and brokerage fees and litigation, indem-
nification and other extraordinary expenses) to the following percentages
of each Fund's average daily net assets, respectively:
<TABLE>
<CAPTION>
Other
Fund Expenses
--------------------------
<S> <C>
Internet
Tollkeeper 0.06%
Real Estate
Securities 0.00%
</TABLE>
17
<PAGE>
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the expense limitations) with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in Class A, B or C
Shares of a Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that a Fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Internet Tollkeeper
Class A Shares $704 $1,027 N/A N/A
Class B Shares
- Assuming complete
redemption at end of
period $738 $1,033 N/A N/A
- Assuming no redemption $238 $ 733 N/A N/A
Class C Shares
- Assuming complete
redemption at end of
period $338 $ 733 N/A N/A
- Assuming no redemption $238 $ 733 N/A N/A
- ---------------------------------------------------------
Real Estate Securities
Class A Shares $738 $1,131 $1,549 $2,710
Class B Shares
- Assuming complete
redemption at end of
period $749 $1,067 $1,511 $2,673
- Assuming no redemption $249 $ 767 $1,311 $2,673
Class C Shares
- Assuming complete
redemption at end of
period $349 $ 767 $1,311 $2,796
- Assuming no redemption $249 $ 767 $1,311 $2,796
- ---------------------------------------------------------
</TABLE>
The hypothetical example assumes that a CDSC will not apply to redemptions of
Class A Shares within the first 18 months. Class B Shares convert to Class A
Shares eight years after purchase; therefore, Class A expenses are used in the
hypothetical example for the Real Estate Securities Fund after year eight.
Certain institutions that sell Fund shares and/or their salespersons may
receive other compensation in connection with the sale and distribution of
Class A, Class B and Class C Shares for services to their customers' accounts
and/or the Funds. For additional information regarding such compensation, see
"What Should I Know When I Purchase Shares Through An Authorized Dealer?"
18
<PAGE>
Service Providers
INVESTMENT ADVISER
<TABLE>
<CAPTION>
Investment Adviser
---------------------------------------------
<S> <C>
Goldman Sachs Asset Management ("GSAM")
32 Old Slip
New York, New York 10005
---------------------------------------------
</TABLE>
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. Goldman Sachs registered as an investment adviser in
1981. The Goldman Sachs Group, L.P., which controlled the Investment Advis-
er, merged into The Goldman Sachs Group, Inc. as a result of an initial pub-
lic offering. As of December 31, 1999, GSAM, along with other units of IMD,
had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser makes the investment decisions
for the Funds and places purchase and sale orders for the Funds' portfolio
transactions in U.S. and foreign markets. As permitted by applicable law,
these orders may be directed to any brokers, including Goldman Sachs and its
affiliates. While the Investment Adviser is ultimately responsible for the
management of the Funds, it is able to draw upon the research and expertise
of its asset management affiliates for portfolio decisions and management
with respect to certain portfolio securities. In addition, the Investment
Adviser has access to the research and certain proprietary technical models
developed by Goldman Sachs, and will apply quantitative and qualitative
analysis in determining the appropriate allocations among categories of
issuers and types of securities.
The Investment Adviser also performs the following additional services for
the Funds:
. Supervises all non-advisory operations of the Funds
. Provides personnel to perform necessary executive, administrative and
clerical services to the Funds
. Arranges for the preparation of all required tax returns, reports to
shareholders, prospectuses and statements of additional information and
other reports filed with the Securities and Exchange Commission (the
"SEC") and other regulatory authorities
. Maintains the records of each Fund
. Provides office space and all necessary office equipment and services
19
<PAGE>
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates (as a percentage of each respective
Fund's average daily net assets) listed below:
<TABLE>
<CAPTION>
Actual Rate
For the Fiscal Year
or Period Ended
Contractual Rate December 31, 1999
-------------------------------------------------------------
<S> <C> <C>
Internet Tollkeeper 1.00% 1.00%
-------------------------------------------------------------
Real Estate Securities 1.00% 1.00%
-------------------------------------------------------------
</TABLE>
FUND MANAGERS
M. Roch Hillenbrand, a Managing Director of Goldman Sachs since 1997, is the
Head of Global Equities for GSAM, overseeing the United States, Europe,
Japan, and non-Japan Asia. In this capacity, he is responsible for managing
the group as it defines and implements global portfolio management processes
that are consistent, reliable and predictable. Since 1981, Mr. Hillenbrand
has been President of Commodities Corporation LLC, of which Goldman Sachs is
the parent company. Over the course of his 19-year career at Commodities
Corporation, Mr. Hillenbrand has had extensive experience in dealing with
internal and external investment managers who have managed a range of
futures and equities strategies across multiple markets, using a variety of
styles.
Growth Equity Investment Team
. 19-year consistent investment style applied through diverse and complete
market cycles
. More than $20 billion in equities currently under management
. More than 300 client account relationships
. A portfolio management and analytical team with more than 160 years com-
bined investment experience
20
<PAGE>
SERVICE PROVIDERS
- --------------------------------------------------------------------------------
Growth Equity Investment Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
- ------------------------------------------------------------------------------------------------
<C> <C> <C> <S>
George D. Adler Senior Portfolio Manager-- Since Mr. Adler joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager in
1997. From 1990 to 1997,
he was a portfolio
manager at Liberty
Investment Management,
Inc. ("Liberty") and its
predecessor firm, Eagle
Asset Management
("Eagle").
- ------------------------------------------------------------------------------------------------
Steve Barry Senior Portfolio Manager-- Since Mr. Barry joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager in
1999. From 1988 to 1999,
he was a portfolio
manager at Alliance
Capital Management.
- ------------------------------------------------------------------------------------------------
Robert G. Collins Senior Portfolio Manager-- Since Mr. Collins joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager and
Co-Chair of the Growth
Equity Investment
Committee in 1997. From
1991 to 1997, he was a
portfolio manager at
Liberty and its
predecessor firm, Eagle.
- ------------------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the
Managing Director Internet Tollkeeper 1999 Investment Adviser as a
senior portfolio manager
and Chief Investment
Officer of the Growth
Equity team in 1997.
From 1994 to 1997, he
was the Chief Investment
Officer and Chairman of
Liberty. From 1984 to
1994, he was a portfolio
manager and President at
Liberty's predecessor
firm, Eagle.
- ------------------------------------------------------------------------------------------------
Gregory H. Ekizian Senior Portfolio Manager-- Since Mr. Ekizian joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager and
Co-Chair of the Growth
Equity Investment
Committee in 1997. From
1990 to 1997, he was a
portfolio manager at
Liberty and its
predecessor firm, Eagle.
- ------------------------------------------------------------------------------------------------
Scott Kolar Portfolio Manager-- Since Mr. Kolar joined the
Associate Internet Tollkeeper 1999 Investment Adviser as an
equity analyst in 1997
and became a portfolio
manager in 1999. From
1994 to 1997, he was an
equity analyst and
information systems
specialist at Liberty.
- ------------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Senior Portfolio Manager-- Since Mr. Segundo joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager in
1997. From 1992 to 1997,
he was a portfolio
manager at Liberty and
its predecessor firm,
Eagle.
- ------------------------------------------------------------------------------------------------
David G. Shell Senior Portfolio Manager-- Since Mr. Shell joined the
Vice President Internet Tollkeeper 1999 Investment Adviser as a
portfolio manager in
1997. From 1987 to 1997,
he was a portfolio
manager at Liberty and
its predecessor firm,
Eagle.
- ------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
Real Estate Securities Team
The Real Estate Securities portfolio management team includes individuals
with backgrounds in:
. Fundamental real estate acquisition, development and operations
. Real estate capital markets
. Mergers and acquisitions
. Asset management
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
- -------------------------------------------------------------------------------------------------
<C> <C> <C> <S>
Herbert E. Ehlers Senior Portfolio Since Mr. Ehlers joined the
Managing Director Manager-- Investment Adviser as a senior
Real Estate Securities 1998 portfolio manager and Chief
Investment Officer of the
Growth Equity team in 1997.
From 1994 to 1997, he was the
Chief Investment Officer and
Chairman of Liberty. From 1984
to 1994, he was a portfolio
manager and President at
Liberty's predecessor firm,
Eagle.
- -------------------------------------------------------------------------------------------------
Mark Howard- Senior Portfolio Since Mr. Howard-Johnson joined the
Johnson Manager-- Investment Adviser as a
Vice President Real Estate Securities 1998 portfolio manager in 1998. His
previous experience includes 15
years in the real estate
finance business. From 1996 to
1998, he was the senior equity
analyst for Boston Financial,
responsible for the Pioneer
Real Estate Shares Fund. Prior
to joining Boston Financial,
from 1994 to 1996, Mr. Howard-
Johnson was a real estate
securities analyst for The
Penobscot Group, Inc., one of
only two independent research
firms in the public real estate
securities business.
- -------------------------------------------------------------------------------------------------
Greg Poole Portfolio Manager-- Since Mr. Poole joined the Investment
Associate Real Estate Securities 2000 Adviser as a real estate
securities analyst in 1998 and
became portfolio manager in
2000. His previous experience
includes investment analysis
and financial structuring for
the Real Estate Principal
Investment Group of the
Investment Banking Division of
Goldman Sachs, which he joined
in 1996. He received his B.A.
in Honours Economics from the
University of Western Ontario
in 1996.
- -------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
SERVICE PROVIDERS
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS
The involvement of the Investment Adviser, Goldman Sachs and their affili-
ates in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect
to a Fund or limit a Fund's investment activities. Goldman Sachs and its
affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Funds and/or which engage
in and compete for transactions in the same types of securities, currencies
and instruments as the Funds. Goldman Sachs and its affiliates will not have
any obligation to make available any information regarding their proprietary
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the Funds.
The results of a Fund's investment activities, therefore, may differ from
those of Goldman Sachs and its affiliates, and it is possible that a Fund
could sustain losses during periods in which Goldman Sachs and its affili-
ates and other accounts achieve significant profits on their trading for
proprietary or other accounts. In addition, the Funds may, from time to
time, enter into transactions in which other clients of Goldman Sachs have
an adverse interest. A Fund's activities may be limited because of regula-
tory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions.
23
<PAGE>
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
24
<PAGE>
Dividends
Each Fund pays dividends from its net investment income and capital gain net
income. You may choose to have dividends paid in:
. Cash
. Additional shares of the same class of the same Fund
. Shares of the same or an equivalent class of another Goldman Sachs Fund. Spe-
cial restrictions may apply for certain ILA Portfolios. See the Additional
Statement.
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time before the record date for a
particular dividend. If you do not indicate any choice, dividends will be rein-
vested automatically in the applicable Fund.
The election to reinvest dividends in additional shares will not affect the tax
treatment of such dividends, which will be treated as received by you and then
used to purchase the shares.
Dividends from net investment income and capital gain net income are declared
and paid as follows:
<TABLE>
<CAPTION>
Net
Investment Capital Gain
Fund Income Net Income
- -----------------------------------------------
<S> <C> <C>
Internet Tollkeeper Annually Annually
- -----------------------------------------------
Real Estate Securities Quarterly Annually
- -----------------------------------------------
</TABLE>
From time to time a portion of a Fund's dividends may constitute a return of
capital.
At the time of an investor's purchase of shares of a Fund, a portion of the NAV
per share may be represented by undistributed income or undistributed realized
appreciation of the Fund's portfolio securities. Therefore, subsequent distri-
butions on such shares from such income or realized appreciation may be taxable
to you even if the NAV of the shares is, as a result of the distributions,
reduced below the cost of such shares and the distributions (or portions there-
of) represent a return of a portion of the purchase price.
25
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' shares.
HOW TO BUY SHARES
How Can I Purchase Class A, Class B And Class C Shares Of The Funds?
You may purchase shares of the Funds through:
. Goldman Sachs;
. Authorized Dealers; or
. Directly from Goldman Sachs Trust (the "Trust").
In order to make an initial investment in a Fund, you must furnish to the
Fund, Goldman Sachs or your Authorized Dealer the information in the Account
Application.
To Open an Account:
. Complete the Account Application
. Mail your payment and Account Application to:
Your Authorized Dealer
- Purchases by check or Federal Reserve draft should be made payable to
your Authorized Dealer
- Your Authorized Dealer is responsible for forwarding payment promptly
(within three business days) to the Fund
or
Goldman Sachs Funds c/o National Financial Data Services, Inc. ("NFDS"),
P.O. Box 219711, Kansas City, MO 64121-9711
- Purchases by check or Federal Reserve draft should be made payable to
Goldman Sachs Funds - (Name of Fund and Class of Shares)
- NFDS will not accept a check drawn on a foreign bank, a third-party
check, cash, money orders, travelers checques or credit card checks
- Federal funds wire, Automated Clearing House Network ("ACH") transfer or
bank wires should be sent to State Street Bank and Trust Company ("State
Street") (each Fund's custodian). Please call the Funds at
1-800-526-7384 to get detailed instructions on how to wire your money.
26
<PAGE>
SHAREHOLDER GUIDE
What Is My Minimum Investment In The Funds?
<TABLE>
<CAPTION>
Initial Additional
------------------------------------------------------------------------------
<S> <C> <C>
Regular Accounts $1,000 $50
------------------------------------------------------------------------------
Tax-Sheltered Retirement Plans (excluding SIMPLE IRAs and
Education IRAs) $ 250 $50
------------------------------------------------------------------------------
Uniform Gift to Minors Act Accounts/Uniform Transfer to
Minors Act Accounts $ 250 $50
------------------------------------------------------------------------------
403(b) Plan Accounts $ 200 $50
------------------------------------------------------------------------------
SIMPLE IRAs and Education IRAs $ 50 $50
------------------------------------------------------------------------------
Automatic Investment Plan Accounts $ 50 $50
------------------------------------------------------------------------------
</TABLE>
What Alternative Sales Arrangements Are Available?
The Funds offer three classes of shares through this Prospectus.
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------
Maximum Amount You Can Buy In The Class A No limit
Aggregate Across Funds
------------------------------------
Class B $250,000
------------------------------------
Class C $1,000,000
------------------------------------------------------------------------
Initial Sales Charge Class A Applies to purchases of less
than $1 million--varies by
size of investment with a
maximum of 5.5%
------------------------------------
Class B None
------------------------------------
Class C None
------------------------------------------------------------------------
CDSC Class A 1.00% on certain investments
of $1 million or more if you
sell within 18 months
------------------------------------
Class B 6 year declining CDSC with a
maximum of 5%
------------------------------------
Class C 1% if shares are redeemed
within 12 months of purchase
------------------------------------------------------------------------
Conversion Feature Class A None
------------------------------------
Class B Class B Shares convert to
Class A Shares after 8 years
------------------------------------
Class C None
------------------------------------------------------------------------
</TABLE>
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Refuse to open an account if you fail to (i) provide a social security
number or other taxpayer identification number; or (ii) certify that such
number is correct (if required to do so under applicable law).
. Reject or restrict any purchase or exchange order by a particular purchaser
(or group of related purchasers). This may occur, for example, when a pattern
of
27
<PAGE>
frequent purchases, sales or exchanges of shares of a Fund is evident, or if
purchases, sales or exchanges are, or a subsequent abrupt redemption might
be, of a size that would disrupt management of a Fund.
. Close a Fund to new investors from time to time and reopen any such Fund
whenever it is deemed appropriate by a Fund's Investment Adviser.
. Modify or waive the minimum investment amounts.
. Modify the manner in which shares are offered.
. Modify the sales charge rates applicable to future purchases of shares.
The Funds may allow you to purchase shares with securities instead of cash
if consistent with a Fund's investment policies and operations and if
approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange shares is
determined by a Fund's NAV and share class. Each class calculates its NAV as
follows:
<TABLE>
<S> <C>
(Value of Assets of the Class)
NAV = - (Liabilities of the Class)
-----------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
The Funds' investments are valued based on market quotations or, if accurate
quotations are not readily available, the fair value of the Fund's investments
may be determined in good faith under procedures established by the Trustees.
. NAV per share of each share class is calculated by the Fund's custodian on
each business day as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time). Fund shares will not be
priced on any day the New York Stock Exchange is closed.
. When you buy shares, you pay the NAV next calculated after the Funds
receive your order in proper form, plus any applicable sales charge.
. When you sell shares, you receive the NAV next calculated after the Funds
receive your order in proper form, less any applicable CDSC.
Note: The time at which transactions and shares are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
Foreign securities may trade in their local markets on days a Fund is
closed. As a result, if the Fund holds foreign securities, its NAV may be
impacted on days when investors may not purchase or redeem Fund shares.
28
<PAGE>
SHAREHOLDER GUIDE
In addition, the impact of events that occur after the publication of market
quotations used by a Fund to price its securities (for example, in foreign
markets), but before the close of regular trading on the New York Stock
Exchange will normally not be reflected in a Fund's next determined NAV
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.
COMMON QUESTIONS ABOUT THE PURCHASE OF CLASS A SHARES
What Is The Offering Price Of Class A Shares?
The offering price of Class A Shares of each Fund is the next determined NAV
per share plus an initial sales charge paid to Goldman Sachs at the time of
purchase of shares. The sales charge varies depending upon the amount you
purchase. In some cases, described below, the initial sales charge may be
eliminated altogether, and the offering price will be the NAV per share. The
current sales charges and commissions paid to Authorized Dealers are as fol-
lows:
<TABLE>
<CAPTION>
Sales Charge Maximum Dealer
Sales Charge as as Percentage Allowance as
Amount of Purchase Percentage of of Net Amount Percentage of
(including sales charge, if any) Offering Price Invested Offering Price*
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
$50,000 up to (but less than)
$100,000 4.75 4.99 4.00
$100,000 up to (but less than)
$250,000 3.75 3.90 3.00
$250,000 up to (but less than)
$500,000 2.75 2.83 2.25
$500,000 up to (but less than)
$1 million 2.00 2.04 1.75
$1 million or more 0.00** 0.00** ***
---------------------------------------------------------------------------------
</TABLE>
* Dealer's allowance may be changed periodically. During special promo-
tions, the entire sales charge may be allowed to Authorized Dealers.
Authorized Dealers to whom substantially the entire sales charge is
allowed may be deemed to be "underwriters" under the Securities Act of
1933.
** No sales charge is payable at the time of purchase of Class A Shares of
$1 million or more, but a CDSC of 1% may be imposed in the event of
certain redemptions within 18 months of purchase.
*** The Distributor pays a one-time commission to Authorized Dealers who
initiate or are responsible for purchases of $1 million or more of
shares of the Funds equal to 1.00% of the amount under $3 million,
0.50% of the next $2 million, and 0.25% thereafter. The Distributor may
also pay, with respect to all or a portion of the amount purchased, a
commission in accordance with the foregoing schedule to Authorized
Dealers who initiate or are responsible for purchases of $500,000 or
more by certain pension and profit sharing plans, pension funds and
other company-sponsored benefit plans investing in the Funds which sat-
isfy the criteria set forth below in "When Are Class A Shares Not Sub-
ject To A Sales Load?" or $1 million or more by certain "wrap"
accounts. Purchases by such plans will be made at NAV with no initial
sales charge, but if all of the shares held are redeemed within 18
months after the end of the calendar month in which such purchase was
made, a CDSC of 1% may be imposed upon the plan sponsor or the third
party administrator. In addition, Authorized Dealers will remit to the
Distributor such payments received in connection with "wrap" accounts
in the event that shares are redeemed within 18 months after the end of
the calendar month in which the purchase was made.
29
<PAGE>
What Else Do I Need To Know About Class A Shares' CDSC?
Purchases of $1 million or more of Class A Shares will be made at NAV with
no initial sales charge. However, if you redeem shares within 18 months
after the end of the calendar month in which the purchase was made, excluding
any period of time in which the shares were exchanged into and remained
invested in an equivalent class of an ILA Portfolio, a CDSC of 1% may be
imposed. The CDSC may not be imposed if your Authorized Dealer enters into an
agreement with the Distributor to return all or an applicable prorated portion
of its commission to the Distributor. The CDSC is waived on redemptions in
certain circumstances. See "In What Situations May The CDSC On Class A, B Or C
Shares Be Waived Or Reduced?" below.
When Are Class A Shares Not Subject To A Sales Load?
Class A Shares of the Funds may be sold at NAV without payment of any sales
charge to the following individuals and entities:
. 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 these
individuals;
. Qualified retirement plans of Goldman Sachs;
. Trustees or directors of investment companies for which Goldman Sachs or
an affiliate acts as sponsor;
. Any employee or registered representative of any Authorized Dealer or
their respective spouses, children and parents;
. Banks, trust companies or other types of depository institutions investing
for their own account or investing for discretionary or non-discretionary
accounts;
. Any state, county or city, or any instrumentality, department, authority
or agency thereof, which is prohibited by applicable investment laws from
paying a sales charge or commission in connection with the purchase of
shares of a Fund;
. Pension and profit sharing plans, pension funds and other company-sponsored
benefit plans that:
. Buy shares of Goldman Sachs Funds worth $500,000 or more; or
. Have 100 or more eligible employees at the time of purchase; or
. Certify that they expect to have annual plan purchases of shares of
Goldman Sachs Funds of $200,000 or more; or
. Are provided administrative services by certain third-party administrators
that have entered into a special service arrangement with Goldman Sachs
relating to such plans; or
. Have at the time of purchase aggregate assets of at least $2,000,000;
30
<PAGE>
SHAREHOLDER GUIDE
. "Wrap" accounts for the benefit of clients of broker-dealers, financial
institutions or financial planners, provided they have entered into an
agreement with GSAM specifying aggregate minimums and certain operating
policies and standards;
. Registered investment advisers investing for accounts for which they
receive asset-based fees;
. Accounts over which GSAM or its advisory affiliates have investment dis-
cretion; or
. Shareholders receiving distributions from a qualified retirement plan
invested in the Goldman Sachs Funds and reinvesting such proceeds in a
Goldman Sachs IRA.
You must certify eligibility for any of the above exemptions on your Account
Application and notify the Fund if you no longer are eligible for the exemp-
tion. The Fund will grant you an exemption subject to confirmation of your
entitlement. You may be charged a fee if you effect your transactions
through a broker or agent.
How Can The Sales Charge On Class A Shares Be Reduced?
. Right of Accumulation: When buying Class A Shares in Goldman Sachs Funds,
your current aggregate investment determines the initial sales load you
pay. You may qualify for reduced sales charges when the current market
value of holdings (shares at current offering price), plus new purchases,
reaches $50,000 or more. Class A Shares of any of the Goldman Sachs Funds
may be combined under the Right of Accumulation. To qualify for a reduced
sales load, you or your Authorized Dealer must notify the Funds' Transfer
Agent at the time of investment that a quantity discount is applicable.
Use of this service is subject to a check of appropriate records. The
Additional Statement has more information about the Right of Accumulation.
. Statement of Intention: You may obtain a reduced sales charge by means of
a written Statement of Intention which expresses your non-binding commit-
ment to invest in the aggregate $50,000 or more (not counting reinvest-
ments of dividends and distributions) within a period of 13 months in
Class A Shares of one or more Goldman Sachs Fund. Any investments you make
during the period will receive the discounted sales load based on the full
amount of your investment commitment. If the investment commitment of the
Statement of Intention is not met prior to the expiration of the 13-month
period, the entire amount will be subject to the higher applicable sales
charge. By signing the Statement of Intention, you authorize the Transfer
Agent to escrow and redeem Class A Shares in your account to pay this
additional charge. The Additional Statement has more information about the
Statement of Intention, which you should read carefully.
31
<PAGE>
COMMON QUESTIONS ABOUT THE PURCHASE OF CLASS B SHARES
What Is The Offering Price Of Class B Shares?
You may purchase Class B Shares of the Funds at the next determined NAV
without an initial sales charge. However, Class B Shares redeemed within six
years of purchase will be subject to a CDSC at the rates shown in the table
below based on how long you held your shares.
The CDSC schedule is as follows:
<TABLE>
<CAPTION>
CDSC as a
Percentage of
Dollar Amount
Year Since Purchase Subject to CDSC
----------------------------------------
<S> <C>
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter None
----------------------------------------
</TABLE>
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or in part to defray the Distributor's expenses related to providing
distribution-related services to the Funds in connection with the sale of
Class B Shares, including the payment of compensation to Authorized Dealers.
A commission equal to 4% of the amount invested is paid to Authorized Deal-
ers.
What Should I Know About The Automatic Conversion Of Class B Shares?
Class B Shares of a Fund will automatically convert into Class A Shares of
the same Fund at the end of the calendar quarter that is eight years after
the purchase date.
If you acquire Class B Shares of a Fund by exchange from Class B Shares of
another Goldman Sachs Fund, your Class B Shares will convert into Class A
Shares of such Fund based on the date of the initial purchase and the CDSC
schedule of that purchase.
If you acquire Class B Shares through reinvestment of distributions, your
Class B Shares will convert into Class A Shares based on the date of the
initial purchase of the shares on which the distribution was paid.
The conversion of Class B Shares to Class A Shares will not occur at any
time the Funds are advised that such conversions may constitute taxable
events for federal tax purposes, which the Funds believe is unlikely. If
conversions do not occur as a
32
<PAGE>
SHAREHOLDER GUIDE
result of possible taxability, Class B Shares would continue to be subject
to higher expenses than Class A Shares for an indeterminate period.
A COMMON QUESTION ABOUT THE PURCHASE OF CLASS C SHARES
What Is The Offering Price Of Class C Shares?
You may purchase Class C Shares of the Funds at the next determined NAV
without paying an initial sales charge. However, if you redeem Class C
Shares within 12 months of purchase, a CDSC of 1% will normally be deducted
from the redemption proceeds; provided that in connection with purchases by
pension and profit sharing plans, pension funds and other company-sponsored
benefit plans, where all of the Class C Shares are redeemed within 12 months
of purchase, a CDSC of 1% may be imposed upon the plan sponsor or third
party administrator.
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or in part to defray the Distributor's expenses related to providing
distribution-related services to the Funds in connection with the sale of
Class C Shares, including the payment of compensation to Authorized Dealers.
An amount equal to 1% of the amount invested is normally paid by the Dis-
tributor to Authorized Dealers.
COMMON QUESTIONS APPLICABLE TO THE PURCHASE OF CLASS A, B
AND C SHARES
What Else Do I Need To Know About The CDSC On Class A, B Or C Shares?
. The CDSC is based on the lesser of the NAV of the shares at the time of
redemption or the original offering price (which is the original NAV).
. No CDSC is charged on shares acquired from reinvested dividends or capital
gains distributions.
. No CDSC is charged on the per share appreciation of your account over
the initial purchase price.
. When counting the number of months since a purchase of Class B or Class
C Shares was made, all payments made during a month will be combined and
considered to have been made on the first day of that month.
. To keep your CDSC as low as possible, each time you place a request to
sell shares, the Funds will first sell any shares in your account that do
not carry a CDSC and then the shares in your account that have been held
the longest.
33
<PAGE>
In What Situations May The CDSC On Class A, B Or C Shares Be Waived Or
Reduced?
The CDSC on Class A, Class B and Class C Shares that are subject to a CDSC
may be waived or reduced if the redemption relates to:
. Retirement distributions or loans to participants or beneficiaries from
pension and profit sharing plans, pension funds and other company-spon-
sored benefit plans (each a "Retirement Plan");
. The death or disability (as defined in Section 72(m)(7) of the Internal
Revenue Code of 1986, as amended (the "Code")) of a participant or benefi-
ciary in a Retirement Plan;
. Hardship withdrawals by a participant or beneficiary in a Retirement Plan;
. Satisfying the minimum distribution requirements of the Code;
. Establishing "substantially equal periodic payments" as described under
Section 72(t)(2) of the Code;
. The separation from service by a participant or beneficiary in a Retire-
ment Plan;
. The death or disability (as defined in Section 72(m)(7) of the Code) of a
shareholder if the redemption is made within one year of the event;
. Excess contributions distributed from a Retirement Plan;
. Distributions from a qualified Retirement Plan invested in the Goldman
Sachs Funds which are being rolled over to a Goldman Sachs IRA; or
. Redemption proceeds which are to be reinvested in accounts or non-regis-
tered products over which GSAM or its advisory affiliates have investment
discretion.
In addition, Class A, B and C Shares subject to a systematic withdrawal plan
may be redeemed without a CDSC. The Funds reserve the right to limit such
redemptions, on an annual basis, to 12% each of the value of your Class B
and C Shares and 10% of the value of your Class A Shares.
How Do I Decide Whether To Buy Class A, B Or C Shares?
The decision as to which Class to purchase depends on the amount you invest,
the intended length of the investment and your personal situation.
. Class A Shares. If you are making an investment of $50,000 or more that
qualifies for a reduced sales charge, you should consider purchasing Class
A Shares.
. Class B Shares. If you plan to hold your investment for at least six years
and would prefer not to pay an initial sales charge, you might consider
purchasing Class B Shares. By not paying a front-end sales charge, your
entire investment in Class B Shares is available to work for you from the
time you make your initial investment. However, the distribution and serv-
ice fee paid by Class B
34
<PAGE>
SHAREHOLDER GUIDE
Shares will cause your Class B Shares (until conversion to Class A Shares) to
have a higher expense ratio, and thus lower performance and lower dividend
payments (to the extent dividends are paid) than Class A Shares. A maximum
purchase limitation of $250,000 in the aggregate normally applies to Class B
Shares.
. Class C Shares. If you are unsure of the length of your investment or plan
to hold your investment for less than six years and would prefer not to
pay an initial sales charge, you may prefer Class C Shares. By not paying
a front-end sales charge, your entire investment in Class C Shares is
available to work for you from the time you make your initial investment.
However, the distribution and service fee paid by Class C Shares will
cause your Class C Shares to have a higher expense ratio, and thus lower
performance and lower dividend payments (to the extent dividends are paid)
than Class A Shares (or Class B Shares after conversion to Class A
Shares).
Although Class C Shares are subject to a CDSC for only 12 months, Class C
Shares do not have the conversion feature applicable to Class B Shares and
your investment will therefore pay higher distribution fees indefinitely. A
maximum purchase limitation of $1,000,000 in the aggregate normally applies
to purchases of Class C Shares.
Note: Authorized Dealers may receive different compensation for selling
Class A, Class B or Class C Shares.
In addition to Class A, Class B and Class C Shares, each Fund also offers
other classes of shares to investors. These other share classes are subject
to different fees and expenses (which affect performance), have different
minimum investment requirements and are entitled to different services.
Information regarding these other share classes may be obtained from your
sales representative or from Goldman Sachs by calling the number on the back
cover of this Prospectus.
HOW TO SELL SHARES
How Can I Sell Class A, Class B And Class C Shares Of The Funds?
You may arrange to take money out of your account by selling (redeeming)
some or all of your shares. Each Fund will redeem its shares upon request on
any business day at the NAV next determined after receipt of such request in
proper form, subject to any applicable CDSC. You may request that redemption
proceeds be sent to you by check or by wire (if the wire instructions are on
record). Redemptions may be requested in writing or by telephone.
35
<PAGE>
<TABLE>
<CAPTION>
Instructions For Redemptions:
--------------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund names and Class of Shares
. The dollar amount you want to sell
. How and where to send the proceeds
. Obtain a signature guarantee (see details below)
. Mail your request to:
Goldman Sachs Funds
c/o NFDS
P.O. Box 219711
Kansas City, MO 64121-9711
--------------------------------------------------------------------
By Telephone: If you have not declined the telephone redemption
privilege on your Account Application:
. 1-800-526-7384
(8:00 a.m. to 4:00 p.m. New York time)
. You may redeem up to $50,000 of your shares
within any 7 calendar day period
. Proceeds which are sent directly to a Goldman
Sachs brokerage account are not subject to the
$50,000 limit
--------------------------------------------------------------------
</TABLE>
When Do I Need A Signature Guarantee To Redeem Shares?
A signature guarantee is required if:
. You are requesting in writing to redeem shares in an amount over $50,000;
. You would like the redemption proceeds sent to an address that is not your
address of record; or
. You would like to change the bank designated on your Account Application.
A signature guarantee must be obtained from a bank, brokerage firm or other
financial intermediary that is a member of an approved Medallion Guarantee
Program or that is otherwise approved by the Fund. A notary public cannot
provide a signature guarantee. Additional documentation may be required for
executors, trustees or corporations or when deemed appropriate by the Transfer
Agent.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized telephone
redemption requests that the Trust reasonably believes to be genuine. The Trust
may accept telephone redemption instructions from any person identifying
himself or herself as the owner of an account or the owner's registered
representative where the owner has not declined in writing to use this service.
Thus, you risk possible losses if a telephone redemption is not authorized by
you.
36
<PAGE>
SHAREHOLDER GUIDE
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs and NFDS each employ reasonable proce-
dures specified by the Trust to confirm that such instructions are genuine.
If reasonable procedures are not employed, the Trust may be liable for any
loss due to unauthorized or fraudulent transactions. The following general
policies are currently in effect:
. All telephone requests are recorded.
. Proceeds of telephone redemption requests will be sent only to your
address of record or authorized bank account designated in the Account
Application (unless you provide written instructions and a signature guar-
antee, indicating another address or account) and exchanges of shares nor-
mally will be made only to an identically registered account.
. Telephone redemptions by check to your address of record will not be
accepted during the 30-day period following any change in your address of
record.
. The telephone redemption option does not apply to shares held in a "street
name" account. "Street name" accounts are accounts maintained and serviced
by your Authorized Dealer. If your account is held in "street name," you
should contact your registered representative of record, who may make tel-
ephone redemptions on your behalf.
. The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
How Are Redemption Proceeds Paid?
By Wire: You may arrange for your redemption proceeds to be wired as federal
funds to the bank account designated in your Account Application. The fol-
lowing general policies govern wiring redemption proceeds:
. Redemption proceeds will normally be wired on the next business day in
federal funds (for a total of one business day delay), but may be paid up
to three business days following receipt of a properly executed wire
transfer redemption request. If you are selling shares you recently paid
for by check, the Fund will pay you when your check has cleared, which may
take up to 15 days. If the Federal Reserve Bank is closed on the day that
the redemption proceeds would ordinarily be wired, wiring the redemption
proceeds may be delayed one additional business day.
. A transaction fee of $7.50 may be charged for payments of redemption pro-
ceeds by wire. Your bank may also charge wiring fees. You should contact
your bank directly to learn whether it charges such fees.
37
<PAGE>
. To change the bank designated on your Account Application, you must send
written instructions (with your signature guaranteed) to the Transfer
Agent.
. Neither the Trust, Goldman Sachs nor any Authorized Dealer assumes any
responsibility for the performance of your bank or any intermediaries in
the transfer process. If a problem with such performance arises, you
should deal directly with your bank or any such intermediaries.
By Check: You may elect to receive your redemption proceeds by check.
Redemption proceeds paid by check will normally be mailed to the address of
record within three business days of a properly executed redemption request.
If you are selling shares you recently paid for by check, the Fund will pay
you when your check has cleared, which may take up to 15 days.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
The Trust reserves the right to:
. Redeem your shares if your account balance is less than $50 as a result of
a redemption. The Funds will not redeem your shares on this basis if the
value of your account falls below the minimum account balance solely as a
result of market conditions. The Funds will give you 60 days' prior written
notice to allow you to purchase sufficient additional shares of the Fund in
order to avoid such redemption.
. Redeem your shares in other circumstances determined by the Board of
Trustees to be in the best interests of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distributions
be returned to the Fund as undeliverable or remain uncashed for six months.
In addition, that distribution and all future distributions payable to you
will be reinvested at NAV in additional Fund shares. No interest will accrue
on amounts represented by uncashed distribution or redemption checks.
Can I Reinvest Redemption Proceeds In The Same Or Another Goldman Sachs
Fund?
You may redeem shares of a Fund and reinvest a portion or all of the redemption
proceeds (plus any additional amounts needed to round off purchases to the
nearest full share) at NAV. To be eligible for this privilege, you must hold
the shares you want to redeem for at least 30 days and you must reinvest the
share proceeds within 90 days after you redeem. You may reinvest as follows:
. Class A or B Shares--Class A Shares of the same Fund or any other Goldman
Sachs Fund
38
<PAGE>
SHAREHOLDER GUIDE
. Class C Shares--Class C Shares of the same Fund or any other Goldman Sachs
Fund
. You should obtain and read the applicable prospectuses before investing in
any other Funds.
. If you pay a CDSC upon redemption of Class A or Class C Shares and then
reinvest in Class A or Class C Shares as described above, your account
will be credited with the amount of the CDSC you paid. The reinvested
shares will, however, continue to be subject to a CDSC. The holding period
of the shares acquired through reinvestment will include the holding
period of the redeemed shares for purposes of computing the CDSC payable
upon a subsequent redemption. For Class B Shares, you may reinvest the
redemption proceeds in Class A Shares at NAV but the amount of the CDSC
paid upon redemption of the Class B Shares will not be credited to your
account.
. The reinvestment privilege may be exercised at any time in connection with
transactions in which the proceeds are reinvested at NAV in a tax-sheltered
retirement plan. In other cases, the reinvestment privilege may be exercised
once per year upon receipt of a written request.
. You may be subject to tax as a result of a redemption. You should consult
your tax adviser concerning the tax consequences of a redemption and
reinvestment.
Can I Exchange My Investment From One Fund To Another?
You may exchange shares of a Fund at NAV without the imposition of an initial
sales charge or CDSC at the time of exchange for shares of the same class or an
equivalent class of any other Goldman Sachs Fund. The exchange privilege may be
materially modified or withdrawn at any time upon 60 days' written notice to
you.
<TABLE>
<CAPTION>
Instructions For
Exchanging
Shares:
----------------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund names and Class of Shares
. The dollar amount you want to exchange
. Obtain a signature guarantee (see details above)
. Mail the request to:
Goldman Sachs Funds
c/o NFDS
P.O. Box 219711
Kansas City, MO 64121-9711
or for overnight delivery--
Goldman Sachs Funds
c/o NFDS
330 West 9th St.
Poindexter Bldg., 1st Floor
Kansas City, MO 64105
----------------------------------------------------------------------
By Telephone: If you have not declined the telephone exchange
privilege on your Account Application:
. 1-800-526-7384
(8:00 a.m. to 4:00 p.m. New York time)
----------------------------------------------------------------------
</TABLE>
39
<PAGE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. Six free exchanges are allowed in each 12 month period.
. A $12.50 fee may be charged for each subsequent exchange.
. There is no charge for exchanges made pursuant to the Automatic Exchange
Program.
. The exchanged shares may later be exchanged for shares of the same class
(or an equivalent class) of the original Fund at the next determined NAV
without the imposition of an initial sales charge or CDSC if the amount in
the Fund resulting from such exchanges is less than the largest amount on
which you have previously paid the applicable sales charge.
. When you exchange shares subject to a CDSC, no CDSC will be charged at
that time. The exchanged shares will be subject to the CDSC of the shares
originally held. For purposes of determining the amount of the applicable
CDSC, the length of time you have owned the shares will be measured from
the date you acquired the original shares subject to a CDSC and will not
be affected by a subsequent exchange.
. Eligible investors may exchange certain classes of shares for another
class of shares of the same Fund. For further information, call Goldman
Sachs Funds at 1-800-526-7384.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund.
. Exchanges are available only in states where exchanges may be legally
made.
. It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
. Goldman Sachs and NFDS may use reasonable procedures described under "What
Do I Need to Know About Telephone Redemption Requests?" in an effort to
prevent unauthorized or fraudulent telephone exchange requests.
. Telephone exchanges normally will be made only to an identically regis-
tered account. Shares may be exchanged among accounts with different
names, addresses and social security or other taxpayer identification num-
bers only if the exchange instructions are in writing and accompanied by a
signature guarantee.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
40
<PAGE>
SHAREHOLDER GUIDE
SHAREHOLDER SERVICES
Can I Arrange To Have Automatic Investments Made On A Regular Basis?
You may be able to make systematic cash investments through your bank via
ACH transfer or your checking account via bank draft each month. Forms for
this option are available from Goldman Sachs, your Authorized Dealer or you
may check the appropriate box on the Account Application.
Can My Dividends And Distributions From A Fund Be Invested In Other Funds?
You may elect to cross-reinvest dividends and capital gain distributions
paid by a Fund in shares of the same class or an equivalent class of any
other Goldman Sachs Fund.
. Shares will be purchased at NAV.
. No initial sales charge or CDSC will be imposed.
. You may elect cross-reinvestment into an identically registered account or
an account registered in a different name or with a different address,
social security number or taxpayer identification number provided that the
account has been properly established, appropriate signature guarantees
obtained and the minimum initial investment has been satisfied.
Can I Arrange To Have Automatic Exchanges Made On A Regular Basis?
You may elect to exchange automatically a specified dollar amount of shares
of a Fund for shares of the same class or an equivalent class of any other
Goldman Sachs Fund.
. Shares will be purchased at NAV.
. No initial sales charge is imposed.
. Shares subject to a CDSC acquired under this program may be subject to a
CDSC at the time of redemption from the Fund into which the exchange is
made depending upon the date and value of your original purchase.
. Automatic exchanges are made monthly on the 15th day of each month or the
first business day thereafter.
. Minimum dollar amount: $50 per month.
What Else Should I Know About Cross-Reinvestments And Automatic Exchanges?
Cross-reinvestments and automatic exchanges are subject to the following
conditions:
. You must hold $5,000 or more in the Fund which is paying the dividend or
from which the exchange is being made.
41
<PAGE>
. You must invest an amount in the Fund into which cross-reinvestments or
automatic exchanges are being made that is equal to that Fund's minimum
initial investment or continue to cross-reinvest or to make automatic
exchanges until such minimum initial investment is met.
. You should obtain and read the prospectus of the Fund into which dividends
are invested or automatic exchanges are made.
Can I Have Automatic Withdrawals Made On A Regular Basis?
You may draw on your account systematically via check or ACH transfer in any
amount of $50 or more.
. It is normally undesirable to maintain a systematic withdrawal plan at the
same time that you are purchasing additional Class A, Class B or Class C
Shares because of the sales charge imposed on your purchases of Class A
Shares or the imposition of a CDSC on your redemptions of Class A, Class B
or Class C Shares.
. You must have a minimum balance of $5,000 in a Fund.
. Checks are mailed on or about the 25th day of each month.
. Each systematic withdrawal is a redemption and therefore a taxable trans-
action.
. The CDSC applicable to Class A, Class B or Class C Shares redeemed under
the systematic withdrawal plan may be waived.
What Types of Reports Will I Be Sent Regarding My Investment?
You will be provided with a printed confirmation of each transaction in your
account and an individual quarterly account statement. A year-to-date state-
ment for your account will be provided upon request made to Goldman Sachs.
If your account is held in "street name" you may receive your statement and
confirmations on a different schedule.
You will also receive an annual shareholder report containing audited finan-
cial statements and a semi-annual shareholder report. If you have consented
to the delivery of a single copy of shareholder reports, prospectuses and
other information to all shareholders who share the same mailing address
with your account, you may revoke your consent at any time by contacting
Goldman Sachs Funds by phone at 1-800-526-7384 or by mail at Goldman Sachs
Funds, 4900 Sears Tower--60th Floor, Chicago, IL 60606-6372. The Funds will
begin sending individual copies to you within 30 days after receipt of your
revocation.
The Funds do not generally provide sub-accounting services.
What Should I Know When I Purchase Shares Through An Authorized Dealer?
Authorized Dealers and other financial intermediaries may provide varying
arrangements for their clients to purchase and redeem Fund shares. They may
charge additional fees not described in this Prospectus to their customers
for such services.
42
<PAGE>
SHAREHOLDER GUIDE
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distribu-
tions relating to your 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 your transactions, you 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 your 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 you to obtain historical purchase information about the
shares in the account from the Authorized Dealer.
Authorized Dealers and other financial intermediaries may be authorized to
accept, on behalf of the Trust, 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. In these cases:
. A Fund will be deemed to have received an order that is in proper form
when the order is accepted by an Authorized Dealer or intermediary on a
business day, and the order will be priced at the Fund's NAV per share
(adjusted for any applicable sales charge) next determined after such
acceptance.
. Authorized Dealers and intermediaries are responsible for transmitting
accepted orders to the Funds within the time period agreed upon by them.
You should contact your Authorized Dealer or intermediary to learn whether
it is authorized to accept orders for the Trust.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Authorized Dealers and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds. Additional compensation based on
sales may, but is currently not expected to, exceed 0.50% (annualized) of
the amount invested.
DISTRIBUTION SERVICES AND FEES
What Are The Different Distribution And Service Fees Paid By Class A, B and
C Shares?
The Trust has adopted distribution and service plans (each a "Plan") under
which Class A, Class B and Class C Shares bear distribution and service fees
paid to Authorized Dealers and Goldman Sachs. If the fees received by
Goldman Sachs pursuant to the Plans exceed its expenses, Goldman Sachs may
realize a profit from this arrangement. Goldman Sachs pays the distribution
and service fees on a quarterly basis.
43
<PAGE>
Under the Plans, Goldman Sachs is entitled to a monthly fee from each Fund
for distribution services equal, on an annual basis, to 0.25%, 0.75% and
0.75%, respectively, of a Fund's average daily net assets attributed to
Class A, Class B and Class C Shares. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time, these fees will increase the
cost of your investment and may cost you more than paying other types of
such charges.
The distribution fees are subject to the requirements of Rule 12b-1 under
the Act, and may be used (among other things) for:
. Compensation paid to and expenses incurred by Authorized Dealers, Goldman
Sachs and their respective officers, employees and sales representatives;
. Commissions paid to Authorized Dealers;
. Allocable overhead;
. Telephone and travel expenses;
. Interest and other costs associated with the financing of such compensa-
tion and expenses;
. Printing of prospectuses for prospective shareholders;
. Preparation and distribution of sales literature or advertising of any
type; and
. All other expenses incurred in connection with activities primarily
intended to result in the sale of Class A, Class B and Class C Shares.
In connection with the sale of Class C Shares, Goldman Sachs normally begins
paying the 0.75% distribution fee as an ongoing commission to Authorized
Dealers after the shares have been held for one year.
PERSONAL ACCOUNT MAINTENANCE SERVICES AND FEES
Under the Plans, Goldman Sachs is also entitled to receive a separate fee
equal on an annual basis to 0.25% of each Fund's average daily net assets
attributed to Class A Shares (Real Estate Securities Fund only), Class B or
Class C Shares. This fee is for personal and account maintenance services,
and may be used to make payments to Goldman Sachs, Authorized Dealers and
their officers, sales representatives and employees for responding to inqui-
ries of, and furnishing assistance to, shareholders regarding ownership of
their shares or their accounts or similar services not otherwise provided on
behalf of the Funds. If the fees received by Goldman Sachs pursuant to the
Plans exceed its expenses, Goldman Sachs may realize a profit from this
arrangement.
In connection with the sale of Class C Shares, Goldman Sachs normally begins
paying the 0.25% ongoing service fee to Authorized Dealers after the shares
have been held for one year.
44
<PAGE>
Taxation
TAXABILITY OF DISTRIBUTIONS
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should
consult your tax adviser about the federal, state, local or foreign tax con-
sequences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged account, you should
consider the possible tax consequences of Fund distributions and the sale of
your Fund shares.
TAXES ON DISTRIBUTIONS
Distributions you receive from the Funds are generally subject to federal
income tax, and may also be subject to state or local taxes. This is true
whether you reinvest your distributions in additional Fund shares or receive
them in cash. For federal tax purposes, the Funds' income dividend distribu-
tions and short-term capital gain distributions are taxable to you as ordi-
nary income. Any long-term capital gain distributions are taxable as long-
term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year
they are paid, distributions declared in October, November or December but
paid in January are taxable as if they were paid in December. A percentage
of the Funds' dividends paid to corporate shareholders may be eligible for
the corporate dividends-received deduction. The Funds will inform sharehold-
ers of the character and tax status of all distributions promptly after the
close of each calendar year.
Each Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. In general, the Funds may
deduct these taxes in computing their taxable income.
If you buy shares of a Fund before it makes a distribution, the distribution
will be taxable to you even though it may actually be a return of a portion
of your investment. This is known as "buying a dividend."
45
<PAGE>
TAXABILITY OF SALES AND EXCHANGES
Your sale of Fund shares is a taxable transaction for federal income tax
purposes, and may also be subject to state and local taxes. For tax purpos-
es, the exchange of your Fund shares for shares of a different Goldman Sachs
Fund is the same as a sale. When you sell your shares, you will generally
recognize a capital gain or loss in an amount equal to the difference
between your adjusted tax basis in the shares and the amount received. Gen-
erally, this gain or loss is long-term or short-term depending on whether
your holding period exceeds twelve months, except that any loss realized on
shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gain dividends that were
received on the shares.
OTHER INFORMATION
When you open your account, you should provide your social security or tax
identification number on your Account Application. By law, each Fund must
withhold 31% of your taxable distributions and any redemption proceeds if
you do not provide your correct taxpayer identification number, or certify
that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
46
<PAGE>
Appendix A
Additional Information on Portfolio Risks, Securities and Techniques
A. General Portfolio Risks
The Funds will be subject to the risks associated with equity securities.
"Equity securities" may include common stocks, preferred stocks, interests
in real estate investment trusts, convertible debt obligations, convertible
preferred stocks, equity interests in trusts, partnerships, joint ventures,
limited liability companies and similar enterprises, warrants and stock pur-
chase rights. In general, stock values fluctuate in response to the activi-
ties of individual companies and in response to general market and economic
conditions. Accordingly, the value of the stocks that a Fund holds may
decline over short or extended periods. The stock markets tend to be cycli-
cal, with periods when stock prices generally rise and periods when prices
generally decline. The volatility of equity securities means that the value
of your investment in the Funds may increase or decrease. As of the date of
this Prospectus, certain stock markets were trading at or close to record
high levels and there can be no guarantee that such levels will continue.
To the extent that a Fund invests in fixed-income securities, that Fund will
also be subject to the risks associated with its fixed-income securities.
These risks include interest rate risk, credit risk and call/extension risk.
In general, interest rate risk involves the risk that when interest rates
decline, the market value of fixed-income securities tends to increase (al-
though many mortgage related securities will have less potential than other
debt securities for capital appreciation during periods of declining rates).
Conversely, when interest rates increase, the market value of fixed-income
securities tends to decline. Credit risk involves the risk that an issuer
could default on its obligations, and a Fund will not recover its invest-
ment. Call risk and extension risk are normally present in mortgage-backed
securities and asset-backed securities. For example, homeowners have the
option to prepay their mortgages. Therefore, the duration of a security
backed by home mortgages can either shorten (call risk) or lengthen (exten-
sion risk). In general, if interest rates on new mortgage loans fall suffi-
ciently below the interest rates on existing outstanding mortgage loans, the
rate of prepayment would be expected to increase. Conversely, if mortgage
loan interest rates rise above the interest rates on existing outstanding
mortgage loans, the rate of prepayment would be expected to decrease. In
either case, a change in the prepayment rate can result in losses to invest-
ors.
47
<PAGE>
The Investment Adviser will not consider the portfolio turnover rate a lim-
iting factor in making investment decisions for a Fund. A high rate of port-
folio turnover (100% or more) involves correspondingly greater expenses
which must be borne by a Fund and its shareholders, and is also likely to
result in higher short-term capital gains taxable to shareholders. The port-
folio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of a Fund's portfolio securities, excluding securities having a matu-
rity at the date of purchase of one year or less. See "Financial Highlights"
in Appendix B for a statement of the Funds' historical portfolio turnover
rates.
The following sections provide further information on certain types of secu-
rities and investment techniques that may be used by the Funds, including
their associated risks. Additional information is provided in the Additional
Statement, which is available upon request. Among other things, the Addi-
tional Statement describes certain fundamental investment restrictions that
cannot be changed without shareholder approval. You should note, however,
that all investment objectives and policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objective, you should
consider whether that Fund remains an appropriate investment in light of
your then current financial position and needs.
B. Other Portfolio Risks
Risks of Investing In Internet and Internet-Related Companies. Internet and
Internet-related companies are generally subject to a rate of change in
technology which is higher than other industries and often requires exten-
sive and sustained investment in research and development. As a result,
Internet and Internet-related companies are exposed to the risk of rapid
product obsolescence. Changes in governmental policies, such as telephone
and cable regulations and anti-trust enforcement, and the need for regula-
tory approvals may have an adverse effect on the products, services and
securities of Internet and Internet-related companies. Internet and
Internet-related companies may also produce or use products or services that
prove commercially unsuccessful. In addition, intense worldwide competitive
pressures and changing demand, evolving industry standards, challenges in
achieving product capability, loss of patent protection or proprietary
rights, reduction or interruption in the supply of key components, changes
in strategic alliances, frequent mergers or acquisitions or other factors
can have a significant effect on the financial conditions of companies in
these industries. Competitive pressures in the Internet and Internet-related
industries may affect negatively the financial condition of Internet and
Internet-related companies. Internet and Internet-related companies are also
subject to the risk of service disruptions and
48
<PAGE>
APPENDIX A
the risk of losses arising out of litigation related to these disruptions.
Many Internet companies have exceptionally high price-to-earnings ratios
with little or no earnings histories, and many Internet companies are cur-
rently operating at a loss and may never be profitable. In certain instanc-
es, Internet and Internet-related securities may experience significant
price movements caused by disproportionate investor optimism or pessimism
with little or no basis in fundamental economic conditions. As a result of
these and other reasons, investments in the Internet and Internet-related
industry can experience sudden and rapid appreciation and depreciation.
Risks of Investing in Small Capitalization Companies and REITs. Each Fund
may invest in small capitalization companies and REITs. Investments in small
capitalization companies and REITs involve greater risk and portfolio price
volatility than investments in larger capitalization stocks. Among the rea-
sons for the greater price volatility of these investments are the less cer-
tain growth prospects of smaller firms and the lower degree of liquidity in
the markets for such securities. Small capitalization companies and REITs
may be thinly traded and may have to be sold at a discount from current mar-
ket prices or in small lots over an extended period of time. In addition,
these securities are subject to the risk that during certain periods the
liquidity of particular issuers or industries, or all securities in these
investment categories, will shrink or disappear suddenly and without warning
as a result of adverse economic or market conditions, or adverse investor
perceptions whether or not accurate. Because of the lack of sufficient mar-
ket liquidity, a Fund may incur losses because it will be required to effect
sales at a disadvantageous time and only then at a substantial drop in
price. Small capitalization companies and REITs include "unseasoned" issuers
that do not have an established financial history; often have limited prod-
uct lines, markets or financial resources; may depend on or use a few key
personnel for management; and may be susceptible to losses and risks of
bankruptcy. Transaction costs for these investments are often higher than
those of larger capitalization companies. Investments in small capitaliza-
tion companies and REITs may be more difficult to price precisely than other
types of securities because of their characteristics and lower trading vol-
umes.
Risks of Foreign Investments. Each Fund may invest in foreign investments.
Foreign investments involve special risks that are not typically associated
with U.S. dollar denominated or quoted securities of U.S. issuers. Foreign
investments may be affected by changes in currency rates, changes in foreign
or U.S. laws or restrictions applicable to such investments and changes in
exchange control regulations (e.g., currency blockage). A decline in the
exchange rate of the currency (i.e., weakening of the currency against the
U.S. dollar) in which a portfolio security is quoted or denominated relative
to the U.S. dollar would reduce the value of the
49
<PAGE>
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends.
The introduction of a single currency, the euro, on January 1, 1999 for par-
ticipating nations in the European Economic and Monetary Union presents
unique uncertainties, including the legal treatment of certain outstanding
financial contracts after January 1, 1999 that refer to existing currencies
rather than the euro; the establishment and maintenance of exchange rates
for currencies being converted into the euro; the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2001 and beyond; whether the interest rate, tax and
labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other countries
that now are or may in the future become members of the European Union
("EU"), may have an impact on the euro. These or other factors, including
political and economic risks, could cause market disruptions, and could
adversely affect the value of securities held by the Funds. Because of the
number of countries using this single currency, a significant portion of the
foreign assets held by the Funds may be denominated in the euro.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the United States. In addition, clearance and settlement procedures
may be different in foreign countries and, in certain markets, such proce-
dures have been unable to keep pace with the volume of securities transac-
tions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less gov-
ernment regulation of foreign markets, companies and securities dealers than
in the United States. Foreign securities markets may have substantially less
volume than U.S. securities markets and securities of many foreign issuers
are less liquid and more volatile than securities of comparable domestic
issuers. Furthermore, with respect to certain foreign countries, there is a
possibility of nationalization, expropriation or confiscatory taxation,
imposition of withholding or other taxes on dividend or interest payments
(or, in some cases, capital gains), limitations on the removal of funds or
other assets of the Funds, and political or social instability or diplomatic
developments which could affect investments in those countries.
50
<PAGE>
APPENDIX A
Concentration of a Fund's assets in one or a few countries and currencies
will subject a Fund to greater risks than if a Fund's assets were not geo-
graphically concentrated.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs"), Global Depository
Receipts ("GDRs") and European Depository Receipts ("EDRs") or other similar
instruments representing securities of foreign issuers. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank
or a correspondent bank. Prices of ADRs are quoted in U.S. dollars, and ADRs
are traded in the United States. EDRs and GDRs are receipts evidencing an
arrangement with a non-U.S. bank. EDRs and GDRs are not necessarily quoted
in the same currency as the underlying security.
Risks of Emerging Countries. The Funds may invest in securities of issuers
located in emerging countries. The risks of foreign investment are height-
ened when the issuer is located in an emerging country. Emerging countries
are generally located in the Asia-Pacific region, Eastern Europe, Latin and
South America and Africa. 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 may be computed based on the aggregate trading volume by or
holdings of a Fund, the Investment Adviser, its affiliates and their respec-
tive clients and other service providers. A Fund may not be able to sell
securities in circumstances where price, trading or settlement volume limi-
tations have been reached.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to
only a specified percentage of an issuer's outstanding securities or a spe-
cific class of securities which may have less advantageous terms (including
price) than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportuni-
ties in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by a Fund. The repatriation of both investment income
and capital from certain emerging countries is subject to restrictions such
as the need for governmental consents. Due to restrictions on direct invest-
ment in equity securities in certain Asian countries, it is anticipated
51
<PAGE>
that a Fund may invest in such countries through other investment funds in
such countries.
Many emerging countries have experienced currency devaluations and substan-
tial (and, in some cases, extremely high) rates of inflation, which have had
a negative effect on the economies and securities markets of such emerging
countries. Economies in emerging countries generally are dependent heavily
upon commodity prices and international trade and, accordingly, have been
and may continue to be affected adversely by the economies of their trading
partners, trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by
the countries with which they trade.
Many emerging countries are subject to a substantial degree of economic,
political and social instability. Governments of some emerging countries are
authoritarian in nature or have been installed or removed as a result of
military coups, while governments in other emerging countries have periodi-
cally used force to suppress civil dissent. Disparities of wealth, the pace
and success of democratization, and ethnic, religious and racial disaffec-
tion, among other factors, have also led to social unrest, violence and/or
labor unrest in some emerging countries. Unanticipated political or social
developments may result in sudden and significant investment losses. Invest-
ing in emerging countries involves greater risk of loss due to expropria-
tion, nationalization, confiscation of assets and property or the imposition
of restrictions on foreign investments and on repatriation of capital
invested.
A Fund's investment in emerging countries may also be subject to withholding
or other taxes, which may be significant and may reduce the return from an
investment in such country to the Fund.
Settlement procedures in emerging countries are frequently less developed
and reliable than those in the United States and often may involve a Fund's
delivery of securities before receipt of payment for their sale. In addi-
tion, significant delays are common in certain markets in registering the
transfer of securities. Settlement or registration problems may make it more
difficult for a Fund to value its portfolio securities and could cause the
Fund to miss attractive investment opportunities, to have a portion of its
assets uninvested or to incur losses due to the failure of a counterparty to
pay for securities the Fund has delivered or the Fund's inability to com-
plete its contractual obligations. The creditworthiness of the local securi-
ties firms used by a Fund in emerging countries may not be as sound as the
creditworthiness of firms used in more developed countries. As a result, the
Fund may be subject to a greater risk of loss if a securities firm defaults
in the performance of its responsibilities.
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APPENDIX A
The small size and inexperience of the securities markets in certain emerg-
ing countries and the limited volume of trading in securities in those coun-
tries may make a Fund's investments in such countries less liquid and more
volatile than investments in countries with more developed securities mar-
kets (such as the United States, Japan and most Western European countries).
A Fund's investments in emerging countries are subject to the risk that the
liquidity of a particular investment, or investments generally, in such
countries will shrink or disappear suddenly and without warning as a result
of adverse economic, market or political conditions or adverse investor per-
ceptions, whether or not accurate. Because of the lack of sufficient market
liquidity, a Fund may incur losses because it will be required to effect
sales at a disadvantageous time and only then at a substantial drop in
price. Investments in emerging countries may be more difficult to price pre-
cisely because of the characteristics discussed above and lower trading vol-
umes.
A Fund's use of foreign currency management techniques in emerging countries
may be limited. Due to the limited market for these instruments in emerging
countries, the Investment Adviser does not currently anticipate that a sig-
nificant portion of the Funds' currency exposure in emerging countries, if
any, will be covered by such instruments.
Risks of Derivative Investments. A Fund's transactions in options, futures,
options on futures, swaps, interest rate caps, floors and collars, struc-
tured securities and currency transactions involve additional risk of loss.
Loss can result from a lack of correlation between changes in the value of
derivative instruments and the portfolio assets (if any) being hedged, the
potential illiquidity of the markets for derivative instruments, or the
risks arising from margin requirements and related leverage factors associ-
ated with such transactions. The use of these management techniques also
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices, interest rates or currency
prices. Each Fund may also invest in derivative investments for non-hedging
purposes (that is, to seek to increase total return). Investing for non-
hedging purposes is considered a speculative practice and presents even
greater risk of loss.
Risks of Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities which cannot be disposed of in seven days in
the ordinary course of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of
more than seven days
. Certain over-the-counter options
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. Certain structured securities and all swap transactions
. Certain restricted securities, unless it is determined, based upon a
review of the trading markets for a specific restricted security, that
such restricted security is eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 ("144A Securities") and, therefore, is
liquid.
Investing in 144A Securities may decrease the liquidity of a Fund's portfo-
lio to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities. The purchase price
and subsequent valuation of restricted and illiquid securities normally
reflect a discount, which may be significant, from the market price of com-
parable securities for which a liquid market exists.
Credit Risks. Debt securities purchased by the Funds may include securities
(including zero coupon bonds) issued by the U.S. government (and its agen-
cies, instrumentalities and sponsored enterprises), domestic and foreign
corporations, banks and other issuers. Further information is provided in
the Additional Statement.
Debt securities rated BBB or higher by Standard & Poor's or Baa or higher by
Moody's are considered "investment grade." 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. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, determined by the Investment
Adviser to be of comparable credit quality.
The Funds may invest in fixed-income securities rated BB or Ba or below (or
comparable unrated securities) which are commonly referred to as "junk
bonds." Junk bonds are considered predominantly speculative and may be ques-
tionable as to principal and interest payments.
In some cases, junk bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, invest-
ment in such bonds will present greater speculative risks than those associ-
ated with investment in investment grade bonds. Also, to the extent that the
rating assigned to a security in a Fund's portfolio is downgraded by a rat-
ing organization, the market price and liquidity of such security may be
adversely affected.
Temporary Investment Risks. Each Fund may, for temporary defensive purposes,
invest a certain percentage of its total assets in:
. U.S. government securities
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APPENDIX A
. Commercial paper rated at least A-2 by Standard & Poor's or P-2 by Moody's
. Certificates of deposit
. Bankers' acceptances
. Repurchase agreements
. Non-convertible preferred stocks and non-convertible corporate bonds with
a remaining maturity of less than one year
When a Fund's assets are invested in such instruments, the Fund may not be
achieving its investment objective.
C. Portfolio Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associ-
ated risks. Further information is provided in the Additional Statement,
which is available upon request.
Convertible Securities. Each Fund may invest in convertible securities. Con-
vertible securities are preferred stock or debt obligations that are con-
vertible into common stock. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar qual-
ity. Convertible securities in which a Fund invests are subject to the same
rating criteria as its other investments in fixed-income securities. Con-
vertible securities have both equity and fixed-income risk characteristics.
Like all fixed-income securities, the value of convertible securities is
susceptible to the risk of market losses attributable to changes in interest
rates. Generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. However, when the market price of the common stock underlying
a convertible security exceeds the conversion price of the convertible secu-
rity, the convertible security tends to reflect the market price of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security, like a fixed-income security, tends to
trade increasingly on a yield basis, and thus may not decline in price to
the same extent as the underlying common stock.
Foreign Currency Transactions. A Fund may, to the extent consistent with its
investment policies, purchase or sell foreign currencies on a cash basis or
through forward contracts. A forward contract involves an obligation to pur-
chase or sell a specific currency at a future date at a price set at the
time of the contract. A Fund may engage in foreign currency transactions for
hedging purposes and to seek to protect against anticipated changes in
future foreign currency exchange rates. In addition, certain Funds may also
enter into such transactions to seek to increase total return, which is con-
sidered a speculative practice.
55
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Each Fund may also engage in cross-hedging by using forward contracts in a
currency different from that in which the hedged security is denominated or
quoted if the Investment Adviser determines that there is a pattern of cor-
relation between the two currencies. A Fund may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Investment Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date (e.g. the Investment Adviser may
anticipate the foreign currency to appreciate against the U.S. dollar).
Currency exchange rates may fluctuate significantly over short periods of
time, causing, along with other factors, a Fund's NAV to fluctuate (when the
Fund's NAV fluctuates, the value of your shares may go up or down). Currency
exchange rates also can be affected unpredictably by the intervention of
U.S. or foreign governments or central banks, or the failure to intervene,
or by currency controls or political developments in the United States or
abroad.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available
for currency instruments traded on an exchange. Such contracts are subject
to the risk that the counterparty to the contract will default on its obli-
gations. Since these contracts are not guaranteed by an exchange or clear-
inghouse, a default on a contract would deprive a Fund of unrealized prof-
its, transaction costs or the benefits of a currency hedge or could force
the Fund to cover its purchase or sale commitments, if any, at the current
market price.
Structured Securities. Each Fund may invest in structured securities. Struc-
tured securities are securities whose value is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indices or other financial indicators (the "Reference") or the relative
change in two or more References. The interest rate or the principal amount
payable upon maturity or redemption may be increased or decreased depending
upon changes in the applicable Reference. Structured securities may be posi-
tively or negatively indexed, so that appreciation of the Reference may pro-
duce an increase or decrease in the interest rate or value of the security
at maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the Refer-
ence. Consequently, structured securities may present a greater degree of
market risk than other types of securities and may be more volatile, less
liquid and more difficult to price accurately than less complex securities.
REITs. Each Fund may invest in REITs. REITs are pooled investment vehicles
that invest primarily in either real estate or real estate related loans.
The value of a REIT is affected by changes in the value of the properties
owned by the REIT
56
<PAGE>
APPENDIX A
or securing mortgage loans held by the REIT. REITs are dependent upon the
ability of the REITs' managers, and are subject to heavy cash flow dependen-
cy, default by borrowers and the qualification of the REITs under applicable
regulatory requirements for favorable income tax treatment. REITs are also
subject to risks generally associated with investments in real estate
including possible declines in the value of real estate, general and local
economic conditions, environmental problems and changes in interest rates.
To the extent that assets underlying a REIT are concentrated geographically,
by property type or in certain other respects, these risks may be height-
ened. A Fund will indirectly bear its proportionate share of any expenses,
including management fees, paid by a REIT in which it invests.
Options on Securities, Securities Indices and Foreign Currencies. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) of the option the obligation to buy, the underlying instrument dur-
ing the option period. A call option gives the purchaser of the option the
right to buy, and the writer (seller) of the option the obligation to sell,
the underlying instrument during the option period. Each Fund may write
(sell) covered call and put options and purchase put and call options on any
securities in which it may invest or on any securities index comprised of
securities in which it may invest. A Fund may also, to the extent that it
invests in foreign securities, purchase and sell (write) put and call
options on foreign currencies.
The writing and purchase of options is a highly specialized activity which
involves special investment risks. Options may be used for either hedging or
cross-hedging purposes, or to seek to increase total return (which is con-
sidered a speculative activity). The successful use of options depends in
part on the ability of the Investment Adviser to manage future price fluctu-
ations and the degree of correlation between the options and securities (or
currency) markets. If the Investment Adviser is incorrect in its expectation
of changes in market prices or determination of the correlation between the
instruments or indices on which options are written and purchased and the
instruments in a Fund's investment portfolio, the Fund may incur losses that
it would not otherwise incur. The use of options can also increase a Fund's
transaction costs. Options written or purchased by the Funds may be traded
on either U.S. or foreign exchanges or over-the-counter. Foreign and over-
the-counter options will present greater possibility of loss because of
their greater illiquidity and credit risks.
Futures Contracts and Options on Futures Contracts. Futures contracts are
standardized, exchange-traded contracts that provide for the sale or pur-
chase of a specified financial instrument or currency at a future time at a
specified price. An option on a futures contract gives the purchaser the
right (and the writer of the
57
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option the obligation) to assume a position in a futures contract at a spec-
ified exercise price within a specified period of time. A futures contract
may be based on various securities (such as U.S. government securities),
foreign currencies, securities indices and other financial instruments and
indices. The Funds may engage in futures transactions on both U.S. and for-
eign exchanges.
Each Fund may purchase and sell futures contracts, and purchase and write
call and put options on futures contracts, in order to seek to increase
total return or to hedge against changes in interest rates, securities
prices or, to the extent a Fund invests in foreign securities, currency
exchange rates, or to otherwise manage its term structure, sector selection
and duration in accordance with its investment objectives and policies. Each
Fund may also enter into closing purchase and sale transactions with respect
to such contracts and options. A Fund will engage in futures and related
options transactions for bona fide hedging purposes as defined in regula-
tions of the Commodity Futures Trading Commission or to seek to increase
total return to the extent permitted by such regulations. A Fund may not
purchase or sell futures contracts or purchase or sell related options to
seek to increase total return, except for closing purchase or sale transac-
tions, if immediately thereafter the sum of the amount of initial margin
deposits and premiums paid on the Fund's outstanding positions in futures
and related options entered into for the purpose of seeking to increase
total return would exceed 5% of the market value of the Fund's net assets.
Futures contracts and related options present the following risks:
. While a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in poorer overall performance than if the Fund
had not entered into any futures contracts or options transactions.
. Because perfect correlation between a futures position and portfolio posi-
tion that is intended to be protected is impossible to achieve, the
desired protection may not be obtained and a Fund may be exposed to addi-
tional risk of loss.
. The loss incurred by a Fund in entering into futures contracts and in
writing call options on futures is potentially unlimited and may exceed
the amount of the premium received.
. Futures markets are highly volatile and the use of futures may increase
the volatility of a Fund's NAV.
. As a result of the low margin deposits normally required in futures trad-
ing, a relatively small price movement in a futures contract may result in
substantial losses to a Fund.
. Futures contracts and options on futures may be illiquid, and exchanges
may limit fluctuations in futures contract prices during a single day.
. Foreign exchanges may not provide the same protection as U.S. exchanges.
58
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APPENDIX A
Equity Swaps. Each Fund may invest in equity swaps. Equity swaps allow the
parties to a swap agreement to exchange the dividend income or other compo-
nents of return on an equity investment (for example, a group of equity
securities or an index) for a component of return on another non-equity or
equity investment.
An equity swap may be used by a Fund to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment may be restricted for legal reasons or is otherwise impractical.
Equity swaps are derivatives and their value can be very volatile. To the
extent that the Investment Adviser does not accurately analyze and predict
the potential relative fluctuation of the components swapped with another
party, a Fund may suffer a loss. The value of some components of an equity
swap (such as the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, a Fund may suffer a loss if the
counterparty defaults.
When-Issued Securities and Forward Commitments. Each Fund may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued
securities are purchased in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. A forward commitment involves the entering into a contract to
purchase or sell securities for a fixed price at a future date beyond the
customary settlement period.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased
declines before the settlement date. Conversely, the sale of securities on a
forward commitment basis involves the risk that the value of the securities
sold may increase before the settlement date. Although a Fund will generally
purchase securities on a when-issued or forward commitment basis with the
intention of acquiring the securities for its portfolio, a Fund may dispose
of when-issued securities or forward commitments prior to settlement if the
Investment Adviser deems it appropriate.
Repurchase Agreements. Repurchase agreements involve the purchase of securi-
ties subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price. Each Fund may enter into repurchase agreements
with dealers in U.S. government securities and member banks of the Federal
Reserve System which furnish collateral at least equal in value or market
price to the amount of their repurchase obligation.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and
other collateral held by the Fund are less than the repurchase price and the
Fund's costs associated with
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<PAGE>
delay and enforcement of the repurchase agreement. In addition, in the event
of bankruptcy of the seller, a Fund could suffer additional losses if a
court determines that the Fund's interest in the collateral is not enforce-
able.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Certain
Funds, together with other registered investment companies having advisory
agreements with the Investment Adviser or any of its affiliates, may trans-
fer uninvested cash balances into a single joint account, the daily aggre-
gate balance of which will be invested in one or more repurchase agreements.
Lending of Portfolio Securities. Each Fund may engage in securities lending.
Securities lending involves the lending of securities owned by a Fund to
financial institutions such as certain broker-dealers. The borrowers are
required to secure their loan continuously with cash, cash equivalents, U.S.
government securities or letters of credit in an amount at least equal to
the market value of the securities loaned. Cash collateral may be invested
in cash equivalents. To the extent that cash collateral is invested in other
investment securities, such collateral will be subject to market deprecia-
tion or appreciation, and a Fund will be responsible for any loss that might
result from its investment of the borrowers' collateral. If the Investment
Adviser determines to make securities loans, the value of the securities
loaned may not exceed 33 1/3% of the value of the total assets of a Fund
(including the loan collateral).
A Fund may lend its securities to increase its income. A Fund may, however,
experience delay in the recovery of its securities, or a capital loss, if
the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Fund.
Short Sales Against-the-Box. Each Fund may make short sales against-the-box.
A short sale against-the-box means that at all times when a short position
is open the Fund will own an equal amount of securities sold short, or secu-
rities convertible into or exchangeable for, without payment of any further
consideration, an equal amount of the securities of the same issuer as the
securities sold short.
Preferred Stock, Warrants and Rights. Each 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 earn-
ings 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
or other non-compliance by the issuer of the preferred stock.
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APPENDIX A
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
or right. 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.
Other Investment Companies. Each Fund may invest in securities of other
investment companies (including SPDRs and WEBS, as defined below and other
exchange-traded funds) subject to statutory limitations prescribed by the
Act. These limitations include a prohibition on any Fund acquiring more than
3% of the voting shares of any other investment company, and a prohibition
on investing more than 5% of a Fund's total assets in securities of any one
investment company or more than 10% of its total assets in securities of all
investment companies. A Fund will indirectly bear its proportionate share of
any management fees and other expenses paid by such other investment compa-
nies. Exchange-traded funds such as SPDRs and WEBS are shares of unaffili-
ated investment companies which are traded like traditional equity securi-
ties on a national securities exchange or the NASDAQ National Market System.
. Standard & Poor's Depository Receipts. The Funds may, consistent with
their investment policies, purchase Standard & Poor's Depository Receipts
("SPDRs"). SPDRs are securities traded on the American Stock Exchange
("AMEX") that represent ownership in the SPDR Trust, a trust which has
been established to accumulate and hold a portfolio of common stocks that
is intended to track the price performance and dividend yield of the S&P
500. The SPDR Trust is sponsored by a subsidiary of the AMEX. SPDRs may be
used for several reasons, including, but not limited to, facilitating the
handling of cash flows or trading, or reducing transaction costs. The
price movement of SPDRs may not perfectly parallel the price action of the
S&P 500.
. World Equity Benchmark Shares. World Equity Benchmark Shares ("WEBS") are
shares of an investment company that invests substantially all of its
assets in securities included in the MSCI indices for specified countries.
WEBS are listed on the AMEX and were initially offered to the public in
1996. The market prices of WEBS are expected to fluctuate in accordance
with both changes in the NAVs of their underlying indices and supply and
demand of WEBS on the AMEX. To date, WEBS have traded at relatively modest
discounts and premiums to their NAVs. However, WEBS have a limited operat-
ing history and information is lacking regarding the actual performance
and trading liquidity of WEBS for extended periods or over complete market
cycles. In addition, there is no assurance that the requirements of the
AMEX necessary to maintain the listing of WEBS will continue to be met or
will remain unchanged. In the event substantial market or other disrup-
tions affecting WEBS
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should occur in the future, the liquidity and value of a Fund's shares
could also be substantially and adversely affected. If such disruptions
were to occur, a Fund could be required to reconsider the use of WEBS as
part of its investment strategy.
Unseasoned Companies. Each Fund may invest in companies (including predeces-
sors) which have operated less than three years. The securities of such com-
panies may have limited liquidity, which can result in their being priced
higher or lower than might otherwise be the case. In addition, investments
in unseasoned companies are more speculative and entail greater risk than do
investments in companies with an established operating record.
Corporate Debt Obligations. Corporate debt obligations include bonds, notes,
debentures, commercial paper and other obligations of corporations to pay
interest and repay principal, and include securities issued by banks and
other financial institutions. Each Fund may invest in corporate debt obliga-
tions issued by U.S. and certain non-U.S. issuers which issue securities
denominated in the U.S. dollar (including Yankee and Euro obligations). In
addition to obligations of corporations, corporate debt obligations include
securities issued by banks and other financial institutions and suprana-
tional entities (i.e., the World Bank, the International Monetary Fund,
etc.).
Bank Obligations. Each Fund may invest in obligations issued or guaranteed
by U.S. or foreign banks. Bank obligations, including without limitations,
time deposits, bankers' acceptances and certificates of deposit, may be gen-
eral obligations of the parent bank or may be limited to the issuing branch
by the terms of the specific obligations or by government regulations. Banks
are subject to extensive but different governmental regulations which may
limit both the amount and types of loans which may be made and interest
rates which may be charged. 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 operation of this industry.
U.S. Government Securities. Each Fund may invest in U.S. government securi-
ties. U.S. government securities include U.S. Treasury obligations and obli-
gations issued or guaranteed by U.S. government agencies, instrumentalities
or sponsored enterprises. U.S. government securities may be supported by (a)
the full faith and credit of the U.S. Treasury (such as the Government
National Mortgage Association ("Ginnie Mae")); (b) the right of the issuer
to borrow from the U.S. Treasury (such as securities of the Student Loan
Marketing Association); (c) the discretionary authority of the U.S. govern-
ment to purchase certain obligations of the
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APPENDIX A
issuer (such as the Federal National Mortgage Association ("Fannie Mae") and
Federal Home Loan Mortgage Corporation ("Freddie Mac")); or (d) only the
credit of the issuer. U.S. government securities also include Treasury
receipts, zero coupon bonds and other stripped U.S. government securities,
where the interest and principal components of stripped U.S. government
securities are traded independently.
Custodial Receipts. Each Fund may invest in custodial receipts. Interests in
U.S. government securities may be purchased in the form of custodial
receipts that evidence ownership of future interest payments, principal pay-
ments or both on certain notes or bonds issued or guaranteed as to principal
and interest by the U.S. government, its agencies, instrumentalities, polit-
ical subdivisions or authorities. For certain securities law purposes, cus-
todial receipts are not considered obligations of the U.S. government.
Mortgage-Backed Securities. Each Fund may invest in mortgage-backed securi-
ties. Mortgage-backed securities represent direct or indirect participations
in, or are collateralized by and payable from, mortgage loans secured by
real property. Mortgage-backed securities can be backed by either fixed rate
mortgage loans or adjustable rate mortgage loans, and may be issued by
either a governmental or non-governmental entity. Privately issued mortgage-
backed securities are normally structured with one or more types of "credit
enhancement." However, these mortgage-backed securities typically do not
have the same credit standing as U.S. government guaranteed mortgage-backed
securities.
Mortgage-backed securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs") and Real Estate Mortgage
Investment Conduit ("REMIC") pass-through or participation certificates.
CMOs provide an investor with a specified interest in the cash flow from a
pool of underlying mortgages or of other mortgage-backed securities. CMOs
are issued in multiple classes. In many cases, payments of principal are
applied to the CMO classes in the order of their respective stated maturi-
ties, so that no principal payments will be made on a CMO class until all
other classes having an earlier stated maturity date are paid in full. A
REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages principally secured by interests in real prop-
erty and other permitted investments.
Mortgaged-backed securities also include stripped mortgage-backed securities
("SMBS"), which are derivative multiple class mortgage-backed securities.
SMBS are usually structured with two different classes: one that receives
substantially all of the interest payments and the other that receives sub-
stantially all of the principal payments from a pool of mortgage loans. The
market value of SMBS consisting entirely of principal payments generally is
unusually volatile in response to
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changes in interest rates. The yields on SMBS that receive all or most of
the interest from mortgage loans are generally higher than prevailing market
yields on other mortgage-backed securities because their cash flow patterns
are more volatile and there is a greater risk that the initial investment
will not be fully recouped.
Asset-Backed Securities. Each Fund may invest in asset-backed securities.
Asset-backed securities are securities whose principal and interest payments
are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-
backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of pre-
payments 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 posi-
tions 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 gener-
ally prevailing interest rates at that time. Asset-backed securities present
credit risks that are not presented by mortgage-backed securities. This is
because asset-backed securities generally do not have the benefit of a secu-
rity interest in collateral that is comparable to mortgage assets. There is
the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event
of a default, a Fund may suffer a loss if it cannot sell collateral quickly
and receive the amount it is owed.
Borrowings. Each Fund can borrow money from banks and other financial insti-
tutions in amounts not exceeding one-third of its total assets for temporary
or emergency purposes. A Fund may not make additional investments if
borrowings exceed 5% of its total assets.
Mortgage Dollar Rolls. The Real Estate Securities Fund may enter into mort-
gage dollar rolls. A mortgage dollar roll involves the sale by a Fund of
securities for delivery in the current month. The Fund simultaneously con-
tracts with the same counterparty to repurchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified
future date. During the roll period, the Fund loses the right to receive
principal and interest paid on the securities sold. However, the Fund bene-
fits to the extent of any difference between (a) the price received for the
securities sold and (b) the lower forward price for the future purchase
and/or fee income plus the interest earned on the cash proceeds of the secu-
rities sold. Unless the benefits of a mortgage dollar roll 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 roll,
the use of this technique will diminish the Fund's performance.
64
<PAGE>
APPENDIX A
Successful use of mortgage dollar rolls depends upon the Investment Advis-
er's ability to predict correctly interest rates and mortgage prepayments.
If the Investment Adviser is incorrect in its prediction, a Fund may experi-
ence a loss. For financial reporting and tax purposes, the Fund treats mort-
gage dollar rolls as two separate transactions: one involving the purchase
of a security and a separate transaction involving a sale. The Fund does not
currently intend to enter into mortgage dollar rolls that are accounted for
as a financing and does not treat them as borrowings.
Yield Curve Options. The Real Estate Securities Fund may enter into options
on the yield "spread" or differential between two securities. Such transac-
tions 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.
The trading of yield curve options is subject to all of the risks associated
with the trading of other types of options. In addition, such options pres-
ent 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.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps and Inter-
est Rate Caps, Floors and Collars. 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 princi-
pal 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
65
<PAGE>
and a floor that preserves a certain return within a predetermined range of
interest rates.
The Real Estate Securities Fund may enter into swap transactions for hedging
purposes or to seek to increase total return. 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 fore-
casts 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 these investment techniques were not used.
Inverse Floaters. The Real Estate Securities Fund may invest in inverse
floating rate debt securities ("inverse floaters"). The interest rate on
inverse floaters resets in the opposite direction from the market rate of
interest to which an 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.
66
<PAGE>
[This page intentionally left blank]
67
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). The
information for the period ended December 31, 1999 has been audited by
Arthur Andersen LLP, whose report, along with a Fund's financial statements,
is included in the Funds' annual report (available upon request).
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
Income from
investment operations/a/
-------------------------
Net realized
Net asset and unrealized
value, Net gain (loss) on
beginning investment investment
of period income transactions
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - Class A Shares $ 9.20 $0.38/e/ $(0.48)/e/
1999 - Class B Shares 9.27 0.28/e/ (0.45)/e/
1999 - Class C Shares 9.21 0.30/e/ (0.48)/e/
1999 - Institutional Shares 9.21 0.40/e/ (0.47)/e/
1999 - Service Shares 9.21 0.38/e/ (0.49)/e/
- ------------------------------------------------------------------------------
1998 - Class A Shares (commenced July 27) 10.00 0.15 (0.80)
1998 - Class B Shares (commenced July 27) 10.00 0.14/e/ (0.83)/e/
1998 - Class C Shares (commenced July 27) 10.00 0.22/e/ (0.91)/e/
1998 - Institutional Shares (commenced
July 27) 10.00 0.31/e/ (0.95)/e/
1998 - Service Shares (commenced July 27) 10.00 0.25/e/ (0.91)/e/
- ------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or redemption
charge were taken into account.
c Annualized.
d Not annualized.
e Calculated based on the average shares outstanding methodology.
68
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Distributions to shareholders
--------------------------------
In excess Net Increase Net assets Ratio of
From net of net (Decrease) Net asset at end of net expenses
investment investment From in net asset value, end Total period to average
income income capital value of period return/b/(in 000s) net assets
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.38) $(0.02) $(0.02) $(0.52) $8.68 (1.02)% $93,443 1.44%
(0.28) (0.07) (0.02) (0.54) 8.73 (1.73) 457 2.19
(0.30) (0.05) (0.02) (0.55) 8.66 (1.80) 697 2.19
(0.40) (0.03) (0.02) (0.52) 8.69 (0.64) 42,790 1.04
(0.38) (0.01) (0.02) (0.52) 8.69 (1.12) 1 1.54
- -------------------------------------------------------------------------------------------
(0.15) -- -- (0.80) 9.20 (6.53)/d/ 19,961 1.47/c/
(0.04) -- -- (0.73) 9.27 (6.88)/d/ 2 2.19/c/
(0.10) -- -- (0.79) 9.21 (6.85)/d/ 1 2.19/c/
(0.15) -- -- (0.79) 9.21 (6.37)/d/ 47,516 1.04/c/
(0.13) -- -- (0.79) 9.21 (6.56)/d/ 1 1.54/c/
- -------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
REAL ESTATE SECURITIES FUND (continued)
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees
or expense limitations
--------------------------
Ratio of Ratio of
net investment Ratio of net investment
income to expenses to income Portfolio
average average net to average turnover
net assets assets net assets rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 - Class A Shares 4.14% 1.96% 3.62% 37.43%
1999 - Class B Shares 3.21 2.46 2.94 37.43
1999 - Class C Shares 3.38 2.46 3.11 37.43
1999 - Institutional
Shares 4.43 1.31 4.16 37.43
1999 - Service Shares 4.17 1.81 3.90 37.43
- --------------------------------------------------------------------------------
1998 - Class A Shares
(commenced July 27) 23.52/c/ 3.52/c/ 21.47/c/ 6.03/d/
1998 - Class B Shares
(commenced July 27) 3.60/c/ 4.02/c/ 1.77/c/ 6.03/d/
1998 - Class C Shares
(commenced July 27) 5.49/c/ 4.02/c/ 3.66/c/ 6.03/d/
1998 - Institutional
Shares (commenced July 27) 8.05/c/ 2.87/c/ 6.22/c/ 6.03/d/
1998 - Service Shares
(commenced July 27) 6.29/c/ 3.37/c/ 4.46/c/ 6.03/d/
- --------------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or redemption
charge were taken into account.
c Annualized.
d Not annualized.
e Calculated based on the average shares outstanding methodology.
70
<PAGE>
[This page intentionally left blank]
71
<PAGE>
INTERNET TOLLKEEPER FUND
<TABLE>
<CAPTION>
Income from
investment operations/a/
-----------------------------------
Net asset
value, Net Net realized Net increase
beginning investment and unrealized in net asset
of period loss/e/ gain/e/ value
- -----------------------------------------------------------------------------
For the Period Ended December 31,
<S> <C> <C> <C> <C>
1999 - Class A Shares
(Commenced October 1) $10.00 $(0.05) $9.30 $9.25
1999 - Class B Shares
(Commenced October 1) 10.00 (0.08) 9.28 9.20
1999 - Class C Shares
(Commenced October 1) 10.00 (0.08) 9.27 9.19
1999 - Institutional Shares
(Commenced October 1) 10.00 (0.03) 9.28 9.25
1999 - Service Shares
(Commenced October 1) 10.00 (0.05) 9.28 9.23
- -----------------------------------------------------------------------------
</TABLE>
a Includes the balancing effect of calculating per share amounts.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales or
redemption charges. Total return would be reduced if a sales or redemption
charge were taken into account.
c Annualized.
d Not annualized.
e Calculated based on the average shares outstanding methodology.
72
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming
no expense limitations
---------------------------
Net assets Ratio of Ratio of Ratio of Ratio of
Net asset at end of net expenses net investment expenses to net investment Portfolio
value, end Total period to average loss to average average loss to average turnover
of period return/b/,/d/ (in 000s) net assets/c/ net assets/c/ net assets/c/ net assets/c/ rate/d/
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$19.25 92.50% $575,535 1.50% (1.29)% 1.79% (1.58)% 16.16%
19.20 92.00 537,282 2.25 (2.04) 2.54 (2.33) 16.16
19.19 91.90 329,135 2.25 (2.05) 2.54 (2.34) 16.16
19.25 92.50 68,275 1.10 (0.88) 1.39 (1.17) 16.16
19.23 92.30 53 1.60 (1.35) 1.89 (1.64) 16.16
- -----------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
Index
<TABLE>
<C> <C> <S>
1 General Investment Management Approach
3 Fund Investment Objectives and Strategies
3 Goldman Sachs Internet Tollkeeper Fund
6 Goldman Sachs Real Estate Securities Fund
8 Other Investment Practices and Securities
10 Principal Risks of the Funds
13 Fund Performance
15 Fund Fees and Expenses
</TABLE>
<TABLE>
<C> <C> <S>
19 Service Providers
25 Dividends
26 Shareholder Guide
26 How To Buy Shares
35 How To Sell Shares
45 Taxation
47 Appendix A
Additional Information
on Portfolio Risks,
Securities and
Techniques
68 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Specialty Funds
Prospectus (Class A, B and C Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders. In the Funds' annual
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during the
last fiscal year.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Additional Statement. The Additional Statement is incorporated
by reference into this Prospectus (is legally considered part of this Pro-
spectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-526-7384.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-526-7384
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
Goldman Sachs - http://www.gs.com (Prospectus Only)
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of Fund
documents, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request to:
[email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
Goldman Sachs Internet Tollkeeper FundSM is a service mark of Goldman, Sachs
& Co.
SPECPROABC
<PAGE>
Prospectus
GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS
ILA ("Units" or
"Shares")
May 1, 2000
. Prime
Obligations
Portfolio
. Money Market
Portfolio
. Treasury
Obligations
Portfolio
. Treasury
Instruments
Portfolio
. Government
Portfolio
. Federal
Portfolio
. Tax-Exempt
Diversified Portfolio
. Tax-Exempt
California Portfolio
. Tax-Exempt
New York Portfolio
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE SECURI-
TIES OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
[GRAPHIC]
<PAGE>
NOT FDIC-Insured May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Institutional Liquid Assets Portfolios (the "Funds"). GSAM is
referred to in this Prospectus as the "Investment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek preservation of capital, daily
liquidity and maximum current income. With each Fund the Investment Adviser
follows a conservative, risk-managed investment process that seeks to:
.Manage credit risk
.Manage interest rate risk
.Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1. Managing Credit Risk
The Investment Adviser's process for managing risk emphasizes:
.Intensive research--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as
well as the Investment Research, Legal and Compliance departments of
Goldman Sachs.
.Timely updates--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio
management team via computer link.
The Result: An "approved" list of high-quality credits--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2. Managing Interest Rate Risk
Three main steps are followed in seeking to manage interest rate risk:
. Establish weighted average maturity (WAM) target--WAM (the weighted
average time until the yield of a portfolio reflects any changes in the
current interest rate environment) is constantly revisited and adjusted as
market conditions change. An overall strategy is developed by the
portfolio management team based on insights gained from weekly meetings
with both Goldman Sachs economists and economists from outside the firm.
. Implement optimum portfolio structure--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
. Conduct rigorous analysis of new securities--The Investment Adviser's
five-step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for
money market mutual funds.
3. Managing Liquidity
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
. Each Fund's clients and factors that influence their asset volatility;
. Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
. Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC Financial Data Universal
Averages. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
. The Funds: Each Fund's securities are valued by the amortized cost method
as permitted by Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "Act"). Under Rule 2a-7, each Fund may invest only in U.S.
dollar-denominated securities that are determined to present minimal credit
risk and meet certain other criteria, including conditions relating to
maturity, diversification and credit quality. These operating policies may
be more restrictive than the fundamental policies set forth in the State-
ment of Additional Information (the "Additional Statement").
. Taxable Funds: Prime Obligations, Money Market, Treasury Obligations
and Government Portfolios.
. Tax-Advantaged Funds: Treasury Instruments and Federal Portfolios.
. Tax-Exempt Funds: Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios.
. The Investors: The Funds are designed for investors seeking a high rate of
return, a stable net asset value ("NAV") and convenient liquidation privi-
leges. The Funds are particularly suitable for banks, corporations and
other financial institutions that seek investment of short-term funds for
their own accounts or for the accounts of their customers.
. NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
. Maximum Remaining Maturity of Portfolio Investments: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
. Dollar-Weighted Average Portfolio Maturity ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
. Investment Restrictions: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions"
in the Additional Statement. Fundamental investment restrictions and the
investment objective of a Fund (except the Tax-Exempt California and Tax-
Exempt New York Portfolios' objectives of providing shareholders with
income exempt from California State and New York State and New York City
personal income tax, respectively) cannot be changed without approval of a
majority of the outstanding shares of that Fund. The Treasury Obligations
Portfolio's policy of limiting its investments to U.S. Treasury Obligations
(as defined in Appendix A) and related repurchase agreements is also funda-
mental. All investment policies not specifically designated as fundamental
are non-fundamental and may be changed without shareholder approval.
. Diversification: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of
the value of its total assets at the time of purchase in the securities of
any single issuer with these
3
<PAGE>
exceptions: (a) the Tax-Exempt California and Tax-Exempt New York Portfolios
may each invest up to 25% of their total assets in five or fewer issuers;
and (b) each of the other Funds may invest up to 25% of its total assets in
the securities of a single issuer for up to three business days. These limi-
tations do not apply to cash, certain repurchase agreements, U.S. Government
Securities (as defined in Appendix A) or securities of other investment com-
panies. In addition, securities subject to certain unconditional guarantees
and securities that are not "First Tier Securities" as defined by the SEC
are subject to different diversification requirements as described in the
Additional Statement.
4
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
Taxable and Tax-Advantaged Funds:
The Prime Obligations, Money Market, Treasury Obligations, Treasury Instru-
ments, Government and Federal Portfolios seek to maximize current income to
the extent consistent with the preservation of capital and the maintenance
of liquidity by investing exclusively in high quality money market instru-
ments.
The Prime Obligations and Money Market Portfolios pursue their investment
objectives by investing in U.S. Government Securities, obligations of U.S.
banks, commercial paper and other short-term obligations of U.S. companies,
states, municipalities, and other entities and repurchase agreements. The
Money Market Portfolio may also invest in U.S. dollar-denominated obliga-
tions of foreign banks, foreign companies and foreign governments.
The Treasury Obligations Portfolio pursues its investment objective by
investing in securities issued by the U.S. Treasury and repurchase agree-
ments relating to such securities. The Government Portfolio pursues its
investment objective by investing in U.S. Government Securities and repur-
chase agreements relating to such securities.
The Treasury Instruments and Federal Portfolios pursue their investment
objectives by limiting their investments to certain U.S. Treasury Obliga-
tions and U.S. Government Securities, respectively, the interest from which
is generally exempt from state income taxation. You should consult your tax
adviser to determine whether distributions from the Treasury Instruments and
Federal Portfolios (and any other Fund that may hold such obligations)
derived from interest on such obligations are exempt from state income taxa-
tion in your own state.
Tax-Exempt Funds:
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios seek to provide shareholders, to the extent consistent with the
preservation of capital and prescribed portfolio standards, with a high
level of income exempt from federal income tax by investing primarily in
municipal instruments.
In addition, the Tax-Exempt California and Tax-Exempt New York Portfolios
seek to provide shareholders with income exempt from California State and
New York State and City personal income taxes, respectively, by investing in
instruments the interest on which is exempt from these taxes. (These instru-
ments are called "California instruments" and "New York instruments" in this
Prospectus.)
The Tax-Exempt Funds pursue their investment objectives by investing in
securities issued by or on behalf of states, territories, and possessions of
the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia, the interest from
which, if any, is in the opinion of bond counsel excluded from gross income
for federal income tax purposes, and not an item of tax preference under the
federal alternative minimum tax ("AMT").
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Bank Commercial
Fund Obligations Securities Obligations Paper
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations ./1/ . . .
U.S. banks only/2/
--------------------------------------------------------------------------------------------------
Money Market ./1/ . . .
Over 25% of total assets U.S. and foreign
must be invested in U.S. (US$) commercial
and foreign (US$) banks/3/ paper
--------------------------------------------------------------------------------------------------
Treasury Obligations ./4/
--------------------------------------------------------------------------------------------------
Treasury Instruments ./4/
--------------------------------------------------------------------------------------------------
Government ./1/ .
--------------------------------------------------------------------------------------------------
Federal ./1/ .
--------------------------------------------------------------------------------------------------
Tax-Exempt Diversified .
Tax-exempt only
--------------------------------------------------------------------------------------------------
Tax-Exempt California .
Tax-exempt only
--------------------------------------------------------------------------------------------------
Tax-Exempt New York .
Tax-exempt only
--------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 If adverse economic conditions prevail in the banking industry (such as
substantial losses on loans, increases in non-performing assets and
charge-offs and declines in total deposits), the Fund may, for temporary
defensive purposes, invest less than 25% of its total assets in bank
obligations.
4 Issued by the U.S. Treasury.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Short-Term
Obligations of Asset-Backed and Foreign
Corporations and Repurchase Receivables-Backed Government
Other Entities Agreements Securities/5/ Obligations (US$)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
. . .
U.S. entities only
- ---------------------------------------------------------------------------
. . . ./6/
U.S. and foreign
(US$) entities
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
.
(Does not intend
to invest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
5 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
6 The Money Market Portfolio may invest in U.S. dollar-denominated
obligations (limited to commercial paper and other notes) issued or
guaranteed by a foreign government. The Fund may also invest in U.S.
dollar-denominated obligations issued or guaranteed by any entity located
or organized in a foreign country that maintains a short-term foreign
currency rating in the highest short-term ratings category by the
requisite number of NRSROs. The Fund may not invest more than 25% of its
total assets in the securities of any one foreign government.
7
<PAGE>
Investment Policies Matrix continued
<TABLE>
<CAPTION>
Taxable Tax-Exempt Custodial Unrated Investment
Fund Municipals Municipals Receipts Securities/9/ Companies
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Obligations . /7/ . . .
Up to 10% of total
assets in other
investment
companies
- -------------------------------------------------------------------------------------------------------------
Money Market . /7/ . . .
Up to 10% of total
assets in other
investment
companies
- -------------------------------------------------------------------------------------------------------------
Treasury Obligations
- -------------------------------------------------------------------------------------------------------------
Treasury Instruments
- -------------------------------------------------------------------------------------------------------------
Government .
Up to 10% of total
assets in other
investment
companies
- -------------------------------------------------------------------------------------------------------------
Federal
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations (except in investment
extraordinary circumstances)/8/ companies
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt California . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations and at least 65% of investment
total assets in California companies
instruments (except in
extraordinary circumstances)/8/
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt New York . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations and at least 65% of investment
total assets in New York companies
instruments (except in
extraordinary circumstances)/8/
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
7 Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
8 Ordinarily expect that 100% of a Fund's portfolio securities will be
invested in municipal obligations, but the Funds may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
9 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality to
First Tier Securities, or to the extent that a Fund may purchase Second
Tier Securities, comparable in quality to Second Tier Securities. In
addition, a Fund holding a security supported by a guarantee or demand
feature may rely on the credit quality of the guarantee or demand feature
in determining the credit quality of the investment.
10 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of a Fund's net assets under normal market conditions.
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Private Summary of
Activity Credit Taxation for
Bonds Quality/9/ Distributions/14/ Miscellaneous
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not
permitted
- ---------------------------------------------------------------------------------------------------------------
. First Tier/12/ Taxable federal and state/15/ May invest in obligations of the
International Bank for Reconstruction
and Development. Reverse repurchase
agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not permitted
- ---------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Reverse repurchase agreements not permitted
generally exempt from
state taxation
- ---------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not permitted
- ---------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Under extraordinary circumstances,
generally exempt from may hold cash, U.S. Government
state taxation Securities subject to state taxation
or cash equivalents. Reverse repurchase
agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal and May (but does not currently intend to)
(Does not Second Tier/13/ taxable state/16/ invest up to 20% in securities subject to
intend to AMT and may temporarily invest in the taxable
invest)/10/,/11/ money market instruments described herein.
Reverse repurchase agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal May (but does not currently intend to)
(Does not Second Tier/13/ and California State invest up to 20% in AMT securities
intend to and may temporarily invest in the taxable
invest)/10/,/11/ money market instruments described herein.
Reverse repurchase agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal, May invest up to 20% in AMT securities
(not more than Second Tier/13/ New York State and and may temporarily invest in the taxable
20% of net New York City money market instruments described herein.
assets)/11/ Reverse repurchase agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
11 No more than 25% of the value of a Fund's total assets may be invested in
industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
12 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
13 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
14 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
15 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities
interest income.
16 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Prime Money Treasury Treasury
.Applicable Obligations Market Obligations Instruments
-- Not Applicable Portfolio Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAV . . . .
Interest Rate . . . .
Credit/Default . . . .
Liquidity . . . .
U.S. Government Securities . . -- --
Concentration -- -- -- --
Foreign -- . -- --
Banking Industry -- . -- --
Tax -- -- -- --
- ---------------------------------------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
Tax-Exempt Tax-Exempt Tax-Exempt
Government Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
. . . . .
. . . . .
. . . . .
. . . . .
. . -- -- --
-- -- . . .
-- -- -- -- --
-- -- -- -- --
-- -- . . .
- ----------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Risks that apply to all Funds:
.NAV Risk--The risk that a Fund will not be able to maintain a NAV per share of
$1.00 at all times.
.Interest Rate Risk--The risk that during periods of rising interest rates, a
Fund's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a Fund's
yield will tend to be higher.
.Credit/Default Risk--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase agree-
ment, may default on its payment obligations. In addition, with respect to the
Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York Portfo-
lios, risk of loss from payment default may also exist where municipal instru-
ments are backed by foreign letters of credit or guarantees.
.Liquidity Risk--The risk that a Fund will be unable to pay redemption proceeds
within the time period stated in this Prospectus, because of unusual market
conditions, an unusually high volume of redemption requests, or other reasons.
Risk that applies to the Prime Obligations, Money Market, Government and
Federal Portfolios:
.U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Money Market Portfolio:
.Foreign Risk--The risk that a foreign security could lose value as a result of
political, financial and economic events in foreign countries, less publicly
available financial and other information, less stringent foreign securities
regulations and accounting and disclosure standards, or other factors. The
Money Market Portfolio may not invest more than 25% of its total assets in the
securities of any one foreign government.
.Banking Industry Risk--The risk that if the Fund invests more than 25% of its
total assets in bank obligations, an adverse development in the banking indus-
try may affect the value of the Fund's investments more than if the Fund's
investments were not invested to such a degree in the banking industry. Nor-
mally, the Money Market Portfolio intends to invest more than 25% of its total
assets in bank obligations. Banks may be particularly susceptible to certain
economic factors such as interest rate changes, adverse developments in the
real estate market, fiscal and monetary policy and general economic cycles.
12
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
Risks that apply to the Tax-Exempt Funds:
.Concentration Risk--The risk that if a Fund invests more than 25% of its total
assets in issuers within the same state, industry or economic sector, an
adverse economic, business or political development may affect the value of
the Fund's investments more than if its investments were not so concentrated.
The Tax-Exempt California and Tax-Exempt New York Portfolios intend to invest
at least 65% of their total assets in California municipal obligations and New
York municipal obligations, respectively. These two Funds are classified as
"non-diversified" for regulatory purposes.
.Tax Risk--The risk that future legislative or administrative changes or court
decisions may materially affect the ability of a Fund to pay federal tax-
exempt dividends (in the case of each of these Funds) and state tax-exempt
dividends (in the case of the Tax-Exempt California and Tax-Exempt New York
Portfolios). These Funds would not be a suitable investment for IRAs, other
tax-exempt or tax deferred accounts or for other investors who are not sensi-
tive to the federal, state or local tax consequences of these investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
13
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's ILA
Shares from year to year; and (b) the average annual returns of a Fund's ILA
Shares. Investors should be aware that the fluctuation of interest rates is
one primary factor in performance volatility. The bar chart and table assume
reinvestment of dividends and distributions. A Fund's past performance is
not necessarily an indication of how the Fund will perform in the future.
Performance reflects expense limitations in effect. If expense limitations
were not in place, a Fund's performance would have been reduced. You may
obtain a Fund's current yield by calling 1-800-621-2550.
14
<PAGE>
FUND PERFORMANCE
Prime Obligations Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '90 2.02%
Worst Quarter
Q2 '93 0.72%
[GRAPH]
1990 8.21%
1991 6.10%
1992 3.76%
1993 2.97%
1994 4.07%
1995 5.79%
1996 5.22%
1997 5.38%
1998 5.32%
1999 4.90%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year 5 Years 10 Years Since Inception
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILA Shares (Inception 1/1/81) 4.90% 5.32% 5.16% 7.29%
-----------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Money Market Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '90 2.01%
Worst Quarter
Q2 '93 0.74%
[GRAPH]
1990 8.24%
1991 6.12%
1992 3.77%
1993 3.03%
1994 4.13%
1995 5.85%
1996 5.27%
1997 5.43%
1998 5.33%
1999 4.92%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year 5 Years 10 Years Since Inception
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILA Shares (Inception 1/1/87) 4.92% 5.36% 5.20% 5.74%
------------------------------------------------------------------------
</TABLE>
16
<PAGE>
FUND PERFORMANCE
Treasury Obligations Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '90 1.97%
Worst Quarter
Q2 '93 0.70%
[GRAPH]
1990 8.05%
1991 5.90%
1992 3.66%
1993 2.89%
1994 3.91%
1995 5.73%
1996 5.11%
1997 5.26%
1998 5.15%
1999 4.63%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year 5 Years 10 Years Since Inception
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILA Shares (Inception 12/1/81) 4.63% 5.18% 5.02% 6.60%
--------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Treasury Instruments Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '95 1.45%
Worst Quarter
Q2 '93 0.72%
[GRAPH]
1992 3.54%
1993 2.98%
1994 4.01%
1995 5.70%
1996 5.10%
1997 5.17%
1998 4.96%
1999 4.38%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year 5 Years Since Inception
----------------------------------------------------------------------------
<S> <C> <C> <C>
ILA Shares (Inception 1/30/91) 4.38% 5.06% 4.61%
----------------------------------------------------------------------------
</TABLE>
18
<PAGE>
FUND PERFORMANCE
Government Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q3 '90 1.99%
Worst Quarter
Q2 '93 0.72%
[GRAPH]
1990 8.21%
1991 6.10%
1992 3.76%
1993 2.97%
1994 4.07%
1995 5.79%
1996 5.22%
1997 5.38%
1998 5.32%
1999 4.90%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year 5 Years 10 Years Since Inception
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILA Shares (Inception 1/1/81) 4.77% 5.24% 5.07% 7.11%
-----------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Federal Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '90 1.99%
Worst Quarter
Q2 '93 0.73%
[GRAPH]
1990 8.06%
1991 5.94%
1992 3.62%
1993 3.00%
1994 4.11%
1995 5.83%
1996 5.24%
1997 5.40%
1998 5.25%
1999 4.81%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year 5 Years 10 Years Since Inception
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILA Shares (Inception 5/22/89) 4.81% 5.31% 5.11% 5.33%
--------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
FUND PERFORMANCE
Tax-Exempt Diversified Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '90 1.42%
Worst Quarter
Q1 '94 0.52%
[GRAPH]
1990 5.64%
1991 4.33%
1992 2.83%
1993 2.25%
1994 2.71%
1995 3.72%
1996 3.25%
1997 3.39%
1998 3.17%
1999 2.89%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year 5 Years 10 Years Since Inception
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILA Shares (Inception 3/3/83) 2.89% 3.28% 3.41% 4.08%
-----------------------------------------------------------------------
</TABLE>
21
<PAGE>
Tax-Exempt California Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '90 1.33%
Worst Quarter
Q1 '94 0.48%
[GRAPH]
1990 5.24%
1991 3.95%
1992 2.63%
1993 2.09%
1994 2.53%
1995 3.55%
1996 3.03%
1997 3.15%
1998 2.84%
1999 2.60%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year 5 Years 10 Years Since Inception
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILA Shares (Inception 10/4/88) 2.60% 3.03% 3.16% 3.46%
------------------------------------------------------------------------
</TABLE>
22
<PAGE>
FUND PERFORMANCE
Tax-Exempt New York Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '95 0.93%
Worst Quarter
Q1 '94 0.48%
[GRAPH]
1992 2.71%
1993 2.20%
1994 2.56%
1995 3.51%
1996 3.05%
1997 3.29%
1998 3.02%
1999 2.76%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended
December 31, 1999 1 Year 5 Years Since Inception
---------------------------------------------------------------
<S> <C> <C> <C>
ILA Shares (Inception 2/15/91) 2.76% 3.13% 3.00%
---------------------------------------------------------------
</TABLE>
23
<PAGE>
Fund Fees and Expenses (ILA Shares)
This table describes the fees and expenses that you would pay if you buy and
hold ILA Shares of a Fund.
<TABLE>
<CAPTION>
Prime Money Treasury
Obligations Market Obligations
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Other Expenses/2/ 0.08% 0.06% 0.07%
- -----------------------------------------------------------------------------
Total Fund Operating Expenses/3/ 0.43% 0.41% 0.42%
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Treasury
Instruments Government Federal
Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Other Expenses/2/ 0.08% 0.10% 0.06%
- ----------------------------------------------------------------------------
Total Fund Operating Expenses/3/ 0.43% 0.45% 0.41%
- ----------------------------------------------------------------------------
</TABLE>
24
<PAGE>
FUND FEES AND EXPENSES
<TABLE>
<CAPTION>
Tax-Exempt Tax-Exempt Tax-Exempt
Diversified California New York
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Other Expenses/2/ 0.07% 0.07% 0.09%
- -----------------------------------------------------------------------------
Total Fund Operating Expenses/3/ 0.42% 0.42% 0.44%
- -----------------------------------------------------------------------------
</TABLE>
/1/The Funds' annual operating expenses are based on actual expenses.
/2/"Other Expenses" include transfer agency fees equal to 0.04% of the average
daily net assets of each Fund's ILA Shares plus all other ordinary expenses not
detailed above.
/3/The Investment Adviser has voluntarily agreed to reduce or limit "Total Fund
Operating Expenses" of each Fund (excluding taxes, interest, brokerage fees,
litigation, indemnification and other extraordinary expenses) to 0.43% of each
Fund's average daily net assets. As a result of the current expense limita-
tions, "Other Expenses," and "Total Fund Operating Expenses" of the Government
Portfolio and Tax-Exempt New York Portfolio which are actually incurred are as
set forth below. The expense limitations may be terminated at any time at the
option of the Investment Adviser with the approval of the Trustees. If this
occurs, "Other Expenses" and "Total Fund Operating Expenses" may increase with-
out shareholder approval.
<TABLE>
<CAPTION>
Tax-Exempt
Government New York
Portfolio Portfolio
----------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):
Management Fees 0.35% 0.35%
Other Expenses 0.08% 0.08%
----------------------------------------------------------------------
Total Fund Operating Expenses (after current
expense limitations) 0.43% 0.43%
----------------------------------------------------------------------
</TABLE>
25
<PAGE>
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the expense limitations) with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in ILA Shares of a
Fund for the time periods indicated and then redeem all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that a Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations $44 $138 $241 $542
- -------------------------------------------------------
Money Market $42 $132 $230 $518
- -------------------------------------------------------
Treasury Obligations $43 $135 $235 $530
- -------------------------------------------------------
Treasury Instruments $44 $138 $241 $542
- -------------------------------------------------------
Government $46 $144 $252 $567
- -------------------------------------------------------
Federal $42 $132 $230 $518
- -------------------------------------------------------
Tax-Exempt Diversified $43 $135 $235 $530
- -------------------------------------------------------
Tax-Exempt California $43 $135 $235 $530
- -------------------------------------------------------
Tax-Exempt New York $45 $141 $246 $555
- -------------------------------------------------------
</TABLE>
Institutions that invest in ILA Shares on behalf of their customers may charge
other fees directly to their customer accounts in connection with their invest-
ments. You should contact your institution for information regarding such
charges. Such fees, if any, may affect the return such customers realize with
respect to their investment.
Certain institutions that invest in ILA Shares may receive other compensation
in connection with the sale and distribution of ILA Shares or for services to
their customers' accounts and/or the Funds. For additional information regard-
ing such compensation, see "Shareholder Guide" in the Prospectus and "Other
Information" in the Additional Statement.
26
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the
Investment Adviser, merged into The Goldman Sachs Group, Inc. as a result of
an initial public offering. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser also performs the following serv-
ices for the Funds:
.Continually manages each Fund, including the purchase, retention and
disposition of securities and other assets
.Administers each Fund's business affairs
.Performs various recordholder servicing functions (to the extent not
provided by other organizations)
Pursuant to an SEC order, each Taxable and Tax-Advantaged Fund may enter
into principal transactions in certain taxable money market instruments,
including repurchase agreements, with Goldman Sachs.
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate For the
Fiscal Year Ended
Fund Contractual Rate December 31, 1999
-------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.35% 0.35%
-------------------------------------------------------------
Money Market 0.35% 0.35%
-------------------------------------------------------------
Treasury Obligations 0.35% 0.35%
-------------------------------------------------------------
Treasury Instruments 0.35% 0.35%
-------------------------------------------------------------
Government 0.35% 0.35%
-------------------------------------------------------------
Federal 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt Diversified 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt California 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt New York 0.35% 0.35%
-------------------------------------------------------------
</TABLE>
27
<PAGE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
28
<PAGE>
Dividends
All or substantially all of each Fund's net investment income will be
declared as a dividend daily. Dividends will normally, but not always, be
declared as of 4:00 p.m. New York time as a dividend and distributed month-
ly. You may choose to have dividends paid in:
.Cash
.Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may
be submitted in writing to Goldman Sachs at any time. If you do not indicate
any choice, dividends and distributions will be reinvested automatically in
the applicable Fund.
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of
each month. Net short-term capital gains, if any, will be distributed in
accordance with federal income tax requirements and may be reflected in a
Fund's daily distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid exces-
sive fluctuations in the amount of monthly capital gains distributions, a
portion of any net capital gains realized on the disposition of securities
during the months of November and December may be distributed during the
subsequent calendar year. Although realized gains and losses on the assets
of a Fund are reflected in the NAV of the Fund, they are not expected to be
of an amount which would affect the Fund's NAV of $1.00 per share.
29
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' ILA Shares.
HOW TO BUY SHARES
How Can I Purchase Shares Of The Funds?
You may purchase ILA Shares on any business day at their NAV next determined
after receipt of an order. Shares begin earning dividends after the receipt
of the purchase amount in federal funds. No sales load is charged. You may
place a purchase order in writing or by telephone.
<TABLE>
<S> <C>
--------------------------------------------------------
By Writing: Goldman Sachs Funds
4900 Sears Tower-60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------
By Telephone: 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------
</TABLE>
In order to make an initial investment in a Fund, you must furnish to the
Fund or Goldman Sachs the Account Application.
You may send your payment as follows:
.Wire federal funds to The Northern Trust Company ("Northern"), as sub-cus-
todian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian); or
.Send a check or Federal Reserve draft payable to Goldman Sachs
Funds - (Name of Fund and Class of Shares), 4900 Sears Tower-60th Floor,
Chicago, Illinois 60606-6372. The Funds will not accept a check drawn on a
foreign bank or a third-party check.
It is strongly recommended that payment be effected by wiring federal funds
to Northern.
30
<PAGE>
SHAREHOLDER GUIDE
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
If an effective order and federal
funds are received: Dividends begin:
-----------------------------------------------------
<S> <C>
Taxable and Tax-Advantaged Funds:
Same business
.By 3:00 p.m. New York time day
Next business
.After 3:00 p.m. New York time day
-----------------------------------------------------
Tax-Exempt Funds:
Same business
.By 1:00 p.m. New York time day
Next business
.After 1:00 p.m. New York time day
-----------------------------------------------------
</TABLE>
How Do I Purchase Shares Through A Financial Institution?
Certain institutions (including banks, trust companies, brokers and invest-
ment advisers) that provide recordkeeping, reporting and processing services
to their customers may be authorized to accept, on behalf of the Trust, pur-
chase, redemption and exchange orders placed by or on behalf of their cus-
tomers and may designate other intermediaries to accept such orders, if
approved by the Trust. In these cases:
.A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized institution or intermediary on a busi-
ness day, and the order will be priced at the Fund's NAV next determined
after such acceptance.
.Authorized institutions or intermediaries will be responsible for transmit-
ting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your institution or intermediary directly to learn
whether it is authorized to accept orders for the Trust.
These institutions may receive payments from the Funds or Goldman Sachs for
the services provided by them with respect to the Funds' ILA Shares. These
payments may be in addition to other payments borne by the Funds.
31
<PAGE>
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to certain institutions and other persons in
connection with the sale, distribution and/or servicing of shares of the
Funds and other Goldman Sachs Funds.
In addition to ILA Shares, each Fund also offers other classes of shares to
investors. These other share classes are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than ILA Shares. Infor-
mation regarding these other share classes may be obtained from your sales
representative or from Goldman Sachs by calling the number on the back cover
of this Prospectus.
What Is My Minimum Investment In The Funds?
<TABLE>
<S> <C>
------------------------------------------------
Minimum initial investment $50,000 (may be
allocated among
the Funds)
------------------------------------------------
Minimum account balance $50,000
------------------------------------------------
Minimum subsequent investments None
------------------------------------------------
</TABLE>
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
.Modify or waive the minimum investment and minimum account balance require-
ment.
.Reject any purchase order for any reason.
The Funds may allow you to purchase shares with securities instead of cash
if consistent with a Fund's investment policies and operations and if
approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange ILA Shares is
determined by a Fund's NAV. The Funds calculate NAV as follows:
<TABLE>
<S> <C>
(Value of Assets of the Class)
NAV = - (Liabilities of the Class)
-----------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
.NAV per share of each class is calculated by State Street on each business
day as of the close of regular trading on the New York Stock Exchange (nor-
mally 4:00 p.m. New York time). Fund shares will be priced on any day the
New York Stock Exchange is open, except for days on which Chicago, Boston
or New York banks are closed for local holidays.
32
<PAGE>
SHAREHOLDER GUIDE
.On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, each Fund reserves the right to
close at or prior to the BMA recommended closing time. If a Fund does so,
it will cease granting same business day credit for purchase and redemption
orders received after the Fund's closing time and credit will be given to
the next business day.
.The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-
ted by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securi-
ties are valued at amortized cost in accordance with SEC regulations. Amor-
tized cost will normally approximate market value. There can be no assurance
that a Fund will be able at all times to maintain a NAV of $1.00 per share.
HOW TO SELL SHARES
How Can I Sell ILA Shares Of The Funds?
You may arrange to take money out of your account by selling (redeeming)
some or all of your shares. Generally, each Fund will redeem its ILA Shares
upon request on any business day at their NAV next determined after receipt
of such request in proper form. You may request that redemption proceeds be
sent to you by check or by wire (if the wire instructions are on record).
Redemptions may be requested in writing or by telephone.
<TABLE>
<CAPTION>
Instructions For
Redemptions:
----------------------------------------------------------------------------
<C> <S>
By Writing: .Write a letter of instruction that includes:
.Your name(s) and signature(s)
.Your account number
.The Fund name and Class of Shares
.The dollar amount you want to sell
.How and where to send the proceeds
.Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
----------------------------------------------------------------------------
By Telephone: If you have elected telephone redemption privilege
on your Account Application:
.1-800-621-2550 (8:00 a.m. to 4:00 p.m. New York
time)
----------------------------------------------------------------------------
</TABLE>
Certain institutions and intermediaries are authorized to accept redemption
requests on behalf of the Funds as described under "How Do I Purchase Shares
33
<PAGE>
Through A Financial Institution?" You may also take advantage of the check
redemption privilege, described below.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor, and the Transfer Agent will not be liable for
any loss you may incur in the event that the Trust accepts unauthorized tel-
ephone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
.All telephone requests are recorded.
.Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing
and signed by an authorized person designated on the Account Application.
The written request may be confirmed by telephone with both the requesting
party and the designated bank account to verify instructions.
.The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
When Will Redemption Proceeds Be Wired?
Redemption proceeds will normally be wired to the bank account designated on
your Account Application as follows:
<TABLE>
<CAPTION>
Redemption
Redemption Request Received Proceeds Dividends
------------------------------------------------------------------------------
<S> <C> <C>
Taxable and Tax-Advantaged Funds:
------------------------------------------------------------------------------
.By 3:00 p.m. New York time Wired same Not earned
business day on day
request is
received
.After 3:00 p.m. New York time Wired next Earned on
business day day request
is received
------------------------------------------------------------------------------
Tax-Exempt Funds:
------------------------------------------------------------------------------
.By 12:00 p.m. New York time Wired same Not earned
business day on day
request is
received
.After 12:00 p.m. New York time Wired next Earned on
business day day request
is received
------------------------------------------------------------------------------
</TABLE>
.Although redemption proceeds will normally be wired as described above,
each Fund reserves the right to pay redemption proceeds up to three busi-
ness days following receipt of a properly executed wire transfer redemption
request. If
34
<PAGE>
SHAREHOLDER GUIDE
you are selling shares you recently paid for by check, the Fund will pay
you when your check has cleared, which may take up to 15 days. If the Fed-
eral Reserve Bank is closed on the day that the redemption proceeds would
ordinarily be wired, wiring the redemption proceeds may be delayed one
additional business day.
.To change the bank designated on your Account Application, you must send
written instructions signed by an authorized person designated on the
Account Application to the Transfer Agent.
.Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of your bank or any intermediaries in
the transfer process. If a problem with such performance arises, you should
deal directly with your bank or any such intermediaries.
What Should I Know About The Check Redemption Privilege?
You may elect to have a special account with State Street for the purpose of
redeeming ILA Shares from your account by check.
The following general policies govern the check redemption privilege:
.You will be provided with a supply of checks when State Street receives a
completed signature card and authorization form. Checks drawn on the
account may be payable to the order of any person in any amount over $500,
but cannot be certified.
.The payee of the check may cash or deposit it just like any other check
drawn on a bank.
.When the check is presented to State Street for payment, a sufficient num-
ber of full or fractional ILA Shares will be redeemed to cover the amount
of the check.
.Canceled checks will be returned to you by State Street.
.The check redemption privilege allows you to receive the dividends declared
on the ILA Shares that are to be redeemed until the check is actually proc-
essed. Because of this feature, accounts may not be completely liquidated
by check.
.If the amount of the check is greater than the value of the ILA Shares held
in your account, the check will be returned unpaid. In this case, you may
be subject to extra charges.
.The Trust reserves the right to limit the availability of, modify or termi-
nate the check redemption privilege at any time with respect to any or all
shareholders.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
.Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
35
<PAGE>
The Trust reserves the right to:
.Redeem your shares if your account balance falls below the minimum as a
result of a redemption. The Fund will give you 60 days' prior written
notice to allow you to purchase sufficient additional shares of the Fund in
order to avoid such redemption. Different rules may apply to investors who
have established brokerage accounts with Goldman Sachs in accordance with
the terms and conditions of their account agreements.
.Redeem your shares in other circumstances determined by the Board of Trust-
ees to be in the best interest of the Trust.
.Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
.Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distributions
be returned to the Fund as undeliverable or remain uncashed for six months.
In addition, that distribution and all future distributions payable to you
will be reinvested at NAV in additional Fund shares. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
Can I Exchange My Investment From One Fund To Another?
You may exchange ILA Shares of a Fund at NAV for shares of the corresponding
class of any other Goldman Sachs Fund. The exchange privilege may be
materially modified or withdrawn at any time upon 60 days' written notice to
you.
<TABLE>
<CAPTION>
Instructions For
Exchanging Shares:
-----------------------------------------------------------------------
<C> <S>
By Writing: .Write a letter of instruction that includes:
.Your name(s) and signature(s)
.Your account number
.The Fund names and Class of Shares
.The dollar amount to be exchanged
.Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
-----------------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
.1-800-621-2550 (8:00 a.m. to 4:00 p.m.
New York time)
-----------------------------------------------------------------------
</TABLE>
You should keep in mind the following factors when making or considering an
exchange:
.You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
36
<PAGE>
SHAREHOLDER GUIDE
.All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
.Telephone exchanges normally will be made only to an identically registered
account.
.Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized person
designated on the Account Application.
.Exchanges are available only in states where exchanges may be legally made.
.It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
.Goldman Sachs may use reasonable procedures described under "What Do I Need
to Know About Telephone Redemption Requests?" in an effort to prevent unau-
thorized or fraudulent telephone exchange requests.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
What Types Of Reports Will Be Sent Regarding Investments In Shares?
Recordholders will receive an annual report containing audited financial
statements and a semi-annual report. To eliminate unnecessary duplication,
only one copy of such reports will be sent to shareholders with the same
mailing address. If you would like a duplicate copy to be mailed to you,
please contact the Goldman Sachs Funds at 1-800-621-2550. Recordholders will
also be provided with an individual monthly statement. Any dividends and
distributions paid by the Funds are also reflected in regular statements
issued by the Funds to recordholders. If you purchase shares through an
institution or other intermediary, the institution or intermediary is
responsible for providing these or other reports to their customers who are
the beneficial owners of the Fund shares in accordance with the rules that
apply to their accounts with the institution or intermediary.
37
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
Taxes on Distributions: Except for the Tax-Free Money Market Fund, distribu-
tions of investment income are taxable as ordinary income for federal tax pur-
poses, and may also be subject to state or local taxes. This is true whether
you reinvest your distributions in additional Fund shares or receive them in
cash. To the extent that Fund distributions are attributable to interest on
federal obligations or interest on obligations of your state of residence or
its municipalities or authorities, they will in most cases be exempt from state
and local income taxes. Distributions from the Tax-Free Money Market Fund that
are designated as "exempt interest dividends" are generally not subject to fed-
eral income tax. Distributions of short-term capital gains are taxable to you
as ordinary income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Free Money Market Fund may be a preference item when determining your fed-
eral alternative minimum tax liability. Exempt-interest dividends are also
taken into account in determining the taxable portion of social security or
railroad retirement benefits. Any interest on indebtedness incurred by you to
purchase or carry shares in the Tax-Free Money Market Fund generally will not
be deductible for federal income tax purposes.
Other Information: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
38
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. Treasury Obligations and U.S. Government Securities. U.S. Treasury
Obligations include securities issued or issued or guaranteed by the U.S.
Treasury ("U.S. Treasury Obligations"). Payment of principal and interest on
these obligations is backed by the full faith and credit of the U.S.
government. U.S. Treasury Obligations include, among other things, the
separately traded principal and interest components of securities guaranteed or
issued by the U.S. Treasury if such components are traded independently under
the Separate Trading of Registered Interest and Principal of Securities program
("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
39
<PAGE>
Some Funds invest in U.S. Treasury Obligations and certain U.S. Government
Securities the interest from which is generally exempt from state income taxa-
tion. Securities generally eligible for this exemption include those issued by
the U.S. Treasury and certain agencies, authorities or instrumentalities of the
U.S. government, including the Federal Home Loan Banks, Federal Farm Credit
Banks, Tennessee Valley Authority and Student Loan Marketing Association.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
Bank Obligations. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Funds may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Funds may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Fund invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of opera-
tions and profitability of domestic and foreign banks. Significant developments
in the U.S. banking industry have included increased competition from other
types of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the real estate mar-
kets. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
Commercial Paper. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or
40
<PAGE>
APPENDIX A
bank holding companies, corporations, finance companies and other issuers. The
commercial paper purchased by a Fund consists of direct U.S. dollar-denominated
obligations of domestic or, in the case of certain Funds, foreign issuers.
Short-Term Obligations. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
Repurchase Agreements. Certain Funds may enter into repurchase agreements with
primary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, certain Funds, together with other registered
investment companies having advisory agreements with the Investment Adviser or
any of its 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.
Asset-Backed and Receivables-Backed Securities. Certain Funds may invest in
asset-backed and receivables-backed securities whose principal and interest
payments are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-backed
and receivables-backed 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 and
receivables-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in such securities will
41
<PAGE>
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. In addition, securities that are backed by credit card, automobile and
similar types of receivables generally do not have the benefit of a security
interest in collateral that is comparable in quality to mortgage assets. There
is the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event of a
default, a Fund may suffer a loss if it cannot sell collateral quickly and
receive the amount it is owed.
Foreign Government Obligations and Related Foreign Risks. Certain Funds may
invest in foreign government obligations. Foreign government obligations are
U.S. dollar-denominated obligations (limited to commercial paper and other
notes) issued or guaranteed by a foreign government or other entity located or
organized in a foreign country that maintains a short-term foreign currency
rating in the highest short-term ratings category by the requisite number of
NRSROs.
Investments by a Fund in foreign securities, whether issued by a foreign gov-
ernment, bank, corporation or other issuer, may present a greater degree of
risk than investments in securities of domestic issuers because of less public-
ly-available financial and other information, less securities regulation,
potential imposition of foreign withholding and other taxes, war, expropriation
or other adverse governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and generally are not bound by
the accounting, auditing and financial reporting standards applicable to U.S.
banks.
Municipal Obligations. Certain Funds may invest in municipal obligations.
Municipal obligations are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities, and the District of Columbia. Municipal
obligations in which a Fund may invest consist of fixed rate notes and similar
debt instruments; variable and floating rate demand instruments; tax-exempt
commercial paper; municipal bonds; and unrated notes, paper, bonds or other
instruments.
Municipal Notes and Bonds. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds also include lease rental revenue bonds which are
issued by a state or local authority for capital projects and are secured by
annual lease payments from the state or local-
42
<PAGE>
APPENDIX A
ity sufficient to cover debt service on the authority's obligations. Industrial
development bonds ("private activity bonds") are a specific type of revenue
bond backed by the credit and security of a private user and, therefore, have
more potential risk. Municipal bonds may be issued in a variety of forms,
including commercial paper, tender option bonds and variable and floating rate
securities.
Tender Option Bonds. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal
income tax. Certain tender option bonds may be illiquid or may become illiquid
as a result of a credit rating downgrade, a payment default or a disqualifica-
tion from tax-exempt status.
Revenue Anticipation Warrants. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
Industrial Development Bonds. Certain Funds may invest in industrial develop-
ment bonds (private activity bonds). Industrial development bonds are a spe-
cific type of revenue bond backed by the credit and security of a private user,
the interest from which would be an item of tax preference when distributed by
a Fund as "exempt-interest dividends" to shareholders under the AMT.
43
<PAGE>
Other Municipal Obligation Policies. Certain Funds may invest 25% or more of
the value of their respective total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting one municipal obligation would also affect the other municipal
obligation. For example, a Fund may invest all of its assets in (a) municipal
obligations the interest of which is paid solely from revenues from 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 obligations whose issuers are in the same
state; or (c) industrial development obligations. Concentration of a Fund's
investments in these municipal obligations will subject the Fund, to a greater
extent than if such investment was not so concentrated, to the risks of adverse
economic, business or political developments affecting the particular state,
industry or other area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and are gener-
ally not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
Custodial Receipts. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
Other Investment Companies. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of
44
<PAGE>
APPENDIX A
any other investment company, and a prohibition on investing more than 5% of a
Fund's total assets in securities of any one investment company or more than
10% of its total assets in securities of all investment companies. A Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Such other investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the acquiring Fund and will be subject to substantially the
same risks.
Floating and Variable Rate Obligations. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
When-Issued Securities and Forward Commitments. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring the securities for its portfolio, a Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment Adviser
deems it appropriate.
45
<PAGE>
Illiquid Securities. Each Fund may invest up to 10% of its net assets in illiq-
uid securities which cannot be disposed of in seven days in the ordinary course
of business at fair value. Illiquid securities include:
.Both domestic and foreign securities that are not readily marketable
.Certain municipal leases and participation interests
.Certain stripped mortgage-backed securities
.Repurchase agreements and time deposits with a notice or demand period of more
than seven days
.Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is oth-
erwise eligible for resale pursuant to Rule 144A under the Securities Act of
1933.
Investing in restricted securities may decrease the liquidity of a Fund's port-
folio.
Borrowings. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the Addi-
tional Statement.
Downgraded Securities. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
46
<PAGE>
APPENDIX A
Special Risks and Policies Applicable to the Tax-Exempt Funds:
Fundamental Policies. As a matter of fundamental policy, at least 80% of each
of the net assets of each of the Tax-Exempt Diversified, Tax-Exempt California
and Tax-Exempt New York Portfolios will ordinarily be invested in municipal
obligations, the interest from which is, in the opinion of bond counsel, if
any, excluded from gross income for federal income tax purposes. In addition,
as a matter of fundamental policy, at least 65% of each of the Tax-Exempt Cali-
fornia and Tax-Exempt New York Portfolio's total assets will be invested in
California and New York municipal obligations, except in extraordinary circum-
stances.
For these purposes, California and New York municipal obligations are obliga-
tions issued by or on behalf of the State of California or the State of New
York, respectively, and their respective political subdivisions, agencies and
instrumentalities and the government of Puerto Rico, the U.S. Virgin Islands
and Guam, the interest from which is excluded from gross income for federal
income tax purposes and is exempt from California State personal income tax or
New York State and New York City personal income tax. Each Tax-Exempt Fund may
temporarily invest in taxable money market instruments or, in the case of the
Tax-Exempt California and New York Portfolios, in municipal obligations that
are not California or New York municipal obligations, respectively, when
acceptable California and New York municipal obligations are not available or
when the Investment Adviser believes that the market conditions dictate a
defensive posture. Investments in taxable money market instruments will be lim-
ited to those meeting the quality standards of each Tax-Exempt Fund. The Tax-
Exempt California and Tax-Exempt New York Portfolios' distributions of interest
from municipal obligations other than California and New York municipal obliga-
tions, respectively, may be subject to California and New York State and New
York City personal income taxes.
Risks of Investing in California and New York: The Tax-Exempt California and
Tax-Exempt New York Portfolios concentrate their investments in California and
New York municipal obligations. Consequently, these Funds are more susceptible
to factors adversely affecting issuers of California and New York municipal
obligations, and may be riskier than comparable municipal bond funds and money
market funds that do not emphasize these issuers to this degree.
The Tax-Exempt California Portfolio's investments can be affected by political
and economic developments within the State of California (the "State"), and by
the financial condition of the State, its public authorities and political sub-
divisions. After suffering a severe recession in the early 1990's which caused
the State to experience financial difficulties, California's economy entered a
sustained recovery since late 1993. The State's budget has returned to a posi-
tive balance and is generating substantial surpluses. California's long-term
credit rating has been raised after being reduced
47
<PAGE>
during the recession. To respond to its own revenue shortfalls during the
recession, the State reduced assistance to its public authorities and political
subdivisions. Cutbacks in state aid could further adversely affect the finan-
cial condition of cities, counties and education districts which are subject to
their own fiscal constraints. California voters in the past have passed amend-
ments to the California Constitution and other measures that limit the taxing
and spending authority of California governmental entities, and future voter
initiatives could result in adverse consequences affecting California municipal
obligations. Also, the ultimate fiscal effect of federally-mandated reform of
welfare programs on the State and its local governments is still to be
resolved.
These factors, among others (including the outcome of related pending litiga-
tion), could reduce the credit standing of certain issuers of California munic-
ipal obligations. A more detailed discussion of the risks of investing in Cali-
fornia is included in the Additional Statement.
The Tax-Exempt New York Portfolio's investments will be affected by political
and economic developments within the State of New York (the "State"), and by
the financial conditions of the State, its public authorities and political
subdivisions, particularly the City of New York (the "City"). The State and the
City face long-term economic problems that could seriously affect their ability
and that of other issuers of New York municipal obligations to meet their
financial obligations. Certain substantial issuers of New York municipal obli-
gations (including issuers whose obligations may be acquired by the Fund) have,
at times, experienced serious financial difficulties. Strong demand for New
York municipal obligations has also at times had the effect of permitting New
York municipal obligations to be issued with yields relatively lower, and after
issuance, to trade in the market at prices relatively higher, than comparably
rated municipal obligations issued by other jurisdictions. A recurrence of the
financial difficulties previously experienced by certain issuers of New York
municipal obligations could result in defaults or declines in the market values
of those issuers' existing obligations and, possibly, in the obligations of
other issuers of New York municipal obligations. Although as of April 1, 2000
no issuers were in default with respect to the payment of their New York munic-
ipal obligations, the occurrence of any such default could materially affect
adversely the market values and marketability of all New York municipal obliga-
tions and, consequently, the value of the Fund's holdings. A more detailed dis-
cussion of the risks of investing in New York is included in the Additional
Statement.
If California, New York, or any of their local governmental entities are unable
to meet their financial obligations, the corresponding Fund's income, NAV,
ability to preserve or realize appreciation of capital or liquidity could be
adversely affected. Also, neither of these Funds is a diversified fund under
the Act (except to the extent
48
<PAGE>
APPENDIX A
that diversification is required by Rule 2a-7 or for federal income tax purpos-
es). Because they may invest a larger percentage of their assets in the securi-
ties of fewer issuers than do diversified funds, these Funds may be exposed to
greater risk in that an adverse change in the condition of one or a small num-
ber of issuers would have a greater impact on them.
49
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Arthur Andersen LLP, whose report, along
with a Fund's financial statements, is included in the Fund's annual report
(available upon request without charge).
PRIME OBLIGATIONS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - ILA B units 1.00 0.04 (0.04)
1999 - ILA C units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - ILA B units 1.00 0.04 (0.04)
1998 - ILA C units 1.00 0.04 (0.04)
1998 - Cash Management shares (commenced
May 1) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
1997 - ILA B units 1.00 0.04 (0.04)
1997 - ILA C units (commenced August 15) 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
1996 - ILA B units (commenced May 8) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
</TABLE>
/a/ Calculated based on the average units outstanding methodology.
/b/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/c/ Annualized.
50
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.90% $1,095,109 0.43% 4.79% 0.43% 4.79%
1.00 4.74 40,850 0.58 4.65 0.58 4.65
1.00 4.48 92,975 0.83 4.33 0.83 4.33
1.00 3.86 19,444 1.43 3.83 1.43 3.83
1.00 3.86 7,436 1.43 3.76 1.43 3.76
1.00 4.30 1 1.00 4.44 1.43 4.01
- ------------------------------------------------------------------------------------
1.00 5.32 837,185 0.43 5.19 0.43 5.19
1.00 5.16 38,836 0.58 5.05 0.58 5.05
1.00 4.90 119,309 0.83 4.79 0.83 4.79
1.00 4.27 14,412 1.43 4.07 1.43 4.07
1.00 4.27 6,814 1.43 4.13 1.43 4.13
1.00 4.69/c/ 2 0.93/c/ 4.81/c/ 1.43/c/ 4.31/c/
- ------------------------------------------------------------------------------------
1.00 5.38 866,445 0.42 5.24 0.43 5.23
1.00 5.22 28,110 0.57 5.11 0.58 5.10
1.00 4.96 78,316 0.82 4.85 0.83 4.84
1.00 4.33 1,574 1.42 4.33 1.43 4.32
1.00 4.41/c/ 1,897 1.42/c/ 4.39/c/ 1.43/c/ 4.38/c/
- ------------------------------------------------------------------------------------
1.00 5.22 1,154,787 0.41 5.11 0.43 5.09
1.00 5.06 23,738 0.56 4.97 0.58 4.95
1.00 4.80 84,707 0.81 4.74 0.83 4.72
1.00 3.97/c/ 346 1.41/c/ 4.09/c/ 1.43/c/ 4.07/c/
- ------------------------------------------------------------------------------------
1.00 5.79 1,261,251 0.41 5.66 0.43 5.64
1.00 5.63 63,018 0.56 5.51 0.58 5.49
1.00 5.37 227,233 0.81 5.22 0.83 5.20
- ------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - Cash Management shares
(commenced May 1) 1.00 0.03 (0.03)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
/a/ Calculated based on the average units outstanding methodology.
/b/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/c/ Annualized.
52
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.92% $1,346,765 0.41% 4.80% 0.41% 4.80%
1.00 4.76 6,961 0.56 4.64 0.56 4.64
1.00 4.50 383,932 0.81 4.42 0.81 4.42
1.00 4.32 2 0.98 4.37 1.41 3.94
- ------------------------------------------------------------------------------------
1.00 5.33 1,350,317 0.40 5.17 0.43 5.14
1.00 5.17 314,327 0.55 5.04 0.58 5.01
1.00 4.91 32,349 0.80 4.79 0.83 4.76
1.00 4.69/c/ 2 0.90c 4.80/c/ 1.43/c/ 4.27/c/
- ------------------------------------------------------------------------------------
1.00 5.43 806,096 0.37 5.31 0.42 5.26
1.00 5.28 307,480 0.52 5.15 0.57 5.10
1.00 5.01 20,517 0.77 4.90 0.82 4.85
- ------------------------------------------------------------------------------------
1.00 5.27 703,097 0.36 5.15 0.43 5.08
1.00 5.12 257,258 0.51 5.00 0.58 4.93
1.00 4.86 28,845 0.76 4.75 0.83 4.68
- ------------------------------------------------------------------------------------
1.00 5.85 574,155 0.36 5.71 0.42 5.65
1.00 5.69 164,422 0.51 5.55 0.57 5.49
1.00 5.43 23,080 0.76 5.29 0.82 5.23
- ------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
TREASURY OBLIGATIONS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ unitholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.04 (0.04)
1999 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
/a/ Calculated based on the average units outstanding methodology.
/b/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.63% $404,299 0.42% 4.50% 0.42% 4.50%
1.00 4.48 42,334 0.57 4.35 0.57 4.35
1.00 4.22 264,787 0.82 4.19 0.82 4.19
- ------------------------------------------------------------------------------------
1.00 5.15 734,553 0.42 4.96 0.43 4.95
1.00 4.99 80,464 0.57 4.88 0.58 4.87
1.00 4.73 35,432 0.82 4.67 0.83 4.66
- ------------------------------------------------------------------------------------
1.00 5.26 590,381 0.42 5.12 0.42 5.12
1.00 5.10 124,159 0.57 4.99 0.57 4.99
1.00 4.84 104,133 0.82 4.73 0.82 4.73
- ------------------------------------------------------------------------------------
1.00 5.11 574,734 0.41 4.98 0.43 4.96
1.00 4.95 108,850 0.56 4.83 0.58 4.81
1.00 4.69 123,483 0.81 4.59 0.83 4.57
- ------------------------------------------------------------------------------------
1.00 5.73 711,209 0.41 5.51 0.43 5.49
1.00 5.57 92,643 0.56 5.37 0.58 5.35
1.00 5.31 119,692 0.81 5.11 0.83 5.09
- ------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
TREASURY INSTRUMENTS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ unitholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.04 $(0.04)
1999 - ILA Administration units 1.00 0.04 (0.04)
1999 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
/a/ Calculated based on the average units outstanding methodology.
/b/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.38% $224,609 0.43% 4.29% 0.43% 4.29%
1.00 4.22 32,162 0.58 4.09 0.58 4.09
1.00 3.96 306,483 0.83 3.90 0.83 3.90
- ------------------------------------------------------------------------------------
1.00 4.96 341,476 0.30 4.83 0.43 4.70
1.00 4.80 131,685 0.45 4.68 0.58 4.55
1.00 4.54 374,128 0.70 4.43 0.83 4.30
- ------------------------------------------------------------------------------------
1.00 5.17 330,241 0.22 5.02 0.42 4.82
1.00 5.01 98,667 0.37 4.88 0.57 4.68
1.00 4.75 295,404 0.62 4.63 0.82 4.43
- ------------------------------------------------------------------------------------
1.00 5.10 708,999 0.21 4.96 0.43 4.74
1.00 4.95 137,706 0.36 4.82 0.58 4.60
1.00 4.68 383,901 0.61 4.56 0.83 4.34
- ------------------------------------------------------------------------------------
1.00 5.70 586,294 0.21 5.50 0.44 5.27
1.00 5.54 68,713 0.36 5.34 0.59 5.11
1.00 5.28 123,254 0.61 5.00 0.84 4.77
- ------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - Cash Management shares (commenced
May 1) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
</TABLE>
/a/ Calculated based on the average units outstanding methodology.
/b/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/c/ Annualized.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.77% $205,244 0.43% 4.64% 0.45% 4.62%
1.00 4.61 3,265 0.58 4.42 0.60 4.40
1.00 4.35 79,847 0.83 4.24 0.85 4.22
1.00 4.18 153 1.00 4.68 1.45 4.23
- ------------------------------------------------------------------------------------
1.00 5.21 383,243 0.43 5.09 0.45 5.07
1.00 5.05 7,692 0.58 4.94 0.60 4.92
1.00 4.79 105,732 0.83 4.67 0.85 4.65
1.00 4.57/c/ 2 0.93/c/ 4.60/c/ 1.45/c/ 4.08/c/
- ------------------------------------------------------------------------------------
1.00 5.31 460,457 0.42 5.16 0.42 5.16
1.00 5.15 10,192 0.57 4.98 0.57 4.98
1.00 4.89 83,799 0.82 4.78 0.82 4.78
- ------------------------------------------------------------------------------------
1.00 5.15 694,651 0.41 5.04 0.44 5.01
1.00 4.99 36,055 0.56 4.89 0.59 4.86
1.00 4.73 94,228 0.81 4.63 0.84 4.60
- ------------------------------------------------------------------------------------
1.00 5.77 570,469 0.41 5.62 0.43 5.60
1.00 5.62 47,558 0.56 5.49 0.58 5.47
1.00 5.35 85,401 0.81 5.19 0.83 5.17
- ------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
FEDERAL PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ unitholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
/a/ Calculated based on the average units outstanding methodology.
/b/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
60
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.81% $3,171,330 0.41% 4.72% 0.41% 4.72%
1.00 4.66 836 0.56 4.46 0.56 4.46
1.00 4.39 284,382 0.81 4.30 0.81 4.30
- ------------------------------------------------------------------------------------
1.00 5.25 2,625,705 0.34 5.10 0.42 5.02
1.00 5.09 508,297 0.49 4.97 0.57 4.89
1.00 4.83 53,994 0.74 4.71 0.82 4.63
- ------------------------------------------------------------------------------------
1.00 5.40 2,050,559 0.27 5.26 0.41 5.12
1.00 5.24 530,001 0.42 5.11 0.56 4.97
1.00 4.98 34,540 0.67 4.83 0.81 4.69
- ------------------------------------------------------------------------------------
1.00 5.24 2,303,677 0.26 5.13 0.43 4.96
1.00 5.09 794,537 0.41 4.98 0.58 4.81
1.00 4.83 192,416 0.66 4.73 0.83 4.56
- ------------------------------------------------------------------------------------
1.00 5.83 1,731,935 0.26 5.69 0.42 5.53
1.00 5.67 516,917 0.41 5.50 0.57 5.34
1.00 5.41 102,576 0.66 5.22 0.82 5.06
- ------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
TAX-EXEMPT DIVERSIFIED PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.03 (0.03)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.03 (0.03)
1998 - Cash Management shares (commenced
May 1) 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
1996 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.04 (0.04)
1995 - ILA Administration units 1.00 0.04 (0.04)
1995 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
</TABLE>
/a/ Calculated based on the average units outstanding methodology.
/b/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/c/ Annualized.
62
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.89% $1,734,623 0.42% 2.85% 0.42% 2.85%
1.00 2.73 28,084 0.57 2.66 0.57 2.66
1.00 2.48 20,991 0.82 2.41 0.82 2.41
1.00 2.30 2 0.99 2.51 1.42 2.08
- ------------------------------------------------------------------------------------
1.00 3.17 1,562,285 0.35 3.12 0.41 3.06
1.00 3.02 26,509 0.50 2.98 0.56 2.92
1.00 2.76 37,850 0.75 2.72 0.81 2.66
1.00 2.61/c/ 2 0.85/c/ 2.66/c/ 1.41/c/ 2.10/c/
- ------------------------------------------------------------------------------------
1.00 3.39 1,479,486 0.32 3.33 0.41 3.24
1.00 3.23 27,967 0.47 3.16 0.56 3.07
1.00 2.97 30,513 0.72 2.97 0.81 2.88
- ------------------------------------------------------------------------------------
1.00 3.25 1,514,443 0.31 3.20 0.41 3.10
1.00 3.09 59,097 0.46 3.06 0.56 2.96
1.00 2.84 28,921 0.71 2.79 0.81 2.69
- ------------------------------------------------------------------------------------
1.00 3.72 1,342,585 0.31 3.65 0.42 3.54
1.00 3.57 48,773 0.46 3.51 0.57 3.40
1.00 3.31 49,647 0.71 3.24 0.82 3.13
- ------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
TAX-EXEMPT CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distribution
beginning investment to unit/
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.02 (0.02)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.02 (0.02)
1998 - Cash Management shares (commenced May
1) 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units (Re-commenced
September 1) 1.00 0.01 (0.01)
- -------------------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
1995 - ILA units 1.00 0.03 (0.03)
1995 - ILA Administration units 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
</TABLE>
/a/ Calculated based on the average units outstanding methodology.
/b/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/c/ Annualized.
64
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net
assets at Ratio of net Ratio of net
Net asset end Ratio of net investment Ratio of net investment
value at of period expenses to income to expenses to income to
end Total (in average net average net average net average net
of period return/b/ 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.60% $895,469 0.42% 2.58% 0.42% 2.58%
1.00 2.45 8,910 0.57 2.38 0.57 2.38
1.00 2.19 27,229 0.82 2.39 0.82 2.39
1.00 2.02 1 0.99 2.15 1.42 1.72
- -----------------------------------------------------------------------------------
1.00 2.84 584,615 0.41 2.79 0.41 2.79
1.00 2.68 512 0.56 2.84 0.56 2.84
1.00 2.43 2 0.81 2.48 0.81 2.48
1.00 2.25/c/ 2 0.91/c/ 2.37/c/ 1.41/c/ 1.87/c/
- -----------------------------------------------------------------------------------
1.00 3.15 591,003 0.42 3.10 0.42 3.10
1.00 3.00 360 0.57 2.98 0.57 2.98
1.00 2.87/c/ 2 0.82/c/ 2.90/c/ 0.82/c/ 2.90/c/
- -----------------------------------------------------------------------------------
1.00 3.03 440,476 0.41 2.99 0.42 2.98
1.00 2.88 142 0.56 2.84 0.57 2.83
- -----------------------------------------------------------------------------------
1.00 3.55 346,728 0.41 3.49 0.41 3.49
1.00 3.40 61 0.56 3.32 0.56 3.32
- -----------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
TAX-EXEMPT NEW YORK PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.03 (0.03)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- -----------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.03 (0.03)
1998 - Cash Management
shares (commenced May 1) 1.00 0.02 (0.02)
- -----------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units (commenced
September 15) 1.00 0.01 (0.01)
- -----------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
- -----------------------------------------------------------------------
1995 - ILA units 1.00 0.03 (0.03)
1995 - ILA Administration units 1.00 0.03 (0.03)
- -----------------------------------------------------------------------
</TABLE>
/a/ Calculated based on the average units outstanding methodology.
/b/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/c/ Annualized.
66
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of Ratio of net
Net asset assets at Ratio of net investment net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.76% $160,301 0.43% 2.73% 0.44% 2.72%
1.00 2.60 37,836 0.58 2.61 0.59 2.60
1.00 2.35 2 0.83 2.29 0.84 2.28
1.00 2.17 2 1.00 2.34 1.44 1.90
- -----------------------------------------------------------------------------------
1.00 3.02 122,550 0.36 2.96 0.51 2.81
1.00 2.87 21,580 0.51 2.85 0.66 2.70
1.00 2.61 2 0.76 2.61 0.91 2.46
1.00 2.46/c/ 1 0.86/c/ 2.56/c/ 1.51/c/ 1.91/c/
- -----------------------------------------------------------------------------------
1.00 3.29 102,887 0.33 3.24 0.43 3.14
1.00 3.14 31,993 0.48 3.09 0.58 2.99
1.00 3.02/c/ 2 0.73/c/ 3.04/c/ 0.83/c/ 2.94/c/
- -----------------------------------------------------------------------------------
1.00 3.05 70,175 0.32 3.01 0.43 2.90
1.00 2.90 44,319 0.47 2.88 0.58 2.77
- -----------------------------------------------------------------------------------
1.00 3.51 90,537 0.30 3.44 0.44 3.30
1.00 3.35 26,724 0.45 3.28 0.59 3.14
- -----------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
Index
<TABLE>
<C> <S>
1 General Investment
Management Approach
5 Fund Investment Objectives
and Strategies
10 Principal Risks of the Funds
14 Fund Performance
24 Fund Fees and Expenses
27 Service Providers
29 Dividends
30 Shareholder Guide
30 How to Buy Shares
33 How to Sell Shares
38 Taxation
39 Appendix A
Additional Information on
Portfolio Risks,
Securities and Techniques
50 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Institutional Liquid Assets
Prospectus (ILA Units)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of
Fund documents, after paying a duplicating fee, by writing to the SEC's
Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request to: [email protected]. Information on the operation of the public
reference room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
ILAPROINSTMM
<PAGE>
Prospectus
GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS
ILA
Administration
("Units" or
"Shares")
May 1, 2000
. Prime
Obligations
Portfolio
. Money Market
Portfolio
. Treasury
Obligations
Portfolio
. Treasury
Instruments
Portfolio
. Government
Portfolio
. Federal
Portfolio
. Tax-Exempt
Diversified
Portfolio
. Tax-Exempt
California
Portfolio
. Tax-Exempt
New York
Portfolio
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
[GRAPHIC]
<PAGE>
NOT FDIC-Insured May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Institutional Liquid Assets Portfolios (the "Funds"). GSAM is
referred to in this Prospectus as the "Investment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek preservation of capital, daily
liquidity and maximum current income. With each Fund the Investment Adviser
follows a conservative, risk-managed investment process that seeks to:
. Manage credit risk
. Manage interest rate risk
. Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1. Managing Credit Risk
The Investment Adviser's process for managing risk emphasizes:
. Intensive research--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as
well as the Investment Research, Legal and Compliance departments of
Goldman Sachs.
. Timely updates--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio
management team via computer link.
The Result: An "approved" list of high-quality credits--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2. Managing Interest Rate Risk
Three main steps are followed in seeking to manage interest rate risk:
. Establish weighted average maturity (WAM) target--WAM (the weighted
average time until the yield of a portfolio reflects any changes in the
current interest rate environment) is constantly revisited and adjusted as
market conditions change. An overall strategy is developed by the
portfolio management team based on insights gained from weekly meetings
with both Goldman Sachs economists and economists from outside the firm.
. Implement optimum portfolio structure--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
. Conduct rigorous analysis of new securities--The Investment Adviser's
five-step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for
money market mutual funds.
3. Managing Liquidity
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
. Each Fund's clients and factors that influence their asset volatility;
. Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
. Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC Financial Data Universal
Averages. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
. The Funds: Each Fund's securities are valued by the amortized cost method
as permitted by Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "Act"). Under Rule 2a-7, each Fund may invest only in U.S.
dollar-denominated securities that are determined to present minimal credit
risk and meet certain other criteria, including conditions relating to
maturity, diversification and credit quality. These operating policies may
be more restrictive than the fundamental policies set forth in the State-
ment of Additional Information (the "Additional Statement").
. Taxable Funds: Prime Obligations, Money Market, Treasury Obligations
and Government Portfolios.
. Tax-Advantaged Funds: Treasury Instruments and Federal Portfolios.
. Tax-Exempt Funds: Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios.
. The Investors: The Funds are designed for investors seeking a high rate of
return, a stable net asset value ("NAV") and convenient liquidation privi-
leges. The Funds are particularly suitable for banks, corporations and
other financial institutions that seek investment of short-term funds for
their own accounts or for the accounts of their customers.
. NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
. Maximum Remaining Maturity of Portfolio Investments: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
. Dollar-Weighted Average Portfolio Maturity ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
. Investment Restrictions: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions"
in the Additional Statement. Fundamental investment restrictions and the
investment objective of a Fund (except the Tax-Exempt California and Tax-
Exempt New York Portfolios' objectives of providing shareholders with
income exempt from California State and New York State and New York City
personal income tax, respectively) cannot be changed without approval of a
majority of the outstanding shares of that Fund. The Treasury Obligations
Portfolio's policy of limiting its investments to U.S. Treasury Obligations
(as defined in Appendix A) and related repurchase agreements is also funda-
mental. All investment policies not specifically designated as fundamental
are non-fundamental and may be changed without shareholder approval.
. Diversification: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of
the value of its total assets at the time of purchase in the securities of
any single issuer with these
3
<PAGE>
exceptions: (a) the Tax-Exempt California and Tax-Exempt New York Portfolios
may each invest up to 25% of their total assets in five or fewer issuers;
and (b) each of the other Funds may invest up to 25% of its total assets in
the securities of a single issuer for up to three business days. These limi-
tations do not apply to cash, certain repurchase agreements, U.S. Government
Securities (as defined in Appendix A) or securities of other investment com-
panies. In addition, securities subject to certain unconditional guarantees
and securities that are not "First Tier Securities" as defined by the SEC
are subject to different diversification requirements as described in the
Additional Statement.
4
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
Taxable and Tax-Advantaged Funds:
The Prime Obligations, Money Market, Treasury Obligations, Treasury Instru-
ments, Government and Federal Portfolios seek to maximize current income to
the extent consistent with the preservation of capital and the maintenance
of liquidity by investing exclusively in high quality money market instru-
ments.
The Prime Obligations and Money Market Portfolios pursue their investment
objectives by investing in U.S. Government Securities, obligations of U.S.
banks, commercial paper and other short-term obligations of U.S. companies,
states, municipalities, and other entities and repurchase agreements. The
Money Market Portfolio may also invest in U.S. dollar-denominated obliga-
tions of foreign banks, foreign companies and foreign governments.
The Treasury Obligations Portfolio pursues its investment objective by
investing in securities issued by the U.S. Treasury and repurchase agree-
ments relating to such securities. The Government Portfolio pursues its
investment objective by investing in U.S. Government Securities and repur-
chase agreements relating to such securities.
The Treasury Instruments and Federal Portfolios pursue their investment
objectives by limiting their investments to certain U.S. Treasury Obliga-
tions and U.S. Government Securities, respectively, the interest from which
is generally exempt from state income taxation. You should consult your tax
adviser to determine whether distributions from the Treasury Instruments and
Federal Portfolios (and any other Fund that may hold such obligations)
derived from interest on such obligations are exempt from state income taxa-
tion in your own state.
Tax-Exempt Funds:
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios seek to provide shareholders, to the extent consistent with the
preservation of capital and prescribed portfolio standards, with a high
level of income exempt from federal income tax by investing primarily in
municipal instruments.
In addition, the Tax-Exempt California and Tax-Exempt New York Portfolios
seek to provide shareholders with income exempt from California State and
New York State and City personal income taxes, respectively, by investing in
instruments the interest on which is exempt from these taxes. (These instru-
ments are called "California instruments" and "New York instruments" in this
Prospectus.)
The Tax-Exempt Funds pursue their investment objectives by investing in
securities issued by or on behalf of states, territories, and possessions of
the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia, the interest from
which, if any, is in the opinion of bond counsel excluded from gross income
for federal income tax purposes, and not an item of tax preference under the
federal alternative minimum tax ("AMT").
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Bank Commercial
Fund Obligations Securities Obligations Paper
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations ./1/ . . .
U.S. banks only/2/
--------------------------------------------------------------------------------------------------
Money Market ./1/ . . .
Over 25% of total assets U.S. and foreign
must be invested in U.S. (US$) commercial
and foreign (US$) banks/3/ paper
--------------------------------------------------------------------------------------------------
Treasury Obligations ./4/
--------------------------------------------------------------------------------------------------
Treasury Instruments ./4/
--------------------------------------------------------------------------------------------------
Government ./1/ .
--------------------------------------------------------------------------------------------------
Federal ./1/ .
--------------------------------------------------------------------------------------------------
Tax-Exempt Diversified .
Tax-exempt only
--------------------------------------------------------------------------------------------------
Tax-Exempt California .
Tax-exempt only
--------------------------------------------------------------------------------------------------
Tax-Exempt New York .
Tax-exempt only
--------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 If adverse economic conditions prevail in the banking industry (such as
substantial losses on loans, increases in non-performing assets and
charge-offs and declines in total deposits), the Fund may, for temporary
defensive purposes, invest less than 25% of its total assets in bank
obligations.
4 Issued by the U.S. Treasury.
5 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Short-Term
Obligations of Asset-Backed and Foreign
Corporations and Repurchase Receivables-Backed Government
Other Entities Agreements Securities/5/ Obligations (US$)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
. . .
U.S. entities only
- ---------------------------------------------------------------------------
. . . ./6/
U.S. and foreign
(US$) entities
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
.
(Does not intend
to invest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
6 The Money Market Portfolio may invest in U.S. dollar-denominated
obligations (limited to commercial paper and other notes) issued or
guaranteed by a foreign government. The Fund may also invest in U.S.
dollar-denominated obligations issued or guaranteed by any entity located
or organized in a foreign country that maintains a short-term foreign
currency rating in the highest short-term ratings category by the
requisite number of NRSROs. The Fund may not invest more than 25% of its
total assets in the securities of any one foreign government.
7
<PAGE>
Investment Policies Matrix continued
<TABLE>
<CAPTION>
Taxable Tax-Exempt Custodial Unrated Investment
Fund Municipals Municipals Receipts Securities/9/ Companies
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Obligations . /7/ . . .
Up to 10% of total
assets in other
investment
companies
- -------------------------------------------------------------------------------------------------------------
Money Market . /7/ . . .
Up to 10% of total
assets in other
investment
companies
- -------------------------------------------------------------------------------------------------------------
Treasury Obligations
- -------------------------------------------------------------------------------------------------------------
Treasury Instruments
- -------------------------------------------------------------------------------------------------------------
Government .
Up to 10% of total
assets in other
investment
companies
- -------------------------------------------------------------------------------------------------------------
Federal
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations (except in investment
extraordinary circumstances)/8/ companies
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt California . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations and at least 65% of investment
total assets in California companies
instruments (except in
extraordinary circumstances)/8/
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt New York . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations and at least 65% of investment
total assets in New York companies
instruments (except in
extraordinary circumstances)/8/
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
7 Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
8 Ordinarily expect that 100% of a Fund's portfolio securities will be
invested in municipal obligations, but the Funds may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
9 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality to
First Tier Securities, or to the extent that a Fund may purchase Second
Tier Securities, comparable in quality to Second Tier Securities. In
addition, a Fund holding a security supported by a guarantee or demand
feature may rely on the credit quality of the guarantee or demand feature
in determining the credit quality of the investment.
10 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of a Fund's net assets under normal market conditions.
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Private Summary of
Activity Credit Taxation for
Bonds Quality/9/ Distributions/14/ Miscellaneous
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ---------------------------------------------------------------------------------------------------------------
. First Tier/12/ Taxable federal and state/15/ May invest in obligations
of the International Bank
for Reconstruction and
Development. Reverse
repurchase agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not permitted
- ---------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Reverse repurchase agreements
generally exempt from not permitted
state taxation
- ---------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ---------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Under extraordinary circumstances,
generally exempt from may hold cash, U.S. Government
state taxation Securities subject to state taxation
or cash equivalents. Reverse repurchase
agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal and May (but does not currently intend to)
(Does not Second Tier/13/ taxable state/16/ invest up to 20% in securities subject to
intend to AMT and may temporarily invest in the taxable
invest)/10/,/11/ money market instruments described herein.
Reverse repurchase agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal May (but does not currently intend to)
(Does not Second Tier/13/ and California State invest up to 20% in AMT securities
intend to and may temporarily invest in the taxable
invest)/10/,/11/ money market instruments described herein.
Reverse repurchase agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal, May invest up to 20% in AMT securities
(not more than Second Tier/13/ New York State and and may temporarily invest in the taxable
20% of net New York City money market instruments described herein.
assets)/11/ Reverse repurchase agreements not permitted.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
11 No more than 25% of the value of a Fund's total assets may be invested in
industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
12 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
13 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
14 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
15 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities interest
income.
16 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Prime Money Treasury Treasury
.Applicable Obligations Market Obligations Instruments
-- Not Applicable Portfolio Portfolio Portfolio Portfolio
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAV . . . .
Interest Rate . . . .
Credit/Default . . . .
Liquidity . . . .
U.S. Government Securities . . -- --
Concentration -- -- -- --
Foreign -- . -- --
Banking Industry -- . -- --
Tax -- -- -- --
- --------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
Tax-Exempt Tax-Exempt Tax-Exempt
Government Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
. . . . .
. . . . .
. . . . .
. . . . .
. . -- -- --
-- -- . . .
-- -- -- -- --
-- -- -- -- --
-- -- . . .
- ----------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Risks that apply to all Funds:
. NAV Risk--The risk that a Fund will not be able to maintain a NAV per share
of $1.00 at all times.
. Interest Rate Risk--The risk that during periods of rising interest rates, a
Fund's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a Fund's
yield will tend to be higher.
. Credit/Default Risk--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase agree-
ment, may default on its payment obligations. In addition, with respect to
the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios, risk of loss from payment default may also exist where municipal
instruments are backed by foreign letters of credit or guarantees.
. Liquidity Risk--The risk that a Fund will be unable to pay redemption pro-
ceeds within the time period stated in this Prospectus, because of unusual
market conditions, an unusually high volume of redemption requests, or other
reasons.
Risk that applies to the Prime Obligations, Money Market, Government and
Federal Portfolios:
. U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Money Market Portfolio:
. Foreign Risk--The risk that a foreign security could lose value as a result
of political, financial and economic events in foreign countries, less pub-
licly available financial and other information, less stringent foreign secu-
rities regulations and accounting and disclosure standards, or other factors.
The Money Market Portfolio may not invest more than 25% of its total assets
in the securities of any one foreign government.
. Banking Industry Risk--The risk that if the Fund invests more than 25% of its
total assets in bank obligations, an adverse development in the banking
industry may affect the value of the Fund's investments more than if the
Fund's investments were not invested to such a degree in the banking indus-
try. Normally, the Money Market Portfolio intends to invest more than 25% of
its total assets in bank obligations. Banks may be particularly susceptible
to certain economic factors such as interest rate changes, adverse develop-
ments in the real estate market, fiscal and monetary policy and general eco-
nomic cycles.
12
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
Risks that apply to the Tax-Exempt Funds:
. Concentration Risk--The risk that if a Fund invests more than 25% of its
total assets in issuers within the same state, industry or economic sector,
an adverse economic, business or political development may affect the value
of the Fund's investments more than if its investments were not so concen-
trated. The Tax-Exempt California and Tax-Exempt New York Portfolios intend
to invest at least 65% of their total assets in California municipal obliga-
tions and New York municipal obligations, respectively. These two Funds are
classified as "non-diversified" for regulatory purposes.
. Tax Risk--The risk that future legislative or administrative changes or court
decisions may materially affect the ability of a Fund to pay federal tax-
exempt dividends (in the case of each of these Funds) and state tax-exempt
dividends (in the case of the Tax-Exempt California and Tax-Exempt New York
Portfolios). These Funds would not be a suitable investment for IRAs, other
tax-exempt or tax deferred accounts or for other investors who are not sensi-
tive to the federal, state or local tax consequences of these investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
13
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's Admin-
istration Shares from year to year; and (b) the average annual returns of a
Fund's Administration Shares. Investors should be aware that the fluctuation
of interest rates is one primary factor in performance volatility. The bar
chart and table assume reinvestment of dividends and distributions. A Fund's
past performance is not necessarily an indication of how the Fund will per-
form in the future. Performance reflects expense limitations in effect. If
expense limitations were not in place, a Fund's performance would have been
reduced. You may obtain a Fund's current yield by calling 1-800-621-2550.
14
<PAGE>
FUND PERFORMANCE
Prime Obligations Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.68%
Worst Quarter
Q2 '93 0.68%
[CHART]
1991 5.94%
1992 3.61%
1993 2.82%
1994 3.91%
1995 5.63%
1996 5.06%
1997 5.22%
1998 5.16%
1999 4.74%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 6/5/90) 4.74% 5.16% 4.86%
-------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Money Market Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.68%
Worst Quarter
Q2 '93 0.70%
[CHART]
1991 5.96%
1992 3.62%
1993 2.88%
1994 3.98%
1995 5.69%
1996 5.12%
1997 5.28%
1998 5.17%
1999 4.76%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 6/12/90) 4.76% 5.20% 4.90%
--------------------------------------------------------------------------
</TABLE>
16
<PAGE>
FUND PERFORMANCE
Treasury Obligations Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.57%
Worst Quarter
Q2 '93 0.67%
AVERAGE ANNUAL TOTAL RETURN [CHART]
1991 5.78%
1992 3.47%
1993 2.84%
1994 3.95%
1995 5.67%
1996 5.09%
1997 5.24%
1998 5.09%
1999 4.66%
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 6/12/90) 4.48% 5.02% 4.72%
--------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Treasury Instruments Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '95 1.41%
Worst Quarter
Q2 '93 0.68%
AVERAGE ANNUAL TOTAL RETURN [CHART]
1992 3.38%
1993 2.83%
1994 3.85%
1995 5.54%
1996 4.95%
1997 5.01%
1998 4.80%
1999 4.22%
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 7/24/91) 4.22% 4.90% 4.37%
--------------------------------------------------------------------------
</TABLE>
18
<PAGE>
FUND PERFORMANCE
Government Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.59%
Worst Quarter
Q2 '93 0.68%
[CHART]
1991 5.75%
1992 3.56%
1993 2.79%
1994 3.79%
1995 5.62%
1996 4.99%
1997 5.15%
1998 5.05%
1999 4.61%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 6/1/90) 4.61% 5.08% 4.78%
-------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Federal Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.61%
Worst Quarter
Q2 '93 0.69%
AVERAGE ANNUAL TOTAL RETURN [CHART]
1991 5.78%
1992 3.47%
1993 2.84%
1994 3.95%
1995 5.67%
1996 5.09%
1997 5.24%
1998 5.09%
1999 4.66%
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 9/20/90) 4.66% 5.15% 4.73%
--------------------------------------------------------------------------
</TABLE>
20
<PAGE>
FUND PERFORMANCE
Tax-Exempt Diversified Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.09%
Worst Quarter
Q1 '94 0.48%
[CHART]
1991 4.17%
1992 2.67%
1993 2.09%
1994 2.55%
1995 3.57%
1996 3.09%
1997 3.23%
1998 3.02%
1999 2.73%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 6/12/90) 2.73% 3.13% 3.16%
--------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Tax-Exempt California Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 0.95%
Worst Quarter
Q1 '94 0.44%
AVERAGE ANNUAL TOTAL RETURN [CHART]
1991 3.80%
1992 2.47%
1993 1.93%
1994 2.37%
1995 3.40%
1996 2.88%
1997 3.00%
1998 2.68%
1999 2.45%
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 12/3/90) 2.45% 2.88% 2.79%
--------------------------------------------------------------------------
</TABLE>
22
<PAGE>
FUND PERFORMANCE
Tax-Exempt New York Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '95 0.89%
Worst Quarter
Q1 '94 0.44%
[CHART]
1992 2.55%
1993 2.05%
1994 2.41%
1995 3.35%
1996 2.90%
1997 3.14%
1998 2.87%
1999 2.60%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1998 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 2/15/91) 2.60% 2.97% 2.84%
--------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Fund Fees and Expenses (Administration Shares)
This table describes the fees and expenses that you would pay if you buy and
hold ILA Administration Shares of a Fund.
<TABLE>
<CAPTION>
Prime Money Treasury
Obligations Market Obligations
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Administration Fees/2/ 0.15% 0.15% 0.15%
Other Expenses/3/ 0.08% 0.06% 0.07%
- -----------------------------------------------------------------------------
Total Fund Operating Expenses/4/ 0.58% 0.56% 0.57%
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Treasury
Instruments Government Federal
Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Administration Fees/2/ 0.15% 0.15% 0.15%
Other Expenses/3/ 0.08% 0.10% 0.06%
- ----------------------------------------------------------------------------
Total Fund Operating Expenses/4/ 0.58% 0.60% 0.56%
- ----------------------------------------------------------------------------
</TABLE>
24
<PAGE>
FUND FEES AND EXPENSES
<TABLE>
<CAPTION>
Tax-Exempt Tax-Exempt Tax-Exempt
Diversified California New York
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Administration Fees/2/ 0.15% 0.15% 0.15%
Other Expenses/3/ 0.07% 0.07% 0.09%
- -----------------------------------------------------------------------------
Total Fund Operating Expenses/4/ 0.57% 0.57% 0.59%
- -----------------------------------------------------------------------------
</TABLE>
/1/The Funds' annual operating expenses are based on actual expenses.
/2/Service Organizations may charge other fees directly to their customers who
are the beneficial owners of Administration Shares in connection with their
customers' accounts. Such fees may affect the return such customers realize
with respect to their investments.
/3/"Other Expenses" include transfer agency fees equal to 0.04% of the average
daily net assets of each Fund's Administration Shares plus all other ordinary
expenses not detailed above.
/4/The Investment Adviser has voluntarily agreed to reduce or limit "Total Fund
Operating Expenses" of each Fund (excluding administration fees, taxes,
interest, brokerage fees, litigation, indemnification and other extraordinary
expenses) to 0.43% of each Fund's average daily net assets. As a result of the
current expense limitations, "Other Expenses" and "Total Fund Operating
Expenses" of the Government Portfolio and Tax-Exempt New York Portfolio which
are actually incurred are as set forth below. The expense limitations may be
terminated at any time at the option of the Investment Adviser with the
approval of the Trustees. If this occurs, "Other Expenses" and "Total Fund
Operating Expenses" may increase without shareholder approval.
<TABLE>
<CAPTION>
Tax-Exempt
Government New York
Portfolio Portfolio
----------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):
Management Fees 0.35% 0.35%
Administration Fees 0.15% 0.15%
Other Expenses 0.08% 0.08%
----------------------------------------------------------------------------
Total Fund Operating Expenses (after current expense
limitations) 0.58% 0.58%
----------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the expense limitations) with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in Administration
Shares of a Fund for the time periods indicated and then redeem all of your
Shares at the end of those periods. The Example also assumes that your invest-
ment has a 5% return each year and that a Fund's operating expenses remain the
same. Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations $59 $186 $324 $726
- -------------------------------------------------------
Money Market $57 $179 $313 $701
- -------------------------------------------------------
Treasury Obligations $58 $183 $318 $714
- -------------------------------------------------------
Treasury Instruments $59 $186 $324 $726
- -------------------------------------------------------
Government $61 $192 $335 $750
- -------------------------------------------------------
Federal $57 $179 $313 $701
- -------------------------------------------------------
Tax-Exempt Diversified $58 $183 $318 $714
- -------------------------------------------------------
Tax-Exempt California $58 $183 $318 $714
- -------------------------------------------------------
Tax-Exempt New York $60 $189 $329 $738
- -------------------------------------------------------
</TABLE>
Service Organizations that invest in Administration Shares on behalf of their
customers may charge other fees directly to their customer accounts in connec-
tion with their investments. You should contact your Service Organization for
information regarding such charges. Such fees, if any, may affect the return
such customers realize with respect to their investment.
Certain Service Organizations that invest in Administration Shares may receive
other compensation in connection with the sale and distribution of Administra-
tion Shares or for services to their customers' accounts and/or the Funds. For
additional information regarding such compensation, see "Shareholder Guide" in
the Prospectus and "Other Information" in the Additional Statement.
26
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the
Investment Adviser, merged into The Goldman Sachs Group, Inc. as a result of
an initial public offering. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser also performs the following serv-
ices for the Funds:
. Continually manages each Fund, including the purchase, retention and
disposition of securities and other assets
. Administers each Fund's business affairs
. Performs various recordholder servicing functions (to the extent not
provided by other organizations)
Pursuant to an SEC order, each Taxable and Tax-Advantaged Fund may enter
into principal transactions in certain taxable money market instruments,
including repurchase agreements, with Goldman Sachs.
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate For the
Fiscal Year Ended
Fund Contractual Rate December 31, 1999
-------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.35% 0.35%
-------------------------------------------------------------
Money Market 0.35% 0.35%
-------------------------------------------------------------
Treasury Obligations 0.35% 0.35%
-------------------------------------------------------------
Treasury Instruments 0.35% 0.35%
-------------------------------------------------------------
Government 0.35% 0.35%
-------------------------------------------------------------
Federal 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt Diversified 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt California 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt New York 0.35% 0.35%
-------------------------------------------------------------
</TABLE>
27
<PAGE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
28
<PAGE>
Dividends
All or substantially all of each Fund's net investment income will be
declared as a dividend daily. Dividends will normally, but not always, be
declared as of 4:00 p.m. New York time as a dividend and distributed month-
ly. You may choose to have dividends paid in:
. Cash
. Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may
be submitted in writing to Goldman Sachs at any time. If you do not indicate
any choice, dividends and distributions will be reinvested automatically in
the applicable Fund.
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of
each month. Net short-term capital gains, if any, will be distributed in
accordance with federal income tax requirements and may be reflected in a
Fund's daily distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid exces-
sive fluctuations in the amount of monthly capital gains distributions, a
portion of any net capital gains realized on the disposition of securities
during the months of November and December may be distributed during the
subsequent calendar year. Although realized gains and losses on the assets
of a Fund are reflected in the NAV of the Fund, they are not expected to be
of an amount which would affect the Fund's NAV of $1.00 per share.
29
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Administration
Shares.
HOW TO BUY SHARES
How Can I Purchase Administration Shares Of The Funds?
Generally, Administration Shares may be purchased only through institutions
that have agreed to provide account administration and maintenance services
to their customers who are the beneficial owners of Administration Shares.
These institutions are called "Service Organizations." Customers of a Serv-
ice Organization will normally give their purchase instructions to the Serv-
ice Organization, and the Service Organization will, in turn, place purchase
orders with Goldman Sachs. Service Organizations will set times by which
purchase orders and payments must be received by them from their customers.
Generally, Administration Shares may be purchased from the Funds on any
business day at their NAV next determined after receipt of an order by
Goldman Sachs from a Service Organization. Shares begin earning dividends
after the Fund's receipt of the purchase amount in federal funds. No sales
load is charged.
Service Organizations are responsible for transmitting purchase orders and
payments to Goldman Sachs in a timely fashion. Service Organizations should
place a purchase order in writing or by telephone.
<TABLE>
<S> <C> <C>
-----------------------------------------------------------
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
-----------------------------------------------------------
By Telephone: 1-800-621-2550
(8:00 a.m. to 4:00 p.m New York time)
-----------------------------------------------------------
</TABLE>
Before or immediately after placing an initial purchase order, a Service
Organization should complete and send to Goldman Sachs the Account Applica-
tion.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
30
<PAGE>
SHAREHOLDER GUIDE
Service Organizations may send their payments as follows:
. Wire federal funds to The Northern Trust Company ("Northern"), as sub-cus-
todian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian); or
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds -
(Name of Fund and Class of Shares), 4900 Sears Tower - 60th Floor, Chica-
go, IL 60606-6372. The Funds will not accept a check drawn on a foreign
bank or a third-party check.
It is strongly recommended that payment be effected by wiring federal funds
to Northern.
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
If an effective order and federal
funds are received: Dividends begin:
------------------------------------------------------
<S> <C>
Taxable and Tax-Advantaged Funds:
. By 3:00 p.m. New York time Same business day
. After 3:00 p.m. New York time Next business day
------------------------------------------------------
Tax-Exempt Funds:
. By 1:00 p.m. New York time Same business day
. After 1:00 p.m. New York time Next business day
------------------------------------------------------
</TABLE>
What Do I Need To Know About Service Organizations?
Service Organizations may provide the following services in connection with
their customers' investments in Administration Shares:
. Acting, directly or through an agent, as the sole shareholder of record
. Maintaining account records for customers
. Processing orders to purchase, redeem or exchange shares for customers
In addition, some (but not all) Service Organizations are authorized to
accept, on behalf of the Trust, purchase, redemption and exchange orders
placed by or on behalf of their customers, and may designate other interme-
diaries to accept such orders, if approved by the Trust. In these cases:
. A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized Service Organization or intermediary
on a business day, and the order will be priced at the Fund's NAV next
determined after such acceptance.
31
<PAGE>
. Service Organizations or intermediaries will be responsible for transmit-
ting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your Service Organization directly to learn whether it is
authorized to accept orders for the Trust.
Pursuant to an administration plan adopted by the Trust's Board of Trustees,
Service Organizations are entitled to receive payment for their services
from the Trust of up to 0.15% (on an annualized basis) of the average daily
net assets of the Administration Shares of the Funds, which are attributable
to or held in the name of the Service Organization for its customers. In
addition, GSAM, at its own expense, may pay a Service Organization, up to
0.10% of the average daily net assets of the Administration Shares of the
Fund, which are attributable to or held in the name of the Service Organiza-
tion for its customers. The compensation paid by GSAM does not represent an
additional expense to a Fund or its shareholders, since it will be paid from
the assets of GSAM.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Service Organizations and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds.
In addition to Administration Shares, each Fund also offers other classes of
shares to investors. These other share classes are subject to different fees
and expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than Administration
Shares. Information regarding these other share classes may be obtained from
your sales representative or from Goldman Sachs by calling the number on the
back cover of this Prospectus.
What Is My Minimum Investment In The Funds?
The Funds do not have any minimum purchase or account requirements with
respect to Administration Shares. A Service Organization may, however,
impose a minimum amount for initial and subsequent investments in Adminis-
tration Shares, and may establish other requirements such as a minimum
account balance. A Service Organization may redeem Administration Shares
held by non-complying accounts, and may impose a charge for any special
services.
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Modify or waive the minimum investment and minimum account balance
requirement.
. Reject any purchase order for any reason.
32
<PAGE>
SHAREHOLDER GUIDE
The Funds may allow Service Organizations to purchase shares with securities
instead of cash if consistent with a Fund's investment policies and opera-
tions and if approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Administration
Shares is determined by a Fund's NAV. The Funds calculate NAV as follows:
(Value of Assets of the Class)
- (Liabilities of the Class)
NAV = _______________________________
Number of Outstanding Shares of the Class
. NAV per share of each class is calculated by State Street on each business
day as of the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. New York time). Fund shares will be priced on any day
the New York Stock Exchange is open, except for days on which Chicago,
Boston or New York banks are closed for local holidays.
. On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, each Fund reserves the right to
close at or prior to the BMA recommended closing time. If a Fund does so,
it will cease granting same business day credit for purchase and redemp-
tion orders received after the Fund's closing time and credit will be
given to the next business day.
. The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-
ted by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securi-
ties are valued at amortized cost in accordance with SEC regulations. Amor-
tized cost will normally approximate market value. There can be no assurance
that a Fund will be able at all times to maintain a NAV of $1.00 per share.
33
<PAGE>
HOW TO SELL SHARES
How Can I Sell Administration Shares Of The Funds?
Generally, Administration Shares may be sold (redeemed) only through Service
Organizations. Customers of a Service Organization will normally give their
redemption instructions to the Service Organization, and the Service Organi-
zation will, in turn, place redemption orders with the Funds. Generally,
each Fund will redeem its Administration Shares upon request on any business
day at their NAV next determined after receipt of such request in proper
form. A Service Organization may request redemptions in writing or by tele-
phone if the optional telephone redemption privilege is elected on the
Account Application.
<TABLE>
--------------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------------
By Telephone: If you have elected the telephone redemption
privilege on your Account Application:
. 1-800-621-2550 (8:00 a.m. to 4:00 p.m.
New York time)
--------------------------------------------------------------
</TABLE>
Certain Service Organizations are authorized to accept redemption requests
on behalf of the Funds as described under "What Do I Need To Know About
Service Organizations?" A redemption may also be made with respect to cer-
tain Funds by means of the check redemption privilege.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor, and the Transfer Agent will not be liable for
any loss you may incur in the event that the Trust accepts unauthorized tel-
ephone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or
address other than that designated on the Account Application must be in
writing and signed by an authorized person designated on the Account
Application. The written request may be confirmed by telephone with both
the requesting party and the designated bank account to verify instruc-
tions.
. The telephone redemption option may be modified or terminated at any
time.
Note: It may be difficult to make telephone redemptions in times of dras-
tic economic or market conditions.
34
<PAGE>
SHAREHOLDER GUIDE
When Will Redemption Proceeds Be Wired?
Redemption proceeds will normally be wired to the bank account designated on
a Service Organization's Account Application as follows:
<TABLE>
<CAPTION>
Redemption Request
Received Redemption Proceeds Dividends
-----------------------------------------------------------------------
<S> <C> <C>
Taxable and Tax-
Advantaged Funds:
-----------------------------------------------------------------------
. By 3:00 p.m. New York Wired same business day Not earned on day
time request is received
. After 3:00 p.m. New Wired next business day Earned on day
York time request is received
-----------------------------------------------------------------------
Tax-Exempt Funds:
-----------------------------------------------------------------------
. By 12:00 p.m. New York Wired same business day Not earned on day
time request is received
. After 12:00 p.m. New Wired next business day Earned on day
York time request is received
-----------------------------------------------------------------------
</TABLE>
. Although redemption proceeds will normally be wired as described above,
each Fund reserves the right to pay redemption proceeds up to three busi-
ness days following receipt of a properly executed wire transfer redemp-
tion request. If you are selling shares you recently paid for by check,
the Fund will pay you when your check has cleared, which may take up to 15
days. If the Federal Reserve Bank is closed on the day that the redemption
proceeds would ordinarily be wired, wiring the redemption proceeds may be
delayed one additional business day.
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of intermediaries or your Service
Organization in the transfer process. If a problem with such performance
arises, you should deal directly with such intermediaries or Service Orga-
nizations.
What Should I Know About The Check Redemption Privilege?
A Service Organization may elect to have a special account with State Street
for the purpose of redeeming Administration Shares from its account by
check.
The following general policies govern the check redemption privilege:
. The Service Organization will be provided with a supply of checks when
State Street receives a completed signature card and authorization form.
Checks drawn on the account may be payable to the order of any person in
any amount over $500, but cannot be certified.
. The payee of the check may cash or deposit it just like any other check
drawn on a bank.
35
<PAGE>
. When the check is presented to State Street for payment, a sufficient num-
ber of full or fractional Administration Shares will be redeemed to cover
the amount of the check.
. Canceled checks will be returned to the Service Organization by State
Street.
. The check redemption privilege allows a Service Organization to receive
the dividends declared on the Administration Shares that are to be
redeemed until the check is actually processed. Because of this feature,
accounts may not be completely liquidated by check.
. If the amount of the check is greater than the value of the Administration
Shares held in the Service Organization's account, the check will be
returned unpaid. In this case, the Service Organization may be subject to
extra charges.
. The Trust reserves the right to limit the availability of, modify or ter-
minate the check redemption privilege at any time with respect to any or
all Service Organizations.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate the timely transmittal of redemption requests, Service Organi-
zations may set times by which they must receive redemption requests.
Service Organizations may also require additional documentation from you.
The Trust reserves the right to:
. Redeem the Administration Shares of any Service Organization whose account
balance falls below the minimum as a result of a redemption. The Fund will
give 60 days' prior written notice to allow a Service Organization to pur-
chase sufficient additional shares of the Fund in order to avoid such
redemption. Different rules may apply to investors who have established
brokerage accounts with Goldman Sachs in accordance with the terms and
conditions of their account agreements.
. Redeem the shares in other circumstances determined by the Board of Trust-
ees to be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distribu-
tions be returned to the Fund as undeliverable or remain uncashed for six
months. In addition, that distribution and all future distributions pay-
able to you will be reinvested at NAV in additional Fund shares. No inter-
est will accrue on amounts represented by uncashed distribution or redemp-
tion checks.
36
<PAGE>
SHAREHOLDER GUIDE
Can I Exchange My Investment From One Fund To Another?
A Service Organization may exchange Administration Shares of a Fund at NAV
for shares of the corresponding class of any other Goldman Sachs Fund.
The exchange privilege may be materially modified or withdrawn at any time
upon 60 days' written notice.
<TABLE>
<CAPTION>
Instructions For Exchanging Shares:
----------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. The recordholder name(s) and signature(s)
. The account number
. The Fund names and Class of Shares
. The dollar amount to be exchanged
. Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
----------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
. 1-800-621-2550 (8:00 a.m. to 4:00 p.m.
New York time)
----------------------------------------------------------------
</TABLE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically regis-
tered account.
. Shares may be exchanged among accounts with different names, addresses,
and social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized per-
son designated on the Account Application.
. Exchanges are available only in states where exchanges may be legally
made.
. It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I
Need To Know About Telephone Redemption Requests?" in an effort to prevent
unauthorized or fraudulent telephone exchange requests.
37
<PAGE>
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
What Types Of Reports Will I Be Sent Regarding Investments In Administration
Shares?
Service Organizations will receive from the Funds annual reports containing
audited financial statements and semi-annual reports. Upon request, Service
Organizations will also be provided with a printed confirmation for each
transaction. Any dividends and distributions paid by the Funds are also
reflected in regular statements issued by the Funds to Service Organiza-
tions. Service Organizations are responsible for providing these or other
reports to their customers who are the beneficial owners of Administration
Shares in accordance with the rules that apply to their accounts with the
Service Organizations.
38
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
Taxes on Distributions: Except for the Tax-Free Money Market Fund, distribu-
tions of investment income are taxable as ordinary income for federal tax pur-
poses, and may also be subject to state or local taxes. This is true whether
you reinvest your distributions in additional Fund shares or receive them in
cash. To the extent that Fund distributions are attributable to interest on
federal obligations or interest on obligations of your state of residence or
its municipalities or authorities, they will in most cases be exempt from state
and local income taxes. Distributions from the Tax-Free Money Market Fund that
are designated as "exempt interest dividends" are generally not subject to fed-
eral income tax. Distributions of short-term capital gains are taxable to you
as ordinary income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Free Money Market Fund may be a preference item when determining your fed-
eral alternative minimum tax liability. Exempt-interest dividends are also
taken into account in determining the taxable portion of social security or
railroad retirement benefits. Any interest on indebtedness incurred by you to
purchase or carry shares in the Tax-Free Money Market Fund generally will not
be deductible for federal income tax purposes.
Other Information: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
39
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. Treasury Obligations and U.S. Government Securities. U.S. Treasury
Obligations include securities issued or issued or guaranteed by the U.S.
Treasury ("U.S. Treasury Obligations"). Payment of principal and interest on
these obligations is backed by the full faith and credit of the U.S.
government. U.S. Treasury Obligations include, among other things, the
separately traded principal and interest components of securities guaranteed or
issued by the U.S. Treasury if such components are traded independently under
the Separate Trading of Registered Interest and Principal of Securities program
("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
40
<PAGE>
APPENDIX A
Some Funds invest in U.S. Treasury Obligations and certain U.S. Government
Securities the interest from which is generally exempt from state income taxa-
tion. Securities generally eligible for this exemption include those issued by
the U.S. Treasury and certain agencies, authorities or instrumentalities of the
U.S. government, including the Federal Home Loan Banks, Federal Farm Credit
Banks, Tennessee Valley Authority and Student Loan Marketing Association.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
Bank Obligations. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Funds may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Funds may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Fund invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of opera-
tions and profitability of domestic and foreign banks. Significant developments
in the U.S. banking industry have included increased competition from other
types of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the real estate mar-
kets. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
Commercial Paper. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or
41
<PAGE>
bank holding companies, corporations, finance companies and other issuers. The
commercial paper purchased by a Fund consists of direct U.S. dollar-denominated
obligations of domestic or, in the case of certain Funds, foreign issuers.
Short-Term Obligations. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
Repurchase Agreements. Certain Funds may enter into repurchase agreements with
primary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, certain Funds, together with other registered
investment companies having advisory agreements with the Investment Adviser or
any of its 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.
Asset-Backed and Receivables-Backed Securities. Certain Funds may invest in
asset-backed and receivables-backed securities whose principal and interest
payments are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-backed
and receivables-backed 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 and
receivables-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in such securities will
42
<PAGE>
APPENDIX A
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. In addition, securities that are backed by credit card, automobile and
similar types of receivables generally do not have the benefit of a security
interest in collateral that is comparable in quality to mortgage assets. There
is the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event of a
default, a Fund may suffer a loss if it cannot sell collateral quickly and
receive the amount it is owed.
Foreign Government Obligations and Related Foreign Risks. Certain Funds may
invest in foreign government obligations. Foreign government obligations are
U.S. dollar-denominated obligations (limited to commercial paper and other
notes) issued or guaranteed by a foreign government or other entity located or
organized in a foreign country that maintains a short-term foreign currency
rating in the highest short-term ratings category by the requisite number of
NRSROs.
Investments by a Fund in foreign securities, whether issued by a foreign gov-
ernment, bank, corporation or other issuer, may present a greater degree of
risk than investments in securities of domestic issuers because of less public-
ly-available financial and other information, less securities regulation,
potential imposition of foreign withholding and other taxes, war, expropriation
or other adverse governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and generally are not bound by
the accounting, auditing and financial reporting standards applicable to U.S.
banks.
Municipal Obligations. Certain Funds may invest in municipal obligations.
Municipal obligations are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities, and the District of Columbia. Municipal
obligations in which a Fund may invest consist of fixed rate notes and similar
debt instruments; variable and floating rate demand instruments; tax-exempt
commercial paper; municipal bonds; and unrated notes, paper, bonds or other
instruments.
Municipal Notes and Bonds. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds also include lease rental revenue bonds which are
issued by a state or local authority for capital projects and are secured by
annual lease payments from the state or
43
<PAGE>
locality sufficient to cover debt service on the authority's obligations.
Industrial development bonds ("private activity bonds") are a specific type of
revenue bond backed by the credit and security of a private user and, there-
fore, have more potential risk. Municipal bonds may be issued in a variety of
forms, including commercial paper, tender option bonds and variable and float-
ing rate securities.
Tender Option Bonds. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal
income tax. Certain tender option bonds may be illiquid or may become illiquid
as a result of a credit rating downgrade, a payment default or a disqualifica-
tion from tax-exempt status.
Revenue Anticipation Warrants. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
Industrial Development Bonds. Certain Funds may invest in industrial develop-
ment bonds (private activity bonds). Industrial development bonds are a spe-
cific type of revenue bond backed by the credit and security of a private user,
the interest from which would be an item of tax preference when distributed by
a Fund as "exempt-interest dividends" to shareholders under the AMT.
44
<PAGE>
APPENDIX A
Other Municipal Obligation Policies. Certain Funds may invest 25% or more of
the value of their respective total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting one municipal obligation would also affect the other municipal
obligation. For example, a Fund may invest all of its assets in (a) municipal
obligations the interest of which is paid solely from revenues from 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 obligations whose issuers are in the same
state; or (c) industrial development obligations. Concentration of a Fund's
investments in these municipal obligations will subject the Fund, to a greater
extent than if such investment was not so concentrated, to the risks of adverse
economic, business or political developments affecting the particular state,
industry or other area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and are gener-
ally not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
Custodial Receipts. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
Other Investment Companies. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of
45
<PAGE>
any other investment company, and a prohibition on investing more than 5% of a
Fund's total assets in securities of any one investment company or more than
10% of its total assets in securities of all investment companies. A Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Such other investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the acquiring Fund and will be subject to substantially the
same risks.
Floating and Variable Rate Obligations. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
When-Issued Securities and Forward Commitments. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring the securities for its portfolio, a Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment Adviser
deems it appropriate.
46
<PAGE>
APPENDIX A
Illiquid Securities. Each Fund may invest up to 10% of its net assets in illiq-
uid securities which cannot be disposed of in seven days in the ordinary course
of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain municipal leases and participation interests
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of
more than seven days
. Certain restricted securities, unless it is determined, based upon a review
of the trading markets for a specific restricted security, that such
restricted security is liquid because it is so-called "4(2) commercial paper"
or is otherwise eligible for resale pursuant to Rule 144A under the Securi-
ties Act of 1933.
Investing in restricted securities may decrease the liquidity of a Fund's port-
folio.
Borrowings. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the Addi-
tional Statement.
Downgraded Securities. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
47
<PAGE>
Special Risks and Policies Applicable to the Tax-Exempt Funds:
Fundamental Policies. As a matter of fundamental policy, at least 80% of each
of the net assets of each of the Tax-Exempt Diversified, Tax-Exempt California
and Tax-Exempt New York Portfolios will ordinarily be invested in municipal
obligations, the interest from which is, in the opinion of bond counsel, if
any, excluded from gross income for federal income tax purposes. In addition,
as a matter of fundamental policy, at least 65% of each of the Tax-Exempt Cali-
fornia and Tax-Exempt New York Portfolio's total assets will be invested in
California and New York municipal obligations, except in extraordinary circum-
stances.
For these purposes, California and New York municipal obligations are obliga-
tions issued by or on behalf of the State of California or the State of New
York, respectively, and their respective political subdivisions, agencies and
instrumentalities and the government of Puerto Rico, the U.S. Virgin Islands
and Guam, the interest from which is excluded from gross income for federal
income tax purposes and is exempt from California State personal income tax or
New York State and New York City personal income tax. Each Tax-Exempt Fund may
temporarily invest in taxable money market instruments or, in the case of the
Tax-Exempt California and New York Portfolios, in municipal obligations that
are not California or New York municipal obligations, respectively, when
acceptable California and New York municipal obligations are not available or
when the Investment Adviser believes that the market conditions dictate a
defensive posture. Investments in taxable money market instruments will be lim-
ited to those meeting the quality standards of each Tax-Exempt Fund. The Tax-
Exempt California and Tax-Exempt New York Portfolios' distributions of interest
from municipal obligations other than California and New York municipal obliga-
tions, respectively, may be subject to California and New York State and New
York City personal income taxes.
Risks of Investing in California and New York: The Tax-Exempt California and
Tax-Exempt New York Portfolios concentrate their investments in California and
New York municipal obligations. Consequently, these Funds are more susceptible
to factors adversely affecting issuers of California and New York municipal
obligations, and may be riskier than comparable municipal bond funds and money
market funds that do not emphasize these issuers to this degree.
The Tax-Exempt California Portfolio's investments can be affected by political
and economic developments within the State of California (the "State"), and by
the financial condition of the State, its public authorities and political sub-
divisions. After suffering a severe recession in the early 1990's which caused
the State to experience financial difficulties, California's economy entered a
sustained recovery since late 1993. The State's budget has returned to a posi-
tive balance and is generating substantial surpluses. California's long-term
credit rating has been raised after being reduced
48
<PAGE>
APPENDIX A
during the recession. To respond to its own revenue shortfalls during the
recession, the State reduced assistance to its public authorities and political
subdivisions. Cutbacks in state aid could further adversely affect the finan-
cial condition of cities, counties and education districts which are subject to
their own fiscal constraints. California voters in the past have passed amend-
ments to the California Constitution and other measures that limit the taxing
and spending authority of California governmental entities, and future voter
initiatives could result in adverse consequences affecting California municipal
obligations. Also, the ultimate fiscal effect of federally-mandated reform of
welfare programs on the State and its local governments is still to be
resolved.
These factors, among others (including the outcome of related pending litiga-
tion), could reduce the credit standing of certain issuers of California munic-
ipal obligations. A more detailed discussion of the risks of investing in Cali-
fornia is included in the Additional Statement.
The Tax-Exempt New York Portfolio's investments will be affected by political
and economic developments within the State of New York (the "State"), and by
the financial conditions of the State, its public authorities and political
subdivisions, particularly the City of New York (the "City"). The State and the
City face long-term economic problems that could seriously affect their ability
and that of other issuers of New York municipal obligations to meet their
financial obligations. Certain substantial issuers of New York municipal obli-
gations (including issuers whose obligations may be acquired by the Fund) have,
at times, experienced serious financial difficulties. Strong demand for New
York municipal obligations has also at times had the effect of permitting New
York municipal obligations to be issued with yields relatively lower, and after
issuance, to trade in the market at prices relatively higher, than comparably
rated municipal obligations issued by other jurisdictions. A recurrence of the
financial difficulties previously experienced by certain issuers of New York
municipal obligations could result in defaults or declines in the market values
of those issuers' existing obligations and, possibly, in the obligations of
other issuers of New York municipal obligations. Although as of April 1, 2000
no issuers were in default with respect to the payment of their New York munic-
ipal obligations, the occurrence of any such default could materially affect
adversely the market values and marketability of all New York municipal obliga-
tions and, consequently, the value of the Fund's holdings. A more detailed dis-
cussion of the risks of investing in New York is included in the Additional
Statement.
If California, New York, or any of their local governmental entities are unable
to meet their financial obligations, the corresponding Fund's income, NAV,
ability to preserve or realize appreciation of capital or liquidity could be
adversely affected. Also, neither of these Funds is a diversified fund under
the Act (except to the extent
49
<PAGE>
that diversification is required by Rule 2a-7 or for federal income tax purpos-
es). Because they may invest a larger percentage of their assets in the securi-
ties of fewer issuers than do diversified funds, these Funds may be exposed to
greater risk in that an adverse change in the condition of one or a small num-
ber of issuers would have a greater impact on them.
50
<PAGE>
[This page intentionally left blank]
51
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Arthur Andersen LLP, whose report, along
with a Fund's financial statements, is included in the Fund's annual report
(available upon request without charge).
PRIME OBLIGATIONS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period incomea shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Years Ended December
31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - ILA B units 1.00 0.04 (0.04)
1999 - ILA C units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - ILA B units 1.00 0.04 (0.04)
1998 - ILA C units 1.00 0.04 (0.04)
1998 - Cash Management shares
(commenced May 1) 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
1997 - ILA B units 1.00 0.04 (0.04)
1997 - ILA C units (commenced
August 15) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
1996 - ILA B units (commenced
May 8) 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
52
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.90% $1,095,109 0.43% 4.79% 0.43% 4.79%
1.00 4.74 40,850 0.58 4.65 0.58 4.65
1.00 4.48 92,975 0.83 4.33 0.83 4.33
1.00 3.86 19,444 1.43 3.83 1.43 3.83
1.00 3.86 7,436 1.43 3.76 1.43 3.76
1.00 4.30 1 1.00 4.44 1.43 4.01
- ------------------------------------------------------------------------------------
1.00 5.32 837,185 0.43 5.19 0.43 5.19
1.00 5.16 38,836 0.58 5.05 0.58 5.05
1.00 4.90 119,309 0.83 4.79 0.83 4.79
1.00 4.27 14,412 1.43 4.07 1.43 4.07
1.00 4.27 6,814 1.43 4.13 1.43 4.13
1.00 4.69c 2 0.93c 4.81c 1.43c 4.31c
- ------------------------------------------------------------------------------------
1.00 5.38 866,445 0.42 5.24 0.43 5.23
1.00 5.22 28,110 0.57 5.11 0.58 5.10
1.00 4.96 78,316 0.82 4.85 0.83 4.84
1.00 4.33 1,574 1.42 4.33 1.43 4.32
1.00 4.41c 1,897 1.42c 4.39c 1.43c 4.38c
- ------------------------------------------------------------------------------------
1.00 5.22 1,154,787 0.41 5.11 0.43 5.09
1.00 5.06 23,738 0.56 4.97 0.58 4.95
1.00 4.80 84,707 0.81 4.74 0.83 4.72
1.00 3.97c 346 1.41c 4.09c 1.43c 4.07c
- ------------------------------------------------------------------------------------
1.00 5.79 1,261,251 0.41 5.66 0.43 5.64
1.00 5.63 63,018 0.56 5.51 0.58 5.49
1.00 5.37 227,233 0.81 5.22 0.83 5.20
- ------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - Cash Management shares
(commenced May 1) 1.00 0.03 (0.03)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.92% $1,346,765 0.41% 4.80% 0.41% 4.80%
1.00 4.76 6,961 0.56 4.64 0.56 4.64
1.00 4.50 383,932 0.81 4.42 0.81 4.42
1.00 4.32 2 0.98 4.37 1.41 3.94
- ------------------------------------------------------------------------------------
1.00 5.33 1,350,317 0.40 5.17 0.43 5.14
1.00 5.17 314,327 0.55 5.04 0.58 5.01
1.00 4.91 32,349 0.80 4.79 0.83 4.76
1.00 4.69c 2 0.90c 4.80c 1.43c 4.27c
- ------------------------------------------------------------------------------------
1.00 5.43 806,096 0.37 5.31 0.42 5.26
1.00 5.28 307,480 0.52 5.15 0.57 5.10
1.00 5.01 20,517 0.77 4.90 0.82 4.85
- ------------------------------------------------------------------------------------
1.00 5.27 703,097 0.36 5.15 0.43 5.08
1.00 5.12 257,258 0.51 5.00 0.58 4.93
1.00 4.86 28,845 0.76 4.75 0.83 4.68
- ------------------------------------------------------------------------------------
1.00 5.85 574,155 0.36 5.71 0.42 5.65
1.00 5.69 164,422 0.51 5.55 0.57 5.49
1.00 5.43 23,080 0.76 5.29 0.82 5.23
- ------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
TREASURY OBLIGATIONS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ unitholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.04 (0.04)
1999 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.63% $404,299 0.42% 4.50% 0.42% 4.50%
1.00 4.48 42,334 0.57 4.35 0.57 4.35
1.00 4.22 264,787 0.82 4.19 0.82 4.19
- ------------------------------------------------------------------------------------
1.00 5.15 734,553 0.42 4.96 0.43 4.95
1.00 4.99 80,464 0.57 4.88 0.58 4.87
1.00 4.73 35,432 0.82 4.67 0.83 4.66
- ------------------------------------------------------------------------------------
1.00 5.26 590,381 0.42 5.12 0.42 5.12
1.00 5.10 124,159 0.57 4.99 0.57 4.99
1.00 4.84 104,133 0.82 4.73 0.82 4.73
- ------------------------------------------------------------------------------------
1.00 5.11 574,734 0.41 4.98 0.43 4.96
1.00 4.95 108,850 0.56 4.83 0.58 4.81
1.00 4.69 123,483 0.81 4.59 0.83 4.57
- ------------------------------------------------------------------------------------
1.00 5.73 711,209 0.41 5.51 0.43 5.49
1.00 5.57 92,643 0.56 5.37 0.58 5.35
1.00 5.31 119,692 0.81 5.11 0.83 5.09
- ------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
TREASURY INSTRUMENTS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period incomea unitholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.04 $(0.04)
1999 - ILA Administration units 1.00 0.04 (0.04)
1999 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.38% $224,609 0.43% 4.29% 0.43% 4.29%
1.00 4.22 32,162 0.58 4.09 0.58 4.09
1.00 3.96 306,483 0.83 3.90 0.83 3.90
- ------------------------------------------------------------------------------------
1.00 4.96 341,476 0.30 4.83 0.43 4.70
1.00 4.80 131,685 0.45 4.68 0.58 4.55
1.00 4.54 374,128 0.70 4.43 0.83 4.30
- ------------------------------------------------------------------------------------
1.00 5.17 330,241 0.22 5.02 0.42 4.82
1.00 5.01 98,667 0.37 4.88 0.57 4.68
1.00 4.75 295,404 0.62 4.63 0.82 4.43
- ------------------------------------------------------------------------------------
1.00 5.10 708,999 0.21 4.96 0.43 4.74
1.00 4.95 137,706 0.36 4.82 0.58 4.60
1.00 4.68 383,901 0.61 4.56 0.83 4.34
- ------------------------------------------------------------------------------------
1.00 5.70 586,294 0.21 5.50 0.44 5.27
1.00 5.54 68,713 0.36 5.34 0.59 5.11
1.00 5.28 123,254 0.61 5.00 0.84 4.77
- ------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period incomea shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - Cash Management shares (commenced
May 1) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
60
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.77% $205,244 0.43% 4.64% 0.45% 4.62%
1.00 4.61 3,265 0.58 4.42 0.60 4.40
1.00 4.35 79,847 0.83 4.24 0.85 4.22
1.00 4.18 153 1.00 4.68 1.45 4.23
- ------------------------------------------------------------------------------------
1.00 5.21 383,243 0.43 5.09 0.45 5.07
1.00 5.05 7,692 0.58 4.94 0.60 4.92
1.00 4.79 105,732 0.83 4.67 0.85 4.65
1.00 4.57c 2 0.93c 4.60c 1.45c 4.08c
- ------------------------------------------------------------------------------------
1.00 5.31 460,457 0.42 5.16 0.42 5.16
1.00 5.15 10,192 0.57 4.98 0.57 4.98
1.00 4.89 83,799 0.82 4.78 0.82 4.78
- ------------------------------------------------------------------------------------
1.00 5.15 694,651 0.41 5.04 0.44 5.01
1.00 4.99 36,055 0.56 4.89 0.59 4.86
1.00 4.73 94,228 0.81 4.63 0.84 4.60
- ------------------------------------------------------------------------------------
1.00 5.77 570,469 0.41 5.62 0.43 5.60
1.00 5.62 47,558 0.56 5.49 0.58 5.47
1.00 5.35 85,401 0.81 5.19 0.83 5.17
- ------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
FEDERAL PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period incomea unitholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
62
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.81% $3,171,330 0.41% 4.72% 0.41% 4.72%
1.00 4.66 836 0.56 4.46 0.56 4.46
1.00 4.39 284,382 0.81 4.30 0.81 4.30
- ------------------------------------------------------------------------------------
1.00 5.25 2,625,705 0.34 5.10 0.42 5.02
1.00 5.09 508,297 0.49 4.97 0.57 4.89
1.00 4.83 53,994 0.74 4.71 0.82 4.63
- ------------------------------------------------------------------------------------
1.00 5.40 2,050,559 0.27 5.26 0.41 5.12
1.00 5.24 530,001 0.42 5.11 0.56 4.97
1.00 4.98 34,540 0.67 4.83 0.81 4.69
- ------------------------------------------------------------------------------------
1.00 5.24 2,303,677 0.26 5.13 0.43 4.96
1.00 5.09 794,537 0.41 4.98 0.58 4.81
1.00 4.83 192,416 0.66 4.73 0.83 4.56
- ------------------------------------------------------------------------------------
1.00 5.83 1,731,935 0.26 5.69 0.42 5.53
1.00 5.67 516,917 0.41 5.50 0.57 5.34
1.00 5.41 102,576 0.66 5.22 0.82 5.06
- ------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
TAX-EXEMPT DIVERSIFIED PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period incomea shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.03 (0.03)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.03 (0.03)
1998 - Cash Management shares (commenced
May 1) 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
1996 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.04 (0.04)
1995 - ILA Administration units 1.00 0.04 (0.04)
1995 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
64
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.89% $1,734,623 0.42% 2.85% 0.42% 2.85%
1.00 2.73 28,084 0.57 2.66 0.57 2.66
1.00 2.48 20,991 0.82 2.41 0.82 2.41
1.00 2.30 2 0.99 2.51 1.42 2.08
- ------------------------------------------------------------------------------------
1.00 3.17 1,562,285 0.35 3.12 0.41 3.06
1.00 3.02 26,509 0.50 2.98 0.56 2.92
1.00 2.76 37,850 0.75 2.72 0.81 2.66
1.00 2.61c 2 0.85c 2.66c 1.41c 2.10c
- ------------------------------------------------------------------------------------
1.00 3.39 1,479,486 0.32 3.33 0.41 3.24
1.00 3.23 27,967 0.47 3.16 0.56 3.07
1.00 2.97 30,513 0.72 2.97 0.81 2.88
- ------------------------------------------------------------------------------------
1.00 3.25 1,514,443 0.31 3.20 0.41 3.10
1.00 3.09 59,097 0.46 3.06 0.56 2.96
1.00 2.84 28,921 0.71 2.79 0.81 2.69
- ------------------------------------------------------------------------------------
1.00 3.72 1,342,585 0.31 3.65 0.42 3.54
1.00 3.57 48,773 0.46 3.51 0.57 3.40
1.00 3.31 49,647 0.71 3.24 0.82 3.13
- ------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
TAX-EXEMPT CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distribution
beginning investment to unit/
of period incomea shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.02 (0.02)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.02 (0.02)
1998 - Cash Management shares (commenced May
1) 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units (Re-commenced
September 1) 1.00 0.01 (0.01)
- -------------------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
1995 - ILA units 1.00 0.03 (0.03)
1995 - ILA Administration units 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
66
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net
assets at Ratio of net Ratio of net
Net asset end Ratio of net investment Ratio of net investment
value at of period expenses to income to expenses to income to
end Total (in average net average net average net average net
of period returnb 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.60% $895,469 0.42% 2.58% 0.42% 2.58%
1.00 2.45 8,910 0.57 2.38 0.57 2.38
1.00 2.19 27,229 0.82 2.39 0.82 2.39
1.00 2.02 1 0.99 2.15 1.42 1.72
- -----------------------------------------------------------------------------------
1.00 2.84 584,615 0.41 2.79 0.41 2.79
1.00 2.68 512 0.56 2.84 0.56 2.84
1.00 2.43 2 0.81 2.48 0.81 2.48
1.00 2.25c 2 0.91c 2.37c 1.41c 1.87c
- -----------------------------------------------------------------------------------
1.00 3.15 591,003 0.42 3.10 0.42 3.10
1.00 3.00 360 0.57 2.98 0.57 2.98
1.00 2.87c 2 0.82c 2.90c 0.82c 2.90c
- -----------------------------------------------------------------------------------
1.00 3.03 440,476 0.41 2.99 0.42 2.98
1.00 2.88 142 0.56 2.84 0.57 2.83
- -----------------------------------------------------------------------------------
1.00 3.55 346,728 0.41 3.49 0.41 3.49
1.00 3.40 61 0.56 3.32 0.56 3.32
- -----------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
TAX-EXEMPT NEW YORK PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period incomea shareholders
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.03 (0.03)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- -----------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.03 (0.03)
1998 - Cash Management
shares (commenced May 1) 1.00 0.02 (0.02)
- -----------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units (commenced
September 15) 1.00 0.01 (0.01)
- -----------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
- -----------------------------------------------------------------------
1995 - ILA units 1.00 0.03 (0.03)
1995 - ILA Administration units 1.00 0.03 (0.03)
- -----------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
68
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of Ratio of net
Net asset assets at Ratio of net investment net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.76% $160,301 0.43% 2.73% 0.44% 2.72%
1.00 2.60 37,836 0.58 2.61 0.59 2.60
1.00 2.35 2 0.83 2.29 0.84 2.28
1.00 2.17 2 1.00 2.34 1.44 1.90
- -----------------------------------------------------------------------------------
1.00 3.02 122,550 0.36 2.96 0.51 2.81
1.00 2.87 21,580 0.51 2.85 0.66 2.70
1.00 2.61 2 0.76 2.61 0.91 2.46
1.00 2.46c 1 0.86c 2.56c 1.51c 1.91c
- -----------------------------------------------------------------------------------
1.00 3.29 102,887 0.33 3.24 0.43 3.14
1.00 3.14 31,993 0.48 3.09 0.58 2.99
1.00 3.02c 2 0.73c 3.04c 0.83c 2.94c
- -----------------------------------------------------------------------------------
1.00 3.05 70,175 0.32 3.01 0.43 2.90
1.00 2.90 44,319 0.47 2.88 0.58 2.77
- -----------------------------------------------------------------------------------
1.00 3.51 90,537 0.30 3.44 0.44 3.30
1.00 3.35 26,724 0.45 3.28 0.59 3.14
- -----------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
Index
1 General Investment
Management Approach
5 Fund Investment Objectives
and Strategies
10 Principal Risks of the Funds
14 Fund Performance
24 Fund Fees and Expenses
27 Service Providers
29 Dividends
30 Shareholder Guide
30 How to Buy Shares
34 How to Sell Shares
39 Taxation
40 Appendix A Additional Information
on Portfolio Risks,
Securities and
Techniques
52 Appendix B
Financial Highlights
<PAGE>
Institutional Liquid Assets
Prospectus (ILA Administration Units)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of
Fund documents, after paying a duplicating fee, by writing to the SEC's
Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request to: [email protected]. Information on the operation of the public
reference room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
ILAPROADMM
<PAGE>
Prospectus
GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS
ILA Service
("Units" or
"Shares")
May 1, 2000
. Prime
Obligations
Portfolio
. Money Market
Portfolio
. Treasury
Obligations
Portfolio
. Treasury
Instruments
Portfolio
. Government
Portfolio
. Federal
Portfolio
. Tax-Exempt
Diversified
Portfolio
. Tax-Exempt
California
Portfolio
. Tax-Exempt
New York
Portfolio
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE SECURI-
TIES OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
[GRAPHIC]
<PAGE>
NOT FDIC-Insured May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Institutional Liquid Assets Portfolios (the "Funds"). GSAM is
referred to in this Prospectus as the "Investment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek preservation of capital, daily
liquidity and maximum current income. With each Fund the Investment Adviser
follows a conservative, risk-managed investment process that seeks to:
. Manage credit risk
. Manage interest rate risk
. Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1. Managing Credit Risk
The Investment Adviser's process for managing risk emphasizes:
. Intensive research--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as
well as the Investment Research, Legal and Compliance departments of
Goldman Sachs.
. Timely updates--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio
management team via computer link.
The Result: An "approved" list of high-quality credits--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2. Managing Interest Rate Risk
Three main steps are followed in seeking to manage interest rate risk:
. Establish weighted average maturity (WAM) target--WAM (the weighted
average time until the yield of a portfolio reflects any changes in the
current interest rate environment) is constantly revisited and adjusted as
market conditions change. An overall strategy is developed by the
portfolio management team based on insights gained from weekly meetings
with both Goldman Sachs economists and economists from outside the firm.
. Implement optimum portfolio structure--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
. Conduct rigorous analysis of new securities--The Investment Adviser's
five-step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for
money market mutual funds.
3. Managing Liquidity
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
. Each Fund's clients and factors that influence their asset volatility;
. Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
. Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC Financial Data Universal
Averages. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
. The Funds: Each Fund's securities are valued by the amortized cost method as
permitted by Rule 2a-7 under the Investment Company Act of 1940, as amended
(the "Act"). Under Rule 2a-7, each Fund may invest only in U.S. dollar-
denominated securities that are determined to present minimal credit risk and
meet certain other criteria, including conditions relating to maturity,
diversification and credit quality. These operating policies may be more
restrictive than the fundamental policies set forth in the Statement of
Additional Information (the "Additional Statement").
. Taxable Funds: Prime Obligations, Money Market, Treasury Obligations and
Government Portfolios.
. Tax-Advantaged Funds: Treasury Instruments and Federal Portfolios.
. Tax-Exempt Funds: Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios.
. The Investors: The Funds are designed for investors seeking a high rate of
return, a stable net asset value ("NAV") and convenient liquidation
privileges. The Funds are particularly suitable for banks, corporations and
other financial institutions that seek investment of short-term funds for
their own accounts or for the accounts of their customers.
. NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
. Maximum Remaining Maturity of Portfolio Investments: 13 months (as determined
pursuant to Rule 2a-7) at the time of purchase.
. Dollar-Weighted Average Portfolio Maturity ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
. Investment Restrictions: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions" in
the Additional Statement. Fundamental investment restrictions and the
investment objective of a Fund (except the Tax-Exempt California and Tax-
Exempt New York Portfolios' objectives of providing shareholders with income
exempt from California State and New York State and New York City personal
income tax, respectively) cannot be changed without approval of a majority of
the outstanding shares of that Fund. The Treasury Obligations Portfolio's
policy of limiting its investments to U.S. Treasury Obligations (as defined
in Appendix A) and related repurchase agreements is also fundamental. All
investment policies not specifically designated as fundamental are non-
fundamental and may be changed without shareholder approval.
. Diversification: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of the
value of its total assets at the time of purchase in the securities of any
single issuer with these
3
<PAGE>
exceptions: (a) the Tax-Exempt California and Tax-Exempt New York Portfolios
may each invest up to 25% of their total assets in five or fewer issuers;
and (b) each of the other Funds may invest up to 25% of its total assets in
the securities of a single issuer for up to three business days. These limi-
tations do not apply to cash, certain repurchase agreements, U.S. Government
Securities (as defined in Appendix A) or securities of other investment com-
panies. In addition, securities subject to certain unconditional guarantees
and securities that are not "First Tier Securities" as defined by the SEC
are subject to different diversification requirements as described in the
Additional Statement.
4
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
Taxable and Tax-Advantaged Funds:
The Prime Obligations, Money Market, Treasury Obligations, Treasury Instru-
ments, Government and Federal Portfolios seek to maximize current income to
the extent consistent with the preservation of capital and the maintenance
of liquidity by investing exclusively in high quality money market instru-
ments.
The Prime Obligations and Money Market Portfolios pursue their investment
objectives by investing in U.S. Government Securities, obligations of U.S.
banks, commercial paper and other short-term obligations of U.S. companies,
states, municipalities, and other entities and repurchase agreements. The
Money Market Portfolio may also invest in U.S. dollar-denominated obliga-
tions of foreign banks, foreign companies and foreign governments.
The Treasury Obligations Portfolio pursues its investment objective by
investing in securities issued by the U.S. Treasury and repurchase agree-
ments relating to such securities. The Government Portfolio pursues its
investment objective by investing in U.S. Government Securities and repur-
chase agreements relating to such securities.
The Treasury Instruments and Federal Portfolios pursue their investment
objectives by limiting their investments to certain U.S. Treasury Obliga-
tions and U.S. Government Securities, respectively, the interest from which
is generally exempt from state income taxation. You should consult your tax
adviser to determine whether distributions from the Treasury Instruments and
Federal Portfolios (and any other Fund that may hold such obligations)
derived from interest on such obligations are exempt from state income taxa-
tion in your own state.
Tax-Exempt Funds:
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios seek to provide shareholders, to the extent consistent with the
preservation of capital and prescribed portfolio standards, with a high
level of income exempt from federal income tax by investing primarily in
municipal instruments.
In addition, the Tax-Exempt California and Tax-Exempt New York Portfolios
seek to provide shareholders with income exempt from California State and
New York State and City personal income taxes, respectively, by investing in
instruments the interest on which is exempt from these taxes. (These instru-
ments are called "California instruments" and "New York instruments" in this
Prospectus.)
The Tax-Exempt Funds pursue their investment objectives by investing in
securities issued by or on behalf of states, territories, and possessions of
the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia, the interest from
which, if any, is in the opinion of bond counsel excluded from gross income
for federal income tax purposes, and not an item of tax preference under the
federal alternative minimum tax ("AMT").
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Bank Commercial
Fund Obligations Securities Obligations Paper
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations ./1/ . . .
U.S. banks only/2/
--------------------------------------------------------------------------------------------------
Money Market ./1/ . . .
Over 25% of total assets U.S. and foreign
must be invested in U.S. (US$) commercial
and foreign (US$) banks/3/ paper
--------------------------------------------------------------------------------------------------
Treasury Obligations ./4/
--------------------------------------------------------------------------------------------------
Treasury Instruments ./4/
--------------------------------------------------------------------------------------------------
Government ./1/ .
--------------------------------------------------------------------------------------------------
Federal ./1/ .
--------------------------------------------------------------------------------------------------
Tax-Exempt Diversified .
Tax-exempt only
--------------------------------------------------------------------------------------------------
Tax-Exempt California .
Tax-exempt only
--------------------------------------------------------------------------------------------------
Tax-Exempt New York .
Tax-exempt only
--------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 If adverse economic conditions prevail in the banking industry (such as
substantial losses on loans, increases in non-performing assets and
charge-offs and declines in total deposits), the Fund may, for temporary
defensive purposes, invest less than 25% of its total assets in bank
obligations.
4 Issued by the U.S. Treasury.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Short-Term
Obligations of Asset-Backed and Foreign
Corporations and Repurchase Receivables-Backed Government
Other Entities Agreements Securities/5/ Obligations (US$)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
. . .
U.S. entities only
- ---------------------------------------------------------------------------
. . . ./6/
U.S. and foreign
(US$) entities
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
.
(Does not intend
to invest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
5 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
6 The Money Market Portfolio may invest in U.S. dollar-denominated
obligations (limited to commercial paper and other notes) issued or
guaranteed by a foreign government. The Fund may also invest in U.S.
dollar-denominated obligations issued or guaranteed by any entity located
or organized in a foreign country that maintains a short-term foreign
currency rating in the highest short-term ratings category by the
requisite number of NRSROs. The Fund may not invest more than 25% of its
total assets in the securities of any one foreign government.
7
<PAGE>
Investment Policies Matrix continued
<TABLE>
<CAPTION>
Taxable Tax-Exempt Custodial Unrated Investment
Fund Municipals Municipals Receipts Securities/9/ Companies
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Obligations . /7/ . . .
Up to 10% of total
assets in other
investment
companies
- -------------------------------------------------------------------------------------------------------------
Money Market . /7/ . . .
Up to 10% of total
assets in other
investment
companies
- -------------------------------------------------------------------------------------------------------------
Treasury Obligations
- -------------------------------------------------------------------------------------------------------------
Treasury Instruments
- -------------------------------------------------------------------------------------------------------------
Government .
Up to 10% of total
assets in other
investment
companies
- -------------------------------------------------------------------------------------------------------------
Federal
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations (except in investment
extraordinary circumstances)/8/ companies
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt California . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations and at least 65% of investment
total assets in California companies
instruments (except in
extraordinary circumstances)/8/
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt New York . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations and at least 65% of investment
total assets in New York companies
instruments (except in
extraordinary circumstances)/8/
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
7Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
8 Ordinarily expect that 100% of a Fund's portfolio securities will be
invested in municipal obligations, but the Funds may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
9 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality to
First Tier Securities, or to the extent that a Fund may purchase Second
Tier Securities, comparable in quality to Second Tier Securities. In
addition, a Fund holding a security supported by a guarantee or demand
feature may rely on the credit quality of the guarantee or demand feature
in determining the credit quality of the investment.
10 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of a Fund's net assets under normal market conditions.
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Private Summary of
Activity Credit Taxation for
Bonds Quality/9/ Distributions/14/ Miscellaneous
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not permitted
- ----------------------------------------------------------------------------------------------------------------
. First Tier/12/ Taxable federal and state/15/ May invest in obligations
of the International
Bank for Reconstruction
and Development. Reverse
repurchase agreements not permitted.
- ----------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not permitted
- ----------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Reverse repurchase agreements not permitted
generally exempt from
state taxation
- ----------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not permitted
- ----------------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Under extraordinary circumstances, may
generally exempt from hold cash, U.S. Government Securities
state taxation subject to state taxation or cash equivalents.
Reverse repurchase agreements not permitted.
- ----------------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal and May (but does not currently intend to)
(Does not Second Tier/13/ taxable state/16/ invest up to 20% in securities subject to
intend to AMT and may temporarily invest in the taxable
invest)/10/,/11/ money market instruments described herein.
Reverse repurchase agreements not permitted.
- ----------------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal May (but does not currently intend to)
(Does not Second Tier/13/ and California State invest up to 20% in AMT securities
intend to and may temporarily invest in the taxable
invest)/10/,/11/ money market instruments described herein.
Reverse repurchase agreements not permitted.
- ----------------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal, May invest up to 20% in AMT securities
(not more than Second Tier/13/ New York State and and may temporarily invest in the taxable
20% of net New York City money market instruments described herein.
assets)/11/ Reverse repurchase agreements not permitted.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
11 No more than 25% of the value of a Fund's total assets may be invested in
industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
12 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
13 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
14 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
15 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities interest
income.
16 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Prime Money Treasury Treasury
. Applicable Obligations Market Obligations Instruments
-- Not Applicable Portfolio Portfolio Portfolio Portfolio
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAV . . . .
Interest Rate . . . .
Credit/Default . . . .
Liquidity . . . .
U.S. Government Securities . . -- --
Concentration -- -- -- --
Foreign -- . -- --
Banking Industry -- . -- --
Tax -- -- -- --
- --------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
Tax-Exempt Tax-Exempt Tax-Exempt
Government Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
. . . . .
. . . . .
. . . . .
. . . . .
. . -- -- --
-- -- . . .
-- -- -- -- --
-- -- -- -- --
-- -- . . .
- ----------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Risks that apply to all Funds:
. NAV Risk--The risk that a Fund will not be able to maintain a NAV per share
of $1.00 at all times.
. Interest Rate Risk--The risk that during periods of rising interest rates, a
Fund's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a Fund's
yield will tend to be higher.
. Credit/Default Risk--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase agree-
ment, may default on its payment obligations. In addition, with respect to
the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios, risk of loss from payment default may also exist where municipal
instruments are backed by foreign letters of credit or guarantees.
. Liquidity Risk--The risk that a Fund will be unable to pay redemption pro-
ceeds within the time period stated in this Prospectus, because of unusual
market conditions, an unusually high volume of redemption requests, or other
reasons.
Risk that applies to the Prime Obligations, Money Market, Government and
Federal Portfolios:
. U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Money Market Portfolio:
. Foreign Risk--The risk that a foreign security could lose value as a result
of political, financial and economic events in foreign countries, less pub-
licly available financial and other information, less stringent foreign secu-
rities regulations and accounting and disclosure standards, or other factors.
The Money Market Portfolio may not invest more than 25% of its total assets
in the securities of any one foreign government.
. Banking Industry Risk--The risk that if the Fund invests more than 25% of its
total assets in bank obligations, an adverse development in the banking
industry may affect the value of the Fund's investments more than if the
Fund's investments were not invested to such a degree in the banking indus-
try. Normally, the Money Market Portfolio intends to invest more than 25% of
its total assets in bank obligations. Banks may be particularly susceptible
to certain economic factors such as interest rate changes, adverse develop-
ments in the real estate market, fiscal and monetary policy and general eco-
nomic cycles.
12
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
Risks that apply to the Tax-Exempt Funds:
. Concentration Risk--The risk that if a Fund invests more than 25% of its
total assets in issuers within the same state, industry or economic sector,
an adverse economic, business or political development may affect the value
of the Fund's investments more than if its investments were not so concen-
trated. The Tax-Exempt California and Tax-Exempt New York Portfolios intend
to invest at least 65% of their total assets in California municipal obliga-
tions and New York municipal obligations, respectively. These two Funds are
classified as "non-diversified" for regulatory purposes.
. Tax Risk--The risk that future legislative or administrative changes or court
decisions may materially affect the ability of a Fund to pay federal tax-
exempt dividends (in the case of each of these Funds) and state tax-exempt
dividends (in the case of the Tax-Exempt California and Tax-Exempt New York
Portfolios). These Funds would not be a suitable investment for IRAs, other
tax-exempt or tax deferred accounts or for other investors who are not sensi-
tive to the federal, state or local tax consequences of these investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
13
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's Service
Shares from year to year; and (b) the average annual returns of a Fund's
Service Shares. Investors should be aware that the fluctuation of interest
rates is one primary factor in performance volatility. The bar chart and
table assume reinvestment of dividends and distributions. A Fund's past per-
formance is not necessarily an indication of how the Fund will perform in
the future. Performance reflects expense limitations in effect. If expense
limitations were not in place, a Fund's performance would have been reduced.
You may obtain a Fund's current yield by calling 1-800-621-2550.
14
<PAGE>
FUND PERFORMANCE
Prime Obligations Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.61%
Worst Quarter
Q2 '93 0.62%
[GRAPH]
1991 5.67%
1992 3.35%
1993 2.56%
1994 3.66%
1995 5.37%
1996 4.8%
1997 4.96%
1998 4.9%
1999 4.48%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
------------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 6/1/90) 4.48% 4.90% 4.61%
------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Money Market Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.62%
Worst Quarter
Q2 '93 0.64%
[GRAPH]
1991 5.7%
1992 3.36%
1993 2.62%
1994 3.72%
1995 5.43%
1996 4.86%
1997 5.01%
1998 4.91%
1999 4.5%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 6/1/90) 4.50% 4.94% 4.65%
-------------------------------------------------------------------
</TABLE>
16
<PAGE>
FUND PERFORMANCE
Treasury Obligations Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.51%
Worst Quarter
Q2 '93 0.60%
[GRAPH]
1991 5.48%
1992 3.24%
1993 2.48%
1994 3.49%
1995 5.31%
1996 4.69%
1997 4.84%
1998 4.73%
1999 4.22%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
------------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 6/1/90) 4.22% 4.76% 4.47%
------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Treasury Instruments Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '95 1.35%
Worst Quarter
Q2 '93 0.62%
[GRAPH]
1992 3.13%
1993 2.57%
1994 3.59%
1995 5.28%
1996 4.68%
1997 4.75%
1998 4.54%
1999 3.96%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 1/30/91) 3.96% 4.64% 4.19%
-------------------------------------------------------------------
</TABLE>
18
<PAGE>
FUND PERFORMANCE
Government Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q1 '91 1.53%
Worst Quarter:
Q2 '93 0.62%
[GRAPH]
1991 5.49%
1992 3.3%
1993 2.53%
1994 3.53%
1995 5.35%
1996 4.73%
1997 4.89%
1998 4.79%
1999 4.35%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
------------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 7/1/90) 4.35% 4.82% 4.49%
------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Federal Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '95 1.37%
Worst Quarter
Q1 '94 0.66%
[GRAPH]
1994 3.69%
1995 5.41%
1996 4.83%
1997 4.98%
1998 4.83%
1999 4.39%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 5/15/93) 4.39% 4.89% 4.48%
-------------------------------------------------------------------
</TABLE>
20
<PAGE>
FUND PERFORMANCE
Tax-Exempt Diversified Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.03%
Worst Quarter
Q1 '94 0.42%
[GRAPH]
1991 3.91%
1992 2.42%
1993 1.84%
1994 2.3%
1995 3.31%
1996 2.84%
1997 2.97%
1998 2.76%
1999 2.48%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
------------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 7/2/90) 2.48% 2.87% 2.89%
------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Tax-Exempt California Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '98 0.70%
Worst Quarter
Q1 '99 0.47%
[GRAPH]
1998 2.43%
1999 2.19%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year Since Inception
-----------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 9/15/97) 2.19% 2.38%
-----------------------------------------------------------
</TABLE>
22
<PAGE>
FUND PERFORMANCE
Tax-Exempt New York Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q2 '98 0.74%
Worst Quarter
Q1 '99 0.49%
[GRAPH]
1998 2.61%
1999 2.35%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
----------------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 9/15/97) 2.35% 2.55%
----------------------------------------------------------------
</TABLE>
23
<PAGE>
Fund Fees and Expenses (Service Shares)
This table describes the fees and expenses that you would pay if you buy and
hold ILA Service Shares of a Fund.
<TABLE>
<CAPTION>
Prime Money Treasury
Obligations Market Obligations
Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Service Fees/2/ 0.40% 0.40% 0.40%
Other Expenses/3/ 0.08% 0.06% 0.07%
- ------------------------------------------------------------------------------
Total Fund Operating Expenses/4/ 0.83% 0.81% 0.82%
- ------------------------------------------------------------------------------
<CAPTION>
Treasury
Instruments Government Federal
Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Service Fees/2/ 0.40% 0.40% 0.40%
Other Expenses/3/ 0.08% 0.10% 0.06%
- ------------------------------------------------------------------------------
Total Fund Operating Expenses/4/ 0.83% 0.85% 0.81%
- ------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
FUND FEES AND EXPENSES
<TABLE>
<CAPTION>
Tax-Exempt Tax-Exempt Tax-Exempt
Diversified California New York
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Service Fees/2/ 0.40% 0.40% 0.40%
Other Expenses/3/ 0.07% 0.07% 0.09%
- -----------------------------------------------------------------------------
Total Fund Operating Expenses/4/ 0.82% 0.82% 0.84%
- -----------------------------------------------------------------------------
</TABLE>
/1/The Funds' annual operating expenses are based on actual expenses.
/2/Service Organizations may charge other fees directly to their customers who
are the beneficial owners of Service Shares in connection with their
customers' accounts. Such fees may affect the return such customers realize
with respect to their investments.
/3/"Other Expenses" include transfer agency fees equal to 0.04% of the average
daily net assets of each Fund's Service Shares plus all other ordinary
expenses not detailed above.
/4/The Investment Adviser has voluntarily agreed to reduce or limit "Total Fund
Operating Expenses" of each Fund (excluding service fees, taxes, interest,
brokerage fees, litigation, indemnification and other extraordinary expenses)
to 0.43% of each Fund's average daily net assets. As a result of the current
expense limitations, "Other Expenses" and "Total Fund Operating Expenses" of
the Government Portfolio and Tax-Exempt New York Portfolio which are actually
incurred are as set forth below. The expense limitations may be terminated at
any time at the option of the Investment Adviser with the approval of the
Trustees. If this occurs, "Other Expenses" and "Total Fund Operating
Expenses" may increase without shareholder approval.
<TABLE>
<CAPTION>
Tax-Exempt
Government New York
Portfolio Portfolio
----------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):
Management Fees 0.35% 0.35%
Service Fees 0.40% 0.40%
Other Expenses 0.08% 0.08%
----------------------------------------------------------------------------
Total Fund Operating Expenses (after current expense
limitations) 0.83% 0.83%
----------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the expense limitations) with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in Service Shares of
a Fund for the time periods indicated and then redeem all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that a Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations $85 $265 $460 $1,025
- -------------------------------------------------------
Money Market $83 $259 $450 $1,002
- -------------------------------------------------------
Treasury Obligations $84 $262 $455 $1,014
- -------------------------------------------------------
Treasury Instruments $85 $265 $460 $1,025
- -------------------------------------------------------
Government $87 $271 $471 $1,049
- -------------------------------------------------------
Federal $83 $259 $450 $1,002
- -------------------------------------------------------
Tax-Exempt Diversified $84 $262 $455 $1,014
- -------------------------------------------------------
Tax-Exempt California $84 $262 $455 $1,014
- -------------------------------------------------------
Tax-Exempt New York $86 $268 $466 $1,037
- -------------------------------------------------------
</TABLE>
Service Organizations that invest in Service Shares on behalf of their custom-
ers may charge other fees directly to their customer accounts in connection
with their investments. You should contact your Service Organization for infor-
mation regarding such charges. Such fees, if any, may affect the return such
customers realize with respect to their investment.
Certain Service Organizations that invest in Service Shares may receive other
compensation in connection with the sale and distribution of Service Shares or
for services to their customers' accounts and/or the Funds. For additional
information regarding such compensation, see "Shareholder Guide" in the Pro-
spectus and "Other Information" in the Additional Statement.
26
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the
Investment Adviser, merged into The Goldman Sachs Group, Inc. as a result of
an initial public offering. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser also performs the following serv-
ices for the Funds:
. Continually manages each Fund, including the purchase, retention and
disposition of securities and other assets
. Administers each Fund's business affairs
. Performs various recordholder servicing functions (to the extent not
provided by other organizations)
Pursuant to an SEC order, each Taxable and Tax-Advantaged Fund may enter
into principal transactions in certain taxable money market instruments,
including repurchase agreements, with Goldman Sachs.
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate For the
Fiscal Year Ended
Fund Contractual Rate December 31, 1999
-------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.35% 0.35%
-------------------------------------------------------------
Money Market 0.35% 0.35%
-------------------------------------------------------------
Treasury Obligations 0.35% 0.35%
-------------------------------------------------------------
Treasury Instruments 0.35% 0.35%
-------------------------------------------------------------
Government 0.35% 0.35%
-------------------------------------------------------------
Federal 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt Diversified 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt California 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt New York 0.35% 0.35%
-------------------------------------------------------------
</TABLE>
27
<PAGE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
28
<PAGE>
Dividends
All or substantially all of each Fund's net investment income will be
declared as a dividend daily. Dividends will normally, but not always, be
declared as of 4:00 p.m. New York time as a dividend and distributed month-
ly. You may choose to have dividends paid in:
. Cash
. Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may
be submitted in writing to Goldman Sachs at any time. If you do not indicate
any choice, dividends and distributions will be reinvested automatically in
the applicable Fund.
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of
each month. Net short-term capital gains, if any, will be distributed in
accordance with federal income tax requirements and may be reflected in a
Fund's daily distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid exces-
sive fluctuations in the amount of monthly capital gains distributions, a
portion of any net capital gains realized on the disposition of securities
during the months of November and December may be distributed during the
subsequent calendar year. Although realized gains and losses on the assets
of a Fund are reflected in the NAV of the Fund, they are not expected to be
of an amount which would affect the Fund's NAV of $1.00 per share.
29
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Service
Shares.
HOW TO BUY SHARES
How Can I Purchase Service Shares Of The Funds?
Generally, Service Shares may be purchased only through institutions that
have agreed to provide account administration and personal and account main-
tenance services to their customers who are the beneficial owners of Service
Shares. These institutions are called "Service Organizations." Customers of
a Service Organization will normally give their purchase instructions to the
Service Organization, and the Service Organization will, in turn, place pur-
chase orders with Goldman Sachs. Service Organizations will set times by
which purchase orders and payments must be received by them from their cus-
tomers. Generally, Service Shares may be purchased from the Funds on any
business day at their NAV next determined after receipt of an order by
Goldman Sachs from a Service Organization. Shares begin earning dividends
after the Fund's receipt of the purchase amount in federal funds. No sales
load is charged.
Service Organizations are responsible for transmitting purchase orders and
payments to Goldman Sachs in a timely fashion. Service Organizations should
place a purchase order in writing or by telephone.
<TABLE>
--------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------
By Telephone: 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------
</TABLE>
Before or immediately after placing an initial purchase order, a Service
Organization should complete and send to Goldman Sachs the Account Applica-
tion.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
30
<PAGE>
SHAREHOLDER GUIDE
Service Organizations may send their payments as follows:
. Wire federal funds to The Northern Trust Company ("Northern"), as sub-
custodian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian); or
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds -
(Name of Fund and Class of Shares), 4900 Sears Tower - 60th Floor, Chica-
go, IL 60606-6372. The Funds will not accept a check drawn on a foreign
bank or a third-party check.
It is strongly recommended that payment be effected by wiring federal funds
to Northern.
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
If an effective order and federal funds are received: Dividends begin:
--------------------------------------------------------------------------
<S> <C>
Taxable and Tax-Advantaged Funds:
. By 3:00 p.m. New York time Same business day
. After 3:00 p.m. New York time Next business day
--------------------------------------------------------------------------
Tax-Exempt Funds:
. By 1:00 p.m. New York time Same business day
. After 1:00 p.m. New York time Next business day
--------------------------------------------------------------------------
</TABLE>
What Do I Need To Know About Service Organizations?
Service Organizations may provide the following services in connection with
their customers' investments in Service Shares:
. Acting, directly or through an agent, as the sole shareholder of record
. Maintaining account records for customers
. Processing orders to purchase, redeem or exchange shares for customers
. Responding to inquiries from prospective and existing shareholders
. Assisting customers with investment procedures
In addition, some (but not all) Service Organizations are authorized to
accept, on behalf of the Trust, purchase, redemption and exchange orders
placed by or on behalf of their customers, and may designate other interme-
diaries to accept such orders, if approved by the Trust. In these cases:
. A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized Service Organization or intermediary
on a business day, and the order will be priced at the Fund's NAV next
determined after such acceptance.
31
<PAGE>
. Service Organizations or intermediaries will be responsible for transmit-
ting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your Service Organization directly to learn whether it is
authorized to accept orders for the Trust.
Pursuant to a service plan adopted by the Trust's Board of Trustees, Service
Organizations are entitled to receive payment for their services from the
Trust of up to 0.40% (on an annualized basis) of the average daily net
assets of the Service Shares of the Funds, which are attributable to or held
in the name of the Service Organization for its customers. In addition,
GSAM, at its own expense, may pay a Service Organization up to 0.10% of the
average daily net assets of the Service Shares of the Fund, which are
attributable to or held in the name of the Service Organization for its cus-
tomers. The compensation paid by GSAM does not represent an additional
expense to a Fund or its shareholders, since it will be paid from the assets
of GSAM.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Service Organizations and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds.
In addition to Service Shares, each Fund also offers other classes of shares
to investors. These other share classes are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than Service Shares.
Information regarding these other share classes may be obtained from your
sales representative or from Goldman Sachs by calling the number on the back
cover of this Prospectus.
What Is My Minimum Investment In The Funds?
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance. A Serv-
ice Organization may redeem Service Shares held by non-complying accounts,
and may impose a charge for any special services.
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Modify or waive the minimum investment and minimum account balance
requirement.
. Reject any purchase order for any reason.
32
<PAGE>
SHAREHOLDER GUIDE
The Funds may allow Service Organizations to purchase shares with securities
instead of cash if consistent with a Fund's investment policies and opera-
tions and if approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Service Shares
is determined by a Fund's NAV. The Funds calculate NAV as follows:
(Value of Assets of the Class)
- (Liabilities of the Class)
NAV = _______________________________
Number of Outstanding Shares of the Class
. NAV per share of each class is calculated by State Street on each business
day as of the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. New York time). Fund shares will be priced on any day
the New York Stock Exchange is open, except for days on which Chicago,
Boston or New York banks are closed for local holidays.
. On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, each Fund reserves the right to
close at or prior to the BMA recommended closing time. If a Fund does so,
it will cease granting same business day credit for purchase and redemp-
tion orders received after the Fund's closing time and credit will be
given to the next business day.
. The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-
ted by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securi-
ties are valued at amortized cost in accordance with SEC regulations. Amor-
tized cost will normally approximate market value. There can be no assurance
that a Fund will be able at all times to maintain a NAV of $1.00 per share.
33
<PAGE>
HOW TO SELL SHARES
How Can I Sell Service Shares Of The Funds?
Generally, Service Shares may be sold (redeemed) only through Service Orga-
nizations. Customers of a Service Organization will normally give their
redemption instructions to the Service Organization, and the Service Organi-
zation will, in turn, place redemption orders with the Funds. Generally,
each Fund will redeem Service Shares upon request on any business day at
their NAV next determined after receipt of such request in proper form. A
Service Organization may request redemptions in writing or by telephone if
the optional telephone redemption privilege is elected on the Account Appli-
cation.
<TABLE>
----------------------------------------------------------------------
<C> <S>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
----------------------------------------------------------------------
By Telephone: If you have elected the telephone redemption
privilege on your Account Application:
.1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
----------------------------------------------------------------------
</TABLE>
Certain Service Organizations are authorized to accept redemption requests
on behalf of the Funds as described under "What Do I Need To Know About
Service Organizations?" A redemption may also be made with respect to cer-
tain Funds by means of the check redemption privilege.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor, and the Transfer Agent will not be liable for
any loss you may incur in the event that the Trust accepts unauthorized tel-
ephone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing
and signed by an authorized person designated on the Account Application.
The written request may be confirmed by telephone with both the requesting
party and the designated bank account to verify instructions.
. The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
34
<PAGE>
SHAREHOLDER GUIDE
When Will Redemption Proceeds Be Wired?
Redemption proceeds will normally be wired to the bank account designated on
a Service Organization's Account Application as follows:
<TABLE>
<CAPTION>
Redemption Request Received Redemption Proceeds Dividends
--------------------------------------------------------------------------------
<S> <C> <C>
Taxable and Tax-Advantaged
Funds:
--------------------------------------------------------------------------------
. By 3:00 p.m. New York time Wired same business day Not earned on day
request is received
. After 3:00 p.m. New York time Wired next business day Earned on day request
is received
--------------------------------------------------------------------------------
Tax-Exempt Funds:
--------------------------------------------------------------------------------
. By 12:00 p.m. New York time Wired same business day Not earned on day
request is received
. After 12:00 p.m. New York time Wired next business day Earned on day request
is received
--------------------------------------------------------------------------------
</TABLE>
. Although redemption proceeds will normally be wired as described above, each
Fund reserves the right to pay redemption proceeds up to three business days
following receipt of a properly executed wire transfer redemption request. If
you are selling shares you recently paid for by check, the Fund will pay you
when your check has cleared, which may take up to 15 days. If the Federal
Reserve Bank is closed on the day that the redemption proceeds would
ordinarily be wired, wiring the redemption proceeds may be delayed one
additional business day.
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of intermediaries or your Service
Organ-ization in the transfer process. If a problem with such performance
arises, you should deal directly with such intermediaries or Service
Organizations.
What Should I Know About The Check Redemption Privilege?
A Service Organization may elect to have a special account with State Street
for the purpose of redeeming Service Shares from its account by check.
The following general policies govern the check redemption privilege:
. The Service Organization will be provided with a supply of checks when State
Street receives a completed signature card and authorization form. Checks
drawn on the account may be payable to the order of any person in any amount
over $500, but cannot be certified.
. The payee of the check may cash or deposit it just like any other check
drawn on a bank.
35
<PAGE>
. When the check is presented to State Street for payment, a sufficient num-
ber of full or fractional Service Shares will be redeemed to cover the
amount of the check.
. Canceled checks will be returned to the Service Organization by State
Street.
. The check redemption privilege allows a Service Organization to receive
the dividends declared on the Service Shares that are to be redeemed until
the check is actually processed. Because of this feature, accounts may not
be completely liquidated by check.
. If the amount of the check is greater than the value of the Service Shares
held in the Service Organization's account, the check will be returned
unpaid. In this case, the Service Organization may be subject to extra
charges.
. The Trust reserves the right to limit the availability of, modify or ter-
minate the check redemption privilege at any time with respect to any or
all Service Organizations.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate the timely transmittal of redemption requests, Service Organi-
zations may set times by which they must receive redemption requests.
Service Organizations may also require additional documentation from you.
The Trust reserves the right to:
. Redeem the Service Shares of any Service Organization whose account bal-
ance falls below the minimum as a result of a redemption. The Fund will
give 60 days' prior written notice to allow a Service Organization to pur-
chase sufficient additional shares of the Fund in order to avoid such
redemption. Different rules may apply to investors who have established
brokerage accounts with Goldman Sachs in accordance with the terms and
conditions of their account agreements.
. Redeem the shares in other circumstances determined by the Board of Trust-
ees to be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distribu-
tions be returned to the Fund as undeliverable or remain uncashed for six
months. In addition, that distribution and all future distributions pay-
able to you will be reinvested at NAV in additional Fund shares. No inter-
est will accrue on amounts represented by uncashed distribution or redemp-
tion checks.
36
<PAGE>
SHAREHOLDER GUIDE
Can I Exchange My Investment From One Fund To Another?
A Service Organization may exchange Service Shares of a Fund at NAV for
shares of the corresponding class of any other Goldman Sachs Fund. The
exchange privilege may be materially modified or withdrawn at any time upon
60 days' written notice.
<TABLE>
<CAPTION>
Instructions For Exchanging Shares:
-------------------------------------------------------------------
<S> <C> <C>
By Writing: . Write a letter of instruction that includes:
. The recordholder name(s) and signature(s)
. The account number
. The Fund names and Class of Shares
. The dollar amount to be exchanged
. Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
-------------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
. 1-800-621-2550 (8:00 a.m. to 4:00 p.m.
New York time)
-------------------------------------------------------------------
</TABLE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically registered
account.
. Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the exchange
instructions are in writing and are signed by an authorized person designated
on the Account Application.
. Exchanges are available only in states where exchanges may be legally made.
. It may be difficult to make telephone exchanges in times of drastic
eco-nomic or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I Need
To Know About Telephone Redemption Requests?" in an effort to prevent unau-
thorized or fraudulent telephone exchange requests.
37
<PAGE>
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
What Types Of Reports Will I Be Sent Regarding Investments In Service
Shares?
Service Organizations will receive from the Funds annual reports containing
audited financial statements and semi-annual reports. Upon request, Service
Organizations will also be provided with a printed confirmation for each
transaction. Any dividends and distributions paid by the Funds are also
reflected in regular statements issued by the Funds to Service Organiza-
tions. Service Organizations are responsible for providing these or other
reports to their customers who are the beneficial owners of Service Shares
in accordance with the rules that apply to their accounts with the Service
Organizations.
38
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
Taxes on Distributions: Except for the Tax-Free Money Market Fund, distribu-
tions of investment income are taxable as ordinary income for federal tax pur-
poses, and may also be subject to state or local taxes. This is true whether
you reinvest your distributions in additional Fund shares or receive them in
cash. To the extent that Fund distributions are attributable to interest on
federal obligations or interest on obligations of your state of residence or
its municipalities or authorities, they will in most cases be exempt from state
and local income taxes. Distributions from the Tax-Free Money Market Fund that
are designated as "exempt interest dividends" are generally not subject to fed-
eral income tax. Distributions of short-term capital gains are taxable to you
as ordinary income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Free Money Market Fund may be a preference item when determining your fed-
eral alternative minimum tax liability. Exempt-interest dividends are also
taken into account in determining the taxable portion of social security or
railroad retirement benefits. Any interest on indebtedness incurred by you to
purchase or carry shares in the Tax-Free Money Market Fund generally will not
be deductible for federal income tax purposes.
Other Information: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
39
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. Treasury Obligations and U.S. Government Securities. U.S. Treasury
Obligations include securities issued or issued or guaranteed by the U.S.
Treasury ("U.S. Treasury Obligations"). Payment of principal and interest on
these obligations is backed by the full faith and credit of the U.S.
government. U.S. Treasury Obligations include, among other things, the
separately traded principal and interest components of securities guaranteed or
issued by the U.S. Treasury if such components are traded independently under
the Separate Trading of Registered Interest and Principal of Securities program
("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
40
<PAGE>
APPENDIX A
Some Funds invest in U.S. Treasury Obligations and certain U.S. Government
Securities the interest from which is generally exempt from state income taxa-
tion. Securities generally eligible for this exemption include those issued by
the U.S. Treasury and certain agencies, authorities or instrumentalities of the
U.S. government, including the Federal Home Loan Banks, Federal Farm Credit
Banks, Tennessee Valley Authority and Student Loan Marketing Association.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
Bank Obligations. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Funds may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Funds may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Fund invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of opera-
tions and profitability of domestic and foreign banks. Significant developments
in the U.S. banking industry have included increased competition from other
types of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the real estate mar-
kets. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
Commercial Paper. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or
41
<PAGE>
bank holding companies, corporations, finance companies and other issuers. The
commercial paper purchased by a Fund consists of direct U.S. dollar-denominated
obligations of domestic or, in the case of certain Funds, foreign issuers.
Short-Term Obligations. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
Repurchase Agreements. Certain Funds may enter into repurchase agreements with
primary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, certain Funds, together with other registered
investment companies having advisory agreements with the Investment Adviser or
any of its 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.
Asset-Backed and Receivables-Backed Securities. Certain Funds may invest in
asset-backed and receivables-backed securities whose principal and interest
payments are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-backed
and receivables-backed 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 and
receivables-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in such securities will
42
<PAGE>
APPENDIX A
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. In addition, securities that are backed by credit card, automobile and
similar types of receivables generally do not have the benefit of a security
interest in collateral that is comparable in quality to mortgage assets. There
is the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event of a
default, a Fund may suffer a loss if it cannot sell collateral quickly and
receive the amount it is owed.
Foreign Government Obligations and Related Foreign Risks. Certain Funds may
invest in foreign government obligations. Foreign government obligations are
U.S. dollar-denominated obligations (limited to commercial paper and other
notes) issued or guaranteed by a foreign government or other entity located or
organized in a foreign country that maintains a short-term foreign currency
rating in the highest short-term ratings category by the requisite number of
NRSROs.
Investments by a Fund in foreign securities, whether issued by a foreign gov-
ernment, bank, corporation or other issuer, may present a greater degree of
risk than investments in securities of domestic issuers because of less public-
ly-available financial and other information, less securities regulation,
potential imposition of foreign withholding and other taxes, war, expropriation
or other adverse governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and generally are not bound by
the accounting, auditing and financial reporting standards applicable to U.S.
banks.
Municipal Obligations. Certain Funds may invest in municipal obligations.
Municipal obligations are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities, and the District of Columbia. Municipal
obligations in which a Fund may invest consist of fixed rate notes and similar
debt instruments; variable and floating rate demand instruments; tax-exempt
commercial paper; municipal bonds; and unrated notes, paper, bonds or other
instruments.
Municipal Notes and Bonds. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds also include lease rental revenue bonds which are
issued by a state or local authority for capital projects and are secured by
annual lease payments from the state or local-
43
<PAGE>
ity sufficient to cover debt service on the authority's obligations. Industrial
development bonds ("private activity bonds") are a specific type of revenue
bond backed by the credit and security of a private user and, therefore, have
more potential risk. Municipal bonds may be issued in a variety of forms,
including commercial paper, tender option bonds and variable and floating rate
securities.
Tender Option Bonds. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal
income tax. Certain tender option bonds may be illiquid or may become illiquid
as a result of a credit rating downgrade, a payment default or a disqualifica-
tion from tax-exempt status.
Revenue Anticipation Warrants. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
Industrial Development Bonds. Certain Funds may invest in industrial develop-
ment bonds (private activity bonds). Industrial development bonds are a spe-
cific type of revenue bond backed by the credit and security of a private user,
the interest from which would be an item of tax preference when distributed by
a Fund as "exempt-interest dividends" to shareholders under the AMT.
44
<PAGE>
APPENDIX A
Other Municipal Obligation Policies. Certain Funds may invest 25% or more of
the value of their respective total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting one municipal obligation would also affect the other municipal
obligation. For example, a Fund may invest all of its assets in (a) municipal
obligations the interest of which is paid solely from revenues from 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 obligations whose issuers are in the same
state; or (c) industrial development obligations. Concentration of a Fund's
investments in these municipal obligations will subject the Fund, to a greater
extent than if such investment was not so concentrated, to the risks of adverse
economic, business or political developments affecting the particular state,
industry or other area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and are gener-
ally not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
Custodial Receipts. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
Other Investment Companies. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of
45
<PAGE>
any other investment company, and a prohibition on investing more than 5% of a
Fund's total assets in securities of any one investment company or more than
10% of its total assets in securities of all investment companies. A Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Such other investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the acquiring Fund and will be subject to substantially the
same risks.
Floating and Variable Rate Obligations. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
When-Issued Securities and Forward Commitments. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring the securities for its portfolio, a Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment Adviser
deems it appropriate.
46
<PAGE>
APPENDIX A
Illiquid Securities. Each Fund may invest up to 10% of its net assets in
illiquid securities which cannot be disposed of in seven days in the ordinary
course of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain municipal leases and participation interests
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of more
than seven days
. Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is
otherwise eligible for resale pursuant to Rule 144A under the Securities Act
of 1933.
Investing in restricted securities may decrease the liquidity of a Fund's
portfolio.
Borrowings. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the
Additional Statement.
Downgraded Securities. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
47
<PAGE>
Special Risks and Policies Applicable to the Tax-Exempt Funds:
Fundamental Policies. As a matter of fundamental policy, at least 80% of each
of the net assets of each of the Tax-Exempt Diversified, Tax-Exempt California
and Tax-Exempt New York Portfolios will ordinarily be invested in municipal
obligations, the interest from which is, in the opinion of bond counsel, if
any, excluded from gross income for federal income tax purposes. In addition,
as a matter of fundamental policy, at least 65% of each of the Tax-Exempt Cali-
fornia and Tax-Exempt New York Portfolio's total assets will be invested in
California and New York municipal obligations, except in extraordinary circum-
stances.
For these purposes, California and New York municipal obligations are obliga-
tions issued by or on behalf of the State of California or the State of New
York, respectively, and their respective political subdivisions, agencies and
instrumentalities and the government of Puerto Rico, the U.S. Virgin Islands
and Guam, the interest from which is excluded from gross income for federal
income tax purposes and is exempt from California State personal income tax or
New York State and New York City personal income tax. Each Tax-Exempt Fund may
temporarily invest in taxable money market instruments or, in the case of the
Tax-Exempt California and New York Portfolios, in municipal obligations that
are not California or New York municipal obligations, respectively, when
acceptable California and New York municipal obligations are not available or
when the Investment Adviser believes that the market conditions dictate a
defensive posture. Investments in taxable money market instruments will be lim-
ited to those meeting the quality standards of each Tax-Exempt Fund. The Tax-
Exempt California and Tax-Exempt New York Portfolios' distributions of interest
from municipal obligations other than California and New York municipal obliga-
tions, respectively, may be subject to California and New York State and New
York City personal income taxes.
Risks of Investing in California and New York: The Tax-Exempt California and
Tax-Exempt New York Portfolios concentrate their investments in California and
New York municipal obligations. Consequently, these Funds are more susceptible
to factors adversely affecting issuers of California and New York municipal
obligations, and may be riskier than comparable municipal bond funds and money
market funds that do not emphasize these issuers to this degree.
The Tax-Exempt California Portfolio's investments can be affected by political
and economic developments within the State of California (the "State"), and by
the financial condition of the State, its public authorities and political sub-
divisions. After suffering a severe recession in the early 1990's which caused
the State to experience financial difficulties, California's economy entered a
sustained recovery since late 1993. The State's budget has returned to a posi-
tive balance and is generating substantial surpluses. California's long-term
credit rating has been raised after being reduced
48
<PAGE>
APPENDIX A
during the recession. To respond to its own revenue shortfalls during the
recession, the State reduced assistance to its public authorities and political
subdivisions. Cutbacks in state aid could further adversely affect the finan-
cial condition of cities, counties and education districts which are subject to
their own fiscal constraints. California voters in the past have passed amend-
ments to the California Constitution and other measures that limit the taxing
and spending authority of California governmental entities, and future voter
initiatives could result in adverse consequences affecting California municipal
obligations. Also, the ultimate fiscal effect of federally-mandated reform of
welfare programs on the State and its local governments is still to be
resolved.
These factors, among others (including the outcome of related pending litiga-
tion), could reduce the credit standing of certain issuers of California munic-
ipal obligations. A more detailed discussion of the risks of investing in Cali-
fornia is included in the Additional Statement.
The Tax-Exempt New York Portfolio's investments will be affected by political
and economic developments within the State of New York (the "State"), and by
the financial conditions of the State, its public authorities and political
subdivisions, particularly the City of New York (the "City"). The State and the
City face long-term economic problems that could seriously affect their ability
and that of other issuers of New York municipal obligations to meet their
financial obligations. Certain substantial issuers of New York municipal obli-
gations (including issuers whose obligations may be acquired by the Fund) have,
at times, experienced serious financial difficulties. Strong demand for New
York municipal obligations has also at times had the effect of permitting New
York municipal obligations to be issued with yields relatively lower, and after
issuance, to trade in the market at prices relatively higher, than comparably
rated municipal obligations issued by other jurisdictions. A recurrence of the
financial difficulties previously experienced by certain issuers of New York
municipal obligations could result in defaults or declines in the market values
of those issuers' existing obligations and, possibly, in the obligations of
other issuers of New York municipal obligations. Although as of April 1, 2000
no issuers were in default with respect to the payment of their New York munic-
ipal obligations, the occurrence of any such default could materially affect
adversely the market values and marketability of all New York municipal obliga-
tions and, consequently, the value of the Fund's holdings. A more detailed dis-
cussion of the risks of investing in New York is included in the Additional
Statement.
If California, New York, or any of their local governmental entities are unable
to meet their financial obligations, the corresponding Fund's income, NAV,
ability to preserve or realize appreciation of capital or liquidity could be
adversely affected. Also, neither of these Funds is a diversified fund under
the Act (except to the extent
49
<PAGE>
that diversification is required by Rule 2a-7 or for federal income tax purpos-
es). Because they may invest a larger percentage of their assets in the securi-
ties of fewer issuers than do diversified funds, these Funds may be exposed to
greater risk in that an adverse change in the condition of one or a small num-
ber of issuers would have a greater impact on them.
50
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51
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in a Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Arthur Andersen LLP, whose report, along with a
Fund's financial statements, is included in the Fund's annual report (available
upon request without charge).
PRIME OBLIGATIONS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - ILA B units 1.00 0.04 (0.04)
1999 - ILA C units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - ILA B units 1.00 0.04 (0.04)
1998 - ILA C units 1.00 0.04 (0.04)
1998 - Cash Management shares
(commenced May 1) 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
1997 - ILA B units 1.00 0.04 (0.04)
1997 - ILA C units (commenced
August 15) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
1996 - ILA B units (commenced
May 8) 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
52
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.90% $1,095,109 0.43% 4.79% 0.43% 4.79%
1.00 4.74 40,850 0.58 4.65 0.58 4.65
1.00 4.48 92,975 0.83 4.33 0.83 4.33
1.00 3.86 19,444 1.43 3.83 1.43 3.83
1.00 3.86 7,436 1.43 3.76 1.43 3.76
1.00 4.30 1 1.00 4.44 1.43 4.01
- --------------------------------------------------------------------------------------
1.00 5.32 837,185 0.43 5.19 0.43 5.19
1.00 5.16 38,836 0.58 5.05 0.58 5.05
1.00 4.90 119,309 0.83 4.79 0.83 4.79
1.00 4.27 14,412 1.43 4.07 1.43 4.07
1.00 4.27 6,814 1.43 4.13 1.43 4.13
1.00 4.69/c/ 2 0.93/c/ 4.81/c/ 1.43/c/ 4.31/c/
- --------------------------------------------------------------------------------------
1.00 5.38 866,445 0.42 5.24 0.43 5.23
1.00 5.22 28,110 0.57 5.11 0.58 5.10
1.00 4.96 78,316 0.82 4.85 0.83 4.84
1.00 4.33 1,574 1.42 4.33 1.43 4.32
1.00 4.41/c/ 1,897 1.42/c/ 4.39/c/ 1.43/c/ 4.38/c/
- --------------------------------------------------------------------------------------
1.00 5.22 1,154,787 0.41 5.11 0.43 5.09
1.00 5.06 23,738 0.56 4.97 0.58 4.95
1.00 4.80 84,707 0.81 4.74 0.83 4.72
1.00 3.97/c/ 346 1.41/c/ 4.09/c/ 1.43/c/ 4.07/c/
- --------------------------------------------------------------------------------------
1.00 5.79 1,261,251 0.41 5.66 0.43 5.64
1.00 5.63 63,018 0.56 5.51 0.58 5.49
1.00 5.37 227,233 0.81 5.22 0.83 5.20
- --------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - Cash Management shares
(commenced May 1) 1.00 0.03 (0.03)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.92% $1,346,765 0.41% 4.80% 0.41% 4.80%
1.00 4.76 6,961 0.56 4.64 0.56 4.64
1.00 4.50 383,932 0.81 4.42 0.81 4.42
1.00 4.32 2 0.98 4.37 1.41 3.94
- ---------------------------------------------------------------------------------------
1.00 5.33 1,350,317 0.40 5.17 0.43 5.14
1.00 5.17 314,327 0.55 5.04 0.58 5.01
1.00 4.91 32,349 0.80 4.79 0.83 4.76
1.00 4.69/c/ 2 0.90/c/ 4.80/c/ 1.43/c/ 4.27/c/
- --------------------------------------------------------------------------------------
1.00 5.43 806,096 0.37 5.31 0.42 5.26
1.00 5.28 307,480 0.52 5.15 0.57 5.10
1.00 5.01 20,517 0.77 4.90 0.82 4.85
- --------------------------------------------------------------------------------------
1.00 5.27 703,097 0.36 5.15 0.43 5.08
1.00 5.12 257,258 0.51 5.00 0.58 4.93
1.00 4.86 28,845 0.76 4.75 0.83 4.68
- --------------------------------------------------------------------------------------
1.00 5.85 574,155 0.36 5.71 0.42 5.65
1.00 5.69 164,422 0.51 5.55 0.57 5.49
1.00 5.43 23,080 0.76 5.29 0.82 5.23
- --------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
TREASURY OBLIGATIONS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ unitholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.04 (0.04)
1999 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.63% $404,299 0.42% 4.50% 0.42% 4.50%
1.00 4.48 42,334 0.57 4.35 0.57 4.35
1.00 4.22 264,787 0.82 4.19 0.82 4.19
- --------------------------------------------------------------------------------------
1.00 5.15 734,553 0.42 4.96 0.43 4.95
1.00 4.99 80,464 0.57 4.88 0.58 4.87
1.00 4.73 35,432 0.82 4.67 0.83 4.66
- --------------------------------------------------------------------------------------
1.00 5.26 590,381 0.42 5.12 0.42 5.12
1.00 5.10 124,159 0.57 4.99 0.57 4.99
1.00 4.84 104,133 0.82 4.73 0.82 4.73
- --------------------------------------------------------------------------------------
1.00 5.11 574,734 0.41 4.98 0.43 4.96
1.00 4.95 108,850 0.56 4.83 0.58 4.81
1.00 4.69 123,483 0.81 4.59 0.83 4.57
- --------------------------------------------------------------------------------------
1.00 5.73 711,209 0.41 5.51 0.43 5.49
1.00 5.57 92,643 0.56 5.37 0.58 5.35
1.00 5.31 119,692 0.81 5.11 0.83 5.09
- --------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
TREASURY INSTRUMENTS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ unitholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.04 $(0.04)
1999 - ILA Administration units 1.00 0.04 (0.04)
1999 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.38% $224,609 0.43% 4.29% 0.43% 4.29%
1.00 4.22 32,162 0.58 4.09 0.58 4.09
1.00 3.96 306,483 0.83 3.90 0.83 3.90
- ------------------------------------------------------------------------------------
1.00 4.96 341,476 0.30 4.83 0.43 4.70
1.00 4.80 131,685 0.45 4.68 0.58 4.55
1.00 4.54 374,128 0.70 4.43 0.83 4.30
- ------------------------------------------------------------------------------------
1.00 5.17 330,241 0.22 5.02 0.42 4.82
1.00 5.01 98,667 0.37 4.88 0.57 4.68
1.00 4.75 295,404 0.62 4.63 0.82 4.43
- ------------------------------------------------------------------------------------
1.00 5.10 708,999 0.21 4.96 0.43 4.74
1.00 4.95 137,706 0.36 4.82 0.58 4.60
1.00 4.68 383,901 0.61 4.56 0.83 4.34
- ------------------------------------------------------------------------------------
1.00 5.70 586,294 0.21 5.50 0.44 5.27
1.00 5.54 68,713 0.36 5.34 0.59 5.11
1.00 5.28 123,254 0.61 5.00 0.84 4.77
- ------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - Cash Management shares (commenced
May 1) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
60
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.77% $205,244 0.43% 4.64% 0.45% 4.62%
1.00 4.61 3,265 0.58 4.42 0.60 4.40
1.00 4.35 79,847 0.83 4.24 0.85 4.22
1.00 4.18 153 1.00 4.68 1.45 4.23
- ------------------------------------------------------------------------------------
1.00 5.21 383,243 0.43 5.09 0.45 5.07
1.00 5.05 7,692 0.58 4.94 0.60 4.92
1.00 4.79 105,732 0.83 4.67 0.85 4.65
1.00 4.57/c/ 2 0.93/c/ 4.60/c/ 1.45/c/ 4.08/c/
- ------------------------------------------------------------------------------------
1.00 5.31 460,457 0.42 5.16 0.42 5.16
1.00 5.15 10,192 0.57 4.98 0.57 4.98
1.00 4.89 83,799 0.82 4.78 0.82 4.78
- ------------------------------------------------------------------------------------
1.00 5.15 694,651 0.41 5.04 0.44 5.01
1.00 4.99 36,055 0.56 4.89 0.59 4.86
1.00 4.73 94,228 0.81 4.63 0.84 4.60
- ------------------------------------------------------------------------------------
1.00 5.77 570,469 0.41 5.62 0.43 5.60
1.00 5.62 47,558 0.56 5.49 0.58 5.47
1.00 5.35 85,401 0.81 5.19 0.83 5.17
- ------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
FEDERAL PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ unitholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
62
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.81% $3,171,330 0.41% 4.72% 0.41% 4.72%
1.00 4.66 836 0.56 4.46 0.56 4.46
1.00 4.39 284,382 0.81 4.30 0.81 4.30
- ------------------------------------------------------------------------------------
1.00 5.25 2,625,705 0.34 5.10 0.42 5.02
1.00 5.09 508,297 0.49 4.97 0.57 4.89
1.00 4.83 53,994 0.74 4.71 0.82 4.63
- ------------------------------------------------------------------------------------
1.00 5.40 2,050,559 0.27 5.26 0.41 5.12
1.00 5.24 530,001 0.42 5.11 0.56 4.97
1.00 4.98 34,540 0.67 4.83 0.81 4.69
- ------------------------------------------------------------------------------------
1.00 5.24 2,303,677 0.26 5.13 0.43 4.96
1.00 5.09 794,537 0.41 4.98 0.58 4.81
1.00 4.83 192,416 0.66 4.73 0.83 4.56
- ------------------------------------------------------------------------------------
1.00 5.83 1,731,935 0.26 5.69 0.42 5.53
1.00 5.67 516,917 0.41 5.50 0.57 5.34
1.00 5.41 102,576 0.66 5.22 0.82 5.06
- ------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
TAX-EXEMPT DIVERSIFIED PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.03 (0.03)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.03 (0.03)
1998 - Cash Management shares (commenced
May 1) 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
1996 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.04 (0.04)
1995 - ILA Administration units 1.00 0.04 (0.04)
1995 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
64
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.89% $1,734,623 0.42% 2.85% 0.42% 2.85%
1.00 2.73 28,084 0.57 2.66 0.57 2.66
1.00 2.48 20,991 0.82 2.41 0.82 2.41
1.00 2.30 2 0.99 2.51 1.42 2.08
- ------------------------------------------------------------------------------------
1.00 3.17 1,562,285 0.35 3.12 0.41 3.06
1.00 3.02 26,509 0.50 2.98 0.56 2.92
1.00 2.76 37,850 0.75 2.72 0.81 2.66
1.00 2.61/c/ 2 0.85/c/ 2.66/c/ 1.41/c/ 2.10/c/
- ------------------------------------------------------------------------------------
1.00 3.39 1,479,486 0.32 3.33 0.41 3.24
1.00 3.23 27,967 0.47 3.16 0.56 3.07
1.00 2.97 30,513 0.72 2.97 0.81 2.88
- ------------------------------------------------------------------------------------
1.00 3.25 1,514,443 0.31 3.20 0.41 3.10
1.00 3.09 59,097 0.46 3.06 0.56 2.96
1.00 2.84 28,921 0.71 2.79 0.81 2.69
- ------------------------------------------------------------------------------------
1.00 3.72 1,342,585 0.31 3.65 0.42 3.54
1.00 3.57 48,773 0.46 3.51 0.57 3.40
1.00 3.31 49,647 0.71 3.24 0.82 3.13
- ------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
TAX-EXEMPT CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distribution
beginning investment to unit/
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.02 (0.02)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.02 (0.02)
1998 - Cash Management shares (commenced
May 1) 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units (Re-commenced
September 1) 1.00 0.01 (0.01)
- -------------------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
1995 - ILA units 1.00 0.03 (0.03)
1995 - ILA Administration units 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
66
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net
assets at Ratio of net Ratio of net
Net asset end Ratio of net investment Ratio of net investment
value at of period expenses to income to expenses to income to
end Total (in average net average net average net average net
of period return/b/ 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.60% $895,469 0.42% 2.58% 0.42% 2.58%
1.00 2.45 8,910 0.57 2.38 0.57 2.38
1.00 2.19 27,229 0.82 2.39 0.82 2.39
1.00 2.02 1 0.99 2.15 1.42 1.72
- -----------------------------------------------------------------------------------
1.00 2.84 584,615 0.41 2.79 0.41 2.79
1.00 2.68 512 0.56 2.84 0.56 2.84
1.00 2.43 2 0.81 2.48 0.81 2.48
1.00 2.25/c/ 2 0.91/c/ 2.37/c/ 1.41/c/ 1.87/c/
- -----------------------------------------------------------------------------------
1.00 3.15 591,003 0.42 3.10 0.42 3.10
1.00 3.00 360 0.57 2.98 0.57 2.98
1.00 2.87/c/ 2 0.82/c/ 2.90/c/ 0.82/c/ 2.90/c/
- -----------------------------------------------------------------------------------
1.00 3.03 440,476 0.41 2.99 0.42 2.98
1.00 2.88 142 0.56 2.84 0.57 2.83
- -----------------------------------------------------------------------------------
1.00 3.55 346,728 0.41 3.49 0.41 3.49
1.00 3.40 61 0.56 3.32 0.56 3.32
- -----------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
TAX-EXEMPT NEW YORK PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.03 (0.03)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- -----------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.03 (0.03)
1998 - Cash Management
shares (commenced May 1) 1.00 0.02 (0.02)
- -----------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units (commenced
September 15) 1.00 0.01 (0.01)
- -----------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
- -----------------------------------------------------------------------
1995 - ILA units 1.00 0.03 (0.03)
1995 - ILA Administration units 1.00 0.03 (0.03)
- -----------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
68
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of Ratio of net
Net asset assets at Ratio of net investment net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.76% $160,301 0.43% 2.73% 0.44% 2.72%
1.00 2.60 37,836 0.58 2.61 0.59 2.60
1.00 2.35 2 0.83 2.29 0.84 2.28
1.00 2.17 2 1.00 2.34 1.44 1.90
- -----------------------------------------------------------------------------------
1.00 3.02 122,550 0.36 2.96 0.51 2.81
1.00 2.87 21,580 0.51 2.85 0.66 2.70
1.00 2.61 2 0.76 2.61 0.91 2.46
1.00 2.46/c/ 1 0.86/c/ 2.56/c/ 1.51/c/ 1.91/c/
- -----------------------------------------------------------------------------------
1.00 3.29 102,887 0.33 3.24 0.43 3.14
1.00 3.14 31,993 0.48 3.09 0.58 2.99
1.00 3.02/c/ 2 0.73/c/ 3.04/c/ 0.83/c/ 2.94/c/
- -----------------------------------------------------------------------------------
1.00 3.05 70,175 0.32 3.01 0.43 2.90
1.00 2.90 44,319 0.47 2.88 0.58 2.77
- -----------------------------------------------------------------------------------
1.00 3.51 90,537 0.30 3.44 0.44 3.30
1.00 3.35 26,724 0.45 3.28 0.59 3.14
- -----------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
Index
<TABLE>
<C> <C> <S>
1 General Investment
Management Approach
5 Fund Investment
Objectives
and Strategies
10 Principal Risks of
the Funds
14 Fund Performance
24 Fund Fees
and Expenses
27 Service Providers
29 Dividends
</TABLE>
<TABLE>
<C> <C> <S>
30 Shareholder Guide
30 How to Buy Shares
34 How to Sell Shares
39 Taxation
40 Appendix A
Additional Information
On Portfolio Risks,
Securities And
Techniques
52 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Institutional Liquid Assets Prospectus (ILA Service Units)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of Fund
documents, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request to:
[email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
1 The Funds' investment company registration number is 811-5349.
ILAPROSVCMM
<PAGE>
Prospectus
GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS
ILA Service,
ILA Class B
and Class C
("Units" or
"Shares")
May 1, 2000
Prime
Obligations
Portfolio
. ILA Service
("Units" or
"Shares"),
. ILA Class B
and Class C
("Units" or
"Shares")
Tax-Exempt
Diversified
Portfolio
. ILA Service
("Units" or
"Shares")
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
[GRAPHIC]
<PAGE>
NOT FDIC-Insured May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Institutional Liquid Assets Portfolios (the "Funds"). GSAM is
referred to in this Prospectus as the "Investment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek the preservation of capital,
daily liquidity and maximum current income. With each Fund the Investment
Adviser follows a conservative, risk-managed investment process that seeks
to:
.Manage credit risk
.Manage interest rate risk
.Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1.Managing Credit Risk
The Investment Adviser's process for managing risk emphasizes:
.Intensive research--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as
well as the Investment Research, Legal and Compliance departments of
Goldman Sachs.
.Timely updates--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio
management team via computer link.
The Result: An "approved" list of high-quality credits--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2. Managing Interest Rate Risk
Three main steps are followed in seeking to manage interest rate risk:
.Establish weighted average maturity (WAM) target--WAM (the weighted average
time until the yield of a portfolio reflects any changes in the current
interest rate environment) is constantly revisited and adjusted as market
conditions change. An overall strategy is developed by the portfolio
management team based on insights gained from weekly meetings with both
Goldman Sachs economists and economists from outside the firm.
.Implement optimum portfolio structure--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
.Conduct rigorous analysis of new securities--The Investment Adviser's five-
step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for
money market mutual funds.
3. Managing Liquidity
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
.Each Fund's clients and factors that influence their asset volatility;
.Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
.Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC Financial Data Universal
Averages. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
.The Funds: Each Fund's securities are valued by the amortized cost method
as permitted by Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "Act"). Under Rule 2a-7, each Fund may invest only in U.S.
dollar-denominated securities that are determined to present minimal credit
risk and meet certain other criteria, including those conditions relating
to maturity, diversification and credit quality. These operating policies
may be more restrictive than the fundamental policies set forth in the
Statement of Additional Information (the "Additional Statement").
.Taxable Fund: Prime Obligations Portfolio
.Tax-Exempt Fund: Tax-Exempt Diversified Portfolio
.The Investors: The Funds are designed for investors seeking a high rate of
return, a stable net asset value ("NAV") and convenient liquidation privi-
leges.
.NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
.Maximum Remaining Maturity of Portfolio Investments: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
.Dollar-Weighted Average Portfolio Maturity ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
.Investment Restrictions: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions"
in the Additional Statement. Fundamental investment restrictions and the
investment objective of a Fund cannot be changed without approval of a
majority of the outstanding shares of that Fund. All investment policies
not specifically designated as fundamental are non-fundamental and may be
changed without shareholder approval.
.Diversification: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of
the value of its total assets at the time of purchase in the securities of
any single issuer except that each Fund may invest up to 25% of its total
assets in the securities of a single issuer for up to three business days.
These limitations do not apply to cash, certain repurchase agreements, U.S.
Government Securities (as defined in Appendix A) or securities of other
investment companies. In addition, securities subject to certain uncondi-
tional guarantees and securities that are not "First Tier Securities" as
defined by the SEC are subject to different diversification requirements as
described in the Additional Statement.
3
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
Taxable Fund:
The Prime Obligations Portfolio seeks to maximize current income to the
extent consistent with the preservation of capital and the maintenance of
liquidity by investing exclusively in high quality money market instruments.
The Prime Obligations Portfolio pursues its investment objective by invest-
ing in U.S. Government Securities, obligations of U.S. banks, commercial
paper and other short-term obligations of U.S. companies, states, municipal-
ities and other entities and repurchase agreements.
Tax-Exempt Fund:
The Tax-Exempt Diversified Portfolio seeks to provide shareholders, to the
extent consistent with the preservation of capital and prescribed portfolio
standards, with a high level of income exempt from federal income tax by
investing primarily in municipal instruments.
As a matter of fundamental policy, at least 80% of the net assets of the
Tax-Exempt Diversified Portfolio will ordinarily be invested in securities
issued by or on behalf of states, territories, and possessions of the United
States and their political subdivisions, agencies, authorities and instru-
mentalities, and the District of Columbia, the interest from which, if any,
is, in the opinion of bond counsel excluded from gross income for federal
income tax purposes, and not an item of tax preference under the federal
alternative minimum tax ("AMT").
4
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences between the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
Prime Tax-Exempt
Obligations Diversified
Portfolio Portfolio
-----------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Obligations ./1/
-----------------------------------------------------------------------------
U.S. Government Securities .
-----------------------------------------------------------------------------
Bank Obligations .
U.S. banks
only/2/
-----------------------------------------------------------------------------
Commercial Paper . .
Tax-exempt only
-----------------------------------------------------------------------------
Short-Term Obligations of Corporations .
and Other Entities U.S. entities
only
-----------------------------------------------------------------------------
Repurchase Agreements .
-----------------------------------------------------------------------------
Asset-Backed and Receivables-Backed .
Securities/3/
-----------------------------------------------------------------------------
Taxable Municipals ./4/
-----------------------------------------------------------------------------
Tax-Exempt Municipals .
At least 80% of net
assets in tax-
exempt municipal
obligations (except
in extraordinary
circumstances)/5/
-----------------------------------------------------------------------------
Custodial Receipts . .
-----------------------------------------------------------------------------
Unrated Securities/6/ . .
-----------------------------------------------------------------------------
Investment Companies . .
Up to 10% of Up to 10% of total
total assets assets in other
in other investment
investment companies
companies
-----------------------------------------------------------------------------
Private Activity Bonds . .
(Does not intend to
invest)/7/
-----------------------------------------------------------------------------
Credit Quality/6/ First Tier/8/ First Tier/8/ or
Second Tier/9/
-----------------------------------------------------------------------------
Summary of Taxation for Taxable federal Tax-exempt federal
Distributions/10/ and state/11/ and taxable
state/12/
-----------------------------------------------------------------------------
Miscellaneous Reverse Reverse repurchase
repurchase agreements not
agreements not permitted. May (but
permitted does not currently
intend to) invest
up to 20% in AMT
securities and may
temporarily invest
in the taxable
money market
instruments
described herein
-----------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
4 Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
5 Ordinarily expect that 100% of the Fund's portfolio securities will be
invested in municipal obligations, but the Fund may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
6 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality
to First Tier Securities, or to the extent that a Fund may purchase
Second Tier Securities, comparable in quality to Second Tier Securities.
In addition, a Fund holding a security supported by a guarantee or demand
feature may rely on the credit quality of the guarantee or demand feature
in determining the credit quality of the investment.
7 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of the Fund's net assets under normal market conditions.
No more than 25% of the value of the Fund's total assets may be invested
in industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
8 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
9 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
10 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
11 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities
interest income.
12 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
6
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Prime Tax-Exempt
. Applicable Obligations Diversified
- -- Not Applicable Portfolio Portfolio
- ------------------------------------------------------------
<S> <C> <C>
NAV . .
- ------------------------------------------------------------
Interest Rate . .
- ------------------------------------------------------------
Credit/Default . .
- ------------------------------------------------------------
Liquidity . .
- ------------------------------------------------------------
U.S. Government Securities . --
- ------------------------------------------------------------
Concentration -- .
- ------------------------------------------------------------
Tax -- .
- ------------------------------------------------------------
</TABLE>
Risks that apply to each Fund:
.NAV Risk--The risk that a Fund will not be able to maintain a NAV per share of
$1.00 at all times.
.Interest Rate Risk--The risk that during periods of rising interest rates, a
Fund's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a Fund's
yield will tend to be higher.
.Credit/Default Risk--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase agree-
ment, may default on its payment obligations. In addition, with respect to the
Tax-Exempt Diversified Portfolio, risk of loss from payment default may also
exist where municipal instruments are backed by foreign letters of credit or
guarantees.
.Liquidity Risk--The risk that a Fund will be unable to pay redemption proceeds
within the time period stated in this Prospectus, because of unusual market
conditions, an unusually high volume of redemption requests, or other reasons.
7
<PAGE>
Risk that applies to the Prime Obligations Portfolio:
.U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government, agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Tax-Exempt Diversified Portfolio:
.Concentration Risk--The risk that if the Fund invests more than 25% of its
total assets in issuers within the same state, industry or economic sector, an
adverse economic, business or political development may affect the value of
the Fund's investments more than if its investments were not so concentrated.
.Tax Risk--The risk that future legislative or administrative changes or court
decisions may materially affect the ability of the Fund to pay federal tax-
exempt dividends. This Fund would not be a suitable investment for IRAs, other
tax-exempt or tax deferred accounts or for other investors who are not sensi-
tive to the federal, state or local tax consequences of these investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
8
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of the Funds' Serv-
ice Shares from year to year; and (b) the average annual returns of the
Funds' Service Shares and the Prime Obligation Portfolio's Class B and C
Shares. Investors should be aware that the fluctuation of interest rates is
one primary factor in performance volatility. The bar chart and table assume
reinvestment of dividends and distributions. A Fund's past performance is
not necessarily an indication of how the Fund will perform in the future.
The average annual total return reflects the assumed contingent deferred
sales charge ("CDSC") for Class B Shares (5% maximum declining to 0% after
six years) and the assumed CDSC for Class C Shares (1% if redeemed within 12
months of purchase). Service Shares are not subject to any initial sales
charge or CDSC. Performance reflects expense limitations in effect. If
expense limitations were not in place, a Fund's performance would have been
reduced. You may obtain a Fund's current yield by calling 1-800-621-2550.
9
<PAGE>
Prime Obligations Portfolio
TOTAL RETURN CALENDAR YEAR (Service Shares)
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.61%
Worst Quarter
Q2 '93 0.62%
[CHART]
1991 5.67%
1992 3.35%
1993 2.56%
1994 3.66%
1995 5.37%
1996 4.80%
1997 4.96%
1998 4.90%
1999 4.48%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
------------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 6/1/90) 4.48% 4.90% 4.61%
------------------------------------------------------------------------
Class B (Inception 5/8/96)
Including CDSC -1.34% N/A 3.27%
------------------------------------------------------------------------
Class C (Inception 8/15/97)
Including CDSC 2.82% N/A 4.12%
------------------------------------------------------------------------
</TABLE>
10
<PAGE>
FUND PERFORMANCE
Tax-Exempt Diversified Portfolio
TOTAL RETURN CALENDAR YEAR (Service Shares)
- --------------------------------------------------------------------------------
Best Quarter
Q1 '91 1.03%
Worst Quarter
Q1 '94 0.42%
[CHART]
1991 3.91%
1992 2.42%
1993 1.84%
1994 2.30%
1995 3.31%
1996 2.84%
1997 2.97%
1998 2.76%
1999 2.48%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 7/2/90) 2.48% 2.87% 2.89%
-------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Fund Fees and Expenses
(Service, Class B and Class C Shares)
This table describes the fees and expenses that you would pay if you buy and
hold ILA Service, Class B or Class C Shares of a Fund.
<TABLE>
<CAPTION>
Prime Tax-Exempt
Obligations Diversified
Portfolio Portfolio
----------------------------------------------------- -------------
(ILA Service) (ILA Class B/+/) (ILA Class C/+/) (ILA Service)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Fees
(fees paid directly from your
investment):
Maximum Sales Charge (Load) Imposed
on Purchases None None None None
Maximum Deferred Sales Charge (Load)/1/ None 5.0%/2/ 1.0%/3/ None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends None None None None
Redemption Fees/4/ None None None None
Exchange Fees/4/ None None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/5/
Management Fees 0.35% 0.35% 0.35% 0.35%
Class B and C Distribution and
Service (12b-1) Fees None 1.00% 1.00% None
Service Fees/6/ 0.40% None None 0.40%
Other Expenses/7/ 0.08% 0.08% 0.08% 0.07%
- --------------------------------------------------------- ---------------------------------------
Total Fund Operating Expenses/8/ 0.83% 1.43% 1.43% 0.82%
- --------------------------------------------------------- ---------------------------------------
</TABLE>
/+/Investors wishing to purchase shares of the Prime Obligations Portfolio are
generally required to purchase ILA Service Shares. ILA Class B and Class C
Shares of the Prime Obligations Portfolio will typically be in exchange for
Class B or Class C Shares, respectively, of another Goldman Sachs Fund.
/1/The maximum CDSC is a percentage of the lesser of the NAV at the time of
redemption or the NAV when the shares were originally purchased.
/2/A CDSC is imposed upon Class B Shares redeemed within six years of purchase
(or initial investment in a Goldman Sachs Fund from which an exchange is made)
at a rate of 5% in the first year, declining to 1% in the sixth year, and elim-
inated thereafter.
/3/A CDSC of 1% is imposed on Class C Shares redeemed within 12 months of pur-
chase (or initial investment in a Goldman Sachs Fund from which an exchange is
made).
/4/A transaction fee of $7.50 may be charged for redemption proceeds paid by
wire. In addition to free reinvestments of dividends and distributions in
shares of other Goldman Sachs Funds and free automatic exchanges pursuant to
the Automatic Exchange Program, six free exchanges are permitted in each
12-month period. A fee of $12.50 may be charged for each subsequent exchange
during such period.
/5/The Funds' annual operating expenses are based on actual expenses.
/6/Service Organizations may charge other Fees directly to their customers who
are the beneficial owners of ILA Service Shares in connection with their cus-
tomers' accounts. Such fees may affect the return such customers realize with
respect to their investments.
/7/"Other Expenses" include transfer agency fees equal to 0.04% of the average
daily net assets of each class plus all other ordinary expenses not detailed
above.
/8/The Investment Adviser has voluntarily agreed to reduce or limit "Total Fund
Operating Expenses" of each Fund (excluding distribution fees, service fees,
taxes, interest and brokerage fees and litigation, indemnification and other
extraordinary expenses) to 0.43% of a Fund's average daily net assets. The
expense limitation may be terminated at any time at the option of the Invest-
ment Adviser with the approval of the Trustees. If this occurs, "Other
Expenses" and "Total Fund Operating Expenses" may increase without shareholder
approval.
12
<PAGE>
FUND FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the expense limitations) with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in Service, Class B
or Class C Shares of a Fund, for the time periods indicated and then redeem all
of your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that a Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations
ILA Service Shares $ 85 $265 $460 $1,025
ILA Class B Shares*
- Assuming complete redemption at end of period $646 $752 $982 $1,550
- Assuming no redemption $146 $452 $782 $1,550
ILA Class C Shares
- Assuming complete redemption at end of period $246 $452 $782 $1,713
- Assuming no redemption $146 $452 $782 $1,713
- --------------------------------------------------------------------------------
Tax-Exempt Diversified
ILA Service Shares $ 84 $262 $455 $1,014
- --------------------------------------------------------------------------------
</TABLE>
*ILA Class B Shares convert to ILA Service Shares eight years after purchase;
therefore, ILA Class B expenses in the hypothetical example above assume this
conversion.
Service Organizations that invest in Service Shares on behalf of their custom-
ers may charge other fees directly to their customer accounts in connection
with their investments. You should contact your Service Organization for infor-
mation regarding such charges. Such fees, if any, may affect the return such
customers realize with respect to their investment.
Certain institutions may receive other compensation in connection with the sale
and distribution of shares or for services to their customers' accounts and/or
the Funds. For additional information regarding such compensation, see "Share-
holder Guide" in the Prospectus and "Other Information" in the Additional
Statement.
13
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the Invest-
ment Adviser, merged into The Goldman Sachs Group, Inc. as a result of an
initial public offering. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser also performs the following serv-
ices for the Funds:
.Continually manages each Fund, including the purchase, retention and
disposition of securities and other assets
.Administers each Fund's business affairs
.Performs various recordholder servicing functions (to the extent not
provided by other organizations)
Pursuant to an SEC order, the Prime Obligations Portfolio may enter into
principal transactions in certain taxable money market instruments, includ-
ing repurchase agreements, with Goldman Sachs.
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate For the
Fiscal Year Ended
Fund Contractual Rate December 31, 1999
-------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt Diversified 0.35% 0.35%
-------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
14
<PAGE>
SERVICE PROVIDERS
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent ( the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
15
<PAGE>
Dividends
All or substantially all of each Fund's net investment income will be
declared as a dividend daily. Dividends will normally, but not always, be
declared as of 4:00 p.m. New York time as a dividend and distributed month-
ly. You may choose to have dividends paid in:
.Cash
.Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may
be submitted in writing to Goldman Sachs at any time. If you do not indicate
any choice, dividends and distributions will be reinvested automatically in
the applicable Fund.
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of
each month. Net short-term capital gains, if any, will be distributed in
accordance with federal income tax requirements and may be reflected in a
Fund's daily distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid exces-
sive fluctuations in the amount of monthly capital gains distributions, a
portion of any net capital gains realized on the disposition of securities
during the months of November and December may be distributed during the
subsequent calendar year. Although realized gains and losses on the assets
of a Fund are reflected in the NAV of the Fund, they are not expected to be
of an amount which would affect the Fund's NAV of $1.00 per share.
16
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' shares.
HOW TO BUY SHARES
How Can I Purchase Shares Of The Funds?
Each Fund offers Service Shares, and the Prime Obligations Portfolio also
offers Class B and Class C Shares. You may purchase shares on any business
day at their NAV next determined after receipt of an order in proper form by
State Street Bank and Trust Company ("State Street") as agent for Goldman
Sachs or certain authorized institutions ("Authorized Dealers"). No sales
load is charged.
Service Shares may be purchased through Goldman Sachs acting as a Service
Organization or through Authorized Dealers. Class B and Class C Shares may
be purchased through Goldman Sachs or through Authorized Dealers. Class B
and Class C Shares will typically be issued only upon an exchange of Class B
and Class C Shares of another equity or bond fund of the Goldman Sachs Trust
(the "Trust") or to accounts that intend to systematically exchange such
shares for Class B or Class C Shares of other Goldman Sachs Funds. If you do
not specify in your instructions to the Funds which class of shares you wish
to purchase, the Funds will assume that the instructions apply to Service
Shares since, unlike Class B and Class C Shares, they are normally not sub-
ject to any CDSC and have lower fees.
In order to make an initial investment in a Fund, you must furnish to the
Fund, Goldman Sachs, your Service Organization or your Authorized Dealer the
information in the Account Application.
To Open an Account:
.Complete the enclosed Account Application
.Mail your payment and Account Application to:
Your Authorized Dealer
- Purchases by check or Federal Reserve draft should be made payable to
your Authorized Dealer
- Your Authorized Dealer is responsible for forwarding payment promptly
(within three business days) to the Fund
or
Goldman Sachs Funds c/o National Financial Data Services ("NFDS"), P.O. Box
419711, Kansas City, MO 64141-6711
17
<PAGE>
- Purchases by check or Federal Reserve draft should be made payable to
Goldman Sachs Funds--(Name of Fund and Class of Shares)
- NFDS will not accept a check drawn on a foreign bank or a third party
check, cash, money orders, travelers checques or credit card checks
- Federal funds wire, Automated Clearing House Network ("ACH") transfer or
bank wires should be sent to State Street
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt. ACH transfers are
expected to convert to federal funds on the business day following receipt
of the ACH transfer.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
If an effective order and federal funds are received: Dividends begin:
--------------------------------------------------------------------------
<S> <C>
Prime Obligations Portfolio:
.By 3:00 p.m. New York time Same business day
.After 3:00 p.m. New York time Next business day
--------------------------------------------------------------------------
Tax-Exempt Diversified Portfolio:
.By 1:00 p.m. New York time Same business day
.After 1:00 p.m. New York time Next business day
--------------------------------------------------------------------------
</TABLE>
What Is My Minimum Investment In The Funds?
<TABLE>
<CAPTION>
All Funds Initial Additional
-----------------------------------------------------------------------------
<S> <C> <C>
Regular Accounts $5,000 None
-----------------------------------------------------------------------------
Systematic Exchange Program (Class B and C Shares
Only) $1,000 None
-----------------------------------------------------------------------------
Other Share Exchanges $5,000 or
full account
share balance,
whichever
is less None
-----------------------------------------------------------------------------
<CAPTION>
Prime Obligations Portfolio Only
-----------------------------------------------------------------------------
<S> <C> <C>
Tax-Sheltered Retirement Plans (excluding SIMPLE
IRAs and Education IRAs) $250 $50
-----------------------------------------------------------------------------
Uniform Gift to Minors Act Accounts/Uniform
Transfer to Minors Act Accounts $250 $50
-----------------------------------------------------------------------------
403(b) Plan Accounts $200 $50
-----------------------------------------------------------------------------
SIMPLE IRAs and Education IRAs $50 $50
-----------------------------------------------------------------------------
Automatic Investment Plan Accounts $50 $50
-----------------------------------------------------------------------------
</TABLE>
18
<PAGE>
SHAREHOLDER GUIDE
What Alternative Sales Arrangements Are Available?
The Funds offer three classes of shares through this Prospectus:
<TABLE>
----------------------------------------------------------------
<S> <C> <C>
Maximum Amount You Can Class B $250,000
----------------------------------------
Buy in the Aggregate Class C $1,000,000
----------------------------------------
Across Funds Service
Shares No limit
----------------------------------------------------------------
Initial Sales Charge Class B None
----------------------------------------
Class C None
----------------------------------------
Service
Shares None
----------------------------------------------------------------
CDSC Class B 6 year declining CDSC with a
maximum of 5%
----------------------------------------
Class C 1% if shares are redeemed
within 12 months of purchase
----------------------------------------
Service None unless acquired in an
Shares exchange for shares subject
to a CDSC
----------------------------------------------------------------
Conversion Feature Class B Class B Shares convert to
ILA Service Shares after 8
years
----------------------------------------
Class C None
----------------------------------------
Service
Shares None
----------------------------------------------------------------
</TABLE>
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
.Refuse to open an account if you fail to (i) provide a social security num-
ber or other taxpayer identification number; or (ii) certify that such num-
ber is correct (if required to do so under applicable law).
.Reject any purchase order for any reason.
.Modify or waive the minimum investment amounts.
.Modify the manner in which shares are offered.
.Modify the sales charge rate applicable to future purchases of Class B and
Class C Shares.
The Funds may allow you to purchase shares with securities instead of cash
if consistent with a Fund's investment policies and operations and if
approved by the Investment Adviser.
19
<PAGE>
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange shares is deter-
mined by a Fund's NAV. The Funds calculate NAV as follows:
(Value of Assets of the Class)
- (Liabilities of the Class)
NAV = --------------------------------------------------
Number of Outstanding Shares of the Class
.NAV per share of each class is calculated by State Street on each business
day as of the close of regular trading on the New York Stock Exchange (nor-
mally 4:00 p.m. New York time). Fund shares will be priced on any day the
New York Stock Exchange is open, except for days on which Chicago, Boston,
or New York banks are closed for local holidays.
.On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, each Fund reserves the right to
close at or prior to the BMA recommended closing time. If a Fund does so,
it will cease granting same business day credit for purchase and redemption
orders received after the Fund's closing time and credit will be granted to
the next business day.
.The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-
ted by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securi-
ties are valued at amortized cost in accordance with SEC regulations. Amor-
tized cost will normally approximate market value. There can be no assurance
that a Fund will be able at all times to maintain a NAV of $1.00 per share.
A COMMON QUESTION ABOUT THE PURCHASE OF SERVICE SHARES
What Is The Offering Price Of Service Shares?
You may purchase Service Shares of the Funds at the next determined NAV
without an initial sales charge. Service Shares are not subject to any CDSC.
COMMON QUESTIONS ABOUT THE PURCHASE OF CLASS B SHARES
What Is The Offering Price Of Class B Shares?
You may purchase Class B Shares of the Prime Obligations Portfolio at the
next determined NAV without an initial sales charge. However, Class B Shares
redeemed within six years of purchase will be subject to a CDSC at the rates
shown in the table below based on how long you held your shares.
20
<PAGE>
SHAREHOLDER GUIDE
The CDSC schedule is as follows:
<TABLE>
<CAPTION>
CDSC as a
Percentage of
Dollar Amount
Year Since Purchase Subject to CDSC
-----------------------------------------------------------------------------
<S> <C>
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter None
-----------------------------------------------------------------------------
</TABLE>
No CDSC is imposed upon exchanges of Class B Shares between the Prime Obli-
gation Portfolios and another Goldman Sachs Fund. However, shares acquired
in an exchange will be subject to the CDSC to the same extent as if there
had been no exchange.
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or in part to defray the Distributor's expenses related to providing
distribution-related services to the Funds in connection with the sale of
Class B Shares, including the payment of compensation to Authorized Dealers.
A commission equal to 4% of the amount invested is paid to Authorized Deal-
ers.
What Should I Know About The Automatic Conversion Of Class B Shares?
Class B Shares of the Prime Obligations Portfolio will automatically convert
into Service Shares of the Prime Obligations Portfolio at the end of the
calendar quarter that is eight years after the purchase date.
If you acquire Class B Shares of the Prime Obligations Portfolio by exchange
from Class B Shares of another Goldman Sachs Fund, your Class B Shares will
convert into Service Shares of the Prime Obligations Portfolio based on the
date of the initial purchase and the CDSC schedule of that purchase.
If you acquire Class B Shares through reinvestment of distributions, your
Class B Shares will convert into Service Shares based on the date of the
initial purchase of the shares on which the distribution was paid.
The conversion of Class B Shares to Service Shares will not occur at any
time the Prime Obligations Portfolio is advised that such conversions may
constitute taxable events for federal tax purposes, which the Fund believes
is unlikely. If conversions do not occur as a result of possible taxability,
Class B Shares would continue to be subject to higher expenses than Service
Shares for an indeterminate period.
21
<PAGE>
A COMMON QUESTION ABOUT THE PURCHASE OF CLASS C SHARES
What Is The Offering Price Of Class C Shares?
You may purchase Class C Shares of the Prime Obligations Portfolio at the
next determined NAV without paying an initial sales charge. However, if you
redeem Class C Shares within 12 months of purchase, a CDSC of 1% will be
deducted from the redemption proceeds; provided that in connection with pur-
chases by pension and profit sharing plans, pension funds and othercompany-
sponsored benefit plans, where all of the Class C Shares are redeemed within
12 months of purchase, a CDSC of 1% may be imposed upon the plan sponsor or
third party administrator.
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or in part to defray the Distributor's expenses related to providing
distribution-related services to the Funds in connection with the sale of
Class C Shares, including the payment of compensation to Authorized Dealers.
An amount equal to 1% of the amount invested is paid by the Distributor to
Authorized Dealers.
COMMON QUESTIONS APPLICABLE TO THE PURCHASE OF SERVICE, CLASS B AND CLASS C
SHARES
What Else Do I Need To Know About The CDSC On Class B Or C Shares?
.No CDSC is charged on shares acquired from reinvested dividends or capital
gains distributions.
.When counting the number of months since a purchase of Class B or Class C
Shares was made, all payments made during a month will be combined and con-
sidered to have been made on the first day of that month.
.To keep your CDSC as low as possible, each time you place a request to sell
shares, the Funds will first sell any shares in your account that do not
carry a CDSC and then the shares in your account that have been held the
longest.
In What Situations May The CDSC On Service, Class B Or Class C Shares Be
Waived Or Reduced?
The CDSC on Service, Class B or Class C Shares that are subject to a CDSC
(i.e., because the Service Shares were acquired in an exchange transaction
for shares of a Goldman Sachs Fund that were subject to a CDSC) may be
waived or reduced if the redemption relates to:
.Retirement distributions or loans to participants or beneficiaries from
pension and profit sharing plans, pension funds and other company-sponsored
benefit plans (each a "Retirement Plan");
22
<PAGE>
SHAREHOLDER GUIDE
.The death or disability (as defined in Section 72(m)(7) of the Internal
Revenue Code of 1986, as amended (the "Code")) of a participant or benefi-
ciary in a Retirement Plan;
.Hardship withdrawals by a participant or beneficiary in a Retirement Plan;
.Satisfying the minimum distribution requirements of the Code;
.Establishing "substantially equal periodic payments" as described under
Section 72(t)(2) of the Code;
.The separation from service by a participant or beneficiary in a Retirement
Plan;
.The death or disability (as defined in Section 72(m)(7) of the Code) of a
shareholder if the redemption is made within one year of the event;
.Excess contributions distributed from a Retirement Plan;
.Distributions from a qualified Retirement Plan invested in the Goldman
Sachs Funds which are being rolled over to a Goldman Sachs IRA; or
.Redemption proceeds which are to be reinvested in accounts or non-regis-
tered products over which GSAM or its advisory affiliates have investment
discretion.
In addition, Service, Class B and Class C Shares subject to a systematic
withdrawal plan may be redeemed without a CDSC. The Funds reserve the right
to limit such redemptions, on an annual basis, to 10% of the value of your
Service Shares and 12% each of the value of your Class B and C Shares.
What Other Attributes of Service, Class B Or Class C Shares Should I Know
About?
.Service Shares. Service Shares are normally not subject to any initial
sales charge or CDSC. However, Service Shares are subject to a service fee
at the annual rate of 0.40% of a Fund's average daily net assets attribut-
able to Service Shares.
.Class B Shares. Class B Shares are subject to a CDSC but not an initial
sales charge. By not paying a front-end sales charge, your entire invest-
ment in Class B Shares is available to work for you from the time you make
your initial investment. However, the distribution fee of up to 0.75% and
service fee of up to 0.25% paid by Class B Shares will cause your Class B
Shares (until conversion to Service Shares) to have a higher expense ratio,
and thus lower performance and dividend payments, than Service Shares.
A maximum purchase limitation of $250,000 in the aggregate normally
applies to Class B Shares.
.Class C Shares. Class C Shares are also subject to a CDSC but not an ini-
tial sales charge. By not paying a front-end sales charge, your entire
investment in Class C Shares is available to work for you from the time you
make your initial investment. However, the distribution fee of 0.75% and
service fee of 0.25%
23
<PAGE>
paid by Class C Shares will cause your Class C Shares to have a higher
expense ratio, and thus lower performance and dividend payments, than Serv-
ice Shares (or Class B Shares after conversion to Service Shares).
Although Class C Shares are subject to a CDSC for only 12 months, Class C
Shares do not have the conversion feature applicable to Class B Shares and
your investment will therefore pay higher distribution fees indefinitely.
A maximum purchase limitation of $1,000,000 in the aggregate normally
applies to purchases of Class C Shares.
Note: Authorized Dealers may receive different compensation for selling
Service, Class B or Class C Shares.
In addition to Service, Class B and Class C Shares, each Fund also offers
other classes of shares to investors. These other share classes are subject
to different fees and expenses (which affect performance), have different
minimum investment requirements and are entitled to different services.
Information regarding these other share classes may be obtained from your
sales representative or from Goldman Sachs by calling the number on the back
cover of this Prospectus.
HOW TO SELL SHARES
How Can I Sell Shares Of The Funds?
You may arrange to take money out of your account by selling (redeeming)
some or all of your shares. Generally, each Fund will redeem its shares upon
request on any business day at their NAV next determined after receipt of
such request in proper form, subject to any applicable CDSC. You may request
that redemption proceeds be sent to you by check or by wire (if the wire
instructions are on record). Redemptions may be requested in writing or by
telephone.
24
<PAGE>
SHAREHOLDER GUIDE
<TABLE>
<CAPTION>
Instructions For Redemptions:
---------------------------------------------------------------------------------
<S> <C> <C>
By Writing: .Write a letter of instruction that includes:
.Your name(s) and signature(s)
.Your account number
.The Fund name and Class of Shares
.The dollar amount you want to sell
.How and where to send the proceeds
.Obtain a signature guarantee (see details below)
.Mail your request to:
Goldman Sachs Funds
c/o NFDS
P.O. Box 49711
Kansas City, MO 64141-6711
---------------------------------------------------------------------------------
By Telephone: If you have not declined the telephone redemption
privilege on your Account Application:
.1-800-526-7384 (8:00 a.m. to 4:00 p.m. New York time)
.You may redeem up to $50,000 of your shares
within any 7 calendar day period
.Proceeds which are sent directly to a Goldman Sachs
brokerage account are not subject to the $50,000 limit
---------------------------------------------------------------------------------
</TABLE>
You may also take advantage of the check redemption privilege described
below.
When Do I Need A Signature Guarantee To Redeem Shares?
A signature guarantee is required if:
.You are requesting in writing to redeem shares in an amount over $50,000;
.You would like the redemption proceeds sent to an address that is not your
address of record; or
.You would like to change the bank designated on your Account Application.
A signature guarantee must be obtained from a bank, brokerage firm or other
financial intermediary that is a member of an approved Medallion Guarantee
Program or that is otherwise approved by the Trust. A notary public cannot
provide a signature guarantee. Additional documentation may be required for
executors, trustees or corporations or when deemed appropriate by the Trans-
fer Agent.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor, and the Transfer Agent will not be liable for
any loss you may incur in the event that the Trust accepts unauthorized tel-
ephone redemption requests that the Trust reasonably believes to be genuine.
The Trust may accept telephone redemption requests from any person identify-
ing himself or herself as the owner of an account or the owner's registered
representative where the owner has not declined in writing to use this serv-
ice. Thus, you risk possible losses if a telephone redemption is not autho-
rized by you.
25
<PAGE>
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs and NFDS employs reasonable procedures
specified by the Trust to confirm that such instructions are genuine. If
reasonable procedures are not employed, the Trust may be liable for any loss
due to unauthorized or fraudulent transactions. The following general poli-
cies are currently in effect:
.All telephone requests are recorded.
.Proceeds of telephone redemption requests will be sent only to your address
of record or authorized bank account designated on your Account Application
(unless you provide written instructions and a signature guarantee, indi-
cating another address or account) and exchanges of shares normally will be
made only to an identically registered account.
.Telephone redemptions by check to your address of record will not be
accepted during the 30-day period following any change in your address of
record.
.The telephone redemption option does not apply to shares held in a "street
name" account. "Street name" accounts are accounts maintained and serviced
by your Authorized Dealer. If your account is held in "street name," you
should contact your registered representative of record, who may make tele-
phone redemptions on your behalf.
.The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
When Will Redemption Proceeds Be Wired Or Mailed?
Redemption proceeds will normally be wired or mailed to the recordholder of
shares as follows:
<TABLE>
<CAPTION>
Redemption Request
Received Redemption Proceeds Dividends
-------------------------------------------------------------------------------
<S> <C> <C>
Prime Obligations
Portfolio:
-------------------------------------------------------------------------------
.By 3:00 p.m. New York .Wired same business day Not earned on day
time
.Checks sent next business day request is received
.After 3:00 p.m. New York .Wired next business day Earned on day
time
.Checks sent within two request is received
business days
-------------------------------------------------------------------------------
Tax-Exempt Diversified
Portfolio:
-------------------------------------------------------------------------------
.By 12:00 p.m. New York .Wired same business day Not earned on day
time
.Checks sent next business request is received
day
.After 12:00 p.m. New .Wired next business day Earned on day
York time
.Checks sent within two request is received
business days
-------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
SHAREHOLDER GUIDE
.Although redemption proceeds will normally be wired or mailed as described
above, each Fund reserves the right to pay redemption proceeds up to three
business days following receipt of a properly executed wire transfer
redemption request. If you are selling shares you recently paid for by
check, the Fund will pay you when your check has cleared, which may take up
to 15 days. If the Federal Reserve Bank is closed on the day that the
redemption proceeds would ordinarily be wired, wiring the redemption pro-
ceeds may be delayed one additional business day.
.A transaction fee of $7.50 may be charged for payments of redemption pro-
ceeds by wire. Your bank may also charge wiring fees. You should contact
your bank directly to learn whether it charges such fees.
.To change the bank designated on your Account Application, you must send
written instructions (with your signature guaranteed) to the Transfer
Agent.
.Neither the Trust, Goldman Sachs nor any Authorized Dealer assumes any
responsibility for the performance of your bank or any intermediaries in
the transfer process. If a problem with such performance arises, you should
deal directly with your bank or any such intermediaries.
What Should I Know About The Check Redemption Privilege? (Service Shares
Only)
You may elect to have a special account with State Street for the purpose of
redeeming shares from your account by check. The following general policies
govern the check redemption privilege:
.You will be provided with a supply of checks when State Street receives a
completed signature card and authorization form. Checks drawn on the
account may be payable to the order of any person in any amount over $500,
but cannot be certified.
.The payee of the check may cash or deposit it just like any other check
drawn on a bank.
.When the check is presented to State Street for payment, a sufficient num-
ber of full or fractional Service Shares will be redeemed to cover the
amount of the check.
.Canceled checks will be returned to you by State Street.
.The check redemption privilege allows you to receive the dividends declared
on the Service Shares that are to be redeemed until the check is actually
processed. Because of this feature, accounts may not be completely liqui-
dated by check.
.If the amount of the check is greater than the value of the Service Shares
held in your account, the check will be returned unpaid. In this case, you
may be subject to extra charges.
.The Trust reserves the right to limit the availability of, modify or termi-
nate the check redemption privilege at any time with respect to any or all
shareholders.
27
<PAGE>
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
.Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
The Trust reserves the right to:
.Redeem the shares of any account whose balance falls below the minimum as a
result of redemption. The Fund will give 60 days' prior written notice to
allow you to purchase sufficient additional shares of the Fund in order to
avoid such redemption. Different rules may apply to investors who have
established brokerage accounts with Goldman Sachs in accordance with the
terms and conditions of their account agreements.
.Redeem the shares in other circumstances determined by the Board of Trust-
ees to be in the best interest of the Trust.
.Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
.Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distributions
be returned to the Fund as undeliverable or remain uncashed for six months.
In addition, that distribution and all future distributions payable to you
will be reinvested at NAV in additional Fund shares. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
28
<PAGE>
SHAREHOLDER GUIDE
Can I Exchange My Investment From One Fund To Another?
You may exchange Service Shares of each Fund and Class B and C Shares of the
Prime Obligations Portfolio for shares of the same class or an equivalent
class of any other Goldman Sachs Fund. The exchange privilege may be materi-
ally modified or withdrawn at any time upon 60 days' written notice to you.
<TABLE>
<CAPTION>
Instructions For Exchanging Shares:
-----------------------------------------------------------------------
<S> <C>
By Writing: .Write a letter of instruction that includes:
.Your name(s) and signature(s)
.Your account number
.The Fund names and Class of Shares
.The dollar amount you want to exchange
.Obtain a signature guarantee (see details above)
.Mail the request to:
Goldman Sachs Funds
c/o NFDS
P.O. Box 419711
Kansas City, MO 64141-6711
or for overnight delivery--
Goldman Sachs Funds
c/o NFDS
330 West 9th St.
Poindexter Bldg.
1st Floor
Kansas City, MO 64105
-----------------------------------------------------------------------
By Telephone: If you have not declined the telephone exchange
privilege on your Account Application:
.1-800-526-7384 (8:00 a.m. to 4:00 p.m.
New York time)
-----------------------------------------------------------------------
</TABLE>
You should keep in mind the following factors when making or considering an
exchange:
.You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
.Six free exchanges are allowed in each 12 month period.
.A $12.50 fee may be charged for each subsequent exchange.
.There is no charge for exchanges made pursuant to the Automatic Exchange
Program.
.Exchanges of Class B and Class C Shares will be made at NAV and will be
subject to the CDSC of the original shares held. For purposes of determin-
ing the amount of the applicable CDSC, the length of time you have owned
the shares will be measured from the date you acquired the original shares
subject to a CDSC and will not be affected by subsequent exchange.
29
<PAGE>
.Exchanges of Service Shares from each Fund will be made into the relevant
Goldman Sachs Fund at the public offering price, which may include a sales
charge, unless a sales charge has previously been paid on the investment
represented by the exchanged shares (i.e., the shares to be exchanged were
originally issued in exchange for shares on which a sales charge was paid),
in which case the exchange will be made at NAV. Service Shares acquired in
an exchange transaction for shares of a Goldman Sachs Fund will be subject
to the CDSC, if any, of the shares originally held.
.All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund. The minimum ini-
tial exchange is $5,000 or the full account share balance, whichever is
less.
.Exchanges are available only in states where exchanges may be legally made.
.It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
.Goldman Sachs and NFDS may use reasonable procedures described under "What
Do I Need To Know About Telephone Redemption Requests?" in an effort to
prevent unauthorized or fraudulent telephone exchange requests.
.Telephone exchanges normally will be made only to an identically registered
account. Shares may be exchanged among accounts with different names,
addresses and social security or other taxpayer identification numbers only
if the exchange instructions are in writing and accompanied by a signature
guarantee.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
SHAREHOLDER SERVICES
Can I Arrange To Have Automatic Investments Made On A Regular Basis?
You may be able to make systematic cash investments through your bank via
ACH transfer or your checking account via bank draft each month. Forms for
this option are available from Goldman Sachs, your Authorized Dealer or you
may check the appropriate box on the Account Application.
Can I Arrange To Have Automatic Exchanges Made On A Regular Basis?
You may elect to exchange automatically a specified dollar amount of shares
of a Fund for shares of the same class or an equivalent class of any other
Goldman Sachs Fund.
.Shares will be purchased at NAV.
30
<PAGE>
SHAREHOLDER GUIDE
.No initial sales charge is imposed.
.Sales subject to a CDSC acquired under this program may be subject to a
CDSC at the time of redemption from the Fund into which the exchange is
made depending upon the date and value of your original purchase.
.Automatic exchanges are made monthly on the 15th day of each month or the
first business day thereafter.
.Minimum dollar amount: $50 per month.
Do I Have Any Reinvestment Privileges With Respect to Class B or
Class C Shares?
You may redeem Class B or Class C Shares of a Fund and reinvest a portion or
all of the redemption proceeds (plus any additional amounts needed to round
off purchases to the nearest full share). To be eligible for this privilege,
you must hold the shares you want to redeem for at least 30 days and must
reinvest the share proceeds within 90 days after you redeem. You may rein-
vest as follows:
.If you redeem Class B Shares of the Prime Obligations Portfolio, you may
reinvest any or all of the redemption proceeds (plus that amount necessary
to acquire a fractional share to round off the purchase to the nearest full
share) in Service Shares of Prime Obligations Portfolio and Tax-Exempt
Diversified Portfolio or Class A Shares of any Goldman Sachs Fund at NAV.
The amount of the CDSC paid upon redemption will not be credited to your
account.
.If you redeem Class C Shares of the Prime Obligations Portfolio, you may
reinvest any or all of the redemption proceeds (plus that amount necessary
to acquire a fractional share to round off the purchase to the nearest full
share) in Class C Shares of the Prime Obligations Portfolio or Class C
Shares of any other Goldman Sachs Fund.
.You should obtain and read the applicable prospectuses before investing in
any other Funds.
.If you redeem Class C Shares, pay a CDSC upon redemption and reinvest in
Class C Shares subject to the conditions set forth above, your account will
be credited with the amount of the CDSC previously charged, and the rein-
vested shares will continue to be subject to a CDSC. In this case, the
holding period of the Class C Shares acquired through reinvestment for pur-
poses of computing the CDSC payable upon a subsequent redemption will
include the holding period of the redeemed shares.
.The reinvestment privilege may be exercised once annually by a shareholder
upon written request, except that this time limit does not apply to trans-
actions the sole purpose of which is to reinvest the proceeds at NAV in a
tax-sheltered retirement plan.
.You may be subject to tax as a result of a redemption. You should consult
your tax adviser concerning the tax consequences of a redemption and rein-
vestment.
31
<PAGE>
Can I Have Automatic Withdrawals Made On A Regular Basis?
You may draw on your account systematically via check or ACH transfer in any
amount of $50 or more.
.It is normally undesirable to maintain a systematic withdrawal plan at the
same time that you are purchasing additional Class B or Class C Shares
because of the imposition of a CDSC on your redemptions of Class B or Class
C Shares.
.You must have a minimum balance of $5,000 in a Fund.
.Checks are mailed on or about the 25th day of each month.
.Each systematic withdrawal is a redemption and therefore a taxable transac-
tion.
.The CDSC applicable to Class B or Class C Shares redeemed under the system-
atic withdrawal plan may be waived.
What Types of Reports Will I Be Sent Regarding Investments in Shares?
You will receive an annual report containing audited financial statements
and a semi-annual report. To eliminate unnecessary duplication, only one
copy of such reports will be sent to shareholders with the same mailing
address. If you would like a duplicate copy to be mailed to you, please con-
tact Goldman Sachs Funds at 1-800-526-7384.
What Should I Know When I Purchase Shares Through An Authorized Dealer?
Authorized Dealers and other financial intermediaries may provide varying
arrangements for their clients to purchase and redeem Fund shares. They may
charge additional fees not described in this Prospectus to their customers
for such services.
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distribu-
tions relating to your 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 your transactions, you should contact the Authorized Dealer to
purchase, redeem or exchange shares, to make changes in or give instructions
concerning your account or to obtain information about your 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 you to obtain historical purchase information about the
shares in the account from the Authorized Dealer.
Authorized Dealers and other financial intermediaries may be authorized to
accept, on behalf of the Trust, 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. In these cases:
.A Fund will be deemed to have received an order that is in proper form by
or on behalf of a customer when the order is accepted by an Authorized
Dealer or
32
<PAGE>
SHAREHOLDER GUIDE
intermediary on a business day, and the order will be priced at the Fund's
NAV per share (adjusted for any applicable sales charge) next determined
after such acceptance.
.Authorized Dealers and intermediaries are responsible for transmitting
accepted orders to the Funds within the time period agreed upon by them.
You should contact your Authorized Dealer or intermediary directly to learn
whether it is authorized to accept orders for the Trust.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Authorized Dealers and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds.
DISTRIBUTION SERVICES AND FEES
What Are The Different Distribution And Service Fees Paid By Service, Class
B and Class C Shares?
The Trust has adopted plans (each a "Plan") under which Service, Class B and
Class C Shares bear service fees and (in the case of Class B and Class C
Shares) distribution fees paid to Service Organizations and Goldman Sachs.
If the fees received by Goldman Sachs pursuant to the Plans exceed its
expenses, Goldman Sachs may realize a profit from this arrangement. Goldman
Sachs pays the distribution and service fees on a quarterly basis.
Under the Plan for Service Shares, Service Organizations agree to provide
services in connection with their customers' investments in Service Shares,
such as:
.Acting, directly or through an agent, as the sole shareholder of record
.Maintaining account record for customers
.Processing orders to purchase, redeem or exchange shares for customers
.Responding to inquiries from prospective and existing shareholders
.Assisting customers with investment procedures
For their services, Service Organizations are entitled to receive payment
from the Trust of up to 0.40% (on an annualized basis) of the average daily
net assets of the Service Shares of the Funds, which are attributable to or
held in the name of a Service Organization for its customers. In addition,
GSAM, at its own expense, may pay a Service Organization up to 10% of the
average daily net assets of the Service Shares of a Fund, which are attrib-
utable to or held in the name of the Service Organization for its customers.
The compensation paid by GSAM does not represent an additional expense to a
Fund or its shareholders, since it will be paid from the assets of GSAM.
33
<PAGE>
Under the Plans for Class B and Class C Shares, Goldman Sachs is entitled to
a monthly fee from each Fund for distribution services equal, on an annual
basis, to 0.75% of a Fund's average daily net assets attributed to Class B
and Class C Shares. Because these fees are paid out of the Fund's assets on
an ongoing basis, over time, these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
The distribution fees are subject to the requirements of Rule 12b-1 under
the Act, and may be used (among other things) for:
.Compensation paid to and expenses incurred by Authorized Dealers, Goldman
Sachs and their respective officers, employees and sales representatives;
.Commissions paid to Authorized Dealers;
.Allocable overhead;
.Telephone and travel expenses;
.Interest and other costs associated with the financing of such compensation
and expenses;
.Printing of prospectuses for prospective shareholders;
.Preparation and distribution of sales literature or advertising of any
type; and
.All other expenses incurred in connection with activities primarily
intended to result in the sale of Class B and Class C Shares.
In connection with the sale of Class C Shares, Goldman Sachs normally begins
paying the 0.75% distribution fee as an ongoing commission to Authorized
Dealers after the shares have been held for one year.
PERSONAL ACCOUNT MAINTENANCE SERVICES AND FEES
Under the Plans for Class B and Class C Shares, Goldman Sachs is also enti-
tled to receive a separate fee equal on an annual basis to 0.25% of each
Fund's average daily net assets attributed to Class B or Class C Shares.
This fee is for personal and account maintenance services, and may be used
to make payments to Goldman Sachs, Authorized Dealers and their officers,
sales representatives and employees for responding to inquiries of, and fur-
nishing assistance to, shareholders regarding ownership of their shares or
their accounts or similar services not otherwise provided on behalf of the
Funds. If the fees received by Goldman Sachs pursuant to the Plans exceed
its expenses, Goldman Sachs may realize a profit from this arrangement.
In connection with the sale of Class C Shares, Goldman Sachs normally begins
paying the 0.25% ongoing service fee to Authorized Dealers after the shares
have been held for one year.
34
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
Taxes on Distributions: Except for the Tax-Exempt Diversified Portfolio, dis-
tributions of investment income are taxable as ordinary income for federal tax
purposes, and may also be subject to state or local taxes. This is true whether
you reinvest your distributions in additional Fund shares or receive them in
cash. To the extent that Fund distributions are attributable to interest on
federal obligations or interest on obligations of your state of residence or
its municipalities or authorities, they will in most cases be exempt from state
and local income taxes. Distributions from the Tax-Exempt Diversified Portfolio
that are designated as "exempt interest dividends" are generally not subject to
federal income tax. Distributions of short-term capital gains are taxable to
you as ordinary income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Exempt Diversified Portfolio may be a preference item when determining your
federal alternative minimum tax liability. Exempt-interest dividends are also
taken into account in determining the taxable portion of social security or
railroad retirement benefits. Any interest on indebtedness incurred by you to
purchase or carry shares in the Tax-Exempt Diversified Portfolio generally will
not be deductible for federal income tax purposes.
Other Information: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
35
<PAGE>
Appendix A
Additional Information on Portfolio Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. Treasury Obligations and U.S. Government Securities. U.S. Treasury Obliga-
tions include securities issued or guaranteed by the U.S. Treasury ("U.S. Trea-
sury Obligations"). Payment of principal and interest on these obligations is
backed by the full faith and credit of the U.S. government. U.S. Treasury Obli-
gations include, among other things, the separately traded principal and inter-
est components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the Separate Trading of Registered
Interest and Principal of Securities program ("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
36
<PAGE>
APPENDIX A
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
Bank Obligations. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. A Fund may invest in obligations issued or backed by
U.S. banks when a bank has more than $1 billion in total assets at the time of
purchase or is a branch or subsidiary of such a bank. Bank obligations may be
general obligations of the parent bank or may be limited to the issuing branch
by the terms of the specific obligation or by government regulation.
Commercial Paper. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commerical paper. Commerical paper
represents short-term unsecured promissory notes issued in bearer form by banks
or bank holding companies, corporations, finance companies and other issuers.
The commercial paper purchased by a Fund consists of direct U.S. dollar-denomi-
nated obligations of domestic or, in the case of a certain Funds, foreign
issuers.
Short-Term Obligations. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
Repurchase Agreements. Each Fund may enter into repurchase agreements with pri-
mary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
37
<PAGE>
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, each Fund, together with other registered investment
companies having advisory agreements with the Investment Adviser or any of its
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.
Asset-Backed and Receivables-Backed Securities. The Prime Obligations Portfolio
may invest in asset-backed and receivables-backed securities, whose principal
and interest payments are collateralized by pools of assets such as auto loans,
credit card receivables, leases, installment contracts and personal property.
Asset-backed and receivables-backed 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 peri-
ods of declining interest rates, prepayment of loans underlying asset-backed
and receivables-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 prepay-
ments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. In addi-
tion, securities that are backed by credit card, automobile and similar types
of receivables generally do not have the benefit of a security interest in col-
lateral that is comparable in quality to mortgage assets. There is the possi-
bility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities. In the event of a default,
the Fund may suffer a loss if it cannot sell collateral quickly and receive the
amount it is owed.
Municipal Obligations. The Funds may invest in municipal obligations. Municipal
obligations are issued by or on behalf of states, territories and possessions
of the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia. Municipal obligations in
which a Fund may invest consist of fixed rate notes and similar debt instru-
ments; variable and floating rate demand instruments; tax-exempt commercial
paper; municipal bonds; and unrated notes, paper, bonds or other instruments.
Municipal Notes and Bonds. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds
38
<PAGE>
APPENDIX A
also include lease rental revenue bonds which are issued by a state or local
authority for capital projects and are secured by annual lease payments from
the state or locality sufficient to cover debt service on the authority's obli-
gations. Industrial development bonds ("private activity bonds") are a specific
type of revenue bond backed by the credit and security of a private user and,
therefore, have more potential risk. Municipal bonds may be issued in a variety
of forms, including commercial paper, tender option bonds and variable and
floating rate securities.
Tender Option Bonds. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal income
tax. Certain tender option bonds may be illiquid or may become illiquid as a
result of a credit rating downgrade, a payment default or a disqualification
from tax-exempt status.
Revenue Anticipation Warrants. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
Industrial Development Bonds. The Funds may invest in industrial development
bonds (private activity bonds). Industrial development bonds are a specific
type of revenue bond backed by the credit and security of a private user, the
interest from
39
<PAGE>
which would be an item of tax preference when distributed by a Fund as "exempt-
interest dividends" to shareholders under the AMT.
Other Municipal Obligation Policies. The Tax-Exempt Diversified Fund may invest
25% or more of the value of its total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting one municipal obligation would also affect the other municipal
obligation. For example, the Fund may invest all of its assets in (a) municipal
obligations the interest of which is paid solely from revenues from 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 obligations whose issuers are in the same
state; or (c) industrial development obligations. Concentration of the Fund's
investments in these municipal obligations will subject the Fund, to a greater
extent than if such investment was not so concentrated, to the risks of adverse
economic, business or political developments affecting the particular state,
industry or other area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and generally
are not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
Custodial Receipts. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
40
<PAGE>
APPENDIX A
Other Investment Companies. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of any other investment company, and a prohibition on investing more
than 5% of a Fund's total assets in securities of any one investment company or
more than 10% of its total assets in securities of all investment companies. A
Fund will indirectly bear its proportionate share of any management fees and
other expenses paid by such other investment companies. Such other investment
companies will have investment objectives, policies and restrictions substan-
tially similar to those of the acquiring Fund and will be subject to substan-
tially the same risks.
Floating and Variable Rate Obligations. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
When-Issued Securities and Forward Commitments. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward
41
<PAGE>
commitment basis with the intention of acquiring the securities for its portfo-
lio, a Fund may dispose of when-issued securities or forward commitments prior
to settlement if the Investment Adviser deems it appropriate.
Illiquid Securities. Each Fund may invest up to 10% of its net assets in illiq-
uid securities which cannot be disposed of in seven days in the ordinary course
of business at fair value. Illiquid securities include:
.Both domestic and foreign securities that are not readily marketable
.Certain municipal leases and participation interests
.Certain stripped mortgage-backed securities
.Repurchase agreements and time deposits with a notice or demand period of more
than seven days
.Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is oth-
erwise eligible for resale pursuant to Rule 144A under the Securities Act of
1933.
Investing in restricted securities may decrease the liquidity of a Fund's port-
folio.
Borrowings. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the Addi-
tional Statement.
Downgraded Securities. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
Special Risks and Policies Applicable to the Tax-Exempt Diversified Portfolio:
Fundamental Policies. As a matter of fundamental policy, at least 80% of the
net assets of the Tax-Exempt Diversified Portfolio will ordinarily be invested
in municipal obligations, the interest from which is, in the opinion of bond
counsel, if any, excluded from gross income for federal income tax purposes. In
addition, the Tax-Exempt Diversified Portfolio may temporarily invest in tax-
able money market instruments. Investments in taxable money market instruments
will be limited to those meeting the quality standards of the Tax-Exempt Diver-
sified Portfolio.
42
<PAGE>
[This page intentionally left blank]
43
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Arthur Andersen LLP, whose report, along
with a Fund's financial statements, is included in the Fund's annual report
(available upon request without charge).
PRIME OBLIGATIONS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - ILA B units 1.00 0.04 (0.04)
1999 - ILA C units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - ILA B units 1.00 0.04 (0.04)
1998 - ILA C units 1.00 0.04 (0.04)
1998 - Cash Management shares (commenced
May 1) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
1997 - ILA B units 1.00 0.04 (0.04)
1997 - ILA C units (commenced August 15) 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
1996 - ILA B units (commenced May 8) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
44
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.90% $1,095,109 0.43% 4.79% 0.43% 4.79%
1.00 4.74 40,850 0.58 4.65 0.58 4.65
1.00 4.48 92,975 0.83 4.33 0.83 4.33
1.00 3.86 19,444 1.43 3.83 1.43 3.83
1.00 3.86 7,436 1.43 3.76 1.43 3.76
1.00 4.30 1 1.00 4.44 1.43 4.01
- ---------------------------------------------------------------------------------------
1.00 5.32 837,185 0.43 5.19 0.43 5.19
1.00 5.16 38,836 0.58 5.05 0.58 5.05
1.00 4.90 119,309 0.83 4.79 0.83 4.79
1.00 4.27 14,412 1.43 4.07 1.43 4.07
1.00 4.27 6,814 1.43 4.13 1.43 4.13
1.00 4.69/c/ 2 0.93/c/ 4.81/c/ 1.43/c/ 4.31/c/
- ---------------------------------------------------------------------------------------
1.00 5.38 866,445 0.42 5.24 0.43 5.23
1.00 5.22 28,110 0.57 5.11 0.58 5.10
1.00 4.96 78,316 0.82 4.85 0.83 4.84
1.00 4.33 1,574 1.42 4.33 1.43 4.32
1.00 4.41/c/ 1,897 1.42/c/ 4.39/c/ 1.43/c/ 4.38/c/
- ---------------------------------------------------------------------------------------
1.00 5.22 1,154,787 0.41 5.11 0.43 5.09
1.00 5.06 23,738 0.56 4.97 0.58 4.95
1.00 4.80 84,707 0.81 4.74 0.83 4.72
1.00 3.97/c/ 346 1.41/c/ 4.09/c/ 1.43/c/ 4.07/c/
- ---------------------------------------------------------------------------------------
1.00 5.79 1,261,251 0.41 5.66 0.43 5.64
1.00 5.63 63,018 0.56 5.51 0.58 5.49
1.00 5.37 227,233 0.81 5.22 0.83 5.20
- ---------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
TAX-EXEMPT DIVERSIFIED PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.03 (0.03)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.03 (0.03)
1998 - Cash Management shares (commenced
May 1) 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
1996 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.04 (0.04)
1995 - ILA Administration units 1.00 0.04 (0.04)
1995 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
46
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.89% $1,734,623 0.42% 2.85% 0.42% 2.85%
1.00 2.73 28,084 0.57 2.66 0.57 2.66
1.00 2.48 20,991 0.82 2.41 0.82 2.41
1.00 2.30 2 0.99 2.51 1.42 2.08
- ------------------------------------------------------------------------------------
1.00 3.17 1,562,285 0.35 3.12 0.41 3.06
1.00 3.02 26,509 0.50 2.98 0.56 2.92
1.00 2.76 37,850 0.75 2.72 0.81 2.66
1.00 2.61/c/ 2 0.85/c/ 2.66/c/ 1.41/c/ 2.10/c/
- ------------------------------------------------------------------------------------
1.00 3.39 1,479,486 0.32 3.33 0.41 3.24
1.00 3.23 27,967 0.47 3.16 0.56 3.07
1.00 2.97 30,513 0.72 2.97 0.81 2.88
- ------------------------------------------------------------------------------------
1.00 3.25 1,514,443 0.31 3.20 0.41 3.10
1.00 3.09 59,097 0.46 3.06 0.56 2.96
1.00 2.84 28,921 0.71 2.79 0.81 2.69
- ------------------------------------------------------------------------------------
1.00 3.72 1,342,585 0.31 3.65 0.42 3.54
1.00 3.57 48,773 0.46 3.51 0.57 3.40
1.00 3.31 49,647 0.71 3.24 0.82 3.13
- ------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
Index
<TABLE>
<C> <C> <S>
1 General
Investment
Management
Approach
4 Fund
Investment
Objectives
and
Strategies
7 Principal
Risks of the
Funds
9 Fund
Performance
12 Fund Fees and
Expenses
14 Service
Providers
16 Dividends
17 Shareholder Guide
17 How to Buy Shares
24 How to Sell Shares
35 Taxation
36 Appendix A
Additional Information on
Portfolio Risks,
Securities
and Techniques
44 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Institutional Liquid Assets
Prospectus (ILA Service, Class B and Class C Units)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, c/o NFDS, P.O. Box 419711, Kansas City, MO
64141-6711
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
Goldman Sachs - http://www.gs.com (Prospectus Only)
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of
Fund documents, after paying a duplicating fee, by writing to the SEC's
public Reference Section, Washington, D.C. 20549-0102 or by electronic
request to: [email protected]. Information on the operation of the public
reference room may be obtained by calling the SEC at (202) 942-8090.
[GOLDMAN SACHS LOGO APPEARS HERE]
The Funds' investment company registration number is 811-5349.
ILAPRORETMM 513486
<PAGE>
GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS
Prospectus
ILA Cash
Management
Shares
May 1, 2000
.Prime
Obligations
Portfolio
.Money Market
Portfolio
.Government
Portfolio
[GRAPHIC] .Tax-Exempt
Diversified
Portfolio
.Tax-Exempt
California
Portfolio
.Tax-Exempt New
York Portfolio
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
<PAGE>
NOT FDIC-INSURED May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Institutional Liquid Assets Portfolios (the "Funds"). GSAM is
referred to in this Prospectus as the "Investment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek preservation of capital, daily
liquidity and maximum current income. With each Fund the Investment Adviser
follows a conservative, risk-managed investment process that seeks to:
. Manage credit risk
. Manage interest rate risk
. Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1.Managing Credit Risk
The Investment Adviser's process for managing risk emphasizes:
. Intensive research--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as well
as the Investment Research, Legal and Compliance departments of Goldman
Sachs.
. Timely updates--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio management
team via computer link.
The Result: An "approved" list of high-quality credits--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2.Managing Interest Rate Risk
Three main steps are followed in seeking to manage interest rate risk:
. Establish weighted average maturity (WAM) target--WAM (the weighted
average time until the yield of a portfolio reflects any changes in the
current interest rate environment) is constantly revisited and adjusted
as market conditions change. An overall strategy is developed by the
portfolio management team based on insights gained from weekly meetings
with both Goldman Sachs economists and economists from outside the firm.
. Implement optimum portfolio structure--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
. Conduct rigorous analysis of new securities--The Investment Adviser's
five-step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for
money market mutual funds.
3. Managing Liquidity
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
. Each Fund's clients and factors that influence their asset volatility;
. Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
. Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC Financial Data Universal
Averages. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
. The Funds: Each Fund's securities are valued by the amortized cost method as
permitted by Rule 2a-7 under the Investment Company Act of 1940, as amended
(the "Act"). Under Rule 2a-7, each Fund may invest only in U.S. dollar-
denominated securities that are determined to present minimal credit risk and
meet certain other criteria including conditions relating to matu-rity,
diversification and credit quality. These operating policies may be more
restrictive than the fundamental policies set forth in the Statement of
Additional Information (the "Additional Statement").
. Taxable Funds: Prime Obligations, Money Market and Government Portfolios.
. Tax-Exempt Funds: Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios.
. The Investors: The Funds are designed for investors seeking a high rate of
return, a stable net asset value ("NAV") and convenient liquidation privi-
leges. The Funds are particularly suitable for banks, corporations and other
financial institutions that seek investment of short-term funds for their own
accounts or for the accounts of their customers.
. NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
. Maximum Remaining Maturity of Portfolio Investments: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
. Dollar-Weighted Average Portfolio Maturity ("WAM"): Not more than 90 days (as
required by Rule 2a-7).
. Investment Restrictions: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions" in
the Additional Statement. Fundamental investment restrictions and the
investment objective of a Fund (except the Tax-Exempt California and Tax-
Exempt New York Portfolios' objectives of providing shareholders with income
exempt from California State and New York State and New York City personal
income tax, respectively) cannot be changed without approval of a majority of
the outstanding shares of that Fund. All investment policies not specifically
designated as fundamental are non-fundamental and may be changed without
shareholder approval.
. Diversification: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of the
value of its total assets at the time of purchase in the securities of any
single issuer with these exceptions: (a) the Tax-Exempt California and Tax-
Exempt New York Portfolios may each invest up to 25% of their total assets in
five or fewer issuers; and (b) each of the other Funds may invest up to 25%
of its total assets
3
<PAGE>
in the securities of a single issuer for up to three business days. These
limitations do not apply to cash, certain repurchase agreements, U.S. Gov-
ernment Securities (as defined in Appendix A) or securities of other
investment companies. In addition, securities subject to certain uncondi-
tional guarantees and securities that are not "First Tier Securities" as
defined by the SEC are subject to different diversification requirements as
described in the Additional Statement.
4
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
Taxable Funds:
The Prime Obligations, Money Market and Government Portfolios seek to maxi-
mize current income to the extent consistent with the preservation of capi-
tal and the maintenance of liquidity by investing exclusively in high qual-
ity money market instruments.
The Prime Obligations and Money Market Portfolios pursue their investment
objectives by investing in U.S. Government Securities, obligations of U.S.
banks, commercial paper and other short-term obligations of U.S. companies,
states, municipalities and other entities and repurchase agreements. The
Money Market Portfolio may also invest in U.S. dollar-denominated obliga-
tions of foreign banks, foreign companies and foreign governments.
The Government Portfolio pursues its investment objective by investing in
U.S. Government Securities and repurchase agreements relating to such
securities.
Tax-Exempt Funds:
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios seek to provide shareholders, to the extent consistent with the
preservation of capital and prescribed portfolio standards, with a high
level of income exempt from federal income tax by investing primarily in
municipal instruments.
In addition, the Tax-Exempt California and Tax-Exempt New York Portfolios
seek to provide shareholders with income exempt from California State and
New York State and City personal income taxes, respectively, by investing in
instruments the interest on which is exempt from these taxes. (These instru-
ments are called "California instruments" and "New York instruments" in this
Prospectus.)
The Tax-Exempt Funds pursue their investment objectives by investing in
securities issued by or on behalf of states, territories, and possessions of
the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia, the interest from
which, if any, is in the opinion of bond counsel excluded from gross income
for federal income tax purposes, and not an item of tax preference under the
federal alternative minimum tax ("AMT").
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Bank Commercial
Fund Obligations Securities Obligations Paper
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations ./1/ . . .
U.S. banks only/2/
--------------------------------------------------------------------------------------------------
Money Market ./1/ . . .
Over 25% of total assets U.S. and foreign
must be invested in U.S. (US$) commercial
and foreign (US$) banks/3/ paper
--------------------------------------------------------------------------------------------------
Government ./1/ .
--------------------------------------------------------------------------------------------------
Tax-Exempt Diversified .
Tax-exempt only
--------------------------------------------------------------------------------------------------
Tax-Exempt Calfornia .
Tax-exempt only
--------------------------------------------------------------------------------------------------
Tax-Exempt New York .
Tax-exempt only
--------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 If adverse economic conditions prevail in the banking industry (such as
substantial losses on loans, increases in non-performing assets and charge-
offs and declines in total deposits), the Fund may, for temporary defensive
purposes, invest less than 25% of its total assets in bank obligations.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Short-Term
Obligations of Asset-Backed and Foreign
Corporations and Repurchase Receivables-Backed Government
Other Entities Agreements Securities/4/ Obligations (US$)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
. . .
U.S. entities only
- ---------------------------------------------------------------------------
. . . ./5/
U.S. and foreign
(US$) entities
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
.
(Does not intend
to invest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
4 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
5 The Money Market Portfolio may invest in U.S. dollar-denominated
obligations (limited to commercial paper and other notes) issued or
guaranteed by a foreign government. The Fund may also invest in U.S.
dollar-denominated obligations issued or guaranteed by any entity located
or organized in a foreign country that maintains a short-term foreign
currency rating in the highest short-term ratings category by the requisite
number of NRSROs. The Fund may not invest more than 25% of its total assets
in the securities of any one foreign government.
7
<PAGE>
Investment Policies Matrix continued
<TABLE>
<CAPTION>
Taxable Tax-Exempt Custodial Unrated Investment
Fund Municipals Municipals Receipts Securities/8/ Companies
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Obligations ./6/ . . .
Up to 10% of total
assets in other
investment companies
- ---------------------------------------------------------------------------------------------------------------
Money Market ./6/ . . .
Up to 10% of total
assets in other
investment companies
- ---------------------------------------------------------------------------------------------------------------
Government .
Up to 10% of total
assets in other
investment companies
- ---------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations (except in investment companies
extraordinary circumstances)/7/
- ---------------------------------------------------------------------------------------------------------------
Tax-Exempt California . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations and at least 65% investment companies
of total assets in California
instruments (except in
extraordinary circumstances)/7/
- ---------------------------------------------------------------------------------------------------------------
Tax-Exempt New York . . . .
At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations and at least 65% investment companies
of total assets in New York
instruments (except in
extraordinary circumstances)/7/
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
6 Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
7 Ordinarily expect that 100% of a Fund's portfolio securities will be
invested in municipal obligations, but the Funds may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
8 To the extent permitted by Rule 2a-7, securities without short-term ratings
may be purchased if they are deemed to be of comparable quality to First
Tier Securities, or to the extent that a Fund may purchase Second Tier
Securities, comparable in quality to Second Tier Securities. In addition, a
Fund holding a security supported by a guarantee or demand feature may rely
on the credit quality of the guarantee or demand feature in determining the
credit quality of the investment.
9 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of a Fund's net assets under normal market conditions.
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Private Summary of
Activity Credit Taxation for
Bonds Quality/8/ Distributions/13/ Miscellaneous
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. First Tier/11/ Taxable federal and state/14/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------------
. First Tier/11/ Taxable federal and state/14/ May invest in obligations of the
International Bank for Reconstruction
and Development. Reverse repurchase
agreements not permitted.
- ------------------------------------------------------------------------------------------------------------
First Tier/11/ Taxable federal and state/14/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------------
.
(Does not First/11/ or Tax-exempt federal and May (but does not currently intend to)
intend to Second Tier/12/ taxable state/15/ invest up to 20% in securities
invest)/9/,/10/ subject to AMT and may temporarily
invest in the taxable money market
instruments described herein. Reverse
repurchase agreements not permitted.
- ------------------------------------------------------------------------------------------------------------
.
(Does not First/11/ or Tax-exempt federal May (but does not currently intend to)
intend to Second Tier/12/ and California State invest up to 20% in AMT securities and
invest)/9/,/10/ may temporarily invest in the taxable money
market instruments described herein.
Reverse repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------------
.
(not more than First/11/ or Tax-exempt federal, May invest up to 20% in AMT securities
20% of net Second Tier/12/ New York State and and may temporarily invest in the taxable
assets)/10/ New York City money market instruments described herein.
Reverse repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
10 No more than 25% of the value of a Fund's total assets may be invested in
industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
11 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
12 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
13 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
14 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities interest
income.
15 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Tax-
. Applicable Prime Money Tax-Exempt Tax-Exempt Exempt
-- Not Obligations Market Government Diversified California New York
Applicable Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NAV . . . . . .
- -------------------------------------------------------------------------------------
Interest Rate . . . . . .
- -------------------------------------------------------------------------------------
Credit/Default . . . . . .
- -------------------------------------------------------------------------------------
Liquidity . . . . . .
- -------------------------------------------------------------------------------------
U.S. Government
Securities . . . -- -- --
- -------------------------------------------------------------------------------------
Concentration -- -- -- . . .
- -------------------------------------------------------------------------------------
Foreign -- . -- -- -- --
- -------------------------------------------------------------------------------------
Banking Industry -- . -- -- -- --
- -------------------------------------------------------------------------------------
Tax -- -- -- . . .
- -------------------------------------------------------------------------------------
</TABLE>
Risks that apply to all Funds:
. NAV Risk--The risk that a Fund will not be able to maintain a NAV per share of
$1.00 at all times.
. Interest Rate Risk--The risk that during periods of rising interest rates, a
Fund's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a Fund's
yield will tend to be higher.
. Credit/Default Risk--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase agree-
ment, may default on its payment obligations. In addition, with respect to the
Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York Portfo-
lios, risk of loss from payment default may also exist where municipal instru-
ments are backed by foreign letters of credit or guarantees.
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
. Liquidity Risk--The risk that a Fund will be unable to pay redemption proceeds
within the time period stated in this Prospectus, because of unusual market
conditions, an unusually high volume of redemption requests, or other reasons.
Risk that applies to the Prime Obligations, Money Market and Government
Portfolios:
. U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Money Market Portfolio:
. Foreign Risk--The risk that a foreign security could lose value as a result of
political, financial and economic events in foreign countries, less publicly
available financial and other information, less stringent foreign securities
regulations and accounting and disclosure standards, or other factors. The
Money Market Portfolio may not invest more than 25% of its total assets in the
securities of any one foreign government.
. Banking Industry Risk--The risk that if the Fund invests more than 25% of its
total assets in bank obligations, an adverse development in the banking indus-
try may affect the value of the Fund's investments more than if the Fund's
investments were not invested to such a degree in the banking industry. Nor-
mally, the Money Market Portfolio intends to invest more than 25% of its total
assets in bank obligations. Banks may be particularly susceptible to certain
economic factors such as interest rate changes, adverse developments in the
real estate market, fiscal and monetary policy and general economic cycles.
Risks that apply to the Tax-Exempt Funds:
. Concentration Risk--The risk that if a Fund invests more than 25% of its total
assets in issuers within the same state, industry or economic sector, an
adverse economic, business or political development may affect the value of
the Fund's investments more than if its investments were not so concentrated.
The Tax-Exempt California and Tax-Exempt New York Portfolios intend to invest
at least 65% of their total assets in California municipal obligations and New
York municipal obligations, respectively. These two Funds are classified as
"non-diversified" for regulatory purposes.
. Tax Risk--The risk that future legislative or administrative changes or court
decisions may materially affect the ability of a Fund to pay federal tax-
exempt divi-
11
<PAGE>
dends (in the case of each of these Funds) and state tax-exempt dividends (in
the case of the Tax-Exempt California and Tax-Exempt New York Portfolios).
These Funds would not be a suitable investment for IRAs, other tax-exempt or
tax deferred accounts or for other investors who are not sensitive to the fed-
eral, state or local tax consequences of these investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
12
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of
investing in a Fund by showing: (a) changes in the performance of a Fund's
ILA Cash Management Shares from year to year; and (b) the average annual
returns of a Fund's ILA Cash Management Shares. Investors should be aware
that the fluctuation of interest rates is one primary factor in performance
volatility. The bar chart and table assume reinvestment of dividends and
distributions. A Fund's past performance is not necessarily an indication of
how the Fund will perform in the future. Performance reflects expense
limitations in effect. If expense limitations were not in place, a Fund's
performance would have been reduced. You may obtain a Fund's current yield
by calling 1-800-621-2550.
13
<PAGE>
Prime Obligations Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 1.15%
Worst Quarter
Q2 '99 0.99%
[GRAPH]
1999 4.30%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Cash Management Shares (Inception 5/1/98) 4.30% 4.47%
------------------------------------------------------------------
</TABLE>
14
<PAGE>
FUND PERFORMANCE
Money Market Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 1.17%
Worst Quarter
Q2 '99 1.00%
[GRAPH]
1999 4.32%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Cash Management Shares (Inception 5/1/98) 4.32% 4.48%
------------------------------------------------------------------
</TABLE>
15
<PAGE>
Government Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 1.13%
Worst Quarter
Q2 '99 0.96%
[GRAPH]
1999 4.18%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Cash Management Shares (Inception 5/1/98) 4.18% 4.35%
------------------------------------------------------------------
</TABLE>
16
<PAGE>
FUND PERFORMANCE
Tax-Exempt Diversified Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 0.66%
Worst Quarter
Q1 '99 0.49%
[GRAPH]
1999 2.30%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Cash Management Shares (Inception 5/1/98) 2.30% 2.43%
------------------------------------------------------------------
</TABLE>
17
<PAGE>
Tax-Exempt California Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 0.58%
Worst Quarter
Q1 '99 0.43%
[GRAPH]
1999 2.02%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Cash Management Shares (Inception 5/1/98) 2.02% 2.12%
------------------------------------------------------------------
</TABLE>
18
<PAGE>
FUND PERFORMANCE
Tax-Exempt New York Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter
Q4 '99 0.64%
Worst Quarter
Q1 '99 0.44%
[GRAPH]
1999 2.17%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
------------------------------------------------------------------
<S> <C> <C>
Cash Management Shares (Inception 5/1/98) 2.17% 2.29%
------------------------------------------------------------------
</TABLE>
19
<PAGE>
Fund Fees and Expenses (Cash Management Shares)
This table describes the fees and expenses that you would pay if you buy and
hold ILA Cash Management Shares of a Fund.
<TABLE>
<CAPTION>
Prime Money
Obligations Market Government
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Distribution and Service (12b-1) Fees/2/ 0.07% 0.07% 0.07%
Service Fees/3/ 0.50% 0.50% 0.50%
Other Expenses/4/ 0.08% 0.06% 0.10%
- -----------------------------------------------------------------------------
Total Fund Operating Expenses/5/ 1.00% 0.98% 1.02%
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Tax- Tax- Tax-
Exempt Exempt Exempt
Diversified California New York
Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on
Purchases None None None
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets):/1/
Management Fees 0.35% 0.35% 0.35%
Distribution and Service (12b-1) Fees/2/ 0.07% 0.07% 0.07%
Service Fees/3/ 0.50% 0.50% 0.50%
Other Expenses/4/ 0.07% 0.07% 0.19%
- ----------------------------------------------------------------------------
Total Fund Operating Expenses/5/ 0.99% 0.99% 1.11%
- ----------------------------------------------------------------------------
</TABLE>
20
<PAGE>
FUND FEES AND EXPENSES
/1/The Funds' annual operating expenses are based on actual expenses.
/2/Goldman Sachs has voluntarily agreed to limit a portion of the distribution
and service fees attributable to Cash Management Shares of each Fund equal to
0.07%. The waiver may be terminated at any time at the option of Goldman
Sachs. If this occurs, the distribution and service fees attributable to Cash
Manage-ment Shares of each Fund will increase to 0.50% of each Fund's average
daily net assets.
/3/Service Organizations may charge other fees directly to their customers who
are the beneficial owners of Cash Management Shares in connection with their
customers' accounts. Such fees may affect the return such customers realize
with respect to their investments.
/4/"Other Expenses" include transfer agency fees equal to 0.04% of the average
daily net assets of each Fund's Cash Management Shares plus all other
ordinary expenses not detailed above.
/5/The Investment Adviser has voluntarily agreed to reduce or limit "Total Fund
Operating Expenses" of each Fund (excluding taxes, interest, brokerage fees,
litigation, indemnification, distribution fees, service fees and other
extraordinary expenses) to 0.43% of each Fund's average daily net assets. As
a result of the current waivers and expense limitations, "Other Expenses" and
"Total Fund Operating Expenses" of the Government Portfolio and Tax-Exempt
New York Portfolio which are actually incurred are as set forth below. The
expense limitations may be terminated at any time at the option of the
Investment Adviser with the approval of the Trustees. If this occurs, "Other
Expenses" and "Total Fund Operating Expenses" may increase without
shareholder approval.
<TABLE>
<CAPTION>
Tax-Exempt
Government New York
Portfolio Portfolio
----------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):
Management Fees 0.35% 0.35%
Distribution and Service (12b-1) Fees 0.07% 0.07%
Service Fees 0.50% 0.50%
Other Expenses 0.08% 0.08%
----------------------------------------------------------------------------
Total Fund Operating Expenses (after current waivers
and expense limitations) 1.00% 1.00%
----------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the waivers and expense limitations) with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in Cash Man-
agement Shares of a Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that a Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations $146 $452 $782 $1,713
- -------------------------------------------------------
Money Market $144 $446 $771 $1,691
- -------------------------------------------------------
Government $148 $459 $792 $1,735
- -------------------------------------------------------
Tax-Exempt Diversified $145 $449 $776 $1,702
- -------------------------------------------------------
Tax-Exempt California $145 $449 $776 $1,702
- -------------------------------------------------------
Tax-Exempt New York $147 $456 $787 $1,724
- -------------------------------------------------------
</TABLE>
Service Organizations that invest in Cash Management Shares on behalf of their
customers may charge other fees directly to their customer accounts in connec-
tion with their investments. You should contact your Service Organization for
information regarding such charges. Such fees, if any, may affect the return
such customers realize with respect to their investment.
Certain Service Organizations that invest in Cash Management Shares may receive
other compensation in connection with the sale and distribution of Cash Manage-
ment Shares or for services to their customers' accounts and/or the Funds. For
additional information regarding such compensation, see "Shareholder Guide" in
the Prospectus and "Other Information" in the Additional Statement.
22
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the Invest-
ment Adviser, merged into The Goldman Sachs Group, Inc. as a result of an
initial public offering. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser also performs the following serv-
ices for the Funds:
. Continually manages each Fund, including the purchase, retention and dispo-
sition of securities and other assets
. Administers each Fund's business affairs
. Performs various recordholder servicing functions (to the extent not pro-
vided by other organizations)
Pursuant to an SEC order, each Taxable Fund may enter into principal trans-
actions in certain taxable money market instruments, including repurchase
agreements, with Goldman Sachs.
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate For the
Fiscal Year Ended
Fund Contractual Rate December 31, 1999
-------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.35% 0.35%
-------------------------------------------------------------
Money Market 0.35% 0.35%
-------------------------------------------------------------
Government 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt Diversified 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt California 0.35% 0.35%
-------------------------------------------------------------
Tax-Exempt New York 0.35% 0.35%
-------------------------------------------------------------
</TABLE>
23
<PAGE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future of its discretion.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
24
<PAGE>
Dividends
All or substantially all of each Fund's net investment income will be declared
as a dividend daily. Dividends will normally, but not always, be declared as of
4:00 p.m. New York time as a dividend and distributed monthly. You may choose
to have dividends paid in:
. Cash
. Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time. If you do not indicate any
choice, dividends and distributions will be reinvested automatically in the
applicable Fund.
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of each
month. Net short-term capital gains, if any, will be distributed in accordance
with federal income tax requirements and may be reflected in a Fund's daily
distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid excessive
fluctuations in the amount of monthly capital gains distributions, a portion of
any net capital gains realized on the disposition of securities during the
months of November and December may be distributed during the subsequent calen-
dar year. Although realized gains and losses on the assets of a Fund are
reflected in the NAV of the Fund, they are not expected to be of an amount
which would affect the Fund's NAV of $1.00 per share.
25
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Cash Manage-
ment Shares.
HOW TO BUY SHARES
How Can I Purchase Cash Management Shares Of The Funds?
Generally, Cash Management Shares may be purchased only through institutions
that have agreed to provide account administration and personal and account
maintenance services to their customers who are the beneficial owners of
Cash Management Shares. These institutions are called "Service Organiza-
tions." Customers of a Service Organization will normally give their pur-
chase instructions to the Service Organization, and the Service Organization
will, in turn, place purchase orders with Goldman Sachs. Service Organiza-
tions will set times by which purchase orders and payments must be received
by them from their customers. Generally, Cash Management Shares may be pur-
chased from the Funds on any business day at their NAV next determined after
receipt of an order by Goldman Sachs from a Service Organization. Shares
begin earning dividends after the Fund's receipt of the purchase amount in
federal funds. No sales load is charged.
Service Organizations are responsible for transmitting purchase orders and
payments to Goldman Sachs in a timely fashion. Service Organizations should
place a purchase order in writing or by telephone.
<TABLE>
--------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------
By Telephone: 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------
</TABLE>
Before or immediately after placing an initial purchase order, a Service
Organization should complete and send to Goldman Sachs the Account Applica-
tion.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
26
<PAGE>
SHAREHOLDER GUIDE
Service Organizations may send their payments as follows:
. Wire federal funds to The Northern Trust Company ("Northern"), as sub-
custodian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian); or
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds -(Name
of Fund and Class of Shares), 4900 Sears Tower-60th Floor, Chicago, IL 60606-
6372. The Funds will not accept a check drawn on a foreign bank or a third-
party check.
It is strongly recommended that payment be effected by wiring federal funds
to Northern.
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
If an effective order and
federal funds are received: Dividends begin:
---------------------------------------------------
<S> <C>
Taxable Funds:
.By 3:00 p.m. New York time Same business day
.After 3:00 p.m. New York time Next business day
---------------------------------------------------
Tax-Exempt Funds:
.By 1:00 p.m. New York time Same business day
.After 1:00 p.m. New York time Next business day
---------------------------------------------------
</TABLE>
What Do I Need To Know About Service Organizations?
Service Organizations may provide the following services in connection with
their customers' investments in Cash Management Shares:
. Acting, directly or through an agent, as the sole shareholder of record
. Maintaining account records for customers
. Processing orders to purchase, redeem or exchange shares for customers
. Responding to inquiries from prospective and existing shareholders
. Assisting customers with investment procedures
. Developing, maintaining and supporting systems necessary to support accounts
for cash management services
In addition, some (but not all) Service Organizations are authorized to accept,
on behalf of the Trust, purchase, redemption and exchange orders placed by or
on behalf of their customers, and may designate other interme-diaries to accept
such orders, if approved by the Trust. In these cases:
. A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized Service Organization or intermediary on
a
27
<PAGE>
business day, and the order will be priced at the Fund's NAV next deter-
mined after such acceptance.
. Service Organizations or intermediaries will be responsible for transmit-ting
accepted orders and payments to the Trust within the time period agreed upon
by them.
You should contact your Service Organization directly to learn whether it is
authorized to accept orders for the Trust.
Pursuant to a service plan adopted by the Trust's Board of Trustees, Service
Organizations are entitled to receive payment for their services from the
Trust of up to 0.50% (on an annualized basis) of the average daily net
assets of the Cash Management Shares of the Funds, which are attributable to
or held in the name of the Service Organization for its customers.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Service Organizations and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds.
In addition to Cash Management Shares, each Fund also offers other classes
of shares to investors. These other share classes are subject to different
fees and expenses (which affect performance), have different minimum invest-
ment requirements and are entitled to different services than Cash Manage-
ment Shares. Information regarding these other share classes may be obtained
from your sales representative or from Goldman Sachs by calling the number
on the back cover of this Prospectus.
What Is My Minimum Investment In The Funds?
The Funds do not have any minimum purchase or account requirements with
respect to Cash Management Shares. A Service Organization may, however,
impose a minimum amount for initial and subsequent investments in Cash Man-
agement Shares, and may establish other requirements such as a minimum
account balance. A Service Organization may redeem Cash Management Shares
held by non-complying accounts, and may impose a charge for any special
services.
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Modify or waive the minimum investment and minimum account balance require-
ment.
. Reject any purchase order for any reason.
28
<PAGE>
SHAREHOLDER GUIDE
The Funds may allow Service Organizations to purchase shares with securities
instead of cash if consistent with a Fund's investment policies and opera-
tions and if approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Cash Management
Shares is determined by a Fund's NAV. The Funds calculate NAV as follows:
<TABLE>
<S> <C> <C>
(Value of Assets of the Class)
NAV = - (Liabilities of the Class)
Number of Outstanding Shares of the Class
</TABLE>
. NAV per share of each class is calculated by State Street on each business
day as of the close of regular trading on the New York Stock Exchange (nor-
mally 4:00 p.m. New York time). Fund shares will be priced on any day the New
York Stock Exchange is open, except for days on which Chicago, Boston or New
York banks are closed for local holidays.
. On any business day when the Bond Market Association ("BMA") recommends that
the securities markets close early, each Fund reserves the right to close at
or prior to the BMA recommended closing time. If a Fund does so, it will
cease granting same business day credit for purchase and redemption orders
received after the Fund's closing time and credit will be given to the next
business day.
. The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-ted
by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securi-
ties are valued at amortized cost in accordance with SEC regulations. Amor-
tized cost will normally approximate market value. There can be no assurance
that a Fund will be able to at all times maintain a NAV of $1.00 per share.
HOW TO SELL SHARES
How Can I Sell Cash Management Shares Of The Funds?
Generally, Cash Management Shares may be sold (redeemed) only through Serv-
ice Organizations. Customers of a Service Organization will normally give
their redemption instructions to the Service Organization, and the Service
Organization will, in turn, place redemption orders with the Funds. General-
ly, each Fund will redeem its Cash Management Shares upon request on any
business day at their NAV next determined after receipt of such request in
proper form.
A Service Organization may request redemptions in writing or by telephone if
the optional telephone redemption privilege is elected on the Account Appli-
cation.
29
<PAGE>
<TABLE>
----------------------------------------------------------------------
<C> <S>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
----------------------------------------------------------------------
By Telephone: If you have elected the telephone redemption
privilege on your Account Application:
.1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
----------------------------------------------------------------------
</TABLE>
Certain Service Organizations are authorized to accept redemption requests
on behalf of the Funds as described under "What Do I Need To Know About
Service Organizations?" A redemption may also be made with respect to cer-
tain Funds by means of the check redemption privilege.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor, and the Transfer Agent will not be liable for
any loss you may incur in the event that the Trust accepts unauthorized tel-
ephone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing and
signed by an authorized person designated on the Account Application. The
written request may be confirmed by telephone with both the requesting party
and the designated bank account to verify instructions.
. The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
30
<PAGE>
SHAREHOLDER GUIDE
When Will Redemption Proceeds Be Wired?
Redemption proceeds will normally be wired to the bank account designated on
a Service Organization's Account Application as follows:
<TABLE>
<CAPTION>
Redemption Request Received Redemption Proceeds Dividends
-------------------------------------------------------------------------------
<C> <S> <C>
Taxable Funds:
-------------------------------------------------------------------------------
.By 3:00 p.m. New York time Wired same business day Not earned on day
request is received
-------------------------------------------------------------------------------
.After 3:00 p.m. New York time Wired next business day Earned on day
request is received
-------------------------------------------------------------------------------
Tax-Exempt Funds:
-------------------------------------------------------------------------------
.By 12:00 p.m. New York time Wired same business day Not earned on day
request is received
-------------------------------------------------------------------------------
.After 12:00 p.m. New York time Wired next business day Earned on day
request is received
-------------------------------------------------------------------------------
</TABLE>
. Although redemption proceeds will normally be wired as described above, each
Fund reserves the right to pay redemption proceeds up to three busi-ness days
following receipt of a properly executed wire transfer redemption request. If
you are selling shares you recently paid for by check, the Fund will pay you
when your check has cleared, which may take up to 15 days. If the Federal
Reserve Bank is closed on the day that the redemption proceeds would
ordinarily be wired, wiring the redemption proceeds may be delayed one
additional business day.
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of intermediaries or your Service
Organization in the transfer process. If a problem with such performance
arises, you should deal directly with such intermediaries or Service
Organizations.
What Should I Know About The Check Redemption Privilege?
A Service Organization may elect to have a special account with State Street
for the purpose of redeeming Cash Management Shares from its account by
check. The following general policies govern the check redemption privilege:
. The Service Organization will be provided with a supply of checks when
State Street receives a completed signature card and authorization form.
Checks drawn on the account may be payable to the order of any person in
any amount over $500, but cannot be certified.
. The payee of the check may cash or deposit it just like any other check
drawn on a bank.
31
<PAGE>
. When the check is presented to State Street for payment, a sufficient number
of full or fractional Cash Management Shares will be redeemed to cover the
amount of the check.
. Canceled checks will be returned to the Service Organization by State
Street.
. The check redemption privilege allows a Service Organization to receive the
dividends declared on the Cash Management Shares that are to be redeemed
until the check is actually processed. Because of this feature, accounts may
not be completely liquidated by check.
. If the amount of the check is greater than the value of the Cash Management
Shares held in the Service Organization's account, the check will be returned
unpaid. In this case, the Service Organization may be subject to extra
charges.
. The Trust reserves the right to limit the availability of, modify or
terminate the check redemption privilege at any time with respect to any or
all Service Organizations.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate the timely transmittal of redemption requests, Service
Organizations may set times by which they must receive redemption requests.
Service Organizations may also require additional documentation from you.
The Trust reserves the right to:
. Redeem the Cash Management Shares of any Service Organization whose account
balance falls below the minimum as a result of a redemption. The Fund will
give 60 days' prior written notice to allow a Service Organization to
purchase sufficient additional shares of the Fund in order to avoid such
redemption. Different rules may apply to investors who have established
brokerage accounts with Goldman Sachs in accordance with the terms and
conditions of their account agreements.
. Redeem your Cash Management Shares in other circumstances determined by the
Board of Trustees to be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distributions
be returned to the Fund as undeliverable or remain uncashed for six months.
In addition, that distribution and all future distributions payable to you
will be reinvested at
32
<PAGE>
SHAREHOLDER GUIDE
NAV in additional Fund shares. No interest will accrue on amounts repre-
sented by uncashed distribution or redemption checks.
Can I Exchange My Investment From One Fund To Another?
A Service Organization may exchange Cash Management Shares of a Fund at NAV
for shares of the corresponding class of any other Goldman Sachs Fund. The
exchange privilege may be materially modified or withdrawn at any time upon
60 days' written notice.
<TABLE>
<CAPTION>
Instructions For
Exchanging Shares:
-------------------------------------------------------------------
<S> <C>
By Writing: .Write a letter of instruction that includes:
.The recordholder name(s) and signature(s)
.The account number
.The Fund names and Class of Shares
.The dollar amount to be exchanged
.Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
-------------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
.1-800-621-2550 (8:00 a.m. to 4:00 p.m.
New York time)
-------------------------------------------------------------------
</TABLE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically registered
account.
. Shares may be exchanged among accounts with different names, addresses, and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized person
designated on the Account Application.
. Exchanges are available only in states where exchanges may be legally made.
. It may be difficult to make telephone exchanges in times of drastic economic
or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I Need
To Know About Telephone Redemption Requests?" in an effort to prevent
unauthorized or fraudulent telephone exchange requests.
33
<PAGE>
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
What Types Of Reports Will I Be Sent Regarding Investments In Cash
Management Shares?
Service Organizations will receive from the Funds annual reports containing
audited financial statements and semi-annual reports. Upon request, Service
Organizations will also be provided with a printed confirmation for each
transaction. Any dividends and distributions paid by the Funds are also
reflected in regular statements issued by the Funds to Service Organiza-
tions. Service Organizations are responsible for providing these or other
reports to their customers who are the beneficial owners of Cash Management
Shares in accordance with the rules that apply to their accounts with the
Service Organizations.
What Are The Distribution Fees Paid By Cash Management Shares?
The Trust has adopted a distribution and service plan (the "Plan") under
which Cash Management Shares bear distribution and service fees for the sale
and distribution of its shares. Because these fees are paid out of the
Funds' assets on an ongoing basis, over time, these fees will increase the
cost of your investment and may cost you more than paying other types of
sales charges. If the fees received by Goldman Sachs pursuant to the Plan
exceed its expenses, Goldman Sachs may realize a profit from this arrange-
ment.
Under the Plan, Goldman Sachs is entitled to a monthly fee from each Fund
for distribution services equal, on an annual basis, to 0.50% of a Fund's
average daily net assets attributed to Cash Management Shares. Currently,
Goldman Sachs has voluntarily agreed to limit the amount of such fees to
0.07% of a Fund's average daily net assets attributed to Cash Management
Shares. As of the date of this Prospectus, Goldman Sachs has no intention of
modifying or discontinuing such limitation, but may do so in the future at
its discretion.
The distribution fees are subject to the requirements of Rule 12b-1 under
the Act, and may be used (among other things) for:
. Compensation paid to and expenses incurred by Service Organizations,
Goldman Sachs and their respective officers, employees and sales
representatives;
. Commissions paid to Service Organizations;
. Allocable overhead;
. Telephone and travel expenses;
34
<PAGE>
SHAREHOLDER GUIDE
. Interest and other costs associated with the financing of such compensation
and expenses;
. Printing of prospectuses for prospective shareholders;
. Preparation and distribution of sales literature or advertising of any
type; and
. All other expenses incurred in connection with activities primarily
intended to result in the sale of Cash Management Shares.
35
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
Taxes on Distributions: Except for the Tax-Exempt Funds, distributions of
investment income are taxable as ordinary income for federal tax purposes, and
may also be subject to state or local taxes. This is true whether you reinvest
your distributions in additional Fund shares or receive them in cash. To the
extent that Fund distributions are attributable to interest on federal obliga-
tions or interest on obligations of your state of residence or its municipali-
ties or authorities, they will in most cases be exempt from state and local
income taxes. Distributions from the Tax-Exempt Funds that are designated as
"exempt interest dividends" are generally not subject to federal income tax.
Distributions of short-term capital gains are taxable to you as ordinary
income. Any long-term capital gain distributions are taxable as long-term capi-
tal gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Exempt Funds may be a preference item when determining your federal alter-
native minimum tax liability. Exempt-interest dividends are also taken into
account in determining the taxable portion of social security or railroad
retirement benefits. Any interest on indebtedness incurred by you to purchase
or carry shares in the Tax-Exempt Funds generally will not be deductible for
federal income tax purposes.
Other Information: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
36
<PAGE>
Appendix A
Additional Information on Portfolio Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. Treasury Obligations and U.S. Government Securities. U.S. Treasury Obliga-
tions include securities issued or guaranteed by the U.S. Treasury ("U.S. Trea-
sury Obligations"). Payment of principal and interest on these obligations is
backed by the full faith and credit of the U.S. government. U.S. Treasury Obli-
gations include, among other things, the separately traded principal and inter-
est components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the Separate Trading of Registered
Interest and Principal of Securities program ("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed.
37
<PAGE>
Certain of these participations may be regarded as illiquid. U.S. Government
Securities also include zero coupon bonds.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
Bank Obligations. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Funds may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank, U.S. dollar-
denominated obligations issued or guaranteed by foreign banks that have more
than $1 billion in total assets at the time of purchase, U.S. branches of such
foreign banks (Yankee obligations), foreign branches of such foreign banks and
foreign branches of U.S. banks having more than $1 billion in total assets at
the time of purchase. Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific obli-
gation or by government regulation.
If a Fund invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of opera-
tions and profitability of domestic and foreign banks. Significant developments
in the U.S. banking industry have included increased competition from other
types of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the real estate mar-
kets. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
Commercial Paper. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or bank holding companies, corporations, finance companies and other issuers.
The commercial paper purchased by a Fund consists of direct U.S. dollar-denomi-
nated obligations of domestic or, in the case of a certain Funds, foreign
issuers.
38
<PAGE>
APPENDIX A
Short-Term Obligations. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
Repurchase Agreements. Each Fund may enter into repurchase agreements with pri-
mary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, each Fund, together with other registered investment
companies having advisory agreements with the Investment Adviser or any of its
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.
Asset-Backed and Receivables-Backed Securities. Certain Funds may invest in
asset-backed and receivables-backed securities whose principal and interest
payments are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-backed
and receivables-backed 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 declin-
ing interest rates, prepayment of loans underlying asset-backed and receiv-
ables-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. In addition, securities that
39
<PAGE>
are backed by credit card, automobile and similar types of receivables gener-
ally do not have the benefit of a security interest in collateral that is com-
parable in quality to mortgage assets. There is the possibility that, in some
cases, recoveries on repossessed collateral may not be available to support
payments on these securities. In the event of a default, a Fund may suffer a
loss if it cannot sell collateral quickly and receive the amount it is owed.
Foreign Government Obligations and Related Foreign Risks. Certain Funds may
invest in foreign government obligations. Foreign government obligations are
U.S. dollar-denominated obligations (limited to commercial paper and other
notes) issued or guaranteed by a foreign government or other entity located or
organized in a foreign country that maintains a short-term foreign currency
rating in the highest short-term ratings category by the requisite number of
NRSROs.
Investments by a Fund in foreign securities, whether issued by a foreign gov-
ernment, bank, corporation or other issuer, may present a greater degree of
risk than investments in securities of domestic issuers because of less public-
ly-available financial and other information, less securities regulation,
potential imposition of foreign withholding and other taxes, war, expropriation
or other adverse governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and generally are not bound by
the accounting, auditing and financial reporting standards applicable to U.S.
banks.
Municipal Obligations. Certain Funds may invest in municipal obligations.
Municipal obligations are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities, and the District of Columbia. Municipal
obligations in which a Fund may invest consist of fixed rate notes and similar
debt instruments; variable and floating rate demand instruments; tax-exempt
commercial paper; municipal bonds; and unrated notes, paper, bonds or other
instruments.
Municipal Notes and Bonds. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds also include lease rental revenue bonds which are
issued by a state or local authority for capital projects and are secured by
annual lease payments from the state or locality sufficient to cover debt serv-
ice on the authority's obligations. Industrial development bonds ("private
activity bonds") are a specific type of revenue bond backed by the credit and
security of a private user and, therefore, have more potential risk.
40
<PAGE>
APPENDIX A
Municipal bonds may be issued in a variety of forms, including commercial
paper, tender option bonds and variable and floating rate securities.
Tender Option Bonds. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal income
tax. Certain tender option bonds may be illiquid or may become illiquid as a
result of a credit rating downgrade, a payment default or a disqualification
from tax-exempt status.
Revenue Anticipation Warrants. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
Industrial Development Bonds. Certain Funds may invest in industrial develop-
ment bonds (private activity bonds). Industrial development bonds are a spe-
cific type of revenue bond backed by the credit and security of a private user,
the interest from which would be an item of tax preference when distributed by
a Fund as "exempt-interest dividends" to shareholders under the AMT.
Other Municipal Obligation Policies. Certain Funds may invest 25% or more of
the value of their respective total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting
41
<PAGE>
one municipal obligation would also affect the other municipal obligation. For
example, a Fund may invest all of its assets in (a) municipal obligations the
interest of which is paid solely from revenues from similar projects such as
hospitals, electric utility systems, multi-family housing, nursing homes, com-
mercial facilities (including hotels), steel companies or life care facilities;
(b) municipal obligations whose issuers are in the same state; or (c) indus-
trial development obligations. Concentration of a Fund's investments in these
municipal obligations will subject the Fund, to a greater extent than if such
investment was not so concentrated, to the risks of adverse economic, business
or political developments affecting the particular state, industry or other
area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities and generally
are not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
Custodial Receipts. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
Other Investment Companies. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of
any other investment company, and a prohibition on investing more than 5% of a
Fund's total assets in securities of any one investment company or more than
10% of its total assets in securities of all investment companies. A Fund will
indirectly bear
42
<PAGE>
APPENDIX A
its proportionate share of any management fees and other expenses paid by such
other investment companies. Such other investment companies will have invest-
ment objectives, policies and restrictions substantially similar to those of
the acquiring Fund and will be subject to substantially the same risks.
Floating and Variable Rate Obligations. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
When-Issued Securities and Forward Commitments. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring the securities for its portfolio, a Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment Adviser
deems it appropriate.
43
<PAGE>
Illiquid Securities. Each Fund may invest up to 10% of its net assets in
illiq-uid securities which cannot be disposed of in seven days in the ordinary
course of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain municipal leases and participation interests
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of more
than seven days
. Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is oth-
erwise eligible for resale pursuant to Rule 144A under the Securities Act of
1933.
Investing in restricted securities may decrease the liquidity of a Fund's
port-folio.
Borrowings. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the Addi-
tional Statement.
Downgraded Securities. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
Special Risks and Policies Applicable to the Tax-Exempt Funds:
Fundamental Policies. As a matter of fundamental policy, at least 80% of each
of the net assets of each of the Tax-Exempt Diversified, Tax-Exempt California
and Tax-Exempt New York Portfolios will ordinarily be invested in municipal
obligations, the interest from which is, in the opinion of bond counsel, if
any, excluded from gross income for federal income tax purposes. In addition,
as a matter of fundamental policy, at least 65% of each of the Tax-Exempt Cali-
fornia and Tax-Exempt New York Portfolio's total assets will be invested in
California and New York municipal obligations, except in extraordinary circum-
stances.
For these purposes, California and New York municipal obligations are obliga-
tions issued by or on behalf of the State of California or the State of New
York, respectively, and their respective political subdivisions, agencies and
instrumentalities and the government of Puerto Rico, the U.S. Virgin Islands
and Guam, the interest from which is excluded from gross income for federal
income tax purposes and is exempt from California State personal income tax or
New York State and New York City personal income tax. Each Tax-Exempt Fund may
temporarily invest in taxable money market instruments or, in the case of the
Tax-Exempt California and New
44
<PAGE>
APPENDIX A
York Portfolios, in municipal obligations that are not California or New York
municipal obligations, respectively, when acceptable California and New York
municipal obligations are not available or when the Investment Adviser believes
that the market conditions dictate a defensive posture. Investments in taxable
money market instruments will be limited to those meeting the quality standards
of each Tax-Exempt Fund. The Tax-Exempt California and Tax-Exempt New York
Portfolios' distributions of interest from municipal obligations other than
California and New York municipal obligations, respectively, may be subject to
California and New York State and New York City personal income taxes.
Risks of Investing in California and New York: The Tax-Exempt California and
Tax-Exempt New York Portfolios concentrate their investments in California and
New York municipal obligations. Consequently, these Funds are more susceptible
to factors adversely affecting issuers of California and New York municipal
obligations, and may be riskier than comparable municipal bond funds and money
market funds that do not emphasize these issuers to this degree.
The Tax-Exempt California Portfolio's investments can be affected by political
and economic developments within the State of California (the "State"), and by
the financial condition of the State, its public authorities and political sub-
divisions. After suffering a severe recession in the early 1990's which caused
the State to experience financial difficulties, California's economy entered a
sustained recovery since late 1993. The State's budget has returned to a posi-
tive balance and is generating substantial surpluses. California's long-term
credit rating has been raised after being reduced during the recession. To
respond to its own revenue shortfalls during the recession, the State reduced
assistance to its public authorities and political subdivisions. Cutbacks in
state aid could further adversely affect the financial condition of cities,
counties and education districts which are subject to their own fiscal
constraints. California voters in the past have passed amendments to the Cali-
fornia Constitution and other measures that limit the taxing and spending
authority of California governmental entities, and future voter initiatives
could result in adverse consequences affecting California municipal obliga-
tions. Also, the ultimate fiscal effect of federally-mandated reform of welfare
programs on the State and its local governments is still to be resolved.
These factors, among others (including the outcome of related pending litiga-
tion), could reduce the credit standing of certain issuers of California munic-
ipal obligations. A more detailed discussion of the risks of investing in Cali-
fornia is included in the Additional Statement.
The Tax-Exempt New York Portfolio's investments will be affected by political
and economic developments within the State of New York (the "State"), and by
the financial conditions of the State, its public authorities and political
subdivisions, par-
45
<PAGE>
ticularly the City of New York (the "City"). The State and the City face long-
term economic problems that could seriously affect their ability and that of
other issuers of New York municipal obligations to meet their financial obliga-
tions. Certain substantial issuers of New York municipal obligations (including
issuers whose obligations may be acquired by the Fund) have, at times, experi-
enced serious financial difficulties. Strong demand for New York municipal
obligations has also at times had the effect of permitting New York municipal
obligations to be issued with yields relatively lower, and after issuance, to
trade in the market at prices relatively higher, than comparably rated munici-
pal obligations issued by other jurisdictions. A recurrence of the financial
difficulties previously experienced by certain issuers of New York municipal
obligations could result in defaults or declines in the market values of those
issuers' existing obligations and, possibly, in the obligations of other
issuers of New York municipal obligations. Although as of April 1, 2000 no
issuers were in default with respect to the payment of their New York municipal
obligations, the occurrence of any such default could materially affect
adversely the market values and marketability of all New York municipal obliga-
tions and, consequently, the value of the Fund's holdings. A more detailed dis-
cussion of the risks of investing in New York is included in the Additional
Statement.
If California, New York, or any of their local governmental entities are unable
to meet their financial obligations, the corresponding Fund's income, NAV,
ability to preserve or realize appreciation of capital or liquidity could be
adversely affected. Also, neither of these Funds is a diversified fund under
the Act (except to the extent that diversification is required by Rule 2a-7 or
for federal income tax purposes). Because they may invest a larger percentage
of their assets in the securities of fewer issuers than do diversified funds,
these Funds may be exposed to greater risk in that an adverse change in the
condition of one or a small number of issuers would have a greater impact on
them.
46
<PAGE>
[This page intentionally left blank]
47
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Arthur Andersen LLP, whose report, along
with a Fund's financial statements, is included in the Fund's annual report
(available upon request without charge).
PRIME OBLIGATIONS PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period incomea shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - ILA B units 1.00 0.04 (0.04)
1999 - ILA C units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - ILA B units 1.00 0.04 (0.04)
1998 - ILA C units 1.00 0.04 (0.04)
1998 - Cash Management shares (commenced
May 1) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
1997 - ILA B units 1.00 0.04 (0.04)
1997 - ILA C units (commenced August 15) 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
1996 - ILA B units (commenced May 8) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
48
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.90% $1,095,109 0.43% 4.79% 0.43% 4.79%
1.00 4.74 40,850 0.58 4.65 0.58 4.65
1.00 4.48 92,975 0.83 4.33 0.83 4.33
1.00 3.86 19,444 1.43 3.83 1.43 3.83
1.00 3.86 7,436 1.43 3.76 1.43 3.76
1.00 4.30 1 1.00 4.44 1.43 4.01
- ------------------------------------------------------------------------------------
1.00 5.32 837,185 0.43 5.19 0.43 5.19
1.00 5.16 38,836 0.58 5.05 0.58 5.05
1.00 4.90 119,309 0.83 4.79 0.83 4.79
1.00 4.27 14,412 1.43 4.07 1.43 4.07
1.00 4.27 6,814 1.43 4.13 1.43 4.13
1.00 4.69/c/ 2 0.93/c/ 4.81/c/ 1.43/c/ 4.31/c/
- ------------------------------------------------------------------------------------
1.00 5.38 866,445 0.42 5.24 0.43 5.23
1.00 5.22 28,110 0.57 5.11 0.58 5.10
1.00 4.96 78,316 0.82 4.85 0.83 4.84
1.00 4.33 1,574 1.42 4.33 1.43 4.32
1.00 4.41/c/ 1,897 1.42/c/ 4.39/c/ 1.43/c/ 4.38/c/
- ------------------------------------------------------------------------------------
1.00 5.22 1,154,787 0.41 5.11 0.43 5.09
1.00 5.06 23,738 0.56 4.97 0.58 4.95
1.00 4.80 84,707 0.81 4.74 0.83 4.72
1.00 3.97/c/ 346 1.41/c/ 4.09/c/ 1.43/c/ 4.07/c/
- ------------------------------------------------------------------------------------
1.00 5.79 1,261,251 0.41 5.66 0.43 5.64
1.00 5.63 63,018 0.56 5.51 0.58 5.49
1.00 5.37 227,233 0.81 5.22 0.83 5.20
- ------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period incomea shareholders
- --------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- --------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - Cash Management shares
(commenced May 1) 1.00 0.03 (0.03)
- --------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.06 (0.06)
1995 - ILA Service units 1.00 0.05 (0.05)
- --------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
50
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.92% $1,346,765 0.41% 4.80% 0.41% 4.80%
1.00 4.76 6,961 0.56 4.64 0.56 4.64
1.00 4.50 383,932 0.81 4.42 0.81 4.42
1.00 4.32 2 0.98 4.37 1.41 3.94
- ------------------------------------------------------------------------------------
1.00 5.33 1,350,317 0.40 5.17 0.43 5.14
1.00 5.17 314,327 0.55 5.04 0.58 5.01
1.00 4.91 32,349 0.80 4.79 0.83 4.76
1.00 4.69c 2 0.90c 4.80c 1.43c 4.27c
- ------------------------------------------------------------------------------------
1.00 5.43 806,096 0.37 5.31 0.42 5.26
1.00 5.28 307,480 0.52 5.15 0.57 5.10
1.00 5.01 20,517 0.77 4.90 0.82 4.85
- ------------------------------------------------------------------------------------
1.00 5.27 703,097 0.36 5.15 0.43 5.08
1.00 5.12 257,258 0.51 5.00 0.58 4.93
1.00 4.86 28,845 0.76 4.75 0.83 4.68
- ------------------------------------------------------------------------------------
1.00 5.85 574,155 0.36 5.71 0.42 5.65
1.00 5.69 164,422 0.51 5.55 0.57 5.49
1.00 5.43 23,080 0.76 5.29 0.82 5.23
- ------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 - Cash Management shares (commenced
May 1) 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- ----------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
52
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.77% $205,244 0.43% 4.64% 0.45% 4.62%
1.00 4.61 3,265 0.58 4.42 0.60 4.40
1.00 4.35 79,847 0.83 4.24 0.85 4.22
1.00 4.18 153 1.00 4.68 1.45 4.23
- ------------------------------------------------------------------------------------
1.00 5.21 383,243 0.43 5.09 0.45 5.07
1.00 5.05 7,692 0.58 4.94 0.60 4.92
1.00 4.79 105,732 0.83 4.67 0.85 4.65
1.00 4.57/c/ 2 0.93/c/ 4.60/c/ 1.45/c/ 4.08/c/
- ------------------------------------------------------------------------------------
1.00 5.31 460,457 0.42 5.16 0.42 5.16
1.00 5.15 10,192 0.57 4.98 0.57 4.98
1.00 4.89 83,799 0.82 4.78 0.82 4.78
- ------------------------------------------------------------------------------------
1.00 5.15 694,651 0.41 5.04 0.44 5.01
1.00 4.99 36,055 0.56 4.89 0.59 4.86
1.00 4.73 94,228 0.81 4.63 0.84 4.60
- ------------------------------------------------------------------------------------
1.00 5.77 570,469 0.41 5.62 0.43 5.60
1.00 5.62 47,558 0.56 5.49 0.58 5.47
1.00 5.35 85,401 0.81 5.19 0.83 5.17
- ------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
TAX-EXEMPT DIVERSIFIED PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.03 (0.03)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.03 (0.03)
1998 - Cash Management shares (commenced
May 1) 1.00 0.02 (0.02)
- ----------------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
1996 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
1995 - ILA units 1.00 0.04 (0.04)
1995 - ILA Administration units 1.00 0.04 (0.04)
1995 - ILA Service units 1.00 0.03 (0.03)
- ----------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.89% $1,734,623 0.42% 2.85% 0.42% 2.85%
1.00 2.73 28,084 0.57 2.66 0.57 2.66
1.00 2.48 20,991 0.82 2.41 0.82 2.41
1.00 2.30 2 0.99 2.51 1.42 2.08
- ------------------------------------------------------------------------------------
1.00 3.17 1,562,285 0.35 3.12 0.41 3.06
1.00 3.02 26,509 0.50 2.98 0.56 2.92
1.00 2.76 37,850 0.75 2.72 0.81 2.66
1.00 2.61/c/ 2 0.85/c/ 2.66/c/ 1.41/c/ 2.10/c/
- ------------------------------------------------------------------------------------
1.00 3.39 1,479,486 0.32 3.33 0.41 3.24
1.00 3.23 27,967 0.47 3.16 0.56 3.07
1.00 2.97 30,513 0.72 2.97 0.81 2.88
- ------------------------------------------------------------------------------------
1.00 3.25 1,514,443 0.31 3.20 0.41 3.10
1.00 3.09 59,097 0.46 3.06 0.56 2.96
1.00 2.84 28,921 0.71 2.79 0.81 2.69
- ------------------------------------------------------------------------------------
1.00 3.72 1,342,585 0.31 3.65 0.42 3.54
1.00 3.57 48,773 0.46 3.51 0.57 3.40
1.00 3.31 49,647 0.71 3.24 0.82 3.13
- ------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
TAX-EXEMPT CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distribution
beginning investment to unit/
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.02 (0.02)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.02 (0.02)
1998 - Cash Management shares (commenced May
1) 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units (Re-commenced
September 1) 1.00 0.01 (0.01)
- -------------------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
1995 - ILA units 1.00 0.03 (0.03)
1995 - ILA Administration units 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net
assets at Ratio of net Ratio of net
Net asset end Ratio of net investment Ratio of net investment
value at of period expenses to income to expenses to income to
end Total (in average net average net average net average net
of period return/b/ 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.60% $895,469 0.42% 2.58% 0.42% 2.58%
1.00 2.45 8,910 0.57 2.38 0.57 2.38
1.00 2.19 27,229 0.82 2.39 0.82 2.39
1.00 2.02 1 0.99 2.15 1.42 1.72
- -----------------------------------------------------------------------------------
1.00 2.84 584,615 0.41 2.79 0.41 2.79
1.00 2.68 512 0.56 2.84 0.56 2.84
1.00 2.43 2 0.81 2.48 0.81 2.48
1.00 2.25/c/ 2 0.91/c/ 2.37/c/ 1.41/c/ 1.87/c/
- -----------------------------------------------------------------------------------
1.00 3.15 591,003 0.42 3.10 0.42 3.10
1.00 3.00 360 0.57 2.98 0.57 2.98
1.00 2.87/c/ 2 0.82/c/ 2.90/c/ 0.82/c/ 2.90/c/
- -----------------------------------------------------------------------------------
1.00 3.03 440,476 0.41 2.99 0.42 2.98
1.00 2.88 142 0.56 2.84 0.57 2.83
- -----------------------------------------------------------------------------------
1.00 3.55 346,728 0.41 3.49 0.41 3.49
1.00 3.40 61 0.56 3.32 0.56 3.32
- -----------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
TAX-EXEMPT NEW YORK PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period income/a/ shareholders
- -----------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.03 $(0.03)
1999 - ILA Administration units 1.00 0.03 (0.03)
1999 - ILA Service units 1.00 0.02 (0.02)
1999 - Cash Management shares 1.00 0.02 (0.02)
- -----------------------------------------------------------------------
1998 - ILA units 1.00 0.03 (0.03)
1998 - ILA Administration units 1.00 0.03 (0.03)
1998 - ILA Service units 1.00 0.03 (0.03)
1998 - Cash Management
shares (commenced May 1) 1.00 0.02 (0.02)
- -----------------------------------------------------------------------
1997 - ILA units 1.00 0.03 (0.03)
1997 - ILA Administration units 1.00 0.03 (0.03)
1997 - ILA Service units (commenced
September 15) 1.00 0.01 (0.01)
- -----------------------------------------------------------------------
1996 - ILA units 1.00 0.03 (0.03)
1996 - ILA Administration units 1.00 0.03 (0.03)
- -----------------------------------------------------------------------
1995 - ILA units 1.00 0.03 (0.03)
1995 - ILA Administration units 1.00 0.03 (0.03)
- -----------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 2.76% $160,301 0.43% 2.73% 0.44% 2.72%
1.00 2.60 37,836 0.58 2.61 0.59 2.60
1.00 2.35 2 0.83 2.29 0.84 2.28
1.00 2.17 2 1.00 2.34 1.44 1.90
- ------------------------------------------------------------------------------------
1.00 3.02 122,550 0.36 2.96 0.51 2.81
1.00 2.87 21,580 0.51 2.85 0.66 2.70
1.00 2.61 2 0.76 2.61 0.91 2.46
1.00 2.46/c/ 1 0.86/c/ 2.56/c/ 1.51/c/ 1.91/c/
- ------------------------------------------------------------------------------------
1.00 3.29 102,887 0.33 3.24 0.43 3.14
1.00 3.14 31,993 0.48 3.09 0.58 2.99
1.00 3.02/c/ 2 0.73/c/ 3.04/c/ 0.83/c/ 2.94/c/
- ------------------------------------------------------------------------------------
1.00 3.05 70,175 0.32 3.01 0.43 2.90
1.00 2.90 44,319 0.47 2.88 0.58 2.77
- ------------------------------------------------------------------------------------
1.00 3.51 90,537 0.30 3.44 0.44 3.30
1.00 3.35 26,724 0.45 3.28 0.59 3.14
- ------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
Index
1 General Investment Management Approach
5 Fund Investment Objectives and Strategies
10 Principal Risks of the Funds
13 Fund Performance
20 Fund Fees and Expenses
23 Service Providers
25 Dividends
26 Shareholder Guide
26 How to Buy Shares
29 How to Sell Shares
36 Taxation
37 Appendix A Additional Information on Portfolio Risks, Securities
and Techniques
48 Appendix B Financial Highlights
<PAGE>
Institutional Liquid Assets
Prospectus (ILA Cash Management Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of Fund
documents, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request to:
[email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
ILAPROCMS
<PAGE>
Oakmark Units
Government Portfolio
A Cash Management Vehicle for
Existing and Prospective Shareholders of
[LOGO OF OAKMARK]
PROSPECTUS
May 1, 2000
-----------
The Oakmark Family of Funds
Two North LaSalle Street
Chicago, Illinois 60602-3790
-----------
<PAGE>
Prospectus
Oakmark Units
May 1, 2000
.Government
Portfolio
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE SECURI-
TIES OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A PORTFOLIO IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A PORTFOLIO
SEEKS TO PRESERVE THE VALUE OF YOUR INVEST-
MENT AT $1.00 PER SHARE, IT IS POSSIBLE TO
LOSE MONEY BY INVESTING IN A PORTFOLIO.
[ART]
<PAGE>
NOT FDIC-INSURED May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
The Government Portfolio (the "Portfolio") is a portfolio of Goldman Sachs
Trust (the "Trust"), an open-end, management investment company (a "mutual
fund") which includes the Goldman Sachs-Institutional Liquid Assets Portfo-
lios. This Prospectus relates to the offering of ILA Service Units of bene-
ficial interest of the Government Portfolio ("Oakmark Units") through Harris
Associates, L.P. ("Harris Associates") in its capacity as a Service Organi-
zation for the Portfolio.
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Portfolio. GSAM is referred to in this Prospectus as the "In-
vestment Adviser." Harris Associates or its designee will act as nominee and
record holder of the Oakmark Units. You should be aware that Oakmark Units
of the Portfolio may be purchased only through Harris Associates or its des-
ignee. Harris Associates is not the distributor of the Portfolio.
Goldman Sachs' Money Market Investment Philosophy:
The Portfolio is managed to seek preservation of capital, daily liquidity
and maximum current income. The Investment Adviser follows a conservative,
risk-managed investment process that seeks to:
.Manage credit risk
.Manage interest rate risk
.Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1.Managing Credit Risk
The Investment Adviser's process for managing risk emphasizes:
.Intensive research--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Portfolio. Sources for the
Credit Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as
well as the Investment Research, Legal and Compliance departments of
Goldman Sachs.
1
<PAGE>
.Timely updates--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio
management team via computer link.
The Result: An "approved" list of high-quality credits--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
2.Managing Interest Rate Risk
Three main steps are followed in seeking to manage interest rate risk:
.Establish weighted average maturity (WAM) target--WAM (the weighted average
time until the yield of a portfolio reflects any changes in the current
interest rate environment) is constantly revisited and adjusted as market
conditions change. An overall strategy is developed by the portfolio
management team based on insights gained from weekly meetings with both
Goldman Sachs economists and economists from outside the firm.
.Implement optimum portfolio structure--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and the Portfolio's asset volatility, are used to identify the most
effective portfolio structure.
.Conduct rigorous analysis of new securities--The Investment Adviser's five-
step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for
money market mutual funds.
3. Managing Liquidity
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
.The Portfolio's clients and factors that influence their asset volatility;
.Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
.Bid-ask spreads associated with securities in the portfolios.
The benchmark for the Portfolio is the IBC Financial Data Universal Aver-
ages. The Portfolio tracks the IBC Index which best corresponds to the Port-
folio's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
.The Portfolio: The Portfolio's securities are valued by the amortized cost
method as permitted by Rule 2a-7 under the Investment Company Act of 1940,
as amended (the "Act"). Under Rule 2a-7, the Portfolio may invest only in
U.S. dollar-denominated securities that are determined to present minimal
credit risk and meet certain other criteria, including conditions relating
to maturity, diversification and credit quality. These operating policies
may be more restrictive than the fundamental policies set forth in the
Statement of Additional Information (the "Additional Statement").
.The Investors: The Portfolio is designed for investors seeking a high rate
of return, a stable net asset value ("NAV") and convenient liquidation priv-
ileges. The Portfolio is particularly suitable for banks, corporations and
other financial institutions that seek investment of short-term funds for
their own accounts or for the accounts of their customers.
.NAV: The Portfolio seeks to maintain a stable NAV of $1.00 per unit. There
can be no assurance that the Portfolio will be able at all times to maintain
a NAV of $1.00 per unit.
.Maximum Remaining Maturity of Portfolio Investments: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
.Dollar-Weighted Average Portfolio Maturity ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
.Investment Restrictions: The Portfolio is subject to certain investment
restrictions that are described in detail under "Investment Restrictions" in
the Additional Statement. Fundamental investment restrictions and the
investment objective of the Portfolio cannot be changed without approval of
a majority of the outstanding units of the Portfolio. All investment poli-
cies not specifically designated as fundamental are non-fundamental and may
be changed without unitholder approval.
.Diversification: Diversification can help the Portfolio reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), the Portfolio may not invest more than 5%
of the value of its total assets at the time of purchase in the securities
of any single issuer with the exception that the Portfolio may invest up to
25% of its total assets in the securities of a single issuer for up to three
business days. These limitations do not apply to cash, certain repurchase
agreements, U.S. Government Securities (as defined in Appendix A) or securi-
ties of other investment companies. In addition, securities subject to cer-
tain unconditional guarantees and securities that are not "First Tier Secu-
rities" as defined by the SEC are subject to different diversification
requirements as described in the Additional Statement.
3
<PAGE>
Portfolio Investment Objective and Strategies
INVESTMENT OBJECTIVE
Government Portfolio:
The Government Portfolio seeks to maximize current income to the extent con-
sistent with the preservation of capital and the maintenance of liquidity by
investing exclusively in high quality money market instruments.
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Portfolio in seeking to achieve its
investment objective. Numbers in this table show allowable usage only; for
actual usage, consult the Portfolio's annual and semi-annual reports. For
more information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
Government
----------------------------------------------------------
<S> <C>
U.S. Treasury Obligations ./1/
----------------------------------------------------------
U.S. Government Securities .
----------------------------------------------------------
Repurchase Agreements .
----------------------------------------------------------
Unrated Securities/2/
----------------------------------------------------------
Investment Companies .
Up to 10% of
total
assets in other
investment
companies
----------------------------------------------------------
Credit Quality/2/ First Tier/3/
----------------------------------------------------------
Summary of Taxation for Distributions/4/ Taxable federal
and state/5/
----------------------------------------------------------
Miscellaneous Reverse
repurchase
agreements not
permitted
----------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
1 Issued or guaranteed by the U.S. Treasury.
2 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality
to First Tier Securities. In addition, if the Portfolio holds a security
supported by a guarantee or demand feature may rely on the credit quality
of the guarantee or demand feature in determining the credit quality of
the investment.
3 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
the Portfolio under certain conditions to demand payment from, an entity
with such ratings. U.S. Government Securities are considered First Tier
Securities.
4
<PAGE>
PORTFOLIO INVESTMENT OBJECTIVE AND STRATEGIES
4 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
5 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities
interest income.
5
<PAGE>
Principal Risks of the Portfolio
Loss of money is a risk of investing in the Portfolio. An investment in the
Portfolio is not a deposit of any bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. The fol-
lowing summarizes important risks that apply to the Portfolio and may result in
a loss of your investment. The Portfolio should not be relied upon as a com-
plete investment program. There can be no assurance that the Portfolio will
achieve its investment objective.
<TABLE>
<CAPTION>
Government
.Applicable Portfolio
- ------------------------------------------------------------------------------
<S> <C>
NAV .
Interest Rate .
Credit/Default .
Liquidity .
U.S. Government Securities .
- ------------------------------------------------------------------------------
</TABLE>
Risks that apply to the Portfolio:
.NAV Risk--The risk that the Portfolio will not be able to maintain a NAV per
unit of $1.00 at all times.
.Interest Rate Risk--The risk that during periods of rising interest rates, the
Portfolio's yield (and the market value of its securities) will tend to be
lower than prevailing market rates; in periods of falling interest rates, the
Portfolio's yield will tend to be higher.
.Credit/Default Risk--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase agree-
ment, may default on its payment obligations.
.Liquidity Risk--The risk that the Portfolio will be unable to pay redemption
proceeds within the time period stated in this Prospectus, because of unusual
market conditions, an unusually high volume of redemption requests, or other
reasons.
.U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
6
<PAGE>
Portfolio Performance
HOW THE PORTFOLIO PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in the Portfolio by showing: (a) changes in the performance of the Port-
folio's Oakmark Units from year to year; and (b) the average annual returns
of the Portfolio's Oakmark Units. Investors should be aware that the fluctu-
ation of interest rates is one primary factor in performance volatility. The
bar chart and table assume reinvestment of dividends and distributions. The
Portfolio's past performance is not necessarily an indication of how the
Portfolio will perform in the future. Performance reflects expense limita-
tions in effect. If expense limitations were not in place the Portfolio's
performance would have been reduced. You may obtain the Portfolio's current
yield by calling 1-800-OAKMARK (1-800-625-6275).
7
<PAGE>
Government Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q1 '91 1.53%
Worst Quarter:
Q2 '93 0.62%
[GRAPH]
Government
1991 1992 1993 1994 1995 1996 1997 1998 1999
5.49% 3.30% 2.53% 3.53% 5.35% 4.73% 4.89% 4.79% 4.35%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
------------------------------------------------------------------------
<S> <C> <C> <C>
Oakmark Units (Inception 7/1/90) 4.35% 4.82% 4.49%
------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Portfolio Fees and Expenses (Oakmark Units)
This table describes the fees and expenses that you would pay if you buy and
hold Oakmark Units of the Portfolio.
<TABLE>
<CAPTION>
Government
Portfolio
- -----------------------------------------------------------------------
<S> <C>
Unitholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fees None
Exchange Fees None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):/1/
Management Fees 0.35%
Service Fees/2/ 0.40%
Other Expenses/3/ 0.10%
- -----------------------------------------------------------------------
Total Portfolio Operating Expenses/4/ 0.85%
- -----------------------------------------------------------------------
</TABLE>
/1/The Portfolio's annual operating expenses are based on actual expenses.
/2/Service Organizations may charge other fees directly to their customers who
are the beneficial owners of Oakmark Units in connection with their customers'
accounts. Such fees may affect the return such customers realize with respect
to their investments.
/3/"Other Expenses" include transfer agency fees equal to 0.04% of the average
daily net assets of the Portfolio's Oakmark Units plus all other ordinary
expenses not detailed above.
/4/The Investment Adviser has voluntarily agreed to reduce or limit "Total
Portfolio Operating Expenses" of the Government Portfolio (excluding service
fees, taxes, interest, brokerage fees, litigation, indemnification and other
extraordinary expenses) to 0.43% of the Portfolio's average daily net assets.
As a result of the current expense limitations, "Other Expenses" and "Total
Portfolio Operating Expenses" of the Portfolio which are actually incurred are
as set forth below. The expense limitations may be terminated at any time at
the option of the Investment Adviser with the approval of the Trustees. If this
occurs, "Other Expenses" and "Total Portfolio Operating Expenses" may increase
without shareholder approval.
<TABLE>
<CAPTION>
Government
Portfolio
--------------------------------------------------------------------------
<S> <C> <C>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets):
Management Fees 0.35%
Service Fees 0.40%
Other Expenses 0.08%
--------------------------------------------------------------------------
Total Portfolio Operating Expenses (after current expense
limitations) 0.83%
--------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Example
The following Example is intended to help you compare the cost of investing
in the Government Portfolio (without the expense limitations) with the cost
of investing in other mutual funds. The Example assumes that you invest
$10,000 in Oakmark Units of the Portfolio for the time periods indicated and
then redeem all of your units at the end of those periods. The Example also
assumes that your investment has a 5% return each year and that the Portfo-
lio's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
--------------------------------------------
<S> <C> <C> <C> <C>
Government $87 $271 $471 $1,049
--------------------------------------------
</TABLE>
Service Organizations that invest in Oakmark Units on behalf of their cus-
tomers may charge other fees directly to their customer accounts in connec-
tion with their investments. You should contact your Service Organization
for information regarding such charges. Such fees, if any, may affect the
return such customers realize with respect to their investment.
Certain Service Organizations that invest in Oakmark Units may receive other
compensation in connection with the sale and distribution of Oakmark Units
or for services to their customers' accounts and/or the Portfolio. For addi-
tional information regarding such compensation, see "Shareholder Guide" in
the Prospectus and "Other Information" in the Additional Statement.
In addition to Oakmark Units, the Portfolio also offers other classes of
shares to investors. These other share classes are subject to different fees
and expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than Oakmark Units.
Information regarding these other share classes may be obtained from your
sales representative or from Oakmark by calling the number on the back cover
of this Prospectus.
10
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Portfolio. Goldman Sachs registered as an
investment adviser in 1981. The Goldman Sachs Group, L.P., which controlled
the Investment Adviser, merged into The Goldman Sachs Group, Inc. as a
result of an initial public offering. As of December 31, 1999, GSAM, along
with other units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Portfolio's
transactions. The Investment Adviser also performs the following services
for the Portfolio:
.Continually manages the Portfolio, including the purchase, retention and
disposition of securities and other assets
.Administers the Portfolio's business affairs
.Performs various unitholder servicing functions (to the extent not provided
by other organizations)
Pursuant to an SEC order, the Government Portfolio may enter into principal
transactions in certain taxable money market instruments, including repur-
chase agreements, with Goldman Sachs.
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of the
Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate For the
Fiscal Year Ended
Contractual Rate December 31, 1999
-------------------------------------------------
<S> <C> <C>
Government 0.35% 0.35%
-------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Portfolio reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations at any time
in the future at its discretion.
11
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of the Portfolio's units. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Portfolio's transfer agent (the "Transfer Agent") and, as such, performs
various unitholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold units of the Portfolio. Goldman Sachs reserves the right to redeem at
any time some or all of the units acquired for its own account.
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
12
<PAGE>
Dividends
All or substantially all of the Portfolio's net investment income will be
declared as a dividend daily and paid to Harris Associates for distribution
to holders of Oakmark Units monthly. Dividends will normally, but not
always, be declared as of 4:00 p.m. New York time. You may choose to have
dividends paid in:
.Cash
.Additional Oakmark Units of the same Portfolio
You may indicate your election on your New Account Registration Form. Any
changes may be submitted in writing to Harris Associates at any time. If you
do not indicate any choice, dividends and distributions will be reinvested
automatically in the applicable Portfolio.
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of
each month. Net short-term capital gains, if any, will be distributed in
accordance with federal income tax requirements and may be reflected in the
Portfolio's daily distributions.
The Portfolio may distribute at least annually other realized capital gains,
if any, after reduction by available capital losses. In order to avoid
excessive fluctuations in the amount of monthly capital gains distributions,
a portion of any net capital gains realized on the disposition of securities
during the months of November and December may be distributed during the
subsequent calendar year. Although realized gains and losses on the assets
of the Portfolio are reflected in the NAV of the Portfolio, they are not
expected to be of an amount which would affect the Portfolio's NAV of $1.00
per unit.
13
<PAGE>
Unitholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Portfolio's Oakmark
Units.
HOW TO BUY OAKMARK UNITS
How Can I Purchase Oakmark Units Of The Portfolio?
You may purchase Oakmark Units of the Portfolio by check, by wire, by elec-
tronic transfer or by exchange through State Street Bank and Trust Company
as agent for Harris Associates ("Oakmark"). There are no sales commissions
or underwriting discounts. The minimum initial investment is $1,000 or $500
in the case of an Education IRA or participation in the Automatic Investment
Plan or Payroll Deduction Plan. Minimum subsequent investments are $100,
except for reinvestments of dividends and capital gain distributions.
By Check. To make an initial purchase of units, complete and sign the New
Account Registration Form and mail it to the Oakmark Family of Funds, P.O.
Box 8510, Boston, Massachusetts 02266-8510, together with a check for the
total purchase amount payable to State Street Bank and Trust Company.
You may make subsequent investments by submitting a check (except that a
third- party check will not be accepted) along with either the stub from
your Portfolio account confirmation statement or a note indicating the
amount of the purchase, your account number, and the name in which your
account is registered. Each individual check submitted for purchase must be
at least $100. Oakmark will not accept cash, drafts, "starter" checks,
third-party checks, or checks drawn on banks outside of the United States.
If your order to purchase Oakmark Units of a Portfolio is cancelled because
your check does not clear, you will be responsible for any resulting loss
incurred by Oakmark.
By Wire Transfer. You may also pay for Oakmark Units by instructing your
bank to wire money to Oakmark. Your bank may charge you a fee for sending
the wire. If you are opening a new account by wire transfer, you must first
telephone Oakmark at 1-800-OAKMARK (1-800-625-6275) to request an account
number and furnish your social security or other tax identification number.
Neither the Portfolio nor Oakmark will be responsible for the consequences
of delays, including delays in the banking or Federal Reserve wire systems.
14
<PAGE>
UNITHOLDER GUIDE
By Electronic Transfer. If you have an established Portfolio account you may
make subsequent investments by an electronic transfer of funds from your
bank account. Electronic transfer allows you to make purchases at your
request by calling 1-800-OAKMARK (1-800-625-6275) or at pre-scheduled inter-
vals. (See "Unitholder Services.") You may not open a new account through
electronic transfer.
By Exchange. You may purchase Oakmark Units of the Portfolio by exchange of
shares from the Class I Shares of The Oakmark Fund, The Oakmark Select Fund,
The Oakmark International Fund, The Oakmark Small Cap Fund, The Oakmark
Equity and Income Fund, The Oakmark Global Fund and The Oakmark Interna-
tional Small Cap Fund ("The Oakmark Funds") either by phone or by mail. An
exchange transaction is a sale and purchase for federal income tax purposes
and may result in capital gain or loss. Please review the information under
"How to Redeem Units--By Exchange."
Each of The Oakmark Funds except The Oakmark Fund and The Oakmark Equity and
Income Fund imposes a short-term trading fee on redemptions of Class I
Shares held less than 90 days to offset two types of costs to the Fund
caused by short-term trading: portfolio transaction and market impact costs
associated with erratic redemption activity and administrative costs associ-
ated with processing redemptions. The fee is 2% of the redemption value and
is deducted from the redemption proceeds.
The "first-in, first-out" (FIFO) method is used to determine the holding
period, which means that if you bought shares on different days, the shares
purchased first will be redeemed first for purposes of determining whether
the short-term trading fee applies.
We do not impose a redemption fee on a redemption of:
.shares acquired by reinvestment of dividends or distributions of a Fund; or
.shares held in an account of certain retirement plans or profit sharing
plans or purchased through certain Intermediaries.
Purchase Amount and Dividends. Oakmark Units of the Portfolio may be pur-
chased on any business day at the NAV next determined after receipt by
Oakmark of both the purchase order and the purchase amount in federal funds.
Purchases of Oakmark Units may be made by check or wire transfer. Purchases
are effective as soon as a check is converted to federal funds. Purchases by
wire transfer will be effected the day the wire transfer is received if the
wire transfer is received prior to the Portfolio's cut-off time as noted
below. It is expected that checks will ordinarily be converted to federal
funds within two business days after receipt. A purchase by check is deemed
to be effective prior to the
15
<PAGE>
Portfolio's cut-off time noted below on the date such purchase proceeds con-
vert to federal funds. Oakmark Units purchased by check may not be redeemed
until the check has cleared, as described under "How to Redeem Units."
Oakmark Units of the Government Portfolio are deemed to have been purchased
when an order becomes effective and are entitled to dividends as follows:
<TABLE>
<CAPTION>
If an effective order is
received by Oakmark Dividends Begin
-----------------------------------------------
<S> <C>
By: 3:00 p.m.--N.Y. time Same Business Day
After: 3:00 p.m.--N.Y. time Next Business Day
</TABLE>
General. Each purchase order for Oakmark Units must be accepted by Oakmark.
Once your purchase order has been accepted, you may not cancel or revoke it;
however, you may redeem the Oakmark Units. Oakmark reserves the right not to
accept any purchase order that it determines not to be in the best interest
of the Trust or of the Portfolio's unitholders. Oakmark uses procedures
designed to give reasonable assurance that telephone instructions are genu-
ine, including recording telephone calls, testing a caller's identity and
sending written confirmation of telephone transactions. If Oakmark does not
follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Oakmark will not be liable for acting
upon instructions communicated by telephone that it reasonably believes to
be genuine.
What Do I Need To Know About Service Organizations?
Service Organizations, including Harris Associates, may provide the follow-
ing services in connection with their customers' investments in ILA Service
Units:
.Acting, directly or through an agent, as the sole unitholder of record
.Maintaining account records for customers
.Processing orders to purchase, redeem or exchange units for customers
.Responding to inquiries from prospective and existing unitholders
.Assisting customers with investment procedures
Pursuant to a service plan adopted by the Goldman Sachs Trust's Board of
Trustees, Service Organizations are entitled to receive payment for their
services from the Trust of up to 0.40% (on an annualized basis) of the aver-
age daily net assets of the ILA Service Units of the Portfolio, which are
attributable to or held in the name of the Service Organization for its cus-
tomers. In addition, GSAM, at its own expense, may pay a Service Organiza-
tion up to 0.10% of the average daily net assets of the ILA Service Units of
the Portfolio, which are attributable to or held in the name of the Service
Organization for its customers. Such compensation does not represent an
additional expense to the Portfolio or its unitholders, since it will be
paid from the assets of GSAM.
16
<PAGE>
UNITHOLDER GUIDE
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Portfolio, to selected Service Organizations and
other persons in connection with the sale, distribution and/or servicing of
units of the Portfolio and other Goldman Sachs Funds.
How Are Units Priced?
The price you pay or receive when you buy, sell or exchange Oakmark Units is
determined by the Portfolio's NAV. The Portfolio calculates NAV as follows:
(Value of Assets of the Class)
- (Liabilities of the Class)
NAV = _______________________________
Number of Outstanding Units of the Class
.NAV per unit is calculated by State Street Bank and Trust Company (the
Portfolio's Custodian) on each business day as of the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. New York time).
Portfolio units will be priced on any day the New York Stock Exchange is
open, except for days on which Chicago, Boston or New York banks are closed
for local holidays.
.On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, the Portfolio reserves the right
to close at or prior to the BMA recommended closing time. If the Portfolio
does so, it will cease granting same business day credit for purchase and
redemption orders received after the Portfolio's closing time and credit
will be given to the next business day.
.The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-
ted by the SEC.
To help the Portfolio maintain its $1.00 constant unit price, portfolio
securities are valued at amortized cost in accordance with SEC regulations.
Amortized cost will normally approximate market value. There can be no
assurance that the Portfolio will be able at all times to maintain a NAV of
$1.00 per unit.
HOW TO SELL OAKMARK UNITS
How Can I Sell Oakmark Units Of The Portfolio?
By Mail. You may redeem all or any part of your Oakmark Units of the Portfo-
lio upon your written request delivered to the Oakmark Family of Funds, P.O.
Box 8510, Boston, Massachusetts 02266-8510.
Your redemption request must:
.identify the Portfolio and give your account number;
17
<PAGE>
.specify the number of units or dollar amount to be redeemed;
.be signed in ink by all owners exactly as their names appear on the
account; and
.for redemptions payable to an address other than the unitholder address of
record, include an ink-stamped guarantee by an "eligible guarantor
institution" as defined in the Securities Exchange Act of 1934 (including a
bank, broker, dealer, credit union, national securities exchange,
registered securities association, clearing agency or savings association,
but not a notary public) for each signature on the redemption request (the
guarantee must use the phrase "signature guaranteed" and must include the
name of the guarantor bank firm and an authorized signature).
Special rules apply to redemptions by corporations, trusts and partnerships.
In the case of a corporation, the request must be signed in the name of the
corporation by an officer whose title must be stated, and must be accompa-
nied by a bylaw provision or resolution of the board of directors, certified
within 60 days, authorizing the officer to so act. A redemption request from
a partnership or a trust must be signed in the name of the partnership or
trust by a general partner or a trustee and include a signature guarantee.
If the trustee is not named in the account registration, a redemption
request by a trust must also include evidence of the trustee's appointment
as such (e.g., a certified copy of the relevant portions of the trust
instrument). Under certain circumstances, before Oakmark Units can be
redeemed, additional documents may be required in order to verify the
authority of the person seeking to redeem.
By Check. Holders of Oakmark Units of the Portfolio may elect to have checks
issued to them in order to redeem Oakmark Units from their accounts in the
Portfolio. When Oakmark receives a completed New Account Registration Form
and signature card, Oakmark will forward to the requesting customer a supply
of checks. Checks drawn on this account may be payable to the order of any
person in any amount of $500 or more, but cannot be certified. The payee of
the check may cash or deposit it like any other check drawn on a bank. When
such a check is presented to Oakmark for payment, a sufficient number of
full and fractional Oakmark Units will be redeemed to cover the amount of
the check. Cancelled checks will be returned to the recordholder of Oakmark
Units by Oakmark.
The check redemption privilege enables a unitholder to receive the dividends
declared on the Oakmark Units to be redeemed until the date the check is
processed. Because of this feature, the check redemption privilege may not
be used for complete liquidation of a unitholder's account. If the amount of
a check is greater than the value of the Oakmark Units held in the
unitholder's account, the check will be returned unpaid, and the unitholder
may be subject to extra charges.
18
<PAGE>
UNITHOLDER GUIDE
Oakmark reserves the right to impose conditions on, limit the availability
of or terminate the check redemption privilege at any time with respect to a
particular unitholder or all unitholders in general. The Trust and Oakmark
reserve the right at any time to suspend the procedure permitting redemp-
tions by check and intend to do so in the event that federal legislation or
regulations impose reserve requirements or other restrictions deemed by the
Trustees to be adverse to the interests of other Oakmark unitholders of the
Portfolio.
By Exchange. You may redeem all or any portion of your Oakmark Units of the
Portfolio and use the proceeds to purchase ILA Service Units or Class I
Shares of The Oakmark Funds if your signed, properly completed New Account
Registration Form is on file. An exchange transaction is a sale and purchase
for federal income tax purposes and may result in capital gain or loss.
Before exchanging, you should obtain a prospectus from The Oakmark Family of
Funds and read it carefully. The exchange privilege is not an offering or
recommendation of shares of The Oakmark Funds. The registration of the
account to which you are making an exchange must be exactly the same as that
of the account from which the exchange is made and the amount you exchange
must meet any applicable minimum investment of the fund being purchased. An
exchange may be made by following the redemption procedure described above
under "By Mail" and indicating the fund to be purchased, except that a sig-
nature guarantee normally is not required. (See also the discussion below of
the Telephone Exchange Privilege.)
Special Redemption Privileges. The Telephone Exchange and Telephone Redemp-
tion Privileges will be established automatically when you open your
account.
Other Privileges must be specifically elected. A signature guarantee may be
required to establish a Privilege after you open your account. Oakmark Units
held in an IRA account may not be redeemed by telephone.
Telephone Exchange Privilege. You may use the Telephone Exchange Privilege
to exchange among The Oakmark Funds and the Portfolio by calling 1-800-
OAKMARK (1-800-625-6275). The general redemption policies apply to redemp-
tions by Telephone Exchange. (See "General Redemption Policies.")
Oakmark reserves the right at any time without prior notice to suspend or
terminate the use of the Telephone Exchange Privilege by any person or class
of persons. Oakmark believes that use of the Telephone Exchange Privilege by
investors utilizing market-timing strategies adversely affects the Portfo-
lio. Therefore, Oakmark generally will not honor requests for Telephone
Exchanges by unitholders identified by Oakmark as "market-timers." Except
for automatic exchanges from Oakmark Units, you may not make more than four
exchanges from the Portfolio in any calendar year. Oakmark reserves the
right at any time
19
<PAGE>
without prior notice to suspend, limit, modify, or terminate the Telephone
Exchange Privilege in its entirety. Because such a step would be taken only
if it would be in the best interests of the Portfolio, Oakmark expects that
it would provide unitholders with prior written notice of any such action
unless it appears that the resulting delay in the suspension, limitation,
modification, or termination of the Telephone Exchange Privilege would
adversely affect the Portfolio. If Oakmark were to suspend, limit, modify,
or terminate the Telephone Exchange Privilege, you might find that an
exchange could not be processed or that there might be a delay in the imple-
mentation of the exchange. See "How to Redeem Units--By Exchange."
During periods of volatile economic and market conditions, you may have dif-
ficulty placing your exchange by telephone; you may wish to consider placing
your exchange by mail during such periods.
Telephone Redemption Privilege. You may use the Telephone Redemption Privi-
lege to redeem Oakmark Units by calling 1-800-OAKMARK (1-800-625-6275). The
proceeds may be sent by check to your registered address or you may request
payment by electronic transfer to a bank account previously designated by
you at a bank that is a member of the Automated Clearing House. If you
request a redemption by electronic transfer before the Portfolio's redemp-
tion cut-off time and the proceeds are to be sent to your pre-established
designated bank account, the proceeds will be transferred to your bank
account on that business day. The Telephone Redemption Privilege is not
available to redeem units held in an IRA account, and is not available for
30 days after Oakmark receives notice from you of a change of address.
General Redemption Policies. You may not cancel or revoke your redemption
order once instructions have been received and accepted. Please telephone
Oakmark by calling 1-800-OAKMARK (1-800-625-6275) if you have any questions
about requirements for a redemption before submitting your request. Oakmark
reserves the right to require a properly completed New Account Registration
Form before making payment for Oakmark Units redeemed.
If your redemption order is received in proper form before 4:00 p.m. eastern
time, the price at your redemption order will be executed is the NAV deter-
mined that business day. See "Net Asset Value." Dividends are earned on the
day that units are redeemed.
Oakmark will generally mail payment for Oakmark Units redeemed within three
days after proper instructions are received. If you attempt to redeem
Oakmark Units within 15 days after they have been purchased by check or
electronic transfer, Oakmark may delay payment of the redemption proceeds to
you until it can
20
<PAGE>
UNITHOLDER GUIDE
verify that payment for the purchase of those Oakmark Units has been (or
will be) collected. To reduce such delays, Oakmark recommends that your pur-
chase be made by federal funds wire through your bank. If you so request,
the proceeds of your redemption may be paid by wire, provided the redemption
proceeds are at least $250, but the cost of the wire (currently $5) will be
deducted from the redemption proceeds.
Oakmark reserves the right at any time without prior notice to suspend, lim-
it, modify, or terminate any privilege or its use in any manner by any per-
son or class.
Use of any Special Redemption Privilege authorizes Oakmark to tape-record
all instructions to redeem. Oakmark uses procedures designed to give reason-
able assurance that telephone instructions are genuine, including recording
telephone calls, testing a caller's identity and sending written confirma-
tion of telephone transactions. If Oakmark does not follow such procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions. The Trust, the Distributor and Oakmark will not be liable for
any loss you may incur in the event that Oakmark accepts unauthorized tele-
phone redemption requests that Oakmark reasonably believes to be genuine.
Oakmark reserves the right to redeem Oakmark Units in any account and send
the proceeds to the owner if the Oakmark Units in the account do not have a
value of at least $1,000.
Oakmark Units in any account you maintain with the Portfolio may be redeemed
to the extent necessary to reimburse Oakmark for any loss it sustains that
is caused by you (such as losses from uncollected checks and electronic
transfers or any liability under the Code provisions on backup withholding
relating to your account).
Oakmark Units of the Portfolio may be redeemed without charge upon request
on any business day at the net asset value next determined after receipt by
Oakmark of the redemption request.
What Types Of Reports Will I Be Sent Regarding Investments In Oakmark Units?
You will receive a confirmation statement from Oakmark reflecting each of
your purchases and redemptions of Oakmark Units, as well as periodic state-
ments detailing distributions made by the Portfolio. In addition, Oakmark
will send you semiannual and annual reports containing audited financial
statements and will provide you annually with tax information.
21
<PAGE>
UNITHOLDER SERVICES
IRA Plan. Harris Associates Investment Trust has a master individual retire-
ment account (IRA) plan that allows you to invest on a tax-deferred basis in
the Government Portfolio and The Oakmark Funds as defined above. The plan
also permits you to "roll over" or transfer to your Oakmark IRA a lump sum
distribution from a qualified pension or profit-sharing plan, thereby post-
poning federal income tax on the distribution. If your employer has a Sim-
plified Employee Pension Plan (SEP), you may establish an IRA with the Gov-
ernment Portfolio and The Oakmark Funds to which your employer may
contribute annually up to the lesser of 15% of your earned income or
$30,000, subject to special rules designed to avoid discrimination.
SPECIAL WAYS TO INVEST OR REDEEM
In addition to the ways to purchase or redeem Oakmark Units described above,
the New Account Registration Form offers you the following additional
investment and redemption options:
Automatic Investments--purchase Oakmark Units each month with payment by
electronic transfer from your bank account ($100 minimum).
Telephone Investments--purchase Oakmark Units by placing a telephone order
and paying for them by electronic transfer from your bank account ($100-
$50,000 per transaction).
Systematic Withdrawals--redeem a fixed dollar amount of Oakmark Units each
month or quarter and have the proceeds sent by check to you or deposited by
electronic transfer into your bank account.
22
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Portfo-
lio will be taxed. The tax information below is provided as general informa-
tion. More tax information is available in the Additional Statement. You should
consult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Portfolio.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Portfolio distributions.
Taxes on Distributions: Distributions of investment income are taxable as ordi-
nary income for federal tax purposes, and may also be subject to state or local
taxes. This is true whether you reinvest your distributions in additional Port-
folio units or receive them in cash. Distributions of short-term capital gains
are taxable to you as ordinary income. Any long-term capital gain distributions
are taxable as long-term capital gains, no matter how long you have owned your
Portfolio units.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Portfolio will inform
unitholders of the character and tax status of all distributions promptly after
the close of each calendar year.
Other Information: When you open your account, you should provide your social
security or tax identification number on your New Account Form Registration. By
law, each Portfolio must withhold 31% of your taxable distributions and any
redemption proceeds if you do not provide your correct taxpayer identification
number, or certify that it is correct, or if the IRS instructs the Portfolio to
do so. Non-U.S. investors may be subject to U.S. withholding and estate tax.
23
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Portfolio, including their asso-
ciated risks. Additional information is provided in the Additional Statement,
which is available upon request. Among other things, the Additional Statement
describes certain fundamental policies and investment restrictions that cannot
be changed without unitholder approval. You should note, however, that all pol-
icies not specifically designated as fundamental are non-fundamental and may be
changed without unitholder approval. If there is a change in the Portfolio's
investment objective, you should consider whether the Portfolio remains an
appropriate investment in light of your then current financial position and
needs.
U.S. Treasury Obligations and U.S. Government Securities. U.S. Treasury
Obligations include securities issued or guaranteed by the U.S. Treasury ("U.S.
Treasury Obligations"). Payment of principal and interest on these obligations
is backed by the full faith and credit of the U.S. government. U.S. Treasury
Obligations include, among other things, the separately traded principal and
interest components of securities guaranteed or issued by the U.S. Treasury if
such components are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
24
<PAGE>
APPENDIX A
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
Repurchase Agreements. The Portfolio may enter into repurchase agreements with
primary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, the Portfolio might suffer a loss to
the extent that the proceeds from the sale of the underlying securities and
other collateral held by the Portfolio are less than the repurchase price and
the Portfolio's cost associated with delay and enforcement of the repurchase
agreement. In addition, in the event of bankruptcy of the seller, the Portfolio
could suffer additional losses if a court determines that the Portfolio's
interest in the collateral is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to the Portfo-
lio's unitholders. In addition, the Portfolio, together with other registered
investment companies having advisory agreements with the Investment Adviser or
any of its 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.
Floating and Variable Rate Obligations. The Portfolio may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, the Portfolio may consider the maturity of a variable or floating rate
obligation to be shorter than its ultimate stated maturity if the obligation is
a U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Portfolio to receive payment at any time or at
specified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend and letters of cred-
it, which will ordinarily be irrevocable, both of which may be issued by domes-
tic banks or foreign banks which have a branch, agency or subsidiary in the
United States. The Portfolio may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
25
<PAGE>
When-Issued Securities and Forward Commitments. The Portfolio may purchase
when-issued securities and enter into forward commitments. When-issued securi-
ties are securities that have been authorized, but not yet issued. When-issued
securities are purchased in order to secure what is considered to be an advan-
tageous price and yield to a Portfolio at the time of entering into the trans-
action. A forward commitment involves entering into a contract to purchase or
sell securities for a fixed price at a future date beyond the customary settle-
ment period.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although the Portfolio will generally pur-
chase securities on a when-issued or forward commitment basis with the inten-
tion of acquiring the securities for its portfolio, the Portfolio may dispose
of when-issued securities or forward commitments prior to settlement if the
Investment Adviser deems it appropriate.
Illiquid Securities. The Portfolio may invest up to 10% of its net assets in
illiquid securities which cannot be disposed of in seven days in the ordinary
course of business at fair value. Illiquid securities include:
.Both domestic and foreign securities that are not readily marketable
.Certain municipal leases and participation interests
.Certain stripped mortgage-backed securities
.Repurchase agreements and time deposits with a notice or demand period of more
than seven days
.Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is oth-
erwise eligible for resale pursuant to Rule 144A under the Securities Act of
1933.
Investing in restricted securities may decrease the liquidity of the Portfo-
lio's portfolio.
Borrowings. The Portfolio may borrow up to 33 1/3% of its total assets from
banks for temporary or emergency purposes. The Portfolio may not make addi-
tional investments if borrowings exceed 5% of its net assets. For more informa-
tion, see the Additional Statement.
Downgraded Securities. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, the Portfolio may continue
to hold the security if the Investment Adviser believes it is in the best
interest of the Portfolio and its unitholders.
26
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand the
Portfolio's financial performance for the past five years (or less if the
Portfolio has been in operation for less than five years). Certain informa-
tion reflects financial results for a single Portfolio unit. The total
returns in the table represent the rate that an investor would have earned
or lost on an investment in the Portfolio (assuming reinvestment of all div-
idends and distributions). This information has been audited by Arthur
Andersen LLP, whose report, along with the Portfolio's financial statements,
is included in the Portfolio's annual report (available upon request from
Harris Associates without charge).
27
<PAGE>
GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to unit/
of period incomea shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - ILA units $1.00 $0.05 $(0.05)
1999 - ILA Administration units 1.00 0.05 (0.05)
1999 - ILA Service units 1.00 0.04 (0.04)
1999 - Cash Management shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - ILA units 1.00 0.05 (0.05)
1998 - ILA Administration units 1.00 0.05 (0.05)
1998 - ILA Service units 1.00 0.05 (0.05)
1998 Cash Management shares (commenced May
1) 1.00 0.03 (0.03)
- -------------------------------------------------------------------------------
1997 - ILA units 1.00 0.05 (0.05)
1997 - ILA Administration units 1.00 0.05 (0.05)
1997 - ILA Service units 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1996 - ILA units 1.00 0.05 (0.05)
1996 - ILA Administration units 1.00 0.05 (0.05)
1996 - ILA Service units 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1995 - ILA units 1.00 0.06 (0.06)
1995 - ILA Administration units 1.00 0.05 (0.05)
1995 - ILA Service units 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average units outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
28
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of net investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period returnb (in 000's) assets assets assets assets
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.77% $205,244 0.43% 4.64% 0.45% 4.62%
1.00 4.61 3,265 0.58 4.42 0.60 4.40
1.00 4.35 79,847 0.83 4.24 0.85 4.22
1.00 4.18 153 1.00 4.68 1.45 4.23
- ---------------------------------------------------------------------------------
1.00 5.21 383,243 0.43 5.09 0.45 5.07
1.00 5.05 7,692 0.58 4.94 0.60 4.92
1.00 4.79 105,732 0.83 4.67 0.85 4.65
4.57c 2 0.93c 4.60c 1.45c 4.08c
- ---------------------------------------------------------------------------------
1.00 5.31 460,457 0.42 5.16 0.42 5.16
1.00 5.15 10,192 0.57 4.98 0.57 4.98
1.00 4.89 83,799 0.82 4.78 0.82 4.78
- ---------------------------------------------------------------------------------
1.00 5.15 694,651 0.41 5.04 0.44 5.01
1.00 4.99 36,055 0.56 4.89 0.59 4.86
1.00 4.73 94,228 0.81 4.63 0.84 4.60
- ---------------------------------------------------------------------------------
1.00 5.77 570,469 0.41 5.62 0.43 5.60
1.00 5.62 47,558 0.56 5.49 0.58 5.47
1.00 5.35 85,401 0.81 5.19 0.83 5.17
- ---------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Index
<TABLE>
<C> <C> <S>
1 General Investment
Management Approach
4 Portfolio Investment
Objectives and Strategies
6 Principal Risks of the
Portfolio
7 Portfolio Performance
9 Portfolio Fees and Expenses
11 Service Providers
13 Dividends
14 Unitholder Guide
14 How to Buy Oakmark Units
17 How to Sell Oakmark Units
23 Taxation
24 Appendix A
Additional Information on
Portfolio Risks, Securities
and Techniques
27 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Money Market FundsProspectus (Oakmark Units)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Portfolio's investments is available in the
Portfolio's annual and semi-annual reports to unitholders.
Statement of Additional Information
Additional information about the Portfolio and its policies is also avail-
able in the Portfolio's Statement of Additional Information ("Additional
Statement"). The Additional Statement is incorporated by reference into this
Prospectus (is legally considered part of this Prospectus).
The Portfolio's annual and semi-annual reports, and the Additional State-
ment, are available free upon request by calling The Oakmark Family of Funds
at 1-800-OAKMARK (1-800-625-6275).
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-OAKMARK (1-800-625-6275).
By mail - The Oakmark Family of Funds, Two North LaSalle Street, Chicago, IL
60602
By e-mail - [email protected]
On the Internet - Oakmark - http://www.oakmark.com. Text-only versions of
the Portfolio's documents are located online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Portfolio documents by visiting the
SEC's Public Reference Room in Washington, D.C. You may also obtain copies
of Portfolio documents, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request to: [email protected]. Information on the operation of the public
reference room may be obtained by calling the SEC at (202) 942-8090.
The Portfolio's investment company registration number is 811-5349.
<PAGE>
ADDRESS OF HARRIS ASSOCIATES L. P.
Two North LaSalle Street
Chicago, Illinois 60602-3790
THE OAKMARK FUNDS 24-HOUR NAV HOTLINE
1-800-GROWOAK
(1-800-476-9625)
OAKMARK SHAREHOLDER SERVICE
State Street Bank and Trust Company
Attention: Oakmark Funds Family
P.O. Box 8510
Boston, Massachusetts 02266-8510
1-800-OAKMARK
(1-800-625-6275)
<PAGE>
Prospectus FST Shares
GOLDMAN SACHS FINANCIAL SQUARE FUNDS/SM/
May 1, 2000
. Prime
Obligations
Fund
. Money Market
Fund
. Treasury
Obligations
Fund
[GRAPHIC] . Treasury
Instruments
Fund
. Government
Fund
. Federal Fund
. Tax-Free
Money Market
Fund
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
<PAGE>
NOT FDIC-Insured May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Funds. GSAM is referred to in this Prospectus as the "Invest-
ment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek preservation of capital, daily
liquidity and maximum current income. With each Fund, the Investment Adviser
follows a conservative, risk-managed investment process that seeks to:
. Manage credit risk
. Manage interest rate risk
. Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1.Managing Credit Risk
The Investment Adviser's process for managing risk emphasizes:
. Intensive Research--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as well
as the Investment Research, Legal and Compliance departments of Goldman
Sachs.
. Timely Updates--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio management
team via computer link.
The Result: An "approved" list of high-quality credits--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2.Managing Interest Rate Risk
Three main steps are followed in seeking to manage interest rate risk:
. Establish weighted average maturity (WAM) target--WAM (the weighted average
time until the yield of a portfolio reflects any changes in the current
interest rate environment) is constantly revisited and adjusted as market
conditions change. An overall strategy is developed by the portfolio
management team based on insights gained from weekly meetings with both
Goldman Sachs economists and economists from outside the firm.
. Implement optimum portfolio structure--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
. Conduct rigorous analysis of new securities--The Investment Adviser's five-
step process includes legal, credit, historical index and liquidity analysis,
as well as price stress testing to determine suitability for money market
mutual funds.
3.Managing Liquidity
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
. Each Fund's clients and factors that influence their asset volatility;
. Technical events that influence the trading range of federal funds and other
short-term fixed-income markets; and
. Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC Financial Data Universal
Averages. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
. The Funds: Each Fund's securities are valued by the amortized cost method as
permitted by Rule 2a-7 under the Investment Company Act of 1940, as amended
(the "Act"). Under Rule 2a-7, each Fund may invest only in U.S. dollar-
denominated securities that are determined to present minimal credit risk and
meet certain other criteria, including conditions relating to maturity,
diversification and credit quality. These operating policies may be more
restrictive than the fundamental policies set forth in the State-ment of
Additional Information (the "Additional Statement").
. Taxable Funds: Prime Obligations, Money Market, Treasury Obligations and
Government Funds.
. Tax-advantaged Funds: Treasury Instruments and Federal Funds.
. Tax-exempt Fund: Tax-Free Money Market Fund.
. The Investors: The Funds are designed for institutional investors seeking a
high rate of return, a stable net asset value ("NAV") and convenient
liquidation privileges. The Funds are particularly suitable for banks,
corporations and other financial institutions that seek investment of short-
term funds for their own accounts or for the accounts of their customers.
Shares of the Government Fund are intended to qualify as eligible investments
for federally chartered credit unions pursuant to Sections 107(7), 107(8) and
107(15) of the Federal Credit Union Act, Part 703 of the National Credit
Union Administration ("NCUA") Rules and Regulations and NCUA Letter Number
155. The Fund intends to review changes in the applicable laws, rules and
regulations governing eligible investments for federally chartered credit
unions, and to take such action as may be necessary so that the investments
of the Fund qualify as eligible investments under the Federal Credit Union
Act and the regulations thereunder. Shares of the Government Fund, however,
may or may not qualify as eligible investments for particular state-chart-
ered credit unions. A state-chartered credit union should consult qualified
legal counsel to determine whether the Government Fund is a permissible
investment under the law applicable to it.
. NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
. Maximum Remaining Maturity of Portfolio Investments: 13 months (as determined
pursuant to Rule 2a-7) at the time of purchase.
. Dollar-weighted Average Portfolio Maturity ("WAM"): Not more than 90 days (as
required by Rule 2a-7).
3
<PAGE>
. Investment Restrictions: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions" in
the Additional Statement. Fundamental investment restrictions of a Fund
cannot be changed without approval of a majority of the outstanding shares of
that Fund. The Treasury Obligations Fund's policy of limiting its investments
to U.S. Treasury Obligations (as defined in Appendix A) and related
repurchase agreements is also fundamental. All investment objectives and
policies not specifically designated as fundamental are non-fun-damental and
may be changed without shareholder approval.
. Diversification: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of the
value of its total assets at the time of purchase in the securities of any
single issuer. However, a Fund may invest up to 25% of the value of its total
assets in the securities of a single issuer for up to three business days.
These limitations do not apply to cash, certain repurchase agreements, U.S.
Government Securities (as defined in Appendix A) or securities of other
investment companies. In addition, securities subject to certain
unconditional guarantees and securities that are not "First Tier Securities"
as defined by the SEC are subject to different diversification requirements
as described in the Additional Statement.
4
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
The Prime Obligations, Money Market, Treasury Obligations, Treasury
Instruments, Government, Federal and Tax-Free Money Market Funds seek to
maximize current income to the extent consistent with the preservation of
capital and the maintenance of liquidity by investing exclusively in high
quality money market instruments.
Taxable and Tax-advantaged Funds:
The Prime Obligations and Money Market Funds pursue their investment
objectives by investing in U.S. Government Securities, obligations of U.S.
banks, commercial paper and other short-term obligations of U.S. companies,
states, municipalities and other entities and repurchase agreements. The Money
Market Fund may also invest in U.S. dollar-denominated obligations of foreign
banks, foreign companies and foreign governments. The Treasury Obligations Fund
pursues its investment objective by investing in securities issued by the U.S.
Treasury and repurchase agreements relating to such securities. The Government
Fund pursues its investment objective by investing in U.S. Government
Securities and repurchase agreements relating to such securities. The Treasury
Instruments and Federal Funds pursue their investment objectives by limiting
their investments to certain U.S. Treasury Obligations and U.S. Government
Securities, respectively, the interest from which is generally exempt from
state income taxation. You should consult your tax adviser to determine whether
distributions from the Treasury Instruments and Federal Funds (and any other
Fund that may hold such obligations) derived from interest on such obligations
are exempt from state income taxation in your own state.
In order to obtain a rating from a rating organization, the Prime Obligations,
Money Market, Treasury Obligations, Treasury Instruments, Government and
Federal Funds will observe special investment restrictions.
Tax-Exempt Fund:
The Tax-Free Money Market Fund pursues its investment objective by investing
in securities issued by or on behalf of states, territories, and possessions
of the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia, the interest from
which, if any, is in the opinion of bond counsel excluded from gross income
for federal income tax purposes, and not an item of tax preference under the
federal alternative minimum tax ("AMT").
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Bank Commercial
Fund Obligations Securities Obligations Paper
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations ./1/ . . .
U.S. banks only/2/
-------------------------------------------------------------------------------------------------
Money Market ./1/ . . .
Over 25% of total assets U.S. and foreign
must be invested in U.S. (US$) commercial
and foreign (US$) banks/3/ paper
-------------------------------------------------------------------------------------------------
Treasury Obligations ./4/
-------------------------------------------------------------------------------------------------
Treasury Instruments ./4/
-------------------------------------------------------------------------------------------------
Government ./1/ .
-------------------------------------------------------------------------------------------------
Federal ./1/ .
-------------------------------------------------------------------------------------------------
Tax-Free Money Market .
Tax-exempt only
-------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 If adverse economic conditions prevail in the banking industry (such as
substantial losses on loans, increases in non-performing assets and charge-
offs and declines in total deposits) the Fund may, for temporary defensive
purposes, invest less than 25% of its total assets in bank obligations.
4 Issued by the U.S. Treasury.
5 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
6 The Fund may invest in U.S. dollar-denominated obligations (limited to
commercial paper and other notes) issued or guaranteed by a foreign
government. The Fund may also invest in U.S. dollar-denominated obligations
issued or guaranteed by any entity located or organized in a foreign
country that maintains a short-term foreign currency rating in the highest
short-term ratings category by the requisite number of NRSROs. The Fund may
not invest more than 25% of its total assets in the securities of any one
foreign government.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Short-term
Obligations of Asset-backed and Foreign
Corporations and Repurchase Receivables-Backed Government
Other Entities Agreements Securities/5/ Obligations (US$)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
. . .
U.S. entities only
- ---------------------------------------------------------------------------
. . . ./6/
U.S. and foreign
(US$) entities
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
.
(Does not intend
to invest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Investment Policies Matrix continued
<TABLE>
<CAPTION>
Taxable Tax-Exempt Custodial Unrated
Fund Municipals Municipals Receipts Securities/9/ Investment Companies
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Obligations ./7/ . . .
Up to 10% of total
assets in other
investment companies
- --------------------------------------------------------------------------------------------------------------
Money Market ./7/ . . .
Up to 10% of total
assets in other
investment companies
- --------------------------------------------------------------------------------------------------------------
Treasury Obligations
- --------------------------------------------------------------------------------------------------------------
Treasury Instruments
- --------------------------------------------------------------------------------------------------------------
Government .
Up to 10% of total
assets in other
investment companies
- --------------------------------------------------------------------------------------------------------------
Federal
- --------------------------------------------------------------------------------------------------------------
Tax-Free Money . . . .
Market At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations (except in investment companies
extraordinary circumstances)/8/
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
7 Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
8 Ordinarily expect that 100% of a Fund's portfolio securities will be
invested in municipal obligations, but the Fund may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
9 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality to
First Tier Securities, or to the extent that a Fund may purchase Second
Tier Securities, comparable in quality to Second Tier Securities. In
addition, a Fund holding a security supported by a guarantee or demand
feature may rely on the credit quality of the guarantee or demand feature
in determining the credit quality of the investment.
10 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of the Fund's net assets under normal market conditions.
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Private Summary of
Activity Credit Taxation for
Bonds Quality/9/ Distributions/14/ Miscellaneous
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not
permitted
- ------------------------------------------------------------------------------------------------------
. First Tier/12/ Taxable federal and state/15/ May invest in obligations
of the International
Bank for Reconstruction
and Development.
Reverse repurchase agreements not
permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not
permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Reverse repurchase agreements not
generally exempt from permitted
state taxation
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not
permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Under extraordinary circumstances,
generally exempt from may hold cash, U.S. Government
state taxation Securities subject to state taxation
or cash equivalents.
Reverse repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------
.
(Does not First/12/ or Tax-exempt federal May (but does not currently intend
intend to Second Tier/13/ and taxable state/16/ to) invest up to 20% in securities
invest)/10/,/11/ subject to AMT and may temporarily
invest in the taxable money market
instruments described herein.
Reverse repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------
</TABLE>
11 No more than 25% of the value of the Fund's total assets may be invested
in industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
12 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
13 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
14 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
15 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities interest
income.
16 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete
investment program. There can be no assurance that a Fund will achieve its
investment objective.
<TABLE>
<CAPTION>
Prime Money Treasury
. Applicable Obligations Market Obligations
- -- Not Applicable Fund Fund Fund
- ------------------------------------------------------------
<S> <C> <C> <C>
NAV . . .
Interest Rate . . .
Credit/Default . . .
Liquidity . . .
U.S. Government Securities . . --
Concentration -- -- --
Foreign -- . --
Banking Industry -- . --
Tax -- -- --
- ------------------------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
Tax-Free
Treasury Money
Instruments Government Federal Market
Fund Fund Fund Fund
- ---------------------------------------------
<S> <C> <C> <C>
. . . .
. . . .
. . . .
. . . .
-- . . --
-- -- -- .
-- -- -- --
-- -- -- --
-- -- -- .
- ---------------------------------------------
</TABLE>
11
<PAGE>
Risks that apply to all Funds:
. NAV Risk--The risk that a Fund will not be able to maintain a NAV per share of
$1.00 at all times.
. Interest Rate Risk--The risk that during periods of rising interest rates, a
Fund's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a Fund's
yield will tend to be higher.
. Credit/Default Risk--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase
agreement, may default on its payment obligations. In addition, with respect
to the Tax-Free Money Market Fund, risk of loss from payment default may also
exist where municipal instruments are backed by foreign letters of credit or
guaran tees.
. Liquidity Risk--The risk that a Fund will be unable to pay redemption proceeds
within the time period stated in this Prospectus, because of unusual market
conditions, an unusually high volume of redemption requests, or other reasons.
Risk that applies to the Prime Obligations, Money Market, Government and
Federal Funds:
. U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Money Market Fund:
. Foreign Risk--The risk that a foreign security could lose value as a result of
political, financial and economic events in foreign countries, less publicly
available financial and other information, less stringent foreign securities
regulations and accounting and disclosure standards, or other factors. The
Money Market Fund may not invest more than 25% of its total assets in the
securities of any one foreign government.
. Banking Industry Risk--The risk that if the Fund invests more than 25% of its
total assets in bank obligations, an adverse development in the banking
industry may affect the value of the Fund's investments more than if the
Fund's investments were not invested to such a degree in the banking industry.
Normally, the Money Market Fund intends to invest more than 25% of its total
assets in bank obligations. Banks may be particularly susceptible to certain
economic factors such as interest rate changes, adverse developments in the
real estate market, fiscal and monetary policy and general economic cycles.
12
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
Risks that apply to the Tax-Free Money Market Fund:
.Concentration Risk--The risk that if the Fund invests more than 25% of its
total assets in issuers within the same state, industry or economic sector, an
adverse economic, business or political development may affect the value of
the Fund's investments more than if its investments were not so concentrated.
.Tax Risk--The risk that future legislative or administrative changes or court
decisions may materially affect the ability of the Fund to pay federal tax-
exempt dividends. This Fund would not be a suitable investment for IRAs, other
tax-exempt or tax-deferred accounts or for other investors who are not sensi-
tive to the federal, state or local tax consequences of their investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
13
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of investing
in a Fund by showing: (a) changes in the performance of a Fund's FST Shares
from year to year; and (b) the average annual returns of a Fund's FST Shares.
Investors should be aware that the fluctuation of interest rates is one primary
factor in performance volatility. The bar chart and table assume reinvestment
of dividends and distributions. A Fund's past performance is not necessarily an
indication of how the Fund will perform in the future. Performance reflects
expense limitations in effect. If expense limitations were not in place, a
Fund's performance would have been reduced. You may obtain a Fund's current
yield by calling 1-800-621-2550.
14
<PAGE>
FUND PERFORMANCE
Prime Obligations Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q1 '91 1.78%
Worst Quarter:
Q2 '93 0.78%
[GRAPH]
1991 6.26%
1992 3.88%
1993 3.18%
1994 4.28%
1995 6.02%
1996 5.41%
1997 5.60%
1998 5.55%
1999 5.18%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December
31, 1999 1 Year 5 Years Since Inception
---------------------------------------------------------------
<S> <C> <C> <C>
FST Shares (Inception 3/8/90) 5.18% 5.55% 5.30%
---------------------------------------------------------------
</TABLE>
15
<PAGE>
Money Market Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.52%
Worst Quarter:
Q2 '99 1.20%
[GRAPH]
1995 6.07%
1996 5.45%
1997 5.63%
1998 5.55%
1999 5.18%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER
31, 1999 1 YEAR 5 YEAR SINCE INCEPTION
--------------------------------------------------------------
<S> <C> <C> <C>
FST SHARES (Inception 5/18/94) 5.18% 5.58% 5.50%
--------------------------------------------------------------
</TABLE>
16
<PAGE>
FUND PERFORMANCE
Treasury Obligations Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q1 '91 1.65%
Worst Quarter:
Q2 '93 0.76%
[GRAPH]
1991 6.08%
1992 3.80%
1993 3.12%
1994 4.13%
1995 5.96%
1996 5.35%
1997 5.50%
1998 5.40%
1999 4.88%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER
31, 1999 1 YEAR 5 YEARS SINCE INCEPTION
---------------------------------------------------------------
<S> <C> <C> <C>
FST SHARES (Inception 4/25/90) 4.88% 5.42% 5.14%
---------------------------------------------------------------
</TABLE>
17
<PAGE>
Treasury Instruments Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '98 1.28%
Worst Quarter:
Q1 '99 1.07%
[GRAPH]
1998 5.05%
1999 4.60%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER
31, 1999 1 YEAR SINCE INCEPTION
-------------------------------------------------------
<S> <C> <C>
FST SHARES (Inception 3/3/97) 4.60% 4.95%
-------------------------------------------------------
</TABLE>
18
<PAGE>
FUND PERFORMANCE
Government Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.52%
Worst Quarter:
Q1 '94 0.79%
[GRAPH]
1994 4.26%
1995 6.00%
1996 5.38%
1997 5.54%
1998 5.46%
1999 5.03%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER
31, 1999 1 YEAR 5 YEARS SINCE INCEPTION
---------------------------------------------------------------
<S> <C> <C> <C>
FST SHARES (Inception 4/6/93) 5.03% 5.48% 5.04%
---------------------------------------------------------------
</TABLE>
19
<PAGE>
Federal Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q3 '98 1.36%
Worst Quarter:
Q2 '99 1.18%
[GRAPH]
1998 5.41%
1999 5.05%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER
31, 1999 1 YEAR SINCE INCEPTION
-------------------------------------------------------
<S> <C> <C>
FST SHARES (Inception 2/28/97) 5.05% 5.31%
-------------------------------------------------------
</TABLE>
20
<PAGE>
FUND PERFORMANCE
Tax-Free Money Market Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.02%
Worst Quarter:
Q1 '99 0.68%
[GRAPH]
1995 3.89%
1996 3.39%
1997 3.54%
1998 3.34%
1999 3.13%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER
31, 1999 1 YEAR 5 YEARS SINCE INCEPTION
---------------------------------------------------------------
<S> <C> <C> <C>
FST SHARES (Inception 7/19/94) 3.13% 3.46% 3.45%
---------------------------------------------------------------
</TABLE>
21
<PAGE>
Fund Fees and Expenses (FST Shares)
This table describes the fees and expenses that you would pay if you buy and
hold FST Shares of a Fund.
<TABLE>
<CAPTION>
PRIME MONEY
OBLIGATIONS MARKET
FUND FUND
- -------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT):
Maximum Sales Charge (Load) Imposed on Purchases None None
Maximum Deferred Sales Charge (Load) None None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None None
Redemption Fees None None
Exchange Fees None None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):/1/
Management Fees/2/ 0.205% 0.205%
Other Expenses/3/ 0.025% 0.015%
- -------------------------------------------------------------------------------
Total Fund Operating Expenses* 0.230% 0.220%
- -------------------------------------------------------------------------------
</TABLE>
See page 24 for all other footnotes.
* As a result of the current waivers and expense lim-
itations, "Other Expenses" and "Total Fund Operat-
ing Expenses" of the Funds which are actually
incurred are as set forth below. The waivers and
expense limitations may be terminated at any time
at the option of the Investment Adviser. If this
occurs, "Other Expenses" and "Total Fund Operating
Expenses" may increase without shareholder approv-
al.
<TABLE>
<CAPTION>
PRIME MONEY
OBLIGATIONS MARKET
FUND FUND
-----------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/1/
Management Fees/2/ 0.17% 0.17%
Other Expenses/3/ 0.01% 0.01%
-----------------------------------------------------------------------------
Total Fund Operating Expenses (after current waivers and
expense limitations) 0.18% 0.18%
-----------------------------------------------------------------------------
</TABLE>
22
<PAGE>
FUND FEES AND EXPENSES
<TABLE>
<CAPTION>
TAX-FREE
TREASURY TREASURY MONEY
OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MARKET
FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
None None None None None
None None None None None
None None None None None
None None None None None
0.205% 0.205% 0.205% 0.205% 0.205%
0.025% 0.035% 0.015% 0.025% 0.015%
- ------------------------------------------------------------------------------------------
0.230% 0.240% 0.220% 0.230% 0.220%
- ------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE
TREASURY TREASURY MONEY
OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MARKET
FUND FUND FUND FUND FUND
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.17% 0.17% 0.17% 0.19% 0.17%
0.01% 0.01% 0.01% 0.01% 0.01%
-----------------------------------------------------------------------------------------
0.18% 0.18% 0.18% 0.20% 0.18%
-----------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Fund Fees and Expenses continued
/1/ The Funds' annual operating expenses are based on actual expenses.
/2/ The Investment Adviser has voluntarily agreed not to impose a portion of the
management fee on the Federal Fund equal to 0.015% of the Federal Fund's
average daily net assets and equal to 0.035% of all other Funds' average
daily net assets. AS a result of fee waivers, the current management fees o
the Federal Fund and all other Funds is 0.19% and 0.17%, respectively, of
such Fund's average daily net assets. The waivers may be terminated at any
time at the option of the Investment Adviser.
/3/ The Investment Adviser has voluntarily agreed to reduce or limit "Other
Expenses" of each Fund (excluding management fees, taxes, interest,
brokerage fees and litigation, indemnification and other extraordinary
expenses) to 0.01% of each Fund's average daily net assets.
24
<PAGE>
FUND FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the waivers and expense limitations) with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in FST
Shares of a Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your invest-
ment has a 5% return each year and that a Fund's operating expenses remain the
same. Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations $24 $74 $130 $293
- ------------------------------------------------------
Money Market $23 $71 $124 $280
- ------------------------------------------------------
Treasury Obligations $24 $74 $130 $293
- ------------------------------------------------------
Treasury Instruments $25 $77 $135 $306
- ------------------------------------------------------
Government $23 $71 $124 $280
- ------------------------------------------------------
Federal $24 $74 $130 $293
- ------------------------------------------------------
Tax-free Money Market $23 $71 $124 $280
- ------------------------------------------------------
</TABLE>
Institutions that invest in FST Shares on behalf of their customers may charge
other fees directly to their customer accounts in connection with their invest-
ments. You should contact your institution for information regarding such
charges. Such fees, if any, may affect the return such customers realize with
respect to their investments.
Certain institutions that invest in FST Shares may receive other compensation
in connection with the sale and distribution of FST Shares or for services to
their customers' accounts and/or the Funds. For additional information regard-
ing such compensation, see "Shareholder Guide" in the Prospectus and "Other
Information" in the Additional Statement.
25
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the Investment
Adviser, merged into The Goldman Sachs Group, Inc. as a result of an initial
public offering. As of December 31, 1999, GSAM, along with other units of IMD,
had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds'
portfolio transactions. The Investment Adviser also performs the following
services for the Funds:
. Continually manages each Fund, including the purchase, retention and
disposition of securities and other assets
. Administers each Fund's business affairs
. Performs various recordholder servicing functions (to the extent not provided
by other organizations)
Pursuant to an SEC order, each Taxable and Tax-Advantaged Fund may enter
into principal transactions in certain taxable money market instruments,
including repurchase agreements, with Goldman Sachs.
26
<PAGE>
SERVICE PROVIDERS
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Fund's average daily net assets):
<TABLE>
<CAPTION>
ACTUAL RATE FOR THE
FISCAL YEAR ENDED
FUND CONTRACTUAL RATE DECEMBER 31, 1999
------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.205% 0.17%
------------------------------------------------------------
Money Market 0.205% 0.17%
------------------------------------------------------------
Treasury Obligations 0.205% 0.17%
------------------------------------------------------------
Treasury Instruments 0.205% 0.17%
------------------------------------------------------------
Government 0.205% 0.17%
------------------------------------------------------------
Federal 0.205% 0.17%
------------------------------------------------------------
Tax-Free Money Market 0.205% 0.17%
------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
27
<PAGE>
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
28
<PAGE>
Dividends
Dividends will be distributed monthly. You may choose to have dividends paid
in:
. Cash
. Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time. If you do not indicate any
choice, dividends and distributions will be reinvested automatically in the
applicable Fund.
All or substantially all of each Fund's net investment income will be declared
as a dividend daily. Dividends will normally, but not always, be declared as of
the following times:
<TABLE>
<S> <C>
Dividend Declaration Time
Fund (New York Time)
- ------------------------------------------------
Prime Obligations 5:00 p.m.
- ------------------------------------------------
Money Market 4:00 p.m.
- ------------------------------------------------
Treasury Obligations 5:00 p.m.
- ------------------------------------------------
Treasury Instruments 4:00 p.m.
- ------------------------------------------------
Government 5:00 p.m.
- ------------------------------------------------
Federal 4:00 p.m.
- ------------------------------------------------
Tax-Free Money Market 4:00 p.m.
- ------------------------------------------------
</TABLE>
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of each
month. Net short-term capital gains, if any, will be distributed in accordance
with federal income tax requirements and may be reflected in a Fund's daily
distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid excessive
fluctuations in the amount of monthly capital gains distributions, a portion of
any net capital gains realized on the disposition of securities during the
months of November and December may be distributed during the subsequent calen-
dar year. Although realized gains and losses on the assets of a Fund are
reflected in the NAV of the Fund, they are not expected to be of an amount
which would affect the Fund's NAV of $1.00 per share.
29
<PAGE>
The income declared as a dividend for the Prime Obligations, Treasury Obliga-
tions and Government Funds is based on estimates of net investment income for
each Fund. Actual income may differ from estimates, and differences, if any,
will be included in the calculation of subsequent dividends.
30
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' FST Shares.
HOW TO BUY SHARES
How Can I Purchase FST Shares Of The Funds?
You may purchase FST Shares on any business day at their NAV next determined
after receipt of an order. Shares begin earning dividends after the receipt
of the purchase amount in federal funds. No sales load is charged. You may
place a purchase order in writing or by telephone.
<TABLE>
- ---------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
- ---------------------------------------------------------
By Telephone: 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
- ---------------------------------------------------------
</TABLE>
In order to make an initial investment in a Fund, you must furnish to the
Fund or Goldman Sachs the Account Application.
You may send your payment as follows:
. Wire federal funds to The Northern Trust Company ("Northern"), as
sub-custodian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian); OR
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds -(Name
of Fund and Class of Shares), 4900 Sears Tower-60th Floor, Chicago, IL 60606-
6372. The Funds will not accept a check drawn on a foreign bank or a
third-party check.
It is strongly recommended that payment be effected by wiring federal funds
To Northern.
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaratees
must be obtained from a bank, brokerage firm or other financial inter-mediary
that is a
31
<PAGE>
member of an approved Medallion Guarantee Program or that is otherwise
approved by the Trust. A notary public cannot provide a signature guarantee.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
If an effective order and
federal funds are received: Dividends begin:
---------------------------------------------------
<S> <C>
Money Market, Treasury Instruments and Federal
Funds:
. By 3:00 p.m. New York time Same business day
. After 3:00 p.m. New York time Next business day
---------------------------------------------------
Prime Obligations, Treasury Obligations and
Government Funds:
. By 5:00 p.m. New York time Same business day
. After 5:00 p.m. New York time Next business day
---------------------------------------------------
Tax-Free Money Market Fund:
. By 2:00 p.m. New York time Same business day
. After 2:00 p.m. New York time Next business day
---------------------------------------------------
</TABLE>
How Do I Purchase Shares Through A Financial Institution?
Certain institutions (including banks, trust companies, brokers and investment
advisers) that provide recordkeeping, reporting and processing services to
their customers may be authorized to accept, on behalf of the Trust, purchase,
redemption and exchange orders placed by or on behalf of their cus-tomers and
may designate other intermediaries to accept such orders, if approved by the
Trust. In these cases:
. A Fund will be deemed to have received an order in proper form when the order
is accepted by the authorized institution or intermediary on a business day,
and the order will be priced at the Fund's NAV next determined after such
acceptance.
. Authorized institutions or intermediaries will be responsible for
transmitting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your institution or intermediary directly to learn
whether it is authorized to accept orders for the Trust.
These institutions may receive payments from the Funds or Goldman Sachs for
the services provided by them with respect to the Funds' FST Shares. These
payments may be in addition to other payments borne by the Funds.
The Investment Adviser, Distributor and/or their affiliates may pay additional
compensation from time to time, out of their assets and not as an additional
charge to the Funds, to certain institutions and other persons in connection
with the sale, distribution and/or servicing of shares of the Funds and other
Goldman Sachs Funds.
32
<PAGE>
SHAREHOLDER GUIDE
In addition to FST Shares, each Fund also offers other classes of shares to
investors. These other share classes are subject to different fees and
expenses (which affect performance), and are entitled to different services
than FST Shares. Information regarding these other share classes may be
obtained from your sales representative or from Goldman Sachs by calling the
number on the back cover of this Prospectus.
What Is My Minimum Investment In The Funds?
<TABLE>
-----------------------------------------------------------
<S> <C>
Minimum initial investment $10 million (may be
allocated among the Funds)
-----------------------------------------------------------
Minimum account balance $10 million
-----------------------------------------------------------
Minimum subsequent investments None
-----------------------------------------------------------
</TABLE>
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Modify or waive the minimum investment and minimum account balance
requirement.
. Reject any purchase order for any reason.
The Funds may allow you to purchase shares with securities instead of cash
if consistent with a Fund's investment policies and operations and if
approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange FST Shares is
determined by a Fund's NAV. The Funds calculate NAV as follows:
(Value of Assets of the Class)
- (Liabilities of the Class)
NAV = -----------------------------------------
Number of Outstanding Shares of the Class
<TABLE>
<CAPTION>
Fund NAV Calculated
-------------------------------------------------------------------------------------
<S> <C>
Money Market, Treasury Instruments, As of the close of regular trading of the
Federal And Tax-free Money Market New York Stock Exchange (normally 4:00 p.m.
New York time) on each business day
-------------------------------------------------------------------------------------
Prime Obligations, Treasury Obligations As of 5:00 p.m. New York time on
And Government each business day
-------------------------------------------------------------------------------------
</TABLE>
. NAV per share of each class is calculated by State Street on each business
day. Fund shares will be priced on any day the New York Stock Exchange is
open, except for days on which Chicago, Boston or New York banks are closed
for local holidays.
33
<PAGE>
. On any business day when the Bond Market Association ("BMA") recommends that
the securities markets close early, each Fund reserves the right to close at
or prior to the BMA recommended closing time. If a Fund does so, it will
cease granting same business day credit for purchase and redemption orders
received after the Fund's closing time and credit will be given to the next
business day.
. The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permitted
by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securities
are valued at amortized cost in accordance with SEC regulations. Amortized cost
will normally approximate market value. There can be no assurance that a Fund
will be able at all times to maintain a NAV of $1.00 per share.
HOW TO SELL SHARES
How Can I Sell FST Shares Of The Funds?
You may arrange to take money out of your account by selling (redeeming)
some or all of your shares. Generally, each Fund will redeem its FST Shares
upon request on any business day at their NAV next determined after receipt
of such request in proper form. You may request that redemption proceeds be
sent to you by check or by wire (if the wire instructions are on record).
Redemptions may be requested in writing or by telephone.
<TABLE>
<CAPTION>
Instructions For Redemptions:
-------------------------------------------------------------------
<S> <C> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund name and Class of Shares
. The dollar amount you want to sell
. How and where to send the proceeds
. Mail your request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
-------------------------------------------------------------------
By Telephone: If you have elected the telephone redemption
privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
-------------------------------------------------------------------
</TABLE>
Certain institutions and intermediaries are authorized to accept redemption
requests on behalf of the Funds as described under "How Do I Purchase Shares
34
<PAGE>
SHAREHOLDER GUIDE
Through A Financial Institution?" A redemption may also be made with respect
to certain Funds by means of the check redemption privilege described in the
Additional Statement.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing and
signed by an authorized person designated on the Account Application. The
written request may be confirmed by telephone with both the requesting party
and the designated bank account to verify instructions.
. The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
35
<PAGE>
When Will Redemption Proceeds Be Wired?
Redemption proceeds will normally be wired to the bank account designated on
your Account Application as follows:
<TABLE>
<S> <C> <C>
Redemption Request Received Redemption Proceeds Dividends
------------------------------------------------------------------------------
Money Market, Treasury Instruments and
Federal Funds:
------------------------------------------------------------------------------
. By 3:00 p.m. New York time Wired same business Not earned on
day day request is
received
. After 3:00 p.m. New York time Wired next business Earned on day
day request is
received
------------------------------------------------------------------------------
Prime Obligations, Treasury Obligations
and Government Funds:
------------------------------------------------------------------------------
. By 5:00 p.m. New York time Wired same business Not earned on
day day request is
received
. After 5:00 p.m. New York time Wired next business Earned on day
day request is
received
------------------------------------------------------------------------------
Tax-Free Money Market Fund:
------------------------------------------------------------------------------
. By 1:00 p.m. New York time Wired same business Not earned on
day day request is
received
. After 1:00 p.m. New York time Wired next business Earned on day
day request is
received
------------------------------------------------------------------------------
</TABLE>
. Although redemption proceeds will normally be wired as described above, each
Fund reserves the right to pay redemption proceeds up to three business days
following receipt of a properly executed wire transfer redemption request. If
you are selling shares you recently paid for by check, the Fund will pay you
when your check has cleared, which may take up to 15 days. If the Federal
Reserve Bank is closed on the day that the redemption proceeds would
ordinarily be wired, wiring the redemption proceeds may be delayed one
additional business day.
. To change the bank designated on your Account Application, you must send
written instructions signed by an authorized person designated on the Account
Application to the Transfer Agent.
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of your bank or any intermediaries in the
transfer process. If a problem with such performance arises, you should deal
directly with your bank or any such intermediaries.
36
<PAGE>
SHAREHOLDER GUIDE
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
The Trust reserves the right to:
. Redeem your shares if your account balance falls below the minimum as a
result of a redemption. The Fund will give you 60 days' prior written notice
to allow you to purchase sufficient additional shares of the Fund in order to
avoid such redemption. Different rules may apply to investors who have
established brokerage accounts with Goldman Sachs in accordance with the
terms and conditions of their account agreements.
. Redeem your shares in other circumstances determined by the Board of Trustees
to be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distributions
be returned to the Fund as undeliverable or remain uncashed for six months.
In addition, that distribution and all future distributions payable to you
will be reinvested at NAV in additional Fund shares. No interest will accrue
on amounts represented by uncashed distribution or redemption checks.
Can I Exchange My Investment From One Fund To Another?
You may exchange FST Shares of a Fund at NAV for shares of the corresponding
class of any other Goldman Sachs Fund. The exchange privilege may be materially
modified or withdrawn at any time upon 60 days' written notice to you.
<TABLE>
<CAPTION>
INSTRUCTIONS FOR EXCHANGING SHARES:
-------------------------------------------------------------------
<S> <C> <C>
By Writing: . Write a letter of instruction that includes:
. Your name(s) and signature(s)
. Your account number
. The Fund names and Class of Shares
. The dollar amount to be exchanged
. Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
-------------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
-------------------------------------------------------------------
</TABLE>
37
<PAGE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically registered
account.
. Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the exchange
instructions are in writing and are signed by an authorized person designated
on the Account Application.
. Exchanges are available only in states where exchanges may be legally made.
. It may be difficult to make telephone exchanges in times of drastic economic
or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I Need
to Know About Telephone Redemption Requests?" in an effort to prevent
unauthorized or fraudulent telephone exchange requests.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should consult
your tax adviser concerning the tax consequences of an exchange.
What Types Of Reports Will Be Sent Regarding Investments In FST Shares?
Recordholders will receive an annual report containing audited financial
statements and a semi-annual report. To eliminate unnecessary duplication,
only one copy of such reports will be sent to shareholders with the same
mailing address. If you would like a duplicate copy to be mailed to you,
please contact Goldman Sachs Funds at 1-800-621-2550. Recordholders will also
be provided with an individual monthly statement. Any dividends and
distributions paid by the Funds are also reflected in regular statements
issued by the Funds to recordholders. If you purchase shares through an
institution or other intermediary, the institution or intermediary is
responsible for providing these or other reports to their customers who are
the beneficial owners of the Fund shares in accordance with the rules that
apply to their accounts with the institution or intermediary.
38
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
TAXES ON DISTRIBUTIONS: Except for the Tax-Free Money Market Fund, distribu-
tions of investment income are taxable as ordinary income for federal tax pur-
poses, and may also be subject to state or local taxes. This is true whether
you reinvest your distributions in additional Fund shares or receive them in
cash. To the extent that Fund distributions are attributable to interest on
federal obligations or interest on obligations of your state of residence or
its municipalities or authorities, they will in most cases be exempt from state
and local income taxes. Distributions from the Tax-Free Money Market Fund that
are designated as "exempt interest dividends" are generally not subject to fed-
eral income tax. Distributions of short-term capital gains are taxable to you
as ordinary income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Free Money Market Fund may be a preference item when determining your fed-
eral alternative minimum tax liability. Exempt-interest dividends are also
taken into account in determining the taxable portion of social security or
railroad retirement benefits. Any interest on indebtedness incurred by you to
purchase or carry shares in the Tax-Free Money Market Fund generally will not
be deductible for federal income tax purposes.
OTHER INFORMATION: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
39
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. TREASURY OBLIGATIONS AND U.S. GOVERNMENT SECURITIES. U.S. Treasury
Obligations include securities issued or issued or guaranteed by the U.S.
Treasury ("U.S. Treasury Obligations"). Payment of principal and interest on
these obligations is backed by the full faith and credit of the U.S.
government. U.S. Treasury Obligations include, among other things, the
separately traded principal and interest components of securities guaranteed or
issued by the U.S. Treasury if such components are traded independently under
the Separate Trading of Registered Interest and Principal of Securities program
("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
40
<PAGE>
APPENDIX A
Some Funds invest in U.S. Treasury Obligations and certain U.S. Government
Securities the interest from which is generally exempt from state income taxa-
tion. Securities generally eligible for this exemption include those issued by
the U.S. Treasury and certain agencies, authorities or instrumentalities of the
U.S. government, including the Federal Home Loan Banks, Federal Farm Credit
Banks, Tennessee Valley Authority and Student Loan Marketing Association.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
BANK OBLIGATIONS. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Funds may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Funds may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Fund invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of opera-
tions and profitability of domestic and foreign banks. Significant developments
in the U.S. banking industry have included increased competition from other
types of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the real estate mar-
kets. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
COMMERCIAL PAPER. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or
41
<PAGE>
bank holding companies, corporations, finance companies and other issuers. The
commercial paper purchased by a Fund consists of direct U.S. dollar-denominated
obligations of domestic or, in the case of certain Funds, foreign issuers.
SHORT-TERM OBLIGATIONS. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
REPURCHASE AGREEMENTS. Certain Funds may enter into repurchase agreements with
primary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, certain Funds, together with other registered
investment companies having advisory agreements with the Investment Adviser or
any of its 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.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES. Certain Funds may invest in
asset-backed and receivables-backed securities whose principal and interest
payments are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-backed
and receivables-backed 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 and
receivables-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in such securities will
42
<PAGE>
APPENDIX A
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. In addition, securities that are backed by credit card, automobile and
similar types of receivables generally do not have the benefit of a security
interest in collateral that is comparable in quality to mortgage assets. There
is the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event of a
default, a Fund may suffer a loss if it cannot sell collateral quickly and
receive the amount it is owed.
FOREIGN GOVERNMENT OBLIGATIONS AND RELATED FOREIGN RISKS. Certain Funds may
invest in foreign government obligations. Foreign government obligations are
U.S. dollar-denominated obligations (limited to commercial paper and other
notes) issued or guaranteed by a foreign government or other entity located or
organized in a foreign country that maintains a short-term foreign currency
rating in the highest short-term ratings category by the requisite number of
NRSROs.
Investments by a Fund in foreign securities, whether issued by a foreign gov-
ernment, bank, corporation or other issuer, may present a greater degree of
risk than investments in securities of domestic issuers because of less public-
ly-available financial and other information, less securities regulation,
potential imposition of foreign withholding and other taxes, war, expropriation
or other adverse governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and generally are not bound by
the accounting, auditing and financial reporting standards applicable to U.S.
banks.
MUNICIPAL OBLIGATIONS. Certain Funds may invest in municipal obligations.
Municipal obligations are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities, and the District of Columbia. Municipal
obligations in which a Fund may invest consist of fixed rate notes and similar
debt instruments; variable and floating rate demand instruments; tax-exempt
commercial paper; municipal bonds; and unrated notes, paper, bonds or other
instruments.
MUNICIPAL NOTES AND BONDS. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds also include lease rental revenue bonds which are
issued by a state or local authority for capital projects and are secured by
annual lease payments from the state or local-
43
<PAGE>
ity sufficient to cover debt service on the authority's obligations. Industrial
development bonds ("private activity bonds") are a specific type of revenue
bond backed by the credit and security of a private user and, therefore, have
more potential risk. Municipal bonds may be issued in a variety of forms,
including commercial paper, tender option bonds and variable and floating rate
securities.
TENDER OPTION BONDS. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal
income tax. Certain tender option bonds may be illiquid or may become illiquid
as a result of a credit rating downgrade, a payment default or a disqualifica-
tion from tax-exempt status.
REVENUE ANTICIPATION WARRANTS. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
INDUSTRIAL DEVELOPMENT BONDS. Certain Funds may invest in industrial develop-
ment bonds (private activity bonds). Industrial development bonds are a spe-
cific type of revenue bond backed by the credit and security of a private user,
the interest from which would be an item of tax preference when distributed by
a Fund as "exempt-interest dividends" to shareholders under the AMT.
44
<PAGE>
APPENDIX A
OTHER MUNICIPAL OBLIGATION POLICIES. Certain Funds may invest 25% or more of
the value of their respective total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting one municipal obligation would also affect the other municipal
obligation. For example, a Fund may invest all of its assets in (a) municipal
obligations the interest of which is paid solely from revenues from 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 obligations whose issuers are in the same
state; or (c) industrial development obligations. Concentration of a Fund's
investments in these municipal obligations will subject the Fund, to a greater
extent than if such investment was not so concentrated, to the risks of adverse
economic, business or political developments affecting the particular state,
industry or other area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and are gener-
ally not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
CUSTODIAL RECEIPTS. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
OTHER INVESTMENT COMPANIES. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of
45
<PAGE>
any other investment company, and a prohibition on investing more than 5% of a
Fund's total assets in securities of any one investment company or more than
10% of its total assets in securities of all investment companies. A Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Such other investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the acquiring Fund and will be subject to substantially the
same risks.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring the securities for its portfolio, a Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment Adviser
deems it appropriate.
46
<PAGE>
APPENDIX A
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities which cannot be disposed of in seven days in the ordinary
course of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain municipal leases and participation interests
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of more
than seven days
. Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is
otherwise eligible for resale pursuant to Rule 144A under the Securities Act
of 1933.
Investing in restricted securities may decrease the liquidity of a Fund's
portfolio.
BORROWINGS. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the
Additional Statement.
DOWNGRADED SECURITIES. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
47
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). The Pre-
mium Money Market Fund terminated as of March 31, 2000. This information has
been audited by Arthur Andersen LLP, whose report, along with a Fund's
financial statements, is included in the Fund's annual report (available
upon request without charge).
PRIME OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- --------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1997 - FST shares 1.00 0.05 (0.05)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred Shares (commenced
May 1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
</TABLE>
(a) Calculated based on the average shares outstanding methodology.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the invest-
ment at the net asset value at the end of the period.
(c) Annualized.
48
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,062,549 0.18% 5.09% 0.23% 5.04%
1.00 5.07 219,711 0.28 4.87 0.33 4.82
1.00 4.91 1,051,831 0.43 4.88 0.48 4.83
1.00 4.65 690,741 0.68 4.60 0.73 4.55
- ----------------------------------------------------------------------------------
1.00 5.55 5,831,773 0.18 5.39 0.24 5.33
1.00 5.45 132,558 0.28 5.26 0.34 5.20
1.00 5.29 331,196 0.43 5.14 0.49 5.08
1.00 5.03 336,205 0.68 4.89 0.74 4.83
- ----------------------------------------------------------------------------------
1.00 5.60 3,867,739 0.18 5.46 0.23 5.41
1.00 5.50 152,767 0.28 5.38 0.33 5.33
1.00 5.34 241,607 0.43 5.22 0.48 5.17
1.00 5.08 176,133 0.68 4.97 0.73 4.92
- ----------------------------------------------------------------------------------
1.00 5.41 3,901,797 0.18 5.29 0.23 5.24
1.00 5.28(c) 127,126 0.28(c) 5.19(c) 0.33(c) 5.14(c)
1.00 5.14 215,898 0.43 5.06 0.48 5.01
1.00 4.88 115,114 0.68 4.78 0.73 4.73
- ----------------------------------------------------------------------------------
1.00 6.02 3,295,791 0.18 5.86 0.22 5.82
1.00 5.75 147,894 0.43 5.59 0.47 5.55
1.00 5.49 65,278 0.68 5.33 0.72 5.29
- ----------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- --------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1997 - FST shares 1.00 0.06 (0.06)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced
May 1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares (commenced
July 14) 1.00 0.02 (0.02)
- --------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
50
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,747,861 0.18% 5.08% 0.22% 5.04%
1.00 5.07 241,179 0.28 4.99 0.32 4.95
1.00 4.92 403,602 0.43 4.81 0.47 4.77
1.00 4.66 305,972 0.68 4.53 0.72 4.49
- ---------------------------------------------------------------------------------
1.00 5.55 4,995,782 0.18 5.40 0.23 5.35
1.00 5.45 93,218 0.28 5.30 0.33 5.25
1.00 5.29 399,474 0.43 5.16 0.48 5.11
1.00 5.03 496,520 0.68 4.86 0.73 4.81
- ---------------------------------------------------------------------------------
1.00 5.63 4,346,519 0.18 5.50 0.23 5.45
1.00 5.53 20,258 0.28 5.44 0.33 5.39
1.00 5.37 221,256 0.43 5.26 0.48 5.21
1.00 5.11 316,304 0.68 4.99 0.73 4.94
- ---------------------------------------------------------------------------------
1.00 5.45 2,540,366 0.18 5.33 0.23 5.28
1.00 5.31/c/ 17,510 0.28/c/ 5.23/c/ 0.33/c/ 5.18/c/
1.00 5.19 165,766 0.43 5.04 0.48 4.99
1.00 4.93 234,376 0.68 4.84 0.73 4.79
- ---------------------------------------------------------------------------------
1.00 6.07 2,069,197 0.15 5.89 0.23 5.81
1.00 5.80 137,412 0.40 5.61 0.48 5.53
1.00 5.41/c/ 4,219 0.65/c/ 4.93/c/ 0.73/c/ 4.85/c/
- ---------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
PREMIUM MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST Shares $1.00 $0.05 $(0.05)
1999 - FST Preferred Shares 1.00 0.05 (0.05)
1999 - FST Administration Shares 1.00 0.05 (0.05)
1999 - FST Service Shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - FST Shares 1.00 0.05 (0.05)
1998 - FST Preferred Shares 1.00 0.05 (0.05)
1998 - FST Administration Shares 1.00 0.05 (0.05)
1998 - FST Service Shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
For the Period Ended December 31,
1997 - FST Shares (commenced August 1) 1.00 0.02 (0.02)
1997 - FST Preferred Shares (commenced
August 1) 1.00 0.02 (0.02)
1997 - FST Administration Shares (commenced
August 1) 1.00 0.02 (0.02)
1997 - FST Service Shares (commenced August
1) 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
</TABLE>
/(a)/ Calculated based on the average shares outstanding methodology.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the invest-
ment at the net asset value at the end of the period.
/(c)/ Annualized.
52
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
--------------------------
Net
assets at Ratio of net Ratio of net
Net asset end Ratio of net investment Ratio of investment
value at of period expenses to income to expenses to income to
end Total (in average net average net average net average net
of period return/b/ 000's) assets assets assets assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.10% $312,507 0.18% 4.96% 0.23% 4.91%
1.00 5.00 50,847 0.28 4.82 0.33 4.77
1.00 4.84 18,670 0.43 4.78 0.48 4.73
1.00 4.58 17,312 0.68 4.44 0.73 4.39
- ------------------------------------------------------------------------------------------
1.00 5.55 479,851 0.16 5.38 0.29 5.25
1.00 5.45 107,517 0.26 5.29 0.39 5.16
1.00 5.29 13,728 0.41 5.08 0.54 4.95
1.00 5.03 19,655 0.66 4.79 0.79 4.66
- ------------------------------------------------------------------------------------------
1.00 5.73/c/ 218,192 0.08/c/ 5.59/c/ 0.43/c/ 5.24/c/
1.00 5.62/c/ 558 0.18/c/ 5.50/c/ 0.53/c/ 5.15/c/
1.00 5.47/c/ 1,457 0.33/c/ 5.33/c/ 0.68/c/ 4.98/c/
1.00 5.20/c/ 814 0.58/c/ 5.17/c/ 0.93/c/ 4.82/c/
- ------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
TREASURY OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST Shares $1.00 $0.05 $(0.05)
1999 - FST Preferred Shares 1.00 0.05 (0.05)
1999 - FST Administration Shares 1.00 0.05 (0.05)
1999 - FST Service Shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------
1998 - FST Shares 1.00 0.05 (0.05)
1998 - FST Preferred Shares 1.00 0.05 (0.05)
1998 - FST Administration Shares 1.00 0.05 (0.05)
1998 - FST Service Shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1997 - FST Shares 1.00 0.05 (0.05)
1997 - FST Preferred Shares 1.00 0.05 (0.05)
1997 - FST Administration Shares 1.00 0.05 (0.05)
1997 - FST Service Shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1996 - FST Shares 1.00 0.05 (0.05)
1996 - FST Preferred Shares (commenced May
1) 1.00 0.03 (0.03)
1996 - FST Administration Shares 1.00 0.05 (0.05)
1996 - FST Service Shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1995 - FST Shares 1.00 0.06 (0.06)
1995 - FST Administration Shares 1.00 0.06 (0.06)
1995 - FST Service Shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/(in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.88% $2,320,581 0.18% 4.75% 0.23% 4.70%
1.00 4.78 297,925 0.28 4.67 0.33 4.62
1.00 4.62 1,157,825 0.43 4.53 0.48 4.48
1.00 4.36 569,993 0.68 4.28 0.73 4.23
- --------------------------------------------------------------------------------
1.00 5.40 3,521,389 0.18 5.22 0.23 5.17
1.00 5.29 285,240 0.28 5.20 0.33 5.15
1.00 5.14 1,080,454 0.43 4.94 0.48 4.89
1.00 4.87 501,619 0.68 4.69 0.73 4.64
- --------------------------------------------------------------------------------
1.00 5.50 2,217,943 0.18 5.36 0.23 5.31
1.00 5.40 245,355 0.28 5.32 0.33 5.27
1.00 5.24 738,865 0.43 5.12 0.48 5.07
1.00 4.98 312,991 0.68 4.87 0.73 4.82
- --------------------------------------------------------------------------------
1.00 5.35 2,291,051 0.18 5.22 0.24 5.16
1.00 5.24/c/ 46,637 0.28/c/ 5.11/c/ 0.34/c/ 5.05/c/
1.00 5.09 536,895 0.43 4.97 0.49 4.91
1.00 4.83 220,560 0.68 4.72 0.74 4.66
- --------------------------------------------------------------------------------
1.00 5.96 1,587,715 0.18 5.73 0.23 5.68
1.00 5.69 283,186 0.43 5.47 0.48 5.42
1.00 5.43 139,117 0.68 5.21 0.73 5.16
- --------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
TREASURY INSTRUMENTS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST Shares $1.00 $0.05 $(0.05)
1999 - FST Preferred Shares 1.00 0.04 (0.04)
1999 - FST Administration Shares 1.00 0.04 (0.04)
1999 - FST Service Shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - FST Shares 1.00 0.05 (0.05)
1998 - FST Preferred Shares 1.00 0.05 (0.05)
1998 - FST Administration Shares 1.00 0.05 (0.05)
1998 - FST Service Shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31,
1997 - FST Shares (commenced March 3) 1.00 0.04 (0.04)
1997 - FST Preferred Shares (commenced
May 30) 1.00 0.03 (0.03)
1997 - FST Administration Shares (commenced
April 1) 1.00 0.04 (0.04)
1997 - FST Service Shares (commenced
March 5) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net
assets at Ratio of net Ratio of net
Net asset end Ratio of net investment Ratio of investment
value at of period expenses to income to expenses to income to
end Total (in average net average net average net average net
of period return/b/ 000's) assets assets assets assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.60% $428,732 0.18% 4.51% 0.24% 4.45%
1.00 4.49 208 0.28 4.53 0.34 4.47
1.00 4.34 67,748 0.43 4.29 0.49 4.23
1.00 4.08 42,095 0.68 4.07 0.74 4.01
- -------------------------------------------------------------------------------
1.00 5.05 822,207 0.18 4.74 0.29 4.63
1.00 4.94 2 0.28 4.68 0.39 4.57
1.00 4.79 23,676 0.43 4.62 0.54 4.51
1.00 4.53 17,128 0.68 4.37 0.79 4.26
- -------------------------------------------------------------------------------
1.00 5.25/c/ 496,419 0.18/c/ 5.09/c/ 0.29/c/ 4.98/c/
1.00 5.13/c/ 2 0.28/c/ 5.00/c/ 0.39/c/ 4.89/c/
1.00 4.99/c/ 4,159 0.43/c/ 4.84/c/ 0.54/c/ 4.73/c/
1.00 4.71/c/ 20,177 0.68/c/ 4.62/c/ 0.79/c/ 4.51/c/
- -------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
GOVERNMENT FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST Shares $1.00 $0.05 $(0.05)
1999 - FST Preferred Shares 1.00 0.05 (0.05)
1999 - FST Administration Shares 1.00 0.05 (0.05)
1999 - FST Service Shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------
1998 - FST Shares 1.00 0.05 (0.05)
1998 - FST Preferred Shares 1.00 0.05 (0.05)
1998 - FST Administration Shares 1.00 0.05 (0.05)
1998 - FST Service Shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1997 - FST Shares 1.00 0.05 (0.05)
1997 - FST Preferred Shares 1.00 0.05 (0.05)
1997 - FST Administration Shares 1.00 0.05 (0.05)
1997 - FST Service Shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1996 - FST Shares 1.00 0.05 (0.05)
1996 - FST Preferred Shares (commenced May
1) 1.00 0.03 (0.03)
1996 - FST Administration Shares 1.00 0.05 (0.05)
1996 - FST Service Shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1995 - FST Shares 1.00 0.06 (0.06)
1995 - FST Administration Shares 1.00 0.06 (0.06)
1995 - FST Service Shares (commenced May
16) 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/(in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.03% $2,260,275 0.18% 4.91% 0.22% 4.87%
1.00 4.93 181,155 0.28 4.81 0.32 4.77
1.00 4.77 519,266 0.43 4.67 0.47 4.63
1.00 4.51 435,192 0.68 4.35 0.72 4.31
- --------------------------------------------------------------------------------
1.00 5.46 1,563,875 0.18 5.32 0.23 5.27
1.00 5.36 245,628 0.28 5.15 0.33 5.10
1.00 5.20 407,363 0.43 5.06 0.48 5.01
1.00 4.94 699,481 0.68 4.83 0.73 4.78
- --------------------------------------------------------------------------------
1.00 5.54 1,478,539 0.18 5.41 0.24 5.35
1.00 5.43 7,147 0.28 5.34 0.34 5.28
1.00 5.28 299,804 0.43 5.15 0.49 5.09
1.00 5.02 580,200 0.68 4.91 0.74 4.85
- --------------------------------------------------------------------------------
1.00 5.38 858,769 0.18 5.25 0.24 5.19
1.00 5.26/c/ 112 0.28/c/ 5.14/c/ 0.34/c/ 5.08/c/
1.00 5.12 145,108 0.43 5.01 0.49 4.95
1.00 4.86 223,554 0.68 4.74 0.74 4.68
- --------------------------------------------------------------------------------
1.00 6.00 743,884 0.18 5.81 0.24 5.75
1.00 5.74 82,386 0.43 5.54 0.49 5.48
1.00 5.40/c/ 14,508 0.68/c/ 5.08/c/ 0.74/c/ 5.02/c/
- --------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
FEDERAL FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST Shares $1.00 $0.05 $(0.05)
1999 - FST Preferred Shares 1.00 0.05 (0.05)
1999 - FST Administration Shares 1.00 0.05 (0.05)
1999 - FST Service Shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - FST Shares 1.00 0.05 (0.05)
1998 - FST Preferred Shares 1.00 0.05 (0.05)
1998 - FST Administration Shares 1.00 0.05 (0.05)
1998 - FST Service Shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31,
1997 - FST Shares (commenced February 28) 1.00 0.05 (0.05)
1997 - FST Preferred Shares (commenced May
30) 1.00 0.03 (0.03)
1997 - FST Administration Shares (commenced
April 1) 1.00 0.04 (0.04)
1997 - FST Service Shares (commenced March
25) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
60
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.05% $4,206,119 0.18% 4.96% 0.23% 4.91%
1.00 4.94 186,590 0.28 5.05 0.33 5.00
1.00 4.79 789,529 0.43 4.71 0.48 4.66
1.00 4.53 478,635 0.68 4.46 0.73 4.41
- ----------------------------------------------------------------------------------
1.00 5.41 2,346,254 0.18 5.24 0.24 5.18
1.00 5.31 26,724 0.28 5.20 0.34 5.14
1.00 5.15 690,084 0.43 5.02 0.49 4.96
1.00 4.89 321,124 0.68 4.78 0.74 4.72
- ----------------------------------------------------------------------------------
1.00 5.51/c/ 1,125,681 0.18/c/ 5.39/c/ 0.27/c/ 5.30/c/
1.00 5.43/c/ 194,375 0.28/c/ 5.26/c/ 0.37/c/ 5.17/c/
1.00 5.27/c/ 625,334 0.43/c/ 5.15/c/ 0.52/c/ 5.06/c/
1.00 5.00/c/ 228,447 0.68/c/ 4.78/c/ 0.77/c/ 4.69/c/
- ----------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
TAX-FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ Shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years ended December 31,
1999 - FST Shares $1.00 $0.03 $(0.03)
1999 - FST Preferred Shares 1.00 0.03 (0.03)
1999 - FST Administration Shares 1.00 0.03 (0.03)
1999 - FST Service Shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1998 - FST Shares 1.00 0.03 (0.03)
1998 - FST Preferred Shares 1.00 0.03 (0.03)
1998 - FST Administration Shares 1.00 0.03 (0.03)
1998 - FST Service Shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1997 - FST Shares 1.00 0.04 (0.04)
1997 - FST Preferred Shares 1.00 0.03 (0.03)
1997 - FST Administration Shares 1.00 0.03 (0.03)
1997 - FST Service Shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1996 - FST Shares 1.00 0.03 (0.03)
1996 - FST Preferred Shares (commenced May
1) 1.00 0.02 (0.02)
1996 - FST Administration Shares 1.00 0.03 (0.03)
1996 - FST Service Shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1995 - FST Shares 1.00 0.04 (0.04)
1995 - FST Administration Shares 1.00 0.04 (0.04)
1995 - FST Service Shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
62
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end total of period average net average net average net average net
of period return/b/(in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 3.13% $1,775,327 0.18% 3.12% 0.22% 3.08%
1.00 3.03 31,359 0.28 2.99 0.32 2.95
1.00 2.88 127,967 0.43 2.81 0.47 2.77
1.00 2.62 69,465 0.68 2.61 0.72 2.57
- --------------------------------------------------------------------------------
1.00 3.34 1,456,002 0.18 3.28 0.23 3.23
1.00 3.24 20,882 0.28 3.17 0.33 3.12
1.00 3.08 146,800 0.43 3.04 0.48 2.99
1.00 2.83 50,990 0.68 2.77 0.73 2.72
- --------------------------------------------------------------------------------
1.00 3.54 939,407 0.18 3.50 0.24 3.44
1.00 3.43 35,152 0.28 3.39 0.34 3.33
1.00 3.28 103,049 0.43 3.27 0.49 3.21
1.00 3.02 42,578 0.68 3.01 0.74 2.95
- --------------------------------------------------------------------------------
1.00 3.39 440,838 0.18 3.35 0.23 3.30
1.00 3.30/c/ 28,731 0.28/c/ 3.26/c/ 0.33/c/ 3.21/c/
1.00 3.13 51,661 0.43 3.10 0.48 3.05
1.00 2.88 19,855 0.68 2.85 0.73 2.80
- --------------------------------------------------------------------------------
1.00 3.89 448,367 0.14 3.81 0.24 3.71
1.00 3.63 20,939 0.39 3.54 0.49 3.44
1.00 3.38 19,860 0.64 3.32 0.74 3.22
- --------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
Index
1 General 31 Shareholder Guide
Investment 31 How to Buy Shares
Management 34 How to Sell Shares
Approach 39 Taxation
5 Fund 40 Appendix A
Investment Additional Information
Objectives on Portfolio Risks,
and Securities and
Strategies Techniques
10 Principal 48 Appendix B
Risks of the Financial Highlights
Funds
14 Fund
Performance
22 Fund Fees and
Expenses
26 Service
Providers
29 Dividends
<PAGE>
Financial Square Funds
Prospectus (FST Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of
Fund documents, after paying a duplicating fee, by writing to the SEC's
Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request to: [email protected]. Information on the operation of the public
reference room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
Goldman Sachs Financial Square Funds/SM/ is a service mark of Goldman Sachs &
Co.
FSPROINSTMM
<PAGE>
Prospectus
GOLDMAN SACHS FINANCIAL SQUARE FUNDS/SM/
FST Service
Shares
May 1, 2000
. Prime
Obligations
Fund
. Money Market
Fund
. Treasury
Obligations
Fund
[GRAPHIC]
. Treasury
Instruments
Fund
. Government
Fund
. Federal Fund
. Tax- Free Money
Market Fund
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
<PAGE>
NOT FDIC-Insured May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Funds. GSAM is referred to in this Prospectus as the "Invest-
ment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek preservation of capital, daily
liquidity and maximum current income. With each Fund, the Investment Adviser
follows a conservative, risk-managed investment process that seeks to:
. Manage credit risk
. Manage interest rate risk
. Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1. MANAGING CREDIT RISK
The Investment Adviser's process for managing risk emphasizes:
. INTENSIVE RESEARCH--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as well
as the Investment Research, Legal and Compliance departments of Goldman
Sachs.
. TIMELY UPDATES--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio management
team via computer link.
THE RESULT: AN "APPROVED" LIST OF HIGH-QUALITY CREDITS--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2. Managing Interest Rate Risk
Three main steps are followed in seeking to manage interest rate risk:
. Establish weighted average maturity (WAM) target--WAM (the weighted average
time until the yield of a portfolio reflects any changes in the current
interest rate environment) is constantly revisited and adjusted as market
conditions change. An overall strategy is developed by the portfolio
management team based on insights gained from weekly meetings with both
Goldman Sachs economists and economists from outside the firm.
. Implement optimum portfolio structure--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
. Conduct rigorous analysis of new securities--The Investment Adviser's five-
step process includes legal, credit, historical index and liquidity analysis,
as well as price stress testing to determine suitability for money market
mutual funds.
3. Managing Liquidity
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
. Each Fund's clients and factors that influence their asset volatility;
. Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
. Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC Financial Data Universal
Averages. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
. The Funds: Each Fund's securities are valued by the amortized cost method as
permitted by Rule 2a-7 under the Investment Company Act of 1940, as amended
(the "Act"). Under Rule 2a-7, each Fund may invest only in U.S. dollar-
denominated securities that are determined to present minimal credit risk and
meet certain other criteria, including conditions relating to maturity,
diversification and credit quality. These operating policies may be more
restrictive than the fundamental policies set forth in the State-ment of
Additional Information (the "Additional Statement").
. Taxable Funds: Prime Obligations, Money Market, Treasury Obligations and
Government Funds.
. TaX-Advantaged Funds: Treasury Instruments and Federal Funds.
. Tax-Exempt Fund: Tax-Free Money Market Fund.
. The Investors: The Funds are designed for institutional investors seeking a
high rate of return, a stable net asset value ("NAV") and convenient liqui-
dation privileges. The Funds are particularly suitable for banks, corpora-
tions and other financial institutions that seek investment of short-term
funds for their own accounts or for the accounts of their customers. Shares
of the Government Fund are intended to qualify as eligible investments for
federally chartered credit unions pursuant to Sections 107(7), 107(8) and
107(15) of the Federal Credit Union Act, Part 703 of the National Credit
Union Administration ("NCUA") Rules and Regulations and NCUA Letter Number
155. The Fund intends to review changes in the applicable laws, rules and
regulations governing eligible investments for federally chartered credit
unions, and to take such action as may be necessary so that the investments
of the Fund qualify as eligible investments under the Federal Credit Union
Act and the regulations thereunder. Shares of the Government Fund, however,
may or may not qualify as eligible investments for particular state-chart-
ered credit unions. A state-chartered credit union should consult qualified
legal counsel to determine whether the Government Fund is a permissible
investment under the law applicable to it.
. NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
. Maximum Remaining Maturity of Portfolio Investments: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
. Dollar-Weighted Average Portfolio Maturity ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
3
<PAGE>
. Investment Restrictions: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions" in
the Additional Statement. Fundamental investment restrictions of a Fund
cannot be changed without approval of a majority of the outstanding shares of
that Fund. The Treasury Obligations Fund's policy of limiting its investments
to U.S. Treasury Obligations (as defined in Appendix A) and related
repurchase agreements is also fundamental. All investment objec-tives and
policies not specifically designated as fundamental are non-fun-damental and
may be changed without shareholder approval.
. Diversification: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of the
value of its total assets at the time of purchase in the securities of any
single issuer. However, a Fund may invest up to 25% of the value of its total
assets in the securities of a single issuer for up to three business days.
These limitations do not apply to cash, certain repurchase agree-ments, U.S.
Government Securities (as defined in Appendix A) or securities of other
investment companies. In addition, securities subject to certain
unconditional guarantees and securities that are not "First Tier Securi-ties"
as defined by the SEC are subject to different diversification requirements
as described in the Additional Statement.
4
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
The Prime Obligations, Money Market, Treasury Obligations, Treasury Instru-
ments, Government, Federal and Tax-Free Money Market Funds seek to maximize
current income to the extent consistent with the preservation of capital and
the maintenance of liquidity by investing exclusively in high quality money
market instruments.
Taxable and Tax-Advantaged Funds:
The Prime Obligations and Money Market Funds pursue their investment objec-
tives by investing in U.S. Government Securities, obligations of U.S. banks,
commercial paper and other short-term obligations of U.S. companies, states,
municipalities and other entities and repurchase agreements. The Money Mar-
ket Fund may also invest in U.S. dollar-denominated obligations of foreign
banks, foreign companies and foreign governments. The Treasury Obligations
Fund pursues its investment objective by investing in securities issued by
the U.S. Treasury and repurchase agreements relating to such securities. The
Government Fund pursues its investment objective by investing in U.S. Gov-
ernment Securities and repurchase agreements relating to such securities.
The Treasury Instruments and Federal Funds pursue their investment objec-
tives by limiting their investments to certain U.S. Treasury Obligations and
U.S. Government Securities, respectively, the interest from which is gener-
ally exempt from state income taxation. You should consult your tax adviser
to determine whether distributions from the Treasury Instruments and Federal
Funds (and any other Fund that may hold such obligations) derived from
interest on such obligations are exempt from state income taxation in your
own state.
In order to obtain a rating from a rating organization, the Prime Obliga-
tions, Money Market, Treasury Obligations, Treasury Instruments, Government
and Federal Funds will observe special investment restrictions.
Tax-Exempt Fund:
The Tax-Free Money Market Fund pursues its investment objective by investing
in securities issued by or on behalf of states, territories, and possessions
of the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia, the interest from
which, if any, is in the opinion of bond counsel excluded from gross income
for federal income tax purposes, and not an item of tax preference under the
federal alternative minimum tax ("AMT").
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Bank Commercial
Fund Obligations Securities Obligations Paper
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations ./1/ . . .
U.S. banks only/2/
-------------------------------------------------------------------------------------------------
Money Market ./1/ . . .
Over 25% of total assets U.S. and foreign
must be invested in U.S. (US$) commercial
and foreign (US$) banks/3/ paper
-------------------------------------------------------------------------------------------------
Treasury Obligations ./4/
-------------------------------------------------------------------------------------------------
Treasury Instruments ./4/
-------------------------------------------------------------------------------------------------
Government ./1/ .
-------------------------------------------------------------------------------------------------
Federal ./1/ .
-------------------------------------------------------------------------------------------------
Tax-Free Money Market .
Tax-exempt only
-------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 If adverse economic conditions prevail in the banking industry (such as
substantial losses on loans, increases in non-performing assets and
charge-offs and declines in total deposits) the Fund may, for temporary
defensive purposes, invest less than 25% of its total assets in bank
obligations.
4 Issued by the U.S. Treasury.
5 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
6 The Fund may invest in U.S. dollar-denominated obligations (limited to
commercial paper and other notes) issued or guaranteed by a foreign
government. The Fund may also invest in U.S. dollar-denominated
obligations issued or guaranteed by any entity located or organized in a
foreign country that maintains a short-term foreign currency rating in the
highest short-term ratings category by the requisite number of NRSROs. The
Fund may not invest more than 25% of its total assets in the securities of
any one foreign government.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Short-Term
Obligations of Asset-Backed and Foreign
Corporations and Repurchase Receivables-Backed Government
Other Entities Agreements Securities/5/ Obligations (US$)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
. . .
U.S. entities only
- ---------------------------------------------------------------------------
. . . ./6/
U.S. and foreign
(US$) entities
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
.
(Does not intend
to invest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Investment Policies Matrix continued
<TABLE>
<CAPTION>
Taxable Tax-Exempt Custodial Unrated Investment
Fund Municipals Municipals Receipts Securities/9/ Companies
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Obligations ./7/ . . .
Up to 10% of total
assets in other
investment companies
- -------------------------------------------------------------------------------------------------------------
Money Market ./7/ . . .
Up to 10% of total
assets in other
investment companies
- -------------------------------------------------------------------------------------------------------------
Treasury Obligations
- -------------------------------------------------------------------------------------------------------------
Treasury Instruments
- -------------------------------------------------------------------------------------------------------------
Government .
Up to 10% of total
assets in other
investment companies
- -------------------------------------------------------------------------------------------------------------
Federal
- -------------------------------------------------------------------------------------------------------------
Tax-Free Money . . . .
Market At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations (except in investment companies
extraordinary circumstances)/8/
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
7 Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
8 Ordinarily expect that 100% of a Fund's portfolio securities will be
invested in municipal obligations, but the Fund may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
9 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality to
First Tier Securities, or to the extent that a Fund may purchase Second
Tier Securities, comparable in quality to Second Tier Securities. In
addition, a Fund holding a security supported by a guarantee or demand
feature may rely on the credit quality of the guarantee or demand feature
in determining the credit quality of the investment.
10 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of the Fund's net assets under normal market conditions.
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Private Summary of
Activity Credit Taxation for
Bonds Quality/9/ Distributions/14/ Miscellaneous
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------
. First Tier/12/ Taxable federal and state/15/ May invest in obligations
of the International
Bank for Reconstruction
and Development. Reverse
repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Reverse repurchase agreements
generally exempt from not permitted
state taxation
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Under extraordinary circumstances,
generally exempt from may hold cash, U.S. Government
state taxation Securities subject to state taxation
or cash equivalents. Reverse
repurchase agreements not permitted.
- ------------------------------------------------------------------------------------------------------
.
(Does not First/12/ or Tax-exempt federal May (but does not currently intend
intend to Second Tier/13/ and taxable state/16/ to) invest up to 20% in securities
invest)/10/,/11/ subject to AMT and may temporarily
invest in the taxable money market
instruments described herein.
Reverse repurchase agreements
not permitted.
- ------------------------------------------------------------------------------------------------------
</TABLE>
11 No more than 25% of the value of the Fund's total assets may be invested
in industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
12 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
13 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
14 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
15 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities interest
income.
16 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Prime Money Treasury
. Applicable Obligations Market Obligations
- -- Not Applicable Fund Fund Fund
- ------------------------------------------------------------
<S> <C> <C> <C>
NAV . . .
Interest Rate . . .
Credit/Default . . .
Liquidity . . .
U.S. Government Securities . . --
Concentration -- -- --
Foreign -- . --
Banking Industry -- . --
Tax -- -- --
- ------------------------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
Tax-Free
Treasury Money
Instruments Government Federal Market
Fund Fund Fund Fund
- ---------------------------------------------
<S> <C> <C> <C>
. . . .
. . . .
. . . .
. . . .
-- . . --
-- -- -- .
-- -- -- --
-- -- -- --
-- -- -- .
- ---------------------------------------------
</TABLE>
11
<PAGE>
Risks that apply to all Funds:
. NAV Risk--The risk that a Fund will not be able to maintain a NAV per share of
$1.00 at all times.
. Interest Rate Risk--The risk that during periods of rising interest rates, a
Fund's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a Fund's
yield will tend to be higher.
. Credit/Default Risk--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase agree-
ment, may default on its payment obligations. In addition, with respect to the
Tax-Free Money Market Fund, risk of loss from payment default may also exist
where municipal instruments are backed by foreign letters of credit or guaran-
tees.
. Liquidity Risk--The risk that a Fund will be unable to pay redemption proceeds
within the time period stated in this Prospectus, because of unusual market
conditions, an unusually high volume of redemption requests, or other reasons.
Risk that applies to the Prime Obligations, Money Market, Government and
Federal Funds:
. U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Money Market Fund:
. Foreign Risk--The risk that a foreign security could lose value as a result of
political, financial and economic events in foreign countries, less publicly
available financial and other information, less stringent foreign securities
regulations and accounting and disclosure standards, or other factors. The
Money Market Fund may not invest more than 25% of its total assets in the
securities of any one foreign government.
. Banking Industry Risk--The risk that if the Fund invests more than 25% of its
total assets in bank obligations, an adverse development in the banking indus-
try may affect the value of the Fund's investments more than if the Fund's
investments were not invested to such a degree in the banking industry. Nor-
mally, the Money Market Fund intends to invest more than 25% of its total
assets in bank obligations. Banks may be particularly susceptible to certain
economic factors such as interest rate changes, adverse developments in the
real estate market, fiscal and monetary policy and general economic cycles.
12
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
Risks that apply to the Tax-Free Money Market Fund:
. Concentration Risk--The risk that if the Fund invests more than 25% of its
total assets in issuers within the same state, industry or economic sector, an
adverse economic, business or political development may affect the value of
the Fund's investments more than if its investments were not so concentrated.
. Tax Risk--The risk that future legislative or administrative changes or court
decisions may materially affect the ability of the Fund to pay federal tax-
exempt dividends. This Fund would not be a suitable investment for IRAs, other
tax-exempt or tax-deferred accounts or for other investors who are not sensi-
tive to the federal, state or local tax consequences of their investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
13
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's Service
Shares from year to year; and (b) the average annual returns of a Fund's
Service Shares. Investors should be aware that the fluctuation of interest
rates is one primary factor in performance volatility. The bar chart and
table assume reinvestment of dividends and distributions. A Fund's past per-
formance is not necessarily an indication of how the Fund will perform in
the future. Performance reflects expense limitations in effect. If expense
limitations were not in place, a Fund's performance would have been reduced.
You may obtain a Fund's current yield by calling 1-800-621-2550.
14
<PAGE>
FUND PERFORMANCE
Prime Obligations Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.38%
Worst Quarter:
Q2 '93 0.65%
[GRAPH]
1993 2.67%
1994 3.76%
1995 5.49%
1996 4.88%
1997 5.08%
1998 5.03%
1999 4.65%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 1/8/92) 4.65% 5.03% 4.36%
-------------------------------------------------------------------
</TABLE>
15
<PAGE>
Money Market Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q4 '97 1.28%
Worst Quarter:
Q2 '99 1.07%
[GRAPH]
1996 4.93%
1997 5.11%
1998 5.03%
1999 4.66%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year Since Inception
-----------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 7/14/95) 4.66% 4.98%
-----------------------------------------------------------
</TABLE>
16
<PAGE>
FUND PERFORMANCE
Treasury Obligations Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.37%
Worst Quarter:
Q2 '93 0.64%
[GRAPH]
1992 3.29%
1993 2.61%
1994 3.62%
1995 5.43%
1996 4.83%
1997 4.98%
1998 4.87%
1999 4.36%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 10/15/91) 4.36% 4.89% 4.26%
--------------------------------------------------------------------
</TABLE>
17
<PAGE>
Treasury Instruments Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '98 1.16%
Worst Quarter:
Q1 '99 0.94%
[GRAPH]
1998 4.53%
1999 4.08%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year Since Inception
-----------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 3/5/97) 4.08% 4.42%
-----------------------------------------------------------
</TABLE>
18
<PAGE>
FUND PERFORMANCE
Government Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q4 '97 1.26%
Worst Quarter:
Q2 '99 1.05%
[GRAPH]
1996 4.86%
1997 5.02%
1998 4.94%
1999 4.51%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year Since Inception
-----------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 5/16/95) 4.51% 4.91%
-----------------------------------------------------------
</TABLE>
19
<PAGE>
Federal Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q3 '98 1.23%
Worst Quarter:
Q2 '99 1.05%
[GRAPH]
1998 4.89%
1999 4.53%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year Since Inception
-----------------------------------------------------------
<S> <C> <C>
Service Shares (Inception 3/25/97) 4.53% 4.79%
-----------------------------------------------------------
</TABLE>
20
<PAGE>
FUND PERFORMANCE
Tax-Free Money Market Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 0.89%
Worst Quarter:
Q1 '99 0.56%
[GRAPH]
1995 3.38%
1996 2.88%
1997 3.02%
1998 2.83%
1999 2.62%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31,
1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------
<S> <C> <C> <C>
Service Shares (Inception 9/23/94) 2.62% 2.94% 2.95%
-------------------------------------------------------------------
</TABLE>
21
<PAGE>
Fund Fees and Expenses (Service Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Service Shares of a Fund.
<TABLE>
<CAPTION>
Prime Money
Obligations Market
Fund Fund
- -------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases None None
Maximum Deferred Sales Charge (Load) None None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None None
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses
(expenses that are deducted from fund assets):/1/
Management Fees/2/ 0.205% 0.205%
Service Fees/3/ 0.500% 0.500%
Other Expenses/4/ 0.025% 0.015%
- -------------------------------------------------------------------------------
Total Fund Operating Expenses* 0.730% 0.720%
- -------------------------------------------------------------------------------
</TABLE>
See page 24 for all other footnotes.
* As a result of the current waivers and expense limita-
tions, "Other Expenses" and "Total Fund Operating
Expenses" of the Funds which are actually incurred are
as set forth below. The waivers and expense limita-
tions may be terminated at any time at the option of
the Investment Adviser. If this occurs, "Other
Expenses" and "Total Fund Operating Expenses" may
increase without shareholder approval.
<TABLE>
<CAPTION>
Prime Money
Obligations Market
Fund Fund
-----------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/1/
Management Fees/2/ 0.17% 0.17%
Service Fees/3/ 0.50% 0.50%
Other Expenses/4/ 0.01% 0.01%
-----------------------------------------------------------------------------
Total Fund Operating Expenses (after current waivers and
expense limitations) 0.68% 0.68%
-----------------------------------------------------------------------------
</TABLE>
22
<PAGE>
FUND FEES AND EXPENSES
<TABLE>
<CAPTION>
Tax-Free
Treasury Treasury Money
Obligations Instruments Government Federal Market
Fund Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
None None None None None
None None None None None
None None None None None
None None None None None
0.205% 0.205% 0.205% 0.205% 0.205%
0.500% 0.500% 0.500% 0.500% 0.500%
0.025% 0.035% 0.015% 0.025% 0.015%
- ------------------------------------------------------------------------------------------
0.730% 0.740% 0.720% 0.730% 0.720%
- ------------------------------------------------------------------------------------------
<CAPTION>
Tax-Free
Treasury Treasury Money
Obligations Instruments Government Federal Market
Fund Fund Fund Fund Fund
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.17% 0.17% 0.17% 0.19% 0.17%
0.50% 0.50% 0.50% 0.50% 0.50%
0.01% 0.01% 0.01% 0.01% 0.01%
-----------------------------------------------------------------------------------------
0.68% 0.68% 0.68% 0.70% 0.68%
-----------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Fund Fees and Expenses continued
/1/ The Funds' annual operating expenses are based on actual expenses.
/2/ The Investment Adviser has voluntarily agreed not to impose a portion of the
management fee on the Federal Fund equal to 0.015% of the Federal Fund's
aver-age daily net assets and equal to 0.035% of all other Funds' average
daily net assets. As a result of fee waivers, the current management fees of
the Federal Fund and all other Funds is 0.19% and 0.17%, respectively, of
such Fund's aver-age daily net assets. The waivers may be terminated at any
time at the option of the Investment Adviser.
/3/ Service Organizations may charge other fees directly to their customers who
are beneficial owners of Service Shares in connection with their customers'
accounts. Such fees may affect the return customers realize with respect to
their investments.
/4/ The Investment Adviser has voluntarily agreed to reduce or limit "Other
Expenses" of each Fund (excluding management fees, service fees, taxes,
inter-est, brokerage fees and litigation, indemnification and other
extraordinary expenses) to 0.01% of each Fund's average daily net assets.
24
<PAGE>
FUND FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the waivers and expense limitations) with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in Service
Shares of a Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your invest-
ment has a 5% return each year and that a Fund's operating expenses remain the
same. Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations $75 $233 $406 $906
- ------------------------------------------------------
Money Market $74 $230 $401 $894
- ------------------------------------------------------
Treasury Obligations $75 $233 $406 $906
- ------------------------------------------------------
Treasury Instruments $76 $237 $411 $918
- ------------------------------------------------------
Government $74 $230 $401 $894
- ------------------------------------------------------
Federal $75 $233 $406 $906
- ------------------------------------------------------
Tax-Free Money Market $74 $230 $401 $894
- ------------------------------------------------------
</TABLE>
Service Organizations that invest in Service Shares on behalf of their custom-
ers may charge other fees directly to their customer accounts in connection
with their investments. You should contact your Service Organization for infor-
mation regarding such charges. Such fees, if any, may affect the return such
customers realize with respect to their investments.
Certain Service Organizations that invest in Service Shares may receive other
compensation in connection with the sale and distribution of Service Shares or
for services to their customers' accounts and/or the Funds. For additional
information regarding such compensation, see "Shareholder Guide" in the Pro-
spectus and "Other Information" in the Additional Statement.
25
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the Invest-
ment Adviser, merged into The Goldman Sachs Group, Inc. as a result of an
initial public offering. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser also performs the following serv-
ices for the Funds:
. Continually manages each Fund, including the purchase, retention and dispo-
sition of securities and other assets
. Administers each Fund's business affairs
. Performs various recordholder servicing functions (to the extent not pro-
vided by other organizations)
Pursuant to an SEC order, each Taxable and Tax-Advantaged Fund may enter
into principal transactions in certain taxable money market instruments,
including repurchase agreements, with Goldman Sachs.
26
<PAGE>
SERVICE PROVIDERS
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Fund's average daily net assets):
<TABLE>
<CAPTION>
Actual
Fiscal Year Ended
Fund Contractual Rate December 31, 1999
------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.205% 0.17%
------------------------------------------------------------
Money Market 0.205% 0.17%
------------------------------------------------------------
Treasury Obligations 0.205% 0.17%
------------------------------------------------------------
Treasury Instruments 0.205% 0.17%
------------------------------------------------------------
Government 0.205% 0.17%
------------------------------------------------------------
Federal 0.205% 0.17%
------------------------------------------------------------
Tax-Free Money Market 0.205% 0.17%
------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
27
<PAGE>
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
28
<PAGE>
Dividends
Dividends will be distributed monthly. You may choose to have dividends paid
in:
. Cash
. Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time. If you do not indicate any
choice, dividends and distributions will be reinvested automatically in the
applicable Fund.
All or substantially all of each Fund's net investment income will be declared
as a dividend daily. Dividends will normally, but not always, be declared as of
the following times:
<TABLE>
<S> <C>
Dividend Declaration Time
Fund (New York Time)
- ------------------------------------------------
Prime Obligations 5:00 p.m.
- ------------------------------------------------
Money Market 4:00 p.m.
- ------------------------------------------------
Treasury Obligations 5:00 p.m.
- ------------------------------------------------
Treasury Instruments 4:00 p.m.
- ------------------------------------------------
Government 5:00 p.m.
- ------------------------------------------------
Federal 4:00 p.m.
- ------------------------------------------------
Tax-Free Money Market 4:00 p.m.
- ------------------------------------------------
</TABLE>
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of each
month. Net short-term capital gains, if any, will be distributed in accordance
with federal income tax requirements and may be reflected in a Fund's daily
distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid excessive
fluctuations in the amount of monthly capital gains distributions, a portion of
any net capital gains realized on the disposition of securities during the
months of November and December may be distributed during the subsequent calen-
dar year. Although realized gains and losses on the assets of a Fund are
reflected in the NAV of the Fund, they are not expected to be of an amount
which would affect the Fund's NAV of $1.00 per share.
29
<PAGE>
The income declared as a dividend for the Prime Obligations, Treasury Obliga-
tions and Government Funds is based on estimates of net investment income for
each Fund. Actual income may differ from estimates, and differences, if any,
will be included in the calculation of subsequent dividends.
30
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Service
Shares.
HOW TO BUY SHARES
How Can I Purchase Service Shares Of The Funds?
Generally, Service Shares may be purchased only through institutions that
have agreed to provide account administration and personal and account main-
tenance services to their customers who are the beneficial owners of Service
Shares. These institutions are called "Service Organizations." Customers of
a Service Organization will normally give their purchase instructions to the
Service Organization, and the Service Organization will, in turn, place pur-
chase orders with Goldman Sachs. Service Organizations will set times by
which purchase orders and payments must be received by them from their cus-
tomers. Generally, Service Shares may be purchased from the Funds on any
business day at their NAV next determined after receipt of an order by
Goldman Sachs from a Service Organization. Shares begin earning dividends
after the Fund's receipt of the purchase amount in federal funds. No sales
load is charged.
Service Organizations are responsible for transmitting purchase orders and
payments to Goldman Sachs in a timely fashion. Service Organizations should
place a purchase order in writing or by telephone.
<TABLE>
<CAPTION>
--------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------
By Telephone: 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------
</TABLE>
Before or immediately after placing an initial purchase order, a Service
Organization should complete and send to Goldman Sachs the Account Applica-
tion.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
31
<PAGE>
Service Organizations may send their payments as follows:
. Wire federal funds to The Northern Trust Company ("Northern"), as sub-cus-
todian for State Street Bank and Trust Company ("State Street") (each Fund's
custodian); or
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds -(Name
of Fund and Class of Shares), 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372. The Funds will not accept a check drawn on a foreign bank or a
third-party check.
It is strongly recommended that payment be effected by wiring federal funds
to Northern.
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
If an effective order and federal funds are received: Dividends begin:
--------------------------------------------------------------------------
<S> <C>
Money Market, Treasury Obligations and Federal Funds:
. By 3:00 p.m. New York time Same business day
. After 3:00 p.m. New York time Next business day
--------------------------------------------------------------------------
Prime Obligations, Treasury Obligations and Government
Funds:
. By 5:00 p.m. New York time Same business day
. After 5:00 p.m. New York time Next business day
--------------------------------------------------------------------------
Tax-Free Money Market Fund:
. By 2:00 p.m. New York time Same business day
. After 2:00 p.m. New York time Next business day
--------------------------------------------------------------------------
</TABLE>
What Do I Need To Know About Service Organizations?
Service Organizations may provide the following services in connection with
their customers' investments in Service Shares:
. Acting, directly or through an agent, as the sole shareholder of record
. Maintaining account records for customers
. Processing orders to purchase, redeem or exchange shares for customers
. Responding to inquiries from prospective and existing shareholders
. Assisting customers with investment procedures
In addition, some (but not all) Service Organizations are authorized to
accept, on behalf of the Trust, purchase, redemption and exchange orders
placed by or on
32
<PAGE>
SHAREHOLDER GUIDE
behalf of their customers, and may designate other intermediaries to accept
such orders, if approved by the Trust. In these cases:
. A Fund will be deemed to have received an order in proper form when the order
is accepted by the authorized Service Organization or intermediary on a
business day, and the order will be priced at the Fund's NAV next deter-mined
after such acceptance.
. Service Organizations or intermediaries will be responsible for transmit-ting
accepted orders and payments to the Trust within the time period agreed upon
by them.
You should contact your Service Organization directly to learn whether it is
authorized to accept orders for the Trust.
Pursuant to a service plan adopted by the Trust's Board of Trustees, Service
Organizations are entitled to receive payment for their services from the
Trust of up to 0.50% (on an annualized basis) of the average daily net
assets of the Service Shares of the Funds, which are attributable to or held
in the name of the Service Organization for its customers.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Service Organizations and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds.
In addition to Service Shares, each Fund also offers other classes of shares
to investors. These other share classes are subject to different fees and
expenses (which affect performance), and are entitled to different services
than Service Shares. Information regarding these other share classes may be
obtained from your sales representative or from Goldman Sachs by calling the
number on the back cover of this Prospectus.
What Is My Minimum Investment In The Funds?
<TABLE>
----------------------------------------------------
<S> <C>
Minimum initial investment $10 million (may be
allocated among the
Funds)
----------------------------------------------------
Minimum account balance $10 million
----------------------------------------------------
Minimum subsequent investments None
----------------------------------------------------
</TABLE>
A Service Organization may, however, impose a minimum amount for initial and
subsequent investments in Service Shares and may establish other require-
ments such as a minimum account balance. A Service Organization may redeem
Service Shares held by non-complying accounts, and may impose a charge for
any special services.
33
<PAGE>
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Modify or waive the minimum investment and minimum account balance require-
ment.
. Reject any purchase order for any reason.
The Funds may allow Service Organizations to purchase shares with securities
instead of cash if consistent with a Fund's investment policies and opera-
tions and if approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Service Shares
is determined by a Fund's NAV. The Funds calculate NAV as follows:
(Value of Assets of the Class)
- (Liabilities of the Class)
NAV = ________________________________________________
Number of Outstanding Shares of the Class
<TABLE>
<CAPTION>
FUND NAV CALCULATED
------------------------------------------------------------------------------
<S> <C>
Money Market, Treasury As of the close of regular trading of the
Instruments, Federal and Tax- New York Stock Exchange (normally
Free Money 4:00 p.m. New York time) on each business day
Market
------------------------------------------------------------------------------
Prime Obligations, Treasury As of 5:00 p.m. New York time on each
Obligations and Government business day
------------------------------------------------------------------------------
</TABLE>
. NAV per share of each class is calculated by State Street on each business
day. Fund shares will be priced on any day the New York Stock Exchange is
open, except for days on which Chicago, Boston or New York banks are closed
for local holidays.
. On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, each Fund reserves the right to
close at or prior to the BMA recommended closing time. If a Fund does so,
it will cease granting same business day credit for purchase and redemption
orders received after the Fund's closing time and credit will be given to
the next business day.
. The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-
ted by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securi-
ties are valued at amortized cost in accordance with SEC regulations. Amor-
tized cost will normally approximate market value. There can be no assurance
that a Fund will be able at all times to maintain a NAV of $1.00 per share.
34
<PAGE>
SHAREHOLDER GUIDE
HOW TO SELL SHARES
How Can I Sell Service Shares Of The Funds?
Generally, Service Shares may be sold (redeemed) only through Service Orga-
nizations. Customers of a Service Organization will normally give their
redemption instructions to the Service Organization, and the Service Organi-
zation will, in turn, place redemption orders with the Funds. GENERALLY,
EACH FUND WILL REDEEM ITS SERVICE SHARES UPON REQUEST ON ANY BUSINESS DAY AT
THEIR NAV NEXT DETERMINED AFTER RECEIPT OF SUCH REQUEST IN PROPER FORM. A
Service Organization may request redemptions in writing or by telephone if
the optional telephone redemption privilege is elected on the Account
Application.
<TABLE>
<CAPTION>
--------------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6572
--------------------------------------------------------------
By Telephone: If you have elected the telephone redemption
privilege on your Account Application:
.1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------------
</TABLE>
Certain Service Organizations are authorized to accept redemption requests
on behalf of the Funds as described under "What Do I Need To Know About
Service Organizations?" A redemption may also be made with respect to cer-
tain Funds by means of the check redemption privilege described in the Addi-
tional Statement.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
35
<PAGE>
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing and
signed by an authorized person designated on the Account Application. The
written request may be confirmed by telephone with both the requesting party
and the designated bank account to verify instructions.
. The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
When Will Redemption Proceeds Be Wired?
Redemption proceeds will normally be wired to the bank account designated on
a Service Organization's Account Application as follows:
<TABLE>
<CAPTION>
Redemption Request Received Redemption Proceeds Dividends
-------------------------------------------------------------------------------
<S> <C> <C>
Money Market, Treasury
Instruments and Federal Funds:
-------------------------------------------------------------------------------
. By 3:00 p.m. New York time Wired same business day Not earned on day
request is received
. After 3:00 p.m. New York time Wired next business day Earned on day
request is received
-------------------------------------------------------------------------------
Prime Obligations, Treasury
Obligations and Government:
-------------------------------------------------------------------------------
. By 5:00 p.m. New York time Wired same business day Not earned on day
request is received
. After 5:00 p.m. New York time Wired next business day Earned on day
request is received
-------------------------------------------------------------------------------
Tax-Free Money Market Fund:
-------------------------------------------------------------------------------
. By 1:00 p.m. New York time Wired same business day Not earned on day
request is received
. After 1:00 p.m. New York time Wired next business day Earned on day
request is received
-------------------------------------------------------------------------------
</TABLE>
. Although redemption proceeds will normally be wired as described above, each
Fund reserves the right to pay redemption proceeds up to three busi-ness days
following receipt of a properly executed wire transfer redemption request. If
you are selling shares you recently paid for by check, the Fund will pay you
when your check has cleared, which may take up to 15 days. If the Federal
Reserve Bank is closed on the day that the redemption proceeds would
ordinarily be wired, wiring the redemption proceeds may be delayed one
additional business day.
36
<PAGE>
SHAREHOLDER GUIDE
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of intermediaries or your Service Organ-
ization in the transfer process. If a problem with such performance arises,
you should deal directly with such intermediaries or Service Organizations.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Service Organizations are responsible for the timely transmittal of redemp-
tion requests by their customers to the Transfer Agent. In order to facili-
tate the timely transmittal of redemption requests, Service Organizations may
set times by which they must receive redemption requests. Service Orga-
nizations may also require additional documentation from you.
The Trust reserves the right to:
. Redeem the Service Shares of any Service Organization whose account balance
falls below the minimum as a result of a redemption. The Fund will give 60
days' prior written notice to allow a Service Organization to purchase suf-
ficient additional shares of the Fund in order to avoid such redemption.
Different rules may apply to investors who have established brokerage
accounts with Goldman Sachs in accordance with the terms and conditions of
their account agreements.
. Redeem shares in other circumstances determined by the Board of Trustees to
be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distributions
be returned to the Fund as undeliverable or remain uncashed for six months.
In addition, that distribution and all future distributions payable to you
will be reinvested at NAV in additional Fund shares. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
Can I Exchange My Investment From One Fund To Another?
A Service Organization may exchange Service Shares of a Fund at NAV for
shares of the corresponding class of any other Goldman Sachs Fund. The
exchange privilege may be materially modified or withdrawn at any time upon
60 days' written notice.
37
<PAGE>
<TABLE>
<CAPTION>
Instructions for Exchanging Shares:
-------------------------------------------------------------------
<S> <C> <C>
By Writing: . Write a letter of instruction that includes:
. The recordholder name(s) and signature(s)
. The account number
. The Fund names and Class of Shares
. The dollar amount to be exchanged
. Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
-------------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
-------------------------------------------------------------------
</TABLE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically registered
account.
. Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized person
designated on the Account Application.
. Exchanges are available only in states where exchanges may be legally made.
. It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I Need
To Know About Telephone Redemption Requests?" in an effort to prevent unau-
thorized or fraudulent telephone exchange requests.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
38
<PAGE>
SHAREHOLDER GUIDE
What Types Of Reports Will I Be Sent Regarding Investments In Service
Shares?
Service Organizations will receive from the Funds annual reports containing
audited financial statements and semi-annual reports. Upon request, Service
Organizations will also be provided with a printed confirmation for each
transaction. Any dividends and distributions paid by the Funds are also
reflected in regular statements issued by the Funds to Service Organiza-
tions. Service Organizations are responsible for providing these or other
reports to their customers who are the beneficial owners of Service Shares
in accordance with the rules that apply to their accounts with the Service
Organizations.
39
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
Taxes on Distributions: Except for the Tax-Free Money Market Fund, distribu-
tions of investment income are taxable as ordinary income for federal tax pur-
poses, and may also be subject to state or local taxes. This is true whether
you reinvest your distributions in additional Fund shares or receive them in
cash. To the extent that Fund distributions are attributable to interest on
federal obligations or interest on obligations of your state of residence or
its municipalities or authorities, they will in most cases be exempt from state
and local income taxes. Distributions from the Tax-Free Money Market Fund that
are designated as "exempt interest dividends" are generally not subject to fed-
eral income tax. Distributions of short-term capital gains are taxable to you
as ordinary income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Free Money Market Fund may be a preference item when determining your fed-
eral alternative minimum tax liability. Exempt-interest dividends are also
taken into account in determining the taxable portion of social security or
railroad retirement benefits. Any interest on indebtedness incurred by you to
purchase or carry shares in the Tax-Free Money Market Fund generally will not
be deductible for federal income tax purposes.
Other Information: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
40
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. Treasury Obligations and U.S. Government Securities. U.S. Treasury
Obligations include securities issued or issued or guaranteed by the U.S.
Treasury ("U.S. Treasury Obligations"). Payment of principal and interest on
these obligations is backed by the full faith and credit of the U.S.
government. U.S. Treasury Obligations include, among other things, the
separately traded principal and interest components of securities guaranteed or
issued by the U.S. Treasury if such components are traded independently under
the Separate Trading of Registered Interest and Principal of Securities program
("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
41
<PAGE>
Some Funds invest in U.S. Treasury Obligations and certain U.S. Government
Securities the interest from which is generally exempt from state income taxa-
tion. Securities generally eligible for this exemption include those issued by
the U.S. Treasury and certain agencies, authorities or instrumentalities of the
U.S. government, including the Federal Home Loan Banks, Federal Farm Credit
Banks, Tennessee Valley Authority and Student Loan Marketing Association.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
Bank Obligations. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Funds may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Funds may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Fund invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of opera-
tions and profitability of domestic and foreign banks. Significant developments
in the U.S. banking industry have included increased competition from other
types of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the real estate mar-
kets. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
Commercial Paper. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or
42
<PAGE>
APPENDIX A
bank holding companies, corporations, finance companies and other issuers. The
commercial paper purchased by a Fund consists of direct U.S. dollar-denominated
obligations of domestic or, in the case of certain Funds, foreign issuers.
Short-Term Obligations. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
Repurchase Agreements. Certain Funds may enter into repurchase agreements with
primary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, certain Funds, together with other registered
investment companies having advisory agreements with the Investment Adviser or
any of its 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.
Asset-Backed and Receivables-Backed Securities. Certain Funds may invest in
asset-backed and receivables-backed securities whose principal and interest
payments are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-backed
and receivables-backed 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 and
receivables-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in such securities will
43
<PAGE>
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. In addition, securities that are backed by credit card, automobile and
similar types of receivables generally do not have the benefit of a security
interest in collateral that is comparable in quality to mortgage assets. There
is the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event of a
default, a Fund may suffer a loss if it cannot sell collateral quickly and
receive the amount it is owed.
Foreign Government Obligations and Related Foreign Risks. Certain Funds may
invest in foreign government obligations. Foreign government obligations are
U.S. dollar-denominated obligations (limited to commercial paper and other
notes) issued or guaranteed by a foreign government or other entity located or
organized in a foreign country that maintains a short-term foreign currency
rating in the highest short-term ratings category by the requisite number of
NRSROs.
Investments by a Fund in foreign securities, whether issued by a foreign gov-
ernment, bank, corporation or other issuer, may present a greater degree of
risk than investments in securities of domestic issuers because of less public-
ly-available financial and other information, less securities regulation,
potential imposition of foreign withholding and other taxes, war, expropriation
or other adverse governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and generally are not bound by
the accounting, auditing and financial reporting standards applicable to U.S.
banks.
Municipal Obligations. Certain Funds may invest in municipal obligations.
Municipal obligations are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities, and the District of Columbia. Municipal
obligations in which a Fund may invest consist of fixed rate notes and similar
debt instruments; variable and floating rate demand instruments; tax-exempt
commercial paper; municipal bonds; and unrated notes, paper, bonds or other
instruments.
Municipal Notes and Bonds. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds also include lease rental revenue bonds which are
issued by a state or local authority for capital projects and are secured by
annual lease payments from the state or local-
44
<PAGE>
APPENDIX A
ity sufficient to cover debt service on the authority's obligations. Industrial
development bonds ("private activity bonds") are a specific type of revenue
bond backed by the credit and security of a private user and, therefore, have
more potential risk. Municipal bonds may be issued in a variety of forms,
including commercial paper, tender option bonds and variable and floating rate
securities.
Tender Option Bonds. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal
income tax. Certain tender option bonds may be illiquid or may become illiquid
as a result of a credit rating downgrade, a payment default or a disqualifica-
tion from tax-exempt status.
Revenue Anticipation Warrants. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
Industrial Development Bonds. Certain Funds may invest in industrial develop-
ment bonds (private activity bonds). Industrial development bonds are a spe-
cific type of revenue bond backed by the credit and security of a private user,
the interest from which would be an item of tax preference when distributed by
a Fund as "exempt-interest dividends" to shareholders under the AMT.
45
<PAGE>
Other Municipal Obligation Policies. Certain Funds may invest 25% or more of
the value of their respective total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting one municipal obligation would also affect the other municipal
obligation. For example, a Fund may invest all of its assets in (a) municipal
obligations the interest of which is paid solely from revenues from 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 obligations whose issuers are in the same
state; or (c) industrial development obligations. Concentration of a Fund's
investments in these municipal obligations will subject the Fund, to a greater
extent than if such investment was not so concentrated, to the risks of adverse
economic, business or political developments affecting the particular state,
industry or other area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and are gener-
ally not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
Custodial Receipts. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
Other Investment Companies. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of
46
<PAGE>
APPENDIX A
any other investment company, and a prohibition on investing more than 5% of a
Fund's total assets in securities of any one investment company or more than
10% of its total assets in securities of all investment companies. A Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Such other investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the acquiring Fund and will be subject to substantially the
same risks.
Floating and Variable Rate Obligations. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
When-Issued Securities and Forward Commitments. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring the securities for its portfolio, a Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment Adviser
deems it appropriate.
47
<PAGE>
Illiquid Securities. Each Fund may invest up to 10% of its net assets in illiq-
uid securities which cannot be disposed of in seven days in the ordinary course
of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain municipal leases and participation interests
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of more
than seven days
. Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is oth-
erwise eligible for resale pursuant to Rule 144A under the Securities Act of
1933.
Investing in restricted securities may decrease the liquidity of a Fund's port-
folio.
Borrowings. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the Addi-
tional Statement.
Downgraded Securities. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
48
<PAGE>
[This page intentionally left blank]
49
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). The Pre-
mium Money Market Fund terminated as of March 31, 2000. This information has
been audited by Arthur Andersen LLP, whose report, along with a Fund's
financial statements, is included in the Fund's annual report (available
upon request without charge).
PRIME OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net asset
Value at Net Distributions
Beginning Investment to
of Period Income/a/ Shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999-FST shares $1.00 $0.05 $(0.05)
1999-FST Preferred shares 1.00 0.05 (0.05)
1999-FST Administration shares 1.00 0.05 (0.05)
1999-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1998-FST shares 1.00 0.05 (0.05)
1998-FST Preferred shares 1.00 0.05 (0.05)
1998-FST Administration shares 1.00 0.05 (0.05)
1998-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1997-FST shares 1.00 0.05 (0.05)
1997-FST Preferred shares 1.00 0.05 (0.05)
1997-FST Administration shares 1.00 0.05 (0.05)
1997-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1996-FST shares 1.00 0.05 (0.05)
1996-FST Preferred Shares (commenced May 1) 1.00 0.03 (0.03)
1996-FST Administration shares 1.00 0.05 (0.05)
1996-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1995-FST shares 1.00 0.06 (0.06)
1995-FST Administration shares 1.00 0.06 (0.06)
1995-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
50
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,062,549 0.18% 5.09% 0.23% 5.04%
1.00 5.07 219,711 0.28 4.87 0.33 4.82
1.00 4.91 1,051,831 0.43 4.88 0.48 4.83
1.00 4.65 690,741 0.68 4.60 0.73 4.55
- --------------------------------------------------------------------------------
1.00 5.55 5,831,773 0.18 5.39 0.24 5.33
1.00 5.45 132,558 0.28 5.26 0.34 5.20
1.00 5.29 331,196 0.43 5.14 0.49 5.08
1.00 5.03 336,205 0.68 4.89 0.74 4.83
- --------------------------------------------------------------------------------
1.00 5.60 3,867,739 0.18 5.46 0.23 5.41
1.00 5.50 152,767 0.28 5.38 0.33 5.33
1.00 5.34 241,607 0.43 5.22 0.48 5.17
1.00 5.08 176,133 0.68 4.97 0.73 4.92
- --------------------------------------------------------------------------------
1.00 5.41 3,901,797 0.18 5.29 0.23 5.24
1.00 5.28/c/ 127,126 0.28/c/ 5.19/c/ 0.33/c/ 5.14/c/
1.00 5.14 215,898 0.43 5.06 0.48 5.01
1.00 4.88 115,114 0.68 4.78 0.73 4.73
- --------------------------------------------------------------------------------
1.00 6.02 3,295,791 0.18 5.86 0.22 5.82
1.00 5.75 147,894 0.43 5.59 0.47 5.55
1.00 5.49 65,278 0.68 5.33 0.72 5.29
- --------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at net Distributions
beginning investment to
of period income/a/ shareholders
- --------------------------------------------------------------------------
<S> <C> <C> <C>
for the years ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1997 - FST shares 1.00 0.06 (0.06)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced
May 1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares (commenced
July 14) 1.00 0.02 (0.02)
- --------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
52
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,747,861 0.18% 5.08% 0.22% 5.04%
1.00 5.07 241,179 0.28 4.99 0.32 4.95
1.00 4.92 403,602 0.43 4.81 0.47 4.77
1.00 4.66 305,972 0.68 4.53 0.72 4.49
- ---------------------------------------------------------------------------------
1.00 5.55 4,995,782 0.18 5.40 0.23 5.35
1.00 5.45 93,218 0.28 5.30 0.33 5.25
1.00 5.29 399,474 0.43 5.16 0.48 5.11
1.00 5.03 496,520 0.68 4.86 0.73 4.81
- ---------------------------------------------------------------------------------
1.00 5.63 4,346,519 0.18 5.50 0.23 5.45
1.00 5.53 20,258 0.28 5.44 0.33 5.39
1.00 5.37 221,256 0.43 5.26 0.48 5.21
1.00 5.11 316,304 0.68 4.99 0.73 4.94
- ---------------------------------------------------------------------------------
1.00 5.45 2,540,366 0.18 5.33 0.23 5.28
1.00 5.31/c/ 17,510 0.28/c/ 5.23/c/ 0.33/c/ 5.18/c/
1.00 5.19 165,766 0.43 5.04 0.48 4.99
1.00 4.93 234,376 0.68 4.84 0.73 4.79
- ---------------------------------------------------------------------------------
1.00 6.07 2,069,197 0.15 5.89 0.23 5.81
1.00 5.80 137,412 0.40 5.61 0.48 5.53
1.00 5.41/c/ 4,219 0.65/c/ 4.93/c/ 0.73/c/ 4.85/c/
- ---------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
PREMIUM MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999-FST shares $1.00 $0.05 $(0.05)
1999-FST Preferred shares 1.00 0.05 (0.05)
1999-FST Administration shares 1.00 0.05 (0.05)
1999-FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998-FST shares 1.00 0.05 (0.05)
1998-FST Preferred shares 1.00 0.05 (0.05)
1998-FST Administration shares 1.00 0.05 (0.05)
1998-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
For the Period Ended December 31,
1997-FST shares (commenced August 1) 1.00 0.02 (0.02)
1997-FST Preferred shares (commenced August
1) 1.00 0.02 (0.02)
1997-FST Administration shares (commenced
August 1) 1.00 0.02 (0.02)
1997-FST Service shares (commenced August
1) 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses income to expenses to income to
end Total of period to average average average net average net
of period return/b/ (in 000'S) net assets net assets assets assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.10% $312,507 0.18% 4.96% 0.23% 4.91%
1.00 5.00 50,847 0.28 4.82 0.33 4.77
1.00 4.84 18,670 0.43 4.78 0.48 4.73
1.00 4.58 17,312 0.68 4.44 0.73 4.39
- -------------------------------------------------------------------------------
1.00 5.55 479,851 0.16 5.38 0.29 5.25
1.00 5.45 107,517 0.26 5.29 0.39 5.16
1.00 5.29 13,728 0.41 5.08 0.54 4.95
1.00 5.03 19,655 0.66 4.79 0.79 4.66
- -------------------------------------------------------------------------------
1.00 5.73/c/ 218,192 0.08/c/ 5.59/c/ 0.43/c/ 5.24/c/
1.00 5.62/c/ 558 0.18/c/ 5.50/c/ 0.53/c/ 5.15/c/
1.00 5.47/c/ 1,457 0.33/c/ 5.33/c/ 0.68/c/ 4.98/c/
1.00 5.20/c/ 814 0.58/c/ 5.17/c/ 0.93/c/ 4.82/c/
- -------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
TREASURY OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1997 - FST shares 1.00 0.05 (0.05)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced May
1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.88% $2,320,581 0.18% 4.75% 0.23% 4.70%
1.00 4.78 297,925 0.28 4.67 0.33 4.62
1.00 4.62 1,157,825 0.43 4.53 0.48 4.48
1.00 4.36 569,993 0.68 4.28 0.73 4.23
- --------------------------------------------------------------------------------
1.00 5.40 3,521,389 0.18 5.22 0.23 5.17
1.00 5.29 285,240 0.28 5.20 0.33 5.15
1.00 5.14 1,080,454 0.43 4.94 0.48 4.89
1.00 4.87 501,619 0.68 4.69 0.73 4.64
- --------------------------------------------------------------------------------
1.00 5.50 2,217,943 0.18 5.36 0.23 5.31
1.00 5.40 245,355 0.28 5.32 0.33 5.27
1.00 5.24 738,865 0.43 5.12 0.48 5.07
1.00 4.98 312,991 0.68 4.87 0.73 4.82
- --------------------------------------------------------------------------------
1.00 5.35 2,291,051 0.18 5.22 0.24 5.16
1.00 5.24/c/ 46,637 0.28/c/ 5.11/c/ 0.34/c/ 5.05/c/
1.00 5.09 536,895 0.43 4.97 0.49 4.91
1.00 4.83 220,560 0.68 4.72 0.74 4.66
- --------------------------------------------------------------------------------
1.00 5.96 1,587,715 0.18 5.73 0.23 5.68
1.00 5.69 283,186 0.43 5.47 0.48 5.42
1.00 5.43 139,117 0.68 5.21 0.73 5.16
- --------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
TREASURY INSTRUMENTS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.04 (0.04)
1999 - FST Administration shares 1.00 0.04 (0.04)
1999 - FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
For the Period Ended December 31,
1997 - FST shares (commenced March 3) 1.00 0.04 (0.04)
1997 - FST Preferred shares (commenced
May 30) 1.00 0.03 (0.03)
1997 - FST Administration shares (commenced
April 1) 1.00 0.04 (0.04)
1997 - FST Service shares (commenced
March 5) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
--------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000'S) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.60% $428,732 0.18% 4.51% 0.24% 4.45%
1.00 4.49 208 0.28 4.53 0.34 4.47
1.00 4.34 67,748 0.43 4.29 0.49 4.23
1.00 4.08 42,095 0.68 4.07 0.74 4.01
- -----------------------------------------------------------------------------------
1.00 5.05 822,207 0.18 4.74 0.29 4.63
1.00 4.94 2 0.28 4.68 0.39 4.57
1.00 4.79 23,676 0.43 4.62 0.54 4.51
1.00 4.53 17,128 0.68 4.37 0.79 4.26
- -----------------------------------------------------------------------------------
1.00 5.25/c/ 496,419 0.18/c/ 5.09/c/ 0.29/c/ 4.98/c/
1.00 5.13/c/ 2 0.28/c/ 5.00/c/ 0.39/c/ 4.89/c/
1.00 4.99/c/ 4,159 0.43/c/ 4.84/c/ 0.54/c/ 4.73/c/
1.00 4.71/c/ 20,177 0.68/c/ 4.62/c/ 0.79/c/ 4.51/c/
- -----------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
GOVERNMENT FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1997 - FST shares 1.00 0.05 (0.05)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced May
1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares (commenced May
16) 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
60
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
-------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.03% $2,260,275 0.18% 4.91% 0.22% 4.87%
1.00 4.93 181,155 0.28 4.81 0.32 4.77
1.00 4.77 519,266 0.43 4.67 0.47 4.63
1.00 4.51 435,192 0.68 4.35 0.72 4.31
- -----------------------------------------------------------------------------------
1.00 5.46 1,563,875 0.18 5.32 0.23 5.27
1.00 5.36 245,628 0.28 5.15 0.33 5.10
1.00 5.20 407,363 0.43 5.06 0.48 5.01
1.00 4.94 699,481 0.68 4.83 0.73 4.78
- -----------------------------------------------------------------------------------
1.00 5.54 1,478,539 0.18 5.41 0.24 5.35
1.00 5.43 7,147 0.28 5.34 0.34 5.28
1.00 5.28 299,804 0.43 5.15 0.49 5.09
1.00 5.02 580,200 0.68 4.91 0.74 4.85
- -----------------------------------------------------------------------------------
1.00 5.38 858,769 0.18 5.25 0.24 5.19
1.00 5.26/c/ 112 0.28/c/ 5.14/c/ 0.34/c/ 5.08/c/
1.00 5.12 145,108 0.43 5.01 0.49 4.95
1.00 4.86 223,554 0.68 4.74 0.74 4.68
- -----------------------------------------------------------------------------------
1.00 6.00 743,884 0.18 5.81 0.24 5.75
1.00 5.74 82,386 0.43 5.54 0.49 5.48
1.00 5.40/c/ 14,508 0.68/c/ 5.08/c/ 0.74/c/ 5.02/c/
- -----------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
FEDERAL FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
For the Period Ended December 31,
1997 - FST shares (commenced February 28) 1.00 0.05 (0.05)
1997 - FST Preferred shares (commenced May
30) 1.00 0.03 (0.03)
1997 - FST Administration shares (commenced
April 1) 1.00 0.04 (0.04)
1997 - FST Service shares (commenced March
25) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
62
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.05% $4,206,119 0.18% 4.96% 0.23% 4.91%
1.00 4.94 186,590 0.28 5.05 0.33 5.00
1.00 4.79 789,529 0.43 4.71 0.48 4.66
1.00 4.53 478,635 0.68 4.46 0.73 4.41
- -----------------------------------------------------------------------------------
1.00 5.41 2,346,254 0.18 5.24 0.24 5.18
1.00 5.31 26,724 0.28 5.20 0.34 5.14
1.00 5.15 690,084 0.43 5.02 0.49 4.96
1.00 4.89 321,124 0.68 4.78 0.74 4.72
- -----------------------------------------------------------------------------------
1.00 5.51/c/ 1,125,681 0.18/c/ 5.39/c/ 0.27/c/ 5.30/c/
1.00 5.43/c/ 194,375 0.28/c/ 5.26/c/ 0.37/c/ 5.17/c/
1.00 5.27/c/ 625,334 0.43/c/ 5.15/c/ 0.52/c/ 5.06/c/
1.00 5.00/c/ 228,447 0.68/c/ 4.78/c/ 0.77/c/ 4.69/c/
- -----------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
TAX-FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.03 $(0.03)
1999 - FST Preferred shares 1.00 0.03 (0.03)
1999 - FST Administration shares 1.00 0.03 (0.03)
1999 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1998 - FST shares 1.00 0.03 (0.03)
1998 - FST Preferred shares 1.00 0.03 (0.03)
1998 - FST Administration shares 1.00 0.03 (0.03)
1998 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1997 - FST shares 1.00 0.04 (0.04)
1997 - FST Preferred shares 1.00 0.03 (0.03)
1997 - FST Administration shares 1.00 0.03 (0.03)
1997 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1996 - FST shares 1.00 0.03 (0.03)
1996 - FST Preferred shares (commenced May
1) 1.00 0.02 (0.02)
1996 - FST Administration shares 1.00 0.03 (0.03)
1996 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1995 - FST shares 1.00 0.04 (0.04)
1995 - FST Administration shares 1.00 0.04 (0.04)
1995 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
64
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 3.13% $1,775,327 0.18% 3.12% 0.22% 3.08%
1.00 3.03 31,359 0.28 2.99 0.32 2.95
1.00 2.88 127,967 0.43 2.81 0.47 2.77
1.00 2.62 69,465 0.68 2.61 0.72 2.57
- -----------------------------------------------------------------------------------
1.00 3.34 1,456,002 0.18 3.28 0.23 3.23
1.00 3.24 20,882 0.28 3.17 0.33 3.12
1.00 3.08 146,800 0.43 3.04 0.48 2.99
1.00 2.83 50,990 0.68 2.77 0.73 2.72
- -----------------------------------------------------------------------------------
1.00 3.54 939,407 0.18 3.50 0.24 3.44
1.00 3.43 35,152 0.28 3.39 0.34 3.33
1.00 3.28 103,049 0.43 3.27 0.49 3.21
1.00 3.02 42,578 0.68 3.01 0.74 2.95
- -----------------------------------------------------------------------------------
1.00 3.39 440,838 0.18 3.35 0.23 3.30
1.00 3.30/c/ 28,731 0.28/c/ 3.26/c/ 0.33/c/ 3.21/c/
1.00 3.13 51,661 0.43 3.10 0.48 3.05
1.00 2.88 19,855 0.68 2.85 0.73 2.80
- -----------------------------------------------------------------------------------
1.00 3.89 448,367 0.14 3.81 0.24 3.71
1.00 3.63 20,939 0.39 3.54 0.49 3.44
1.00 3.38 19,860 0.64 3.32 0.74 3.22
- -----------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
Index
<TABLE>
<S> <C> <C> <C>
1 General Investment 31 Shareholder Guide
Management Approach 31 How to Buy Shares
5 Fund Investment Objectives 35 How to Sell Shares
and Strategies 40 Taxation
10 Principal Risks of the Funds 41 Appendix A
14 Fund Performance Additional Information on
22 Fund Fees and Expenses Portfolio Risks,
26 Service Providers Securities and Techniques
29 Dividends 50 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Financial Square Funds
Prospectus (FST Service Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower-60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of
Fund documents, after paying a duplicating fee, by writing to the SEC's Pub-
lic Reference Section, Washington, D.C. 20549-0102 or by electronic request
to: [email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
Goldman Sachs Financial Square Funds/SM/ is a service mark of Goldman, Sachs
& Co.
FSPROSVCMM
<PAGE>
Prospectus
GOLDMAN SACHS FINANCIAL SQUARE FUNDS /SM/
FST PREFERRED
SHARES
May 1, 2000
. Prime
Obligations
Fund
[GRAPHIC] . Money Market
Fund
. Treasury
Obligations
Fund
. Treasury
Instruments
Fund
. Government Fund
. Federal Fund
. Tax-Free Money
Market Fund
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
<PAGE>
NOT FDIC-INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Funds. GSAM is referred to in this Prospectus as the "Invest-
ment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek preservation of capital, daily
liquidity and maximum current income. With each Fund, the Investment Adviser
follows a conservative, risk-managed investment process that seeks to:
.Manage credit risk
.Manage interest rate risk
.Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1.MANAGING CREDIT RISK
The Investment Adviser's process for managing risk emphasizes:
.INTENSIVE RESEARCH--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as
well as the Investment Research, Legal and Compliance departments of
Goldman Sachs.
.TIMELY UPDATES--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio
management team via computer link.
THE RESULT: AN "APPROVED" LIST OF HIGH-QUALITY CREDITS--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2.MANAGING INTEREST RATE RISK
Three main steps are followed in seeking to manage interest rate risk:
.ESTABLISH WEIGHTED AVERAGE MATURITY (WAM) TARGET--WAM (the weighted average
time until the yield of a portfolio reflects any changes in the current
interest rate environment) is constantly revisited and adjusted as market
conditions change. An overall strategy is developed by the portfolio
management team based on insights gained from weekly meetings with both
Goldman Sachs economists and economists from outside the firm.
.IMPLEMENT OPTIMUM PORTFOLIO STRUCTURE--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
.CONDUCT RIGOROUS ANALYSIS OF NEW SECURITIES--The Investment Adviser's five-
step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for
money market mutual funds.
3. MANAGING LIQUIDITY
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
.Each Fund's clients and factors that influence their asset volatility;
.Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
.Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC FINANCIAL DATA UNIVERSAL
AVERAGES. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
.THE FUNDS: Each Fund's securities are valued by the amortized cost method
as permitted by Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "Act"). Under Rule 2a-7, each Fund may invest only in U.S.
dollar-denominated securities that are determined to present minimal credit
risk and meet certain other criteria, including conditions relating to
maturity, diversification and credit quality. These operating policies may
be more restrictive than the fundamental policies set forth in the State-
ment of Additional Information (the "Additional Statement").
.TAXABLE FUNDS: Prime Obligations, Money Market, Treasury Obligations and
Government Funds.
.TAX-ADVANTAGED FUNDS: Treasury Instruments and Federal Funds.
.TAX-EXEMPT FUND: Tax-Free Money Market Fund.
.THE INVESTORS: The Funds are designed for institutional investors seeking a
high rate of return, a stable net asset value ("NAV") and convenient liqui-
dation privileges. The Funds are particularly suitable for banks, corpora-
tions and other financial institutions that seek investment of short-term
funds for their own accounts or for the accounts of their customers. Shares
of the Government Fund are intended to qualify as eligible investments for
federally chartered credit unions pursuant to Sections 107(7), 107(8) and
107(15) of the Federal Credit Union Act, Part 703 of the National Credit
Union Administration ("NCUA") Rules and Regulations and NCUA Letter Number
155. The Fund intends to review changes in the applicable laws, rules and
regulations governing eligible investments for federally chartered credit
unions, and to take such action as may be necessary so that the investments
of the Fund qualify as eligible investments under the Federal Credit Union
Act and the regulations thereunder. Shares of the Government Fund, however,
may or may not qualify as eligible investments for particular state-chart-
ered credit unions. A state-chartered credit union should consult qualified
legal counsel to determine whether the Government Fund is a permissible
investment under the law applicable to it.
.NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
.MAXIMUM REMAINING MATURITY OF PORTFOLIO INVESTMENTS: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
.DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
3
<PAGE>
.INVESTMENT RESTRICTIONS: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions"
in the Additional Statement. Fundamental investment restrictions of a Fund
cannot be changed without approval of a majority of the outstanding shares
of that Fund. The Treasury Obligations Fund's policy of limiting its
investments to U.S. Treasury Obligations (as defined in Appendix A) and
related repurchase agreements is also fundamental. All investment objec-
tives and policies not specifically designated as fundamental are non-fun-
damental and may be changed without shareholder approval.
.DIVERSIFICATION: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of
the value of its total assets at the time of purchase in the securities of
any single issuer. However, a Fund may invest up to 25% of the value of its
total assets in the securities of a single issuer for up to three business
days. These limitations do not apply to cash, certain repurchase agree-
ments, U.S. Government Securities (as defined in Appendix A) or securities
of other investment companies. In addition, securities subject to certain
unconditional guarantees and securities that are not "First Tier Securi-
ties" as defined by the SEC are subject to different diversification
requirements as described in the Additional Statement.
4
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
The Prime Obligations, Money Market, Treasury Obligations, Treasury Instru-
ments, Government, Federal and Tax-Free Money Market Funds seek to maximize
current income to the extent consistent with the preservation of capital and
the maintenance of liquidity by investing exclusively in high quality money
market instruments.
TAXABLE AND TAX-ADVANTAGED FUNDS:
The Prime Obligations and Money Market Funds pursue their investment objec-
tives by investing in U.S. Government Securities, obligations of U.S. banks,
commercial paper and other short-term obligations of U.S. companies, states,
municipalities and other entities and repurchase agreements. The Money Mar-
ket Fund may also invest in U.S. dollar-denominated obligations of foreign
banks, foreign companies and foreign governments. The Treasury Obligations
Fund pursues its investment objective by investing in securities issued by
the U.S. Treasury and repurchase agreements relating to such securities. The
Government Fund pursues its investment objective by investing in U.S. Gov-
ernment Securities and repurchase agreements relating to such securities.
The Treasury Instruments and Federal Funds pursue their investment objec-
tives by limiting their investments to certain U.S. Treasury Obligations and
U.S. Government Securities, respectively, the interest from which is gener-
ally exempt from state income taxation. You should consult your tax adviser
to determine whether distributions from the Treasury Instruments and Federal
Funds (and any other Fund that may hold such obligations) derived from
interest on such obligations are exempt from state income taxation in your
own state.
In order to obtain a rating from a rating organization, the Prime Obliga-
tions, Money Market, Treasury Obligations, Treasury Instruments, Government
and Federal Funds will observe special investment restrictions.
TAX-EXEMPT FUND:
The Tax-Free Money Market Fund pursues its investment objective by investing
in securities issued by or on behalf of states, territories, and possessions
of the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia, the interest from
which, if any, is in the opinion of bond counsel excluded from gross income
for federal income tax purposes, and not an item of tax preference under the
federal alternative minimum tax ("AMT").
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
U.S. TREASURY U.S. GOVERNMENT BANK COMMERCIAL
FUND OBLIGATIONS SECURITIES OBLIGATIONS PAPER
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations ./1/ . . .
U.S. banks only/2/
-------------------------------------------------------------------------------------------------
Money Market ./1/ . . .
Over 25% of total assets U.S. and foreign
must be invested in U.S. (US$) commercial
and foreign (US$) banks/3/ paper
-------------------------------------------------------------------------------------------------
Treasury Obligations ./4/
-------------------------------------------------------------------------------------------------
Treasury Instruments ./4/
-------------------------------------------------------------------------------------------------
Government ./1/ .
-------------------------------------------------------------------------------------------------
Federal ./1/ .
-------------------------------------------------------------------------------------------------
Tax-Free Money Market .
Tax-exempt only
-------------------------------------------------------------------------------------------------
</TABLE>
NOTE: SEE APPENDIX A FOR A DESCRIPTION OF, AND CERTAIN CRITERIA APPLICABLE
TO, EACH OF THESE CATEGORIES OF INVESTMENTS.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 If adverse economic conditions prevail in the banking industry (such as
substantial losses on loans, increases in non-performing assets and charge-
offs and declines in total deposits) the Fund may, for temporary defensive
purposes, invest less than 25% of its total assets in bank obligations.
4 Issued by the U.S. Treasury.
5 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
6 The Fund may invest in U.S. dollar-denominated obligations (limited to
commercial paper and other notes) issued or guaranteed by a foreign
government. The Fund may also invest in U.S. dollar-denominated obligations
issued or guaranteed by any entity located or organized in a foreign
country that maintains a short-term foreign currency rating in the highest
short-term ratings category by the requisite number of NRSROs. The Fund may
not invest more than 25% of its total assets in the securities of any one
foreign government.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
SHORT-TERM
OBLIGATIONS OF ASSET-BACKED AND FOREIGN
CORPORATIONS AND REPURCHASE RECEIVABLES-BACKED GOVERNMENT
OTHER ENTITIES AGREEMENTS SECURITIES/5/ OBLIGATIONS (US$)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
. . .
U.S. entities only
- ---------------------------------------------------------------------------
. . . .6
U.S. and foreign
(US$) entities
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
.
(Does not intend
to invest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Investment Policies Matrix continued
<TABLE>
<CAPTION>
TAXABLE TAX-EXEMPT CUSTODIAL UNRATED
FUND MUNICIPALS MUNICIPALS RECEIPTS SECURITIES/9/ INVESTMENT COMPANIES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Obligations ./7/ . . .
Up to 10% of total
assets in other
investment companies
- --------------------------------------------------------------------------------------------------------------
Money Market ./7/ . . .
Up to 10% of total
assets in other
investment companies
- --------------------------------------------------------------------------------------------------------------
Treasury Obligations
- --------------------------------------------------------------------------------------------------------------
Treasury Instruments
- --------------------------------------------------------------------------------------------------------------
Government .
Up to 10% of total
assets in other
investment companies
- --------------------------------------------------------------------------------------------------------------
Federal
- --------------------------------------------------------------------------------------------------------------
Tax-Free Money . . . .
Market At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations (except in investment companies
extraordinary circumstances)/8/
- --------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: SEE APPENDIX A FOR A DESCRIPTION OF, AND CERTAIN CRITERIA APPLICABLE
TO, EACH OF THESE CATEGORIES OF INVESTMENTS.
7 Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
8 Ordinarily expect that 100% of a Fund's portfolio securities will be
invested in municipal obligations, but the Fund may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
9 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality to
First Tier Securities, or to the extent that a Fund may purchase Second
Tier Securities, comparable in quality to Second Tier Securities. In
addition, a Fund holding a security supported by a guarantee or demand
feature may rely on the credit quality of the guarantee or demand feature
in determining the credit quality of the investment.
10 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of the Fund's net assets under normal market conditions.
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
PRIVATE SUMMARY OF
ACTIVITY CREDIT TAXATION FOR
BONDS QUALITY/9/ DISTRIBUTIONS/14/ MISCELLANEOUS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------
. First Tier/12/ Taxable federal and state/15/ May invest in obligations
of the International
Bank for Reconstruction
and Development. Reverse
repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Reverse repurchase agreements
generally exempt from not permitted
state taxation
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Under extraordinary circumstances,
generally exempt from may hold cash, U.S. Government
state taxation Securities subject to state taxation
or cash equivalents. Reverse
repurchase agreements not permitted.
- ------------------------------------------------------------------------------------------------------
. First/12/ or Tax-exempt federal May (but does not currently intend
(Does not Second Tier/13/ and taxable state/16/ to) invest up to 20% in securities
intend to subject to AMT and may temporarily
invest)/10/,/11/ invest in the taxable money market
instruments described herein.
Reverse repurchase agreements
not permitted.
- ------------------------------------------------------------------------------------------------------
</TABLE>
11 No more than 25% of the value of the Fund's total assets may be invested
in industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
12 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
13 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
14 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
15 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities interest
income.
16 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
PRIME MONEY TREASURY
.Applicable OBLIGATIONS MARKET OBLIGATIONS
- --Not Applicable FUND FUND FUND
- ------------------------------------------------------------
<S> <C> <C> <C>
NAV . . .
Interest Rate . . .
Credit/Default . . .
Liquidity . . .
U.S. Government Securities . . --
Concentration -- -- --
Foreign -- . --
Banking Industry -- . --
Tax -- -- --
- ------------------------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
TAX-FREE
TREASURY MONEY
INSTRUMENTS GOVERNMENT FEDERAL MARKET
FUND FUND FUND FUND
- ---------------------------------------------
<S> <C> <C> <C>
. . . .
. . . .
. . . .
. . . .
-- . . --
-- -- -- .
-- -- -- --
-- -- -- --
-- -- -- .
- ---------------------------------------------
</TABLE>
11
<PAGE>
Risks that apply to all Funds:
.NAV RISK--The risk that a Fund will not be able to maintain a NAV per share of
$1.00 at all times.
.INTEREST RATE RISK--The risk that during periods of rising interest rates, a
Fund's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a Fund's
yield will tend to be higher.
.CREDIT/DEFAULT RISK--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase agree-
ment, may default on its payment obligations. In addition, with respect to the
Tax-Free Money Market Fund, risk of loss from payment default may also exist
where municipal instruments are backed by foreign letters of credit or guaran-
tees.
.LIQUIDITY RISK--The risk that a Fund will be unable to pay redemption proceeds
within the time period stated in this Prospectus, because of unusual market
conditions, an unusually high volume of redemption requests, or other reasons.
Risk that applies to the Prime Obligations, Money Market, Government and
Federal Funds:
.U.S. GOVERNMENT SECURITIES RISK--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Money Market Fund:
.FOREIGN RISK--The risk that a foreign security could lose value as a result of
political, financial and economic events in foreign countries, less publicly
available financial and other information, less stringent foreign securities
regulations and accounting and disclosure standards, or other factors. The
Money Market Fund may not invest more than 25% of its total assets in the
securities of any one foreign government.
.BANKING INDUSTRY RISK--The risk that if the Fund invests more than 25% of its
total assets in bank obligations, an adverse development in the banking indus-
try may affect the value of the Fund's investments more than if the Fund's
investments were not invested to such a degree in the banking industry. Nor-
mally, the Money Market Fund intends to invest more than 25% of its total
assets in bank obligations. Banks may be particularly susceptible to certain
economic factors such as interest rate changes, adverse developments in the
real estate market, fiscal and monetary policy and general economic cycles.
12
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
Risks that apply to the Tax-Free Money Market Fund:
.CONCENTRATION RISK--The risk that if the Fund invests more than 25% of its
total assets in issuers within the same state, industry or economic sector, an
adverse economic, business or political development may affect the value of
the Fund's investments more than if its investments were not so concentrated.
.TAX RISK--The risk that future legislative or administrative changes or court
decisions may materially affect the ability of the Fund to pay federal tax-
exempt dividends. This Fund would not be a suitable investment for IRAs, other
tax-exempt or tax-deferred accounts or for other investors who are not sensi-
tive to the federal, state or local tax consequences of their investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
13
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's Pre-
ferred Shares from year to year; and (b) the average annual returns of a
Fund's Preferred Shares. Investors should be aware that the fluctuation of
interest rates is one primary factor in performance volatility. The bar
chart and table assume reinvestment of dividends and distributions. A Fund's
past performance is not necessarily an indication of how the Fund will per-
form in the future. Performance reflects expense limitations in effect. If
expense limitations were not in place, a Fund's performance would have been
reduced. You may obtain a Fund's current yield by calling 1-800-621-2550.
14
<PAGE>
Prime Obligations Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q4 '97 1.38%
Worst Quarter:
Q2 '99 1.17%
[GRAPH]
1997 1998 1999
5.50% 5.45% 5.07%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31,
1999 1 YEAR SINCE INCEPTION
------------------------------------------------------------
<S> <C> <C>
PREFERRED SHARES (Inception 5/1/96) 5.07% 5.33%
------------------------------------------------------------
</TABLE>
15
<PAGE>
Money Market Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q4 '97 1.38%
Worst Quarter:
Q2 '99 1.17%
[GRAPH]
1997 1998 1999
5.53% 5.45% 5.07%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31,
1999 1 YEAR SINCE INCEPTION
------------------------------------------------------------
<S> <C> <C>
PREFERRED SHARES (Inception 5/1/96) 5.07% 5.34%
------------------------------------------------------------
</TABLE>
16
<PAGE>
FUND PERFORMANCE
Treasury Obligations Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q4 '97 1.36%
Worst Quarter:
Q1 '99 1.11%
[GRAPH]
1997 1998 1999
5.40% 5.29% 4.78%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31,
1999 1 YEAR SINCE INCEPTION
------------------------------------------------------------
<S> <C> <C>
PREFERRED SHARES (Inception 5/1/96) 4.78% 5.17%
------------------------------------------------------------
</TABLE>
17
<PAGE>
Treasury Instruments Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '98 1.26%
Worst Quarter:
Q1 '99 1.04%
[GRAPH]
1998 1999
4.94% 4.49%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31,
1999 1 YEAR SINCE INCEPTION
-------------------------------------------------------------
<S> <C> <C>
PREFERRED SHARES (Inception 5/30/97) 4.49% 4.81%
-------------------------------------------------------------
</TABLE>
18
<PAGE>
FUND PERFORMANCE
Government Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q4 '97 1.36%
Worst Quarter:
Q2 '99 1.15%
[GRAPH]
1997 1998 1999
5.43% 5.36% 4.93%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR SINCE INCEPTION
----------------------------------------------------------------------------
<S> <C> <C>
PREFERRED SHARES (Inception 5/1/96) 4.93% 5.24%
----------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Federal Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q3 '98 1.33%
Worst Quarter:
Q2 '99 1.15%
[GRAPH]
1998 1999
5.31% 4.94%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR SINCE INCEPTION
----------------------------------------------------------------------------
<S> <C> <C>
PREFERRED SHARES (Inception 5/30/97) 4.94% 5.19%
----------------------------------------------------------------------------
</TABLE>
20
<PAGE>
FUND PERFORMANCE
Tax-Free Money Market Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '97 0.89%
Worst Quarter:
Q1 '99 0.66%
[GRAPH]
1997 1998 1999
3.43% 3.24% 3.03%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR SINCE INCEPTION
----------------------------------------------------------------------------
<S> <C> <C>
PREFERRED SHARES (Inception 5/1/96) 3.03% 3.25%
----------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Fund Fees and Expenses (Preferred Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Preferred Shares of a Fund.
<TABLE>
<CAPTION>
PRIME MONEY
OBLIGATIONS MARKET
FUND FUND
- -------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT):
Maximum Sales Charge (Load) Imposed on Purchases None None
Maximum Deferred Sales Charge (Load) None None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None None
Redemption Fees None None
Exchange Fees None None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):/1/
Management Fees/2/ 0.205% 0.205%
Preferred Administration Fees/3/ 0.100% 0.100%
Other Expenses4 0.025% 0.015%
- -------------------------------------------------------------------------------
Total Fund Operating Expenses* 0.330% 0.320%
- -------------------------------------------------------------------------------
</TABLE>
See page 24 for all other footnotes.
* As a result of the current waivers and expense limi-
tations, "Other Expenses" and "Total Fund Operating
Expenses" of the Funds which are actually incurred
are as set forth below. The waivers and expense limi-
tations may be terminated at any time at the option
of the Investment Adviser. If this occurs, "Other
Expenses" and "Total Fund Operating Expenses" may
increase without shareholder approval.
<TABLE>
<CAPTION>
PRIME MONEY
OBLIGATIONS MARKET
FUND FUND
-----------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/1/
Management Fees/2/ 0.17% 0.17%
Preferred Administration Fees/3/ 0.10% 0.10%
Other Expenses/4/ 0.01% 0.01%
-----------------------------------------------------------------------------
Total Fund Operating Expenses (after current waivers and
expense limitations) 0.28% 0.28%
-----------------------------------------------------------------------------
</TABLE>
22
<PAGE>
FUND FEES AND EXPENSES
<TABLE>
<CAPTION>
TREASURY TREASURY TAX-FREE
OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MONEY MARKET
FUND FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
None None None None None
None None None None None
None None None None None
None None None None None
0.205% 0.205% 0.205% 0.205% 0.205%
0.100% 0.100% 0.100% 0.100% 0.100%
0.025% 0.035% 0.015% 0.025% 0.015%
- ---------------------------------------------------------------------------------------
0.330% 0.340% 0.320% 0.330% 0.320%
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TREASURY TREASURY TAX-FREE
OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MONEY MARKET
FUND FUND FUND FUND FUND
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.17% 0.17% 0.17% 0.19% 0.17%
0.10% 0.10% 0.10% 0.10% 0.10%
0.01% 0.01% 0.01% 0.01% 0.01%
--------------------------------------------------------------------------------------
0.28% 0.28% 0.28% 0.30% 0.28%
--------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Fund Fees and Expenses continued
/1/The Funds' annual operating expenses are based on actual expenses.
/2/The Investment Adviser has voluntarily agreed not to impose a portion of
the management fee on the Federal Fund equal to 0.015% of the Federal Fund's
average daily net assets and equal to 0.035% of all other Funds' average
daily net assets. AS A RESULT OF FEE WAIVERS, THE CURRENT MANAGEMENT FEES OF
THE FEDERAL FUND AND ALL OTHER FUNDS IS 0.19% AND 0.17%, RESPECTIVELY, OF
SUCH FUND'S AVERAGE DAILY NET ASSETS. THE WAIVERS MAY BE TERMINATED AT ANY
TIME AT THE OPTION OF THE INVESTMENT ADVISER.
/3/Service Organizations may charge other fees directly to their customers
who are beneficial owners of Preferred Shares in connection with their cus-
tomers' accounts. Such fees may affect the return customers realize with
respect to their investments.
/4/The Investment Adviser has voluntarily agreed to reduce or limit "Other
Expenses" of each Fund (excluding management fees, preferred administration
fees, taxes, interest, brokerage fees and litigation, indemnification and
other extraordinary expenses) to 0.01% of each Fund's average daily net
assets.
24
<PAGE>
FUND FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the waivers and expense limitations) with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in Preferred
Shares of a Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your invest-
ment has a 5% return each year and that a Fund's operating expenses remain the
same. Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------
<S> <C> <C> <C> <C>
PRIME OBLIGATIONS $34 $106 $185 $418
- ------------------------------------------------------
MONEY MARKET $33 $103 $180 $406
- ------------------------------------------------------
TREASURY OBLIGATIONS $34 $106 $185 $418
- ------------------------------------------------------
TREASURY INSTRUMENTS $35 $109 $191 $431
- ------------------------------------------------------
GOVERNMENT $33 $103 $180 $406
- ------------------------------------------------------
FEDERAL $34 $106 $185 $418
- ------------------------------------------------------
TAX-FREE MONEY MARKET $33 $103 $180 $406
- ------------------------------------------------------
</TABLE>
Service Organizations that invest in Preferred Shares on behalf of their cus-
tomers may charge other fees directly to their customer accounts in connection
with their investments. You should contact your Service Organization for infor-
mation regarding such charges. Such fees, if any, may affect the return such
customers realize with respect to their investments.
Certain Service Organizations that invest in Preferred Shares may receive other
compensation in connection with the sale and distribution of Preferred Shares
or for services to their customers' accounts and/or the Funds. For additional
information regarding such compensation, see "Shareholder Guide" in the Pro-
spectus and "Other Information" in the Additional Statement.
25
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the Invest-
ment Adviser, merged into The Goldman Sachs Group, Inc. as a result of an
initial public offering. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser also performs the following serv-
ices for the Funds:
.Continually manages each Fund, including the purchase, retention and dispo-
sition of securities and other assets
.Administers each Fund's business affairs
.Performs various recordholder servicing functions (to the extent not pro-
vided by other organizations)
Pursuant to an SEC order, each Taxable and Tax-Advantaged Fund may enter
into principal transactions in certain taxable money market instruments,
including repurchase agreements, with Goldman Sachs.
26
<PAGE>
SERVICE PROVIDERS
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Fund's average daily net assets):
<TABLE>
<CAPTION>
ACTUAL RATE FOR THE
FISCAL YEAR ENDED
FUND CONTRACTUAL RATE DECEMBER 31, 1999
------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.205% 0.17%
------------------------------------------------------------
Money Market 0.205% 0.17%
------------------------------------------------------------
Treasury Obligations 0.205% 0.17%
------------------------------------------------------------
Treasury Instruments 0.205% 0.17%
------------------------------------------------------------
Government 0.205% 0.17%
------------------------------------------------------------
Federal 0.205% 0.17%
------------------------------------------------------------
Tax-Free Money Market 0.205% 0.17%
------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
27
<PAGE>
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
28
<PAGE>
Dividends
Dividends will be distributed monthly. You may choose to have dividends paid
in:
.Cash
.Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time. If you do not indicate any
choice, dividends and distributions will be reinvested automatically in the
applicable Fund.
All or substantially all of each Fund's net investment income will be declared
as a dividend daily. Dividends will normally, but not always, be declared as of
the following times:
<TABLE>
<S> <C>
DIVIDEND DECLARATION TIME
FUND (NEW YORK TIME)
- ------------------------------------------------
Prime Obligations 5:00 p.m.
- ------------------------------------------------
Money Market 4:00 p.m.
- ------------------------------------------------
Treasury Obligations 5:00 p.m.
- ------------------------------------------------
Treasury Instruments 4:00 p.m.
- ------------------------------------------------
Government 5:00 p.m.
- ------------------------------------------------
Federal 4:00 p.m.
- ------------------------------------------------
Tax-Free Money Market 4:00 p.m.
- ------------------------------------------------
</TABLE>
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of each
month. Net short-term capital gains, if any, will be distributed in accordance
with federal income tax requirements and may be reflected in a Fund's daily
distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid excessive
fluctuations in the amount of monthly capital gains distributions, a portion of
any net capital gains realized on the disposition of securities during the
months of November and December may be distributed during the subsequent calen-
dar year. Although realized gains and losses on the assets of a Fund are
reflected in the NAV of the Fund, they are not expected to be of an amount
which would affect the Fund's NAV of $1.00 per share.
29
<PAGE>
The income declared as a dividend for the Prime Obligations, Treasury Obliga-
tions and Government Funds is based on estimates of net investment income for
each Fund. Actual income may differ from estimates, and differences, if any,
will be included in the calculation of subsequent dividends.
30
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Preferred
Shares.
HOW TO BUY SHARES
How Can I Purchase Preferred Shares Of The Funds?
Generally, Preferred Shares may be purchased only through institutions that
have agreed to provide account administration and maintenance services to
their customers who are the beneficial owners of Preferred Shares. These
institutions are called "Service Organizations." Customers of a Service
Organization will normally give their purchase instructions to the Service
Organization, and the Service Organization will, in turn, place purchase
orders with Goldman Sachs. Service Organizations will set times by which
purchase orders and payments must be received by them from their customers.
Generally, Preferred Shares may be purchased from the Funds on any business
day at their NAV next determined after receipt of an order by Goldman Sachs
from a Service Organization. Shares begin earning dividends after the Fund's
receipt of the purchase amount in federal funds. No sales load is charged.
Service Organizations are responsible for transmitting purchase orders and
payments to Goldman Sachs in a timely fashion. Service Organizations should
place a purchase order in writing or by telephone.
<TABLE>
--------------------------------------------------------
<S> <C>
BY WRITING: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------
BY TELEPHONE: 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------
</TABLE>
Before or immediately after placing an initial purchase order, a Service
Organization should complete and send to Goldman Sachs the Account Applica-
tion.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
31
<PAGE>
Service Organizations may send their payments as follows:
.Wire federal funds to The Northern Trust Company ("Northern"), as sub-
custodian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian); OR
.Send a check or Federal Reserve draft payable to Goldman Sachs Funds -
(Name of Fund and Class of Shares), 4900 Sears Tower - 60th Floor, Chicago,
IL 60606-6372. The Funds will not accept a check drawn on a foreign bank or
a third-party check.
IT IS STRONGLY RECOMMENDED THAT PAYMENT BE EFFECTED BY WIRING FEDERAL FUNDS
TO NORTHERN.
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
IF AN EFFECTIVE ORDER AND FEDERAL FUNDS ARE RECEIVED: DIVIDENDS BEGIN:
--------------------------------------------------------------------------
<S> <C>
MONEY MARKET, TREASURY INSTRUMENTS AND FEDERAL FUNDS:
.By 3:00 p.m. New York time Same business day
.After 3:00 p.m. New York time Next business day
--------------------------------------------------------------------------
PRIME OBLIGATIONS, TREASURY OBLIGATIONS AND GOVERNMENT
FUNDS:
.By 5:00 p.m. New York time Same business day
.After 5:00 p.m. New York time Next business day
--------------------------------------------------------------------------
TAX-FREE MONEY MARKET FUND:
.By 2:00 p.m. New York time Same business day
.After 2:00 p.m. New York time Next business day
--------------------------------------------------------------------------
</TABLE>
What Do I Need To Know About Service Organizations?
Service Organizations may provide the following services in connection with
their customers' investments in Preferred Shares:
.Acting, directly or through an agent, as the sole shareholder of record
.Maintaining account records for customers
.Processing orders to purchase, redeem or exchange shares for customers
In addition, some (but not all) Service Organizations are authorized to
accept, on behalf of the Trust, purchase, redemption and exchange orders
placed by or on behalf of their customers, and may designate other interme-
diaries to accept such orders, if approved by the Trust. In these cases:
.A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized Service Organization or intermediary on
a business day, and the order will be priced at the Fund's NAV next deter-
mined after such acceptance.
32
<PAGE>
SHAREHOLDER GUIDE
.Service Organizations or intermediaries will be responsible for transmit-
ting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your Service Organization directly to learn whether it is
authorized to accept orders for the Trust.
Pursuant to a preferred administration plan adopted by the Trust's Board of
Trustees, Service Organizations are entitled to receive payment for their
services from the Trust of up to 0.10% (on an annualized basis) of the aver-
age daily net assets of the Preferred Shares of the Funds, which are attrib-
utable to or held in the name of the Service Organization for its customers.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Service Organizations and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds.
In addition to Preferred Shares, each Fund also offers other classes of
shares to investors. These other share classes are subject to different fees
and expenses (which affect performance), and are entitled to different serv-
ices than Preferred Shares. Information regarding these other share classes
may be obtained from your sales representative or from Goldman Sachs by
calling the number on the back cover of this Prospectus.
What Is My Minimum Investment In The Funds?
<TABLE>
-----------------------------------------------------------
<S> <C>
Minimum initial investment $10 million (may be
allocated among the Funds)
-----------------------------------------------------------
Minimum account balance $10 million
-----------------------------------------------------------
Minimum subsequent investments None
-----------------------------------------------------------
</TABLE>
A Service Organization may, however, impose a minimum amount for initial and
subsequent investments in Preferred Shares and may establish other require-
ments such as a minimum account balance. A Service Organization may redeem
Preferred Shares held by non-complying accounts, and may impose a charge for
any special services.
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
.Modify or waive the minimum investment and minimum account balance require-
ment.
.Reject any purchase order for any reason.
33
<PAGE>
The Funds may allow Service Organizations to purchase shares with securities
instead of cash if consistent with a Fund's investment policies and opera-
tions and if approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Preferred Shares
is determined by a Fund's NAV. The Funds calculate NAV as follows:
(Value of Assets of the Class)
- (Liabilities of the Class)
NAV = _______________________________
Number of Outstanding Shares of the Class
<TABLE>
<CAPTION>
FUND NAV CALCULATED
---------------------------------------------------------------------------
<S> <C>
MONEY MARKET, TREASURY INSTRUMENTS, As of the close of regular trading of
FEDERAL AND TAX-FREE MONEY MARKET the New York Stock Exchange
(normally 4:00 p.m. New York time)
on each business day
---------------------------------------------------------------------------
PRIME OBLIGATIONS, TREASURY As of 5:00 p.m. New York time
OBLIGATIONS AND GOVERNMENT on each business day
---------------------------------------------------------------------------
</TABLE>
.NAV per share of each class is calculated by State Street on each business
day. Fund shares will be priced on any day the New York Stock Exchange is
open, except for days on which Chicago, Boston or New York banks are closed
for local holidays.
.On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, each Fund reserves the right to
close at or prior to the BMA recommended closing time. If a Fund does so,
it will cease granting same business day credit for purchase and redemption
orders received after the Fund's closing time and credit will be given to
the next business day.
.The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-
ted by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securi-
ties are valued at amortized cost in accordance with SEC regulations. Amor-
tized cost will normally approximate market value. There can be no assurance
that a Fund will be able at all times to maintain a NAV of $1.00 per share.
34
<PAGE>
SHAREHOLDER GUIDE
HOW TO SELL SHARES
How Can I Sell Preferred Shares Of The Funds?
Generally, Preferred Shares may be sold (redeemed) only through Service
Organizations. Customers of a Service Organization will normally give their
redemption instructions to the Service Organization, and the Service Organi-
zation will, in turn, place redemption orders with the Funds. GENERALLY,
EACH FUND WILL REDEEM ITS PREFERRED SHARES UPON REQUEST ON ANY BUSINESS DAY
AT THEIR NAV NEXT DETERMINED AFTER RECEIPT OF SUCH REQUEST IN PROPER FORM. A
Service Organization may request redemptions in writing or by telephone if
the optional telephone redemption privilege is elected on the Account
Application.
<TABLE>
--------------------------------------------------------------
<S> <C>
BY WRITING: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------------
BY TELEPHONE: If you have elected the telephone redemption
privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------------
</TABLE>
Certain Service Organizations are authorized to accept redemption requests
on behalf of the Funds as described under "What Do I Need To Know About
Service Organizations?" A redemption may also be made with respect to cer-
tain Funds by means of the check redemption privilege described in the Addi-
tional Statement.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
.All telephone requests are recorded.
.Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing
and signed by an authorized person designated on the Account Application.
The written request may be confirmed by telephone with both the requesting
party and the designated bank account to verify instructions.
.The telephone redemption option may be modified or terminated at any time.
35
<PAGE>
NOTE: IT MAY BE DIFFICULT TO MAKE TELEPHONE REDEMPTIONS IN TIMES OF DRASTIC
ECONOMIC OR MARKET CONDITIONS.
When Will Redemption Proceeds Be Wired?
Redemption proceeds will normally be wired to the bank account designated on
a Service Organization's Account Application as follows:
<TABLE>
<CAPTION>
REDEMPTION REQUEST RECEIVED REDEMPTION PROCEEDS DIVIDENDS
----------------------------------------------------------------------------------
<S> <C> <C>
MONEY MARKET, TREASURY INSTRUMENTS
AND FEDERAL FUNDS:
----------------------------------------------------------------------------------
.By 3:00 p.m. New York time Wired same business day Not earned on day
request is received
.After 3:00 p.m. New York time Wired next business day Earned on day request
is received
----------------------------------------------------------------------------------
PRIME OBLIGATIONS, TREASURY OBLIGATIONS
AND GOVERNMENT FUNDS:
----------------------------------------------------------------------------------
.By 5:00 p.m. New York time Wired same business day Not earned on day
request is received
.After 5:00 p.m. New York time Wired next business day Earned on day request
is received
----------------------------------------------------------------------------------
TAX-FREE MONEY MARKET FUND:
----------------------------------------------------------------------------------
.By 1:00 p.m. New York time Wired same business day Not earned on day
request is received
.After 1:00 p.m. New York time Wired next business day Earned on day request
is received
----------------------------------------------------------------------------------
</TABLE>
.Although redemption proceeds will normally be wired as described above,
each Fund reserves the right to pay redemption proceeds up to three busi-
ness days following receipt of a properly executed wire transfer redemption
request. If you are selling shares you recently paid for by check, the Fund
will pay you when your check has cleared, which may take up to 15 days. If
the Federal Reserve Bank is closed on the day that the redemption proceeds
would ordinarily be wired, wiring the redemption proceeds may be delayed
one additional business day.
.Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of intermediaries or your Service Organ-
ization in the transfer process. If a problem with such performance arises,
you should deal directly with such intermediaries or Service Organizations.
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
.Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
36
<PAGE>
SHAREHOLDER GUIDE
.Service Organizations are responsible for the timely transmittal of redemp-
tion requests by their customers to the Transfer Agent. In order to facili-
tate the timely transmittal of redemption requests, Service Organizations
may set times by which they must receive redemption requests. Service Orga-
nizations may also require additional documentation from you.
The Trust reserves the right to:
.Redeem the Preferred Shares of any Service Organization whose account bal-
ance falls below the minimum as a result of a redemption. The Fund will
give 60 days' prior written notice to allow a Service Organization to pur-
chase sufficient additional shares of the Fund in order to avoid such
redemption. Different rules may apply to investors who have established
brokerage accounts with Goldman Sachs in accordance with the terms and con-
ditions of their account agreements.
.Redeem shares in other circumstances determined by the Board of Trustees to
be in the best interest of the Trust.
.Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
.Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distributions
be returned to the Fund as undeliverable or remain uncashed for six months.
In addition, that distribution and all future distributions payable to you
will be reinvested at NAV in additional Fund shares. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
Can I Exchange My Investment From One Fund To Another?
A Service Organization may exchange Preferred Shares of a Fund at NAV for
shares of the corresponding class of any other Goldman Sachs Fund. The
exchange privilege may be materially modified or withdrawn at any time upon
60 days' written notice.
<TABLE>
<CAPTION>
INSTRUCTIONS FOR EXCHANGING SHARES:
---------------------------------------------------------------------
<S> <C> <C>
BY WRITING: .Write a letter of instruction that includes:
.The recordholder name(s) and signature(s)
.The account number
.The Fund names and Class of Shares
.The dollar amount to be exchanged
.Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor,
Chicago, IL 60606-6372
---------------------------------------------------------------------
BY TELEPHONE: If you have elected the telephone
exchange privilege on your Account Application:
.1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
---------------------------------------------------------------------
</TABLE>
37
<PAGE>
You should keep in mind the following factors when making or considering an
exchange:
.You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
.All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
.Telephone exchanges normally will be made only to an identically registered
account.
.Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized person
designated on the Account Application.
.Exchanges are available only in states where exchanges may be legally made.
.It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
.Goldman Sachs may use reasonable procedures described under "What Do I Need
To Know About Telephone Redemption Requests?" in an effort to prevent unau-
thorized or fraudulent telephone exchange requests.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
What Types Of Reports Will I Be Sent Regarding Investments In Preferred
Shares?
Service Organizations will receive from the Funds annual reports containing
audited financial statements and semi-annual reports. Upon request, Service
Organizations will also be provided with a printed confirmation for each
transaction. Any dividends and distributions paid by the Funds are also
reflected in regular statements issued by the Funds to Service Organiza-
tions. Service Organizations are responsible for providing these or other
reports to their customers who are the beneficial owners of Preferred Shares
in accordance with the rules that apply to their accounts with the Service
Organizations.
38
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
TAXES ON DISTRIBUTIONS: Except for the Tax-Free Money Market Fund, distribu-
tions of investment income are taxable as ordinary income for federal tax pur-
poses, and may also be subject to state or local taxes. This is true whether
you reinvest your distributions in additional Fund shares or receive them in
cash. To the extent that Fund distributions are attributable to interest on
federal obligations or interest on obligations of your state of residence or
its municipalities or authorities, they will in most cases be exempt from state
and local income taxes. Distributions from the Tax-Free Money Market Fund that
are designated as "exempt interest dividends" are generally not subject to fed-
eral income tax. Distributions of short-term capital gains are taxable to you
as ordinary income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Free Money Market Fund may be a preference item when determining your fed-
eral alternative minimum tax liability. Exempt-interest dividends are also
taken into account in determining the taxable portion of social security or
railroad retirement benefits. Any interest on indebtedness incurred by you to
purchase or carry shares in the Tax-Free Money Market Fund generally will not
be deductible for federal income tax purposes.
OTHER INFORMATION: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
39
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. TREASURY OBLIGATIONS AND U.S. GOVERNMENT SECURITIES. U.S. Treasury
Obligations include securities issued or issued or guaranteed by the U.S.
Treasury ("U.S. Treasury Obligations"). Payment of principal and interest on
these obligations is backed by the full faith and credit of the U.S.
government. U.S. Treasury Obligations include, among other things, the
separately traded principal and interest components of securities guaranteed or
issued by the U.S. Treasury if such components are traded independently under
the Separate Trading of Registered Interest and Principal of Securities program
("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
40
<PAGE>
APPENDIX A
Some Funds invest in U.S. Treasury Obligations and certain U.S. Government
Securities the interest from which is generally exempt from state income taxa-
tion. Securities generally eligible for this exemption include those issued by
the U.S. Treasury and certain agencies, authorities or instrumentalities of the
U.S. government, including the Federal Home Loan Banks, Federal Farm Credit
Banks, Tennessee Valley Authority and Student Loan Marketing Association.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
BANK OBLIGATIONS. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Funds may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Funds may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Fund invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of opera-
tions and profitability of domestic and foreign banks. Significant developments
in the U.S. banking industry have included increased competition from other
types of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the real estate mar-
kets. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
COMMERCIAL PAPER. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or
41
<PAGE>
bank holding companies, corporations, finance companies and other issuers. The
commercial paper purchased by a Fund consists of direct U.S. dollar-denominated
obligations of domestic or, in the case of certain Funds, foreign issuers.
SHORT-TERM OBLIGATIONS. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
REPURCHASE AGREEMENTS. Certain Funds may enter into repurchase agreements with
primary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, certain Funds, together with other registered
investment companies having advisory agreements with the Investment Adviser or
any of its 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.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES. Certain Funds may invest in
asset-backed and receivables-backed securities whose principal and interest
payments are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-backed
and receivables-backed 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 and
receivables-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in such securities will
42
<PAGE>
APPENDIX A
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. In addition, securities that are backed by credit card, automobile and
similar types of receivables generally do not have the benefit of a security
interest in collateral that is comparable in quality to mortgage assets. There
is the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event of a
default, a Fund may suffer a loss if it cannot sell collateral quickly and
receive the amount it is owed.
FOREIGN GOVERNMENT OBLIGATIONS AND RELATED FOREIGN RISKS. Certain Funds may
invest in foreign government obligations. Foreign government obligations are
U.S. dollar-denominated obligations (limited to commercial paper and other
notes) issued or guaranteed by a foreign government or other entity located or
organized in a foreign country that maintains a short-term foreign currency
rating in the highest short-term ratings category by the requisite number of
NRSROs.
Investments by a Fund in foreign securities, whether issued by a foreign gov-
ernment, bank, corporation or other issuer, may present a greater degree of
risk than investments in securities of domestic issuers because of less public-
ly-available financial and other information, less securities regulation,
potential imposition of foreign withholding and other taxes, war, expropriation
or other adverse governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and generally are not bound by
the accounting, auditing and financial reporting standards applicable to U.S.
banks.
MUNICIPAL OBLIGATIONS. Certain Funds may invest in municipal obligations.
Municipal obligations are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities, and the District of Columbia. Municipal
obligations in which a Fund may invest consist of fixed rate notes and similar
debt instruments; variable and floating rate demand instruments; tax-exempt
commercial paper; municipal bonds; and unrated notes, paper, bonds or other
instruments.
MUNICIPAL NOTES AND BONDS. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds also include lease rental revenue bonds which are
issued by a state or local authority for capital projects and are secured by
annual lease payments from the state or local-
43
<PAGE>
ity sufficient to cover debt service on the authority's obligations. Industrial
development bonds ("private activity bonds") are a specific type of revenue
bond backed by the credit and security of a private user and, therefore, have
more potential risk. Municipal bonds may be issued in a variety of forms,
including commercial paper, tender option bonds and variable and floating rate
securities.
TENDER OPTION BONDS. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal
income tax. Certain tender option bonds may be illiquid or may become illiquid
as a result of a credit rating downgrade, a payment default or a disqualifica-
tion from tax-exempt status.
REVENUE ANTICIPATION WARRANTS. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
INDUSTRIAL DEVELOPMENT BONDS. Certain Funds may invest in industrial develop-
ment bonds (private activity bonds). Industrial development bonds are a spe-
cific type of revenue bond backed by the credit and security of a private user,
the interest from which would be an item of tax preference when distributed by
a Fund as "exempt-interest dividends" to shareholders under the AMT.
44
<PAGE>
APPENDIX A
OTHER MUNICIPAL OBLIGATION POLICIES. Certain Funds may invest 25% or more of
the value of their respective total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting one municipal obligation would also affect the other municipal
obligation. For example, a Fund may invest all of its assets in (a) municipal
obligations the interest of which is paid solely from revenues from 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 obligations whose issuers are in the same
state; or (c) industrial development obligations. Concentration of a Fund's
investments in these municipal obligations will subject the Fund, to a greater
extent than if such investment was not so concentrated, to the risks of adverse
economic, business or political developments affecting the particular state,
industry or other area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and are gener-
ally not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
CUSTODIAL RECEIPTS. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
OTHER INVESTMENT COMPANIES. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of
45
<PAGE>
any other investment company, and a prohibition on investing more than 5% of a
Fund's total assets in securities of any one investment company or more than
10% of its total assets in securities of all investment companies. A Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Such other investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the acquiring Fund and will be subject to substantially the
same risks.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring the securities for its portfolio, a Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment Adviser
deems it appropriate.
46
<PAGE>
APPENDIX A
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in illiq-
uid securities which cannot be disposed of in seven days in the ordinary course
of business at fair value. Illiquid securities include:
.Both domestic and foreign securities that are not readily marketable
.Certain municipal leases and participation interests
.Certain stripped mortgage-backed securities
.Repurchase agreements and time deposits with a notice or demand period of more
than seven days
.Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is oth-
erwise eligible for resale pursuant to Rule 144A under the Securities Act of
1933.
Investing in restricted securities may decrease the liquidity of a Fund's port-
folio.
BORROWINGS. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the Addi-
tional Statement.
DOWNGRADED SECURITIES. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
47
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). The Pre-
mium Money Market Fund terminated as of March 31, 2000. This information has
been audited by Arthur Andersen LLP, whose report, along with a Fund's
financial statements, is included in the Fund's annual report (available
upon request without charge).
PRIME OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net Asset
Value At Net Distributions
Beginning Investment To
Of Period Income/a/ Shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999-FST shares $1.00 $0.05 $(0.05)
1999-FST Preferred shares 1.00 0.05 (0.05)
1999-FST Administration shares 1.00 0.05 (0.05)
1999-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1998-FST shares 1.00 0.05 (0.05)
1998-FST Preferred shares 1.00 0.05 (0.05)
1998-FST Administration shares 1.00 0.05 (0.05)
1998-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1997-FST shares 1.00 0.05 (0.05)
1997-FST Preferred shares 1.00 0.05 (0.05)
1997-FST Administration shares 1.00 0.05 (0.05)
1997-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1996-FST shares 1.00 0.05 (0.05)
1996-FST Preferred Shares (commenced May 1) 1.00 0.03 (0.03)
1996-FST Administration shares 1.00 0.05 (0.05)
1996-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1995-FST shares 1.00 0.06 (0.06)
1995-FST Administration shares 1.00 0.06 (0.06)
1995-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
48
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios Assuming No
Waiver Of Fees And No
Expense Limitations
------------------------
Net Ratio Of Net Ratio Of Net
Net Asset Assets At Ratio Of Net Investment Ratio Of Investment
Value At End Expenses To Income To Expenses To Income To
End Total Of Period Average Net Average Net Average Net Average Net
Of Period Return/b/ (In 000'S) Assets Assets Assets Assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,062,549 0.18% 5.09% 0.23% 5.04%
1.00 5.07 219,711 0.28 4.87 0.33 4.82
1.00 4.91 1,051,831 0.43 4.88 0.48 4.83
1.00 4.65 690,741 0.68 4.60 0.73 4.55
- ----------------------------------------------------------------------------------
1.00 5.55 5,831,773 0.18 5.39 0.24 5.33
1.00 5.45 132,558 0.28 5.26 0.34 5.20
1.00 5.29 331,196 0.43 5.14 0.49 5.08
1.00 5.03 336,205 0.68 4.89 0.74 4.83
- ----------------------------------------------------------------------------------
1.00 5.60 3,867,739 0.18 5.46 0.23 5.41
1.00 5.50 152,767 0.28 5.38 0.33 5.33
1.00 5.34 241,607 0.43 5.22 0.48 5.17
1.00 5.08 176,133 0.68 4.97 0.73 4.92
- ----------------------------------------------------------------------------------
1.00 5.41 3,901,797 0.18 5.29 0.23 5.24
1.00 5.28/c/ 127,126 0.28c 5.19c 0.33c 5.14/c/
1.00 5.14 215,898 0.43 5.06 0.48 5.01
1.00 4.88 115,114 0.68 4.78 0.73 4.73
- ----------------------------------------------------------------------------------
1.00 6.02 3,295,791 0.18 5.86 0.22 5.82
1.00 5.75 147,894 0.43 5.59 0.47 5.55
1.00 5.49 65,278 0.68 5.33 0.72 5.29
- --------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
Net Asset
Value At Net Distributions
Beginning Investment To
Of Period Income/a/ Shareholders
- --------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1997 - FST shares 1.00 0.06 (0.06)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced
May 1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares (commenced
July 14) 1.00 0.02 (0.02)
- --------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
50
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios Assuming No
Waiver Of Fees And No
Expense Limitations
------------------------
Net Ratio Of Net Ratio Of Net
Net Asset Assets At Ratio Of Net Investment Ratio Of Investment
Value At End Expenses To Income To Expenses To Income To
End Total Of Period Average Net Average Net Average Net Average Net
Of Period Return/b/ (In 000's) Assets Assets Assets Assets
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,747,861 0.18% 5.08% 0.22% 5.04%
1.00 5.07 241,179 0.28 4.99 0.32 4.95
1.00 4.92 403,602 0.43 4.81 0.47 4.77
1.00 4.66 305,972 0.68 4.53 0.72 4.49
- -------------------- -------------------------------------------------------------
1.00 5.55 4,995,782 0.18 5.40 0.23 5.35
1.00 5.45 93,218 0.28 5.30 0.33 5.25
1.00 5.29 399,474 0.43 5.16 0.48 5.11
1.00 5.03 496,520 0.68 4.86 0.73 4.81
- -------------------- -------------------------------------------------------------
1.00 5.63 4,346,519 0.18 5.50 0.23 5.45
1.00 5.53 20,258 0.28 5.44 0.33 5.39
1.00 5.37 221,256 0.43 5.26 0.48 5.21
1.00 5.11 316,304 0.68 4.99 0.73 4.94
- -------------------- -------------------------------------------------------------
1.00 5.45 2,540,366 0.18 5.33 0.23 5.28
1.00 5.31/c/ 17,510 0.28/c/ 5.23/c/ 0.33/c/ 5.18/c/
1.00 5.19 165,766 0.43 5.04 0.48 4.99
1.00 4.93 234,376 0.68 4.84 0.73 4.79
- -------------------- -------------------------------------------------------------
1.00 6.07 2,069,197 0.15 5.89 0.23 5.81
1.00 5.80 137,412 0.40 5.61 0.48 5.53
1.00 5.41/c/ 4,219 0.65/c/ 4.93/c/ 0.73/c/ 4.85/c/
- ---------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
PREMIUM MONEY MARKET FUND
<TABLE>
<CAPTION>
Net Asset
Value At Net Distributions
Beginning Investment To
Of Period Income/a/ Shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999-FST shares $1.00 $0.05 $(0.05)
1999-FST Preferred shares 1.00 0.05 (0.05)
1999-FST Administration shares 1.00 0.05 (0.05)
1999-FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998-FST shares 1.00 0.05 (0.05)
1998-FST Preferred shares 1.00 0.05 (0.05)
1998-FST Administration shares 1.00 0.05 (0.05)
1998-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31,
1997-FST shares (commenced August 1) 1.00 0.02 (0.02)
1997-FST Preferred shares (commenced August
1) 1.00 0.02 (0.02)
1997-FST Administration shares (commenced
August 1) 1.00 0.02 (0.02)
1997-FST Service shares (commenced August
1) 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
52
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios Assuming No
Waiver Of Fees And No
Expense Limitations
------------------------
Net
Assets At Ratio Of Net Ratio Of Net
Net Asset End Ratio Of Net Investment Ratio Of Investment
Value At Of Period Expenses To Income To Expenses To Income To
End Total (In Average Net Average Net Average Net Average Net
Of Period Return/b/ 000's) Assets Assets Assets Assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.10% $312,507 0.18% 4.96% 0.23% 4.91%
1.00 5.00 50,847 0.28 4.82 0.33 4.77
1.00 4.84 18,670 0.43 4.78 0.48 4.73
1.00 4.58 17,312 0.68 4.44 0.73 4.39
- ---------------------------------------------------------------------------------
1.00 5.55 479,851 0.16 5.38 0.29 5.25
1.00 5.45 107,517 0.26 5.29 0.39 5.16
1.00 5.29 13,728 0.41 5.08 0.54 4.95
1.00 5.03 19,655 0.66 4.79 0.79 4.66
- ---------------------------------------------------------------------------------
1.00 5.73/c/ 218,192 0.08/c/ 5.59/c/ 0.43/c/ 5.24/c/
1.00 5.62/c/ 558 0.18/c/ 5.50/c/ 0.53/c/ 5.15/c/
1.00 5.47/c/ 1,457 0.33/c/ 5.33/c/ 0.68/c/ 4.98/c/
1.00 5.20/c/ 814 0.58/c/ 5.17/c/ 0.93/c/ 4.82/c/
- -------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
TREASURY OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net Asset
Value At Net Distributions
Beginning Investment To
Of Period Income/a/ Shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1997 - FST shares 1.00 0.05 (0.05)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced May
1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios Assuming No
Waiver Of Fees And No
Expense Limitations
------------------------
Net Ratio Of Net Ratio Of Net
Net Asset Assets At Ratio Of Net Investment Ratio Of Investment
Value At End Expenses To Income To Expenses To Income To
End Total Of Period Average Net Average Net Average Net Average Net
Of Period Return/b/ (In 000's) Assets Assets Assets Assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.88% $2,320,581 0.18% 4.75% 0.23% 4.70%
1.00 4.78 297,925 0.28 4.67 0.33 4.62
1.00 4.62 1,157,825 0.43 4.53 0.48 4.48
1.00 4.36 569,993 0.68 4.28 0.73 4.23
- -----------------------------------------------------------------------------------
1.00 5.40 3,521,389 0.18 5.22 0.23 5.17
1.00 5.29 285,240 0.28 5.20 0.33 5.15
1.00 5.14 1,080,454 0.43 4.94 0.48 4.89
1.00 4.87 501,619 0.68 4.69 0.73 4.64
- -----------------------------------------------------------------------------------
1.00 5.50 2,217,943 0.18 5.36 0.23 5.31
1.00 5.40 245,355 0.28 5.32 0.33 5.27
1.00 5.24 738,865 0.43 5.12 0.48 5.07
1.00 4.98 312,991 0.68 4.87 0.73 4.82
- -----------------------------------------------------------------------------------
1.00 5.35 2,291,051 0.18 5.22 0.24 5.16
1.00 5.24/c/ 46,637 0.28/c/ 5.11/c/ 0.34/c/ 5.05/c/
1.00 5.09 536,895 0.43 4.97 0.49 4.91
1.00 4.83 220,560 0.68 4.72 0.74 4.66
- -----------------------------------------------------------------------------------
1.00 5.96 1,587,715 0.18 5.73 0.23 5.68
1.00 5.69 283,186 0.43 5.47 0.48 5.42
1.00 5.43 139,117 0.68 5.21 0.73 5.16
- --------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
TREASURY INSTRUMENTS FUND
<TABLE>
<CAPTION>
Net Asset
Value At Net Distributions
Beginning Investment To
Of Period Income/a/ Shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.04 (0.04)
1999 - FST Administration shares 1.00 0.04 (0.04)
1999 - FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31,
1997 - FST shares (commenced March 3) 1.00 0.04 (0.04)
1997 - FST Preferred shares (commenced
May 30) 1.00 0.03 (0.03)
1997 - FST Administration shares (commenced
April 1) 1.00 0.04 (0.04)
1997 - FST Service shares (commenced
March 5) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios Assuming No
Waiver Of Fees And No
Expense Limitations
------------------------
Net
Assets At Ratio Of Net Ratio Of Net
Net Asset End Ratio Of Net Investment Ratio Of Investment
Value At Of Period Expenses To Income To Expenses To Income To
End Total (In Average Net Average Net Average Net Average Net
Of Period Return/b/ 000's) Assets Assets Assets Assets
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.60% $428,732 0.18% 4.51% 0.24% 4.45%
1.00 4.49 208 0.28 4.53 0.34 4.47
1.00 4.34 67,748 0.43 4.29 0.49 4.23
1.00 4.08 42,095 0.68 4.07 0.74 4.01
- --------------------------------------------------------------------------------------
1.00 5.05 822,207 0.18 4.74 0.29 4.63
1.00 4.94 2 0.28 4.68 0.39 4.57
1.00 4.79 23,676 0.43 4.62 0.54 4.51
1.00 4.53 17,128 0.68 4.37 0.79 4.26
- --------------------------------------------------------------------------------------
1.00 5.25/c/ 496,419 0.18/c/ 5.09/c/ 0.29/c/ 4.98/c/
1.00 5.13/c/ 2 0.28/c/ 5.00/c/ 0.39/c/ 4.89/c/
1.00 4.99/c/ 4,159 0.43/c/ 4.84/c/ 0.54/c/ 4.73/c/
1.00 4.71/c/ 20,177 0.68/c/ 4.62/c/ 0.79/c/ 4.51/c/
- --------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
GOVERNMENT FUND
<TABLE>
<CAPTION>
Net Asset
Value At Net Distributions
Beginning Investment To
Of Period Income/a/ Shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1997 - FST shares 1.00 0.05 (0.05)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced May
1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares (commenced May
16) 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios Assuming No
Waiver Of Fees And No
Expense Limitations
------------------------
Net Ratio Of Net Ratio Of Net
Net Asset Assets At Ratio Of Net Investment Ratio Of Investment
Value At End Expenses To Income To Expenses To Income To
End Total Of Period Average Net Average Net Average Net Average Net
Of Period Return/b/ (In 000's) Assets Assets Assets Assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.03% $2,260,275 0.18% 4.91% 0.22% 4.87%
1.00 4.93 181,155 0.28 4.81 0.32 4.77
1.00 4.77 519,266 0.43 4.67 0.47 4.63
1.00 4.51 435,192 0.68 4.35 0.72 4.31
- ----------------------------------------------------------------------------------
1.00 5.46 1,563,875 0.18 5.32 0.23 5.27
1.00 5.36 245,628 0.28 5.15 0.33 5.10
1.00 5.20 407,363 0.43 5.06 0.48 5.01
1.00 4.94 699,481 0.68 4.83 0.73 4.78
- ----------------------------------------------------------------------------------
1.00 5.54 1,478,539 0.18 5.41 0.24 5.35
1.00 5.43 7,147 0.28 5.34 0.34 5.28
1.00 5.28 299,804 0.43 5.15 0.49 5.09
1.00 5.02 580,200 0.68 4.91 0.74 4.85
- ----------------------------------------------------------------------------------
1.00 5.38 858,769 0.18 5.25 0.24 5.19
1.00 5.26/c/ 112 0.28/c/ 5.14/c/ 0.34/c/ 5.08/c/
1.00 5.12 145,108 0.43 5.01 0.49 4.95
1.00 4.86 223,554 0.68 4.74 0.74 4.68
- ----------------------------------------------------------------------------------
1.00 6.00 743,884 0.18 5.81 0.24 5.75
1.00 5.74 82,386 0.43 5.54 0.49 5.48
1.00 5.40/c/ 14,508 0.68/c/ 5.08/c/ 0.74/c/ 5.02/c/
- --------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
FEDERAL FUND
<TABLE>
<CAPTION>
Net Asset
Value At Net Distributions
Beginning Investment To
Of Period Income/a/ Shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31,
1997 - FST shares (commenced February 28) 1.00 0.05 (0.05)
1997 - FST Preferred shares (commenced May
30) 1.00 0.03 (0.03)
1997 - FST Administration shares (commenced
April 1) 1.00 0.04 (0.04)
1997 - FST Service shares (commenced March
25) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
60
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios Assuming No
Waiver Of Fees And No
Expense Limitations
------------------------
Net Ratio Of Net Ratio Of Net
Net Asset Assets At Ratio Of Net Investment Ratio Of Investment
Value At End Expenses To Income To Expenses To Income To
End Total Of Period Average Net Average Net Average Net Average Net
Of Period Return/b/ (In 000's) Assets Assets Assets Assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.05% $4,206,119 0.18% 4.96% 0.23% 4.91%
1.00 4.94 186,590 0.28 5.05 0.33 5.00
1.00 4.79 789,529 0.43 4.71 0.48 4.66
1.00 4.53 478,635 0.68 4.46 0.73 4.41
- --------------------------------------------------------------------------------
1.00 5.41 2,346,254 0.18 5.24 0.24 5.18
1.00 5.31 26,724 0.28 5.20 0.34 5.14
1.00 5.15 690,084 0.43 5.02 0.49 4.96
1.00 4.89 321,124 0.68 4.78 0.74 4.72
- --------------------------------------------------------------------------------
1.00 5.51/c/ 1,125,681 0.18/c/ 5.39/c/ 0.27/c/ 5.30/c/
1.00 5.43/c/ 194,375 0.28/c/ 5.26/c/ 0.37/c/ 5.17/c/
1.00 5.27/c/ 625,334 0.43/c/ 5.15/c/ 0.52/c/ 5.06/c/
1.00 5.00/c/ 228,447 0.68/c/ 4.78/c/ 0.77/c/ 4.69/c/
- --------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
TAX-FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
Net Asset
Value At Net Distributions
Beginning Investment To
Of Period Income/a/ Shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST shares $1.00 $0.03 $(0.03)
1999 - FST Preferred shares 1.00 0.03 (0.03)
1999 - FST Administration shares 1.00 0.03 (0.03)
1999 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1998 - FST shares 1.00 0.03 (0.03)
1998 - FST Preferred shares 1.00 0.03 (0.03)
1998 - FST Administration shares 1.00 0.03 (0.03)
1998 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1997 - FST shares 1.00 0.04 (0.04)
1997 - FST Preferred shares 1.00 0.03 (0.03)
1997 - FST Administration shares 1.00 0.03 (0.03)
1997 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1996 - FST shares 1.00 0.03 (0.03)
1996 - FST Preferred shares (commenced May
1) 1.00 0.02 (0.02)
1996 - FST Administration shares 1.00 0.03 (0.03)
1996 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1995 - FST shares 1.00 0.04 (0.04)
1995 - FST Administration shares 1.00 0.04 (0.04)
1995 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
62
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios Assuming No
Waiver Of Fees And No
Expense Limitations
------------------------
Net Ratio Of Net Ratio Of Net
Net Asset Assets At Ratio Of Net Investment Ratio Of Investment
Value At End Expenses To Income To Expenses To Income To
End Total Of Period Average Net Average Net Average Net Average Net
Of Period Return/b/(In 000's) Assets Assets Assets Assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 3.13% $1,775,327 0.18% 3.12% 0.22% 3.08%
1.00 3.03 31,359 0.28 2.99 0.32 2.95
1.00 2.88 127,967 0.43 2.81 0.47 2.77
1.00 2.62 69,465 0.68 2.61 0.72 2.57
- --------------------------------------------------------------------------------
1.00 3.34 1,456,002 0.18 3.28 0.23 3.23
1.00 3.24 20,882 0.28 3.17 0.33 3.12
1.00 3.08 146,800 0.43 3.04 0.48 2.99
1.00 2.83 50,990 0.68 2.77 0.73 2.72
- --------------------------------------------------------------------------------
1.00 3.54 939,407 0.18 3.50 0.24 3.44
1.00 3.43 35,152 0.28 3.39 0.34 3.33
1.00 3.28 103,049 0.43 3.27 0.49 3.21
1.00 3.02 42,578 0.68 3.01 0.74 2.95
- --------------------------------------------------------------------------------
1.00 3.39 440,838 0.18 3.35 0.23 3.30
1.00 3.30/c/ 28,731 0.28/c/ 3.26/c/ 0.33/c/ 3.21/c/
1.00 3.13 51,661 0.43 3.10 0.48 3.05
1.00 2.88 19,855 0.68 2.85 0.73 2.80
- --------------------------------------------------------------------------------
1.00 3.89 448,367 0.14 3.81 0.24 3.71
1.00 3.63 20,939 0.39 3.54 0.49 3.44
1.00 3.38 19,860 0.64 3.32 0.74 3.22
- --------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
[This page intentionally left blank]
64
<PAGE>
Index
1 General 31 Shareholder Guide
Investment 31 How to Buy Shares
Management 35 How to Sell Shares
Approach 39 Taxation
5 Fund 40 Appendix A
Investment Additional Information
Objectives on Portfolio Risks,
and Securities and
Strategies Techniques
10 Principal 48 Appendix B
Risks of the Financial Highlights
Funds
14 Fund
Performance
22 Fund Fees And
Expenses
26 Service
Providers
29 Dividends
<PAGE>
Financial Square Funds
Prospectus (FST Preferred Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of
Fund documents, after paying a duplicating fee by writing to the SEC's Pub-
lic Reference Section, Washington, D.C. 20549-0102 or by electronic request
to: [email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
Goldman Sachs Financial Square Funds/SM/ is a service mark of Goldman, Sachs &
Co.
FSPROPRMM
<PAGE>
Prospectus
GOLDMAN SACHS FINANCIAL SQUARE FUNDS/SM/
FST SELECT
SHARES
May 1, 2000
. Prime
Obligations
Fund
. Money Market
Fund
. Treasury
Obligations
Fund
[GRAPHIC] . Treasury
Instruments
Fund
. Government Fund
. Federal Fund
. Tax-Free Money
Market Fund
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
<PAGE>
NOT FDIC-INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Funds. GSAM is referred to in this Prospectus as the "Invest-
ment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek preservation of capital, daily
liquidity and maximum current income. With each Fund, the Investment Adviser
follows a conservative, risk-managed investment process that seeks to:
.Manage credit risk
.Manage interest rate risk
.Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1.MANAGING CREDIT RISK
The Investment Adviser's process for managing risk emphasizes:
.INTENSIVE RESEARCH--The Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as
well as the Investment Research, Legal and Compliance departments of
Goldman Sachs.
.TIMELY UPDATES--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio
management team via computer link.
THE RESULT: AN "APPROVED" LIST OF HIGH-QUALITY CREDITS--The Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2.MANAGING INTEREST RATE RISK
Three main steps are followed in seeking to manage interest rate risk:
.ESTABLISH WEIGHTED AVERAGE MATURITY (WAM) TARGET--WAM (the weighted average
time until the yield of a portfolio reflects any changes in the current
interest rate environment) is constantly revisited and adjusted as market
conditions change. An overall strategy is developed by the portfolio
management team based on insights gained from weekly meetings with both
Goldman Sachs economists and economists from outside the firm.
.IMPLEMENT OPTIMUM PORTFOLIO STRUCTURE--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
.CONDUCT RIGOROUS ANALYSIS OF NEW SECURITIES--The Investment Adviser's five-
step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for
money market mutual funds.
3. MANAGING LIQUIDITY
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
.Each Fund's clients and factors that influence their asset volatility;
.Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
.Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC FINANCIAL DATA UNIVERSAL
AVERAGES. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
.THE FUNDS: Each Fund's securities are valued by the amortized cost method
as permitted by Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "Act"). Under Rule 2a-7, each Fund may invest only in U.S.
dollar-denominated securities that are determined to present minimal credit
risk and meet certain other criteria, including conditions relating to
maturity, diversification and credit quality. These operating policies may
be more restrictive than the fundamental policies set forth in the State-
ment of Additional Information (the "Additional Statement").
.TAXABLE FUNDS: Prime Obligations, Money Market, Treasury Obligations and
Government Funds.
.TAX-ADVANTAGED FUNDS: Treasury Instruments and Federal Funds.
.TAX-EXEMPT FUND: Tax-Free Money Market Fund.
.THE INVESTORS: The Funds are designed for institutional investors seeking a
high rate of return, a stable net asset value ("NAV") and convenient liqui-
dation privileges. The Funds are particularly suitable for banks, corpora-
tions and other financial institutions that seek investment of short-term
funds for their own accounts or for the accounts of their customers. Shares
of the Government Fund are intended to qualify as eligible investments for
federally chartered credit unions pursuant to Sections 107(7), 107(8) and
107(15) of the Federal Credit Union Act, Part 703 of the National Credit
Union Administration ("NCUA") Rules and Regulations and NCUA Letter Number
155. The Fund intends to review changes in the applicable laws, rules and
regulations governing eligible investments for federally chartered credit
unions, and to take such action as may be necessary so that the investments
of the Fund qualify as eligible investments under the Federal Credit Union
Act and the regulations thereunder. Shares of the Government Fund, however,
may or may not qualify as eligible investments for particular state-chart-
ered credit unions. A state-chartered credit union should consult qualified
legal counsel to determine whether the Government Fund is a permissible
investment under the law applicable to it.
.NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
.MAXIMUM REMAINING MATURITY OF PORTFOLIO INVESTMENTS: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
.DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
3
<PAGE>
.INVESTMENT RESTRICTIONS: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions"
in the Additional Statement. Fundamental investment restrictions of a Fund
cannot be changed without approval of a majority of the outstanding shares
of that Fund. The Treasury Obligations Fund's policy of limiting its
investments to U.S. Treasury Obligations (as defined in Appendix A) and
related repurchase agreements is also fundamental. All investment objec-
tives and policies not specifically designated as fundamental are non-fun-
damental and may be changed without shareholder approval.
.DIVERSIFICATION: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of
the value of its total assets at the time of purchase in the securities of
any single issuer. However, a Fund may invest up to 25% of the value of its
total assets in the securities of a single issuer for up to three business
days. These limitations do not apply to cash, certain repurchase agree-
ments, U.S. Government Securities (as defined in Appendix A) or securities
of other investment companies. In addition, securities subject to certain
unconditional guarantees and securities that are not "First Tier Securi-
ties" as defined by the SEC are subject to different diversification
requirements as described in the Additional Statement.
4
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
The Prime Obligations, Money Market, Treasury Obligations, Treasury Instru-
ments, Government, Federal and Tax-Free Money Market Funds seek to maximize
current income to the extent consistent with the preservation of capital and
the maintenance of liquidity by investing exclusively in high quality money
market instruments.
TAXABLE AND TAX-ADVANTAGED FUNDS:
The Prime Obligations and Money Market Funds pursue their investment objec-
tives by investing in U.S. Government Securities, obligations of U.S. banks,
commercial paper and other short-term obligations of U.S. companies, states,
municipalities and other entities and repurchase agreements. The Money Mar-
ket Fund may also invest in U.S. dollar-denominated obligations of foreign
banks, foreign companies and foreign governments. The Treasury Obligations
Fund pursues its investment objective by investing in securities issued by
the U.S. Treasury and repurchase agreements relating to such securities. The
Government Fund pursues its investment objective by investing in U.S. Gov-
ernment Securities and repurchase agreements relating to such securities.
The Treasury Instruments and Federal Funds pursue their investment objec-
tives by limiting their investments to certain U.S. Treasury Obligations and
U.S. Government Securities, respectively, the interest from which is gener-
ally exempt from state income taxation. You should consult your tax adviser
to determine whether distributions from the Treasury Instruments and Federal
Funds (and any other Fund that may hold such obligations) derived from
interest on such obligations are exempt from state income taxation in your
own state.
In order to obtain a rating from a rating organization, the Prime Obliga-
tions, Money Market, Treasury Obligations, Treasury Instruments, Government
and Federal Funds will observe special investment restrictions.
TAX-EXEMPT FUND:
The Tax-Free Money Market Fund pursues its investment objective by investing
in securities issued by or on behalf of states, territories, and possessions
of the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia, the interest from
which, if any, is in the opinion of bond counsel excluded from gross income
for federal income tax purposes, and not an item of tax preference under the
federal alternative minimum tax ("AMT").
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
U.S. TREASURY U.S. GOVERNMENT BANK COMMERCIAL
FUND OBLIGATIONS SECURITIES OBLIGATIONS PAPER
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations ./1/ . . .
U.S. banks only/2/
-------------------------------------------------------------------------------------------------
Money Market ./1/ . . .
Over 25% of total assets U.S. and foreign
must be invested in U.S. (US$) commercial
and foreign (US$) banks/3/ paper
-------------------------------------------------------------------------------------------------
Treasury Obligations ./4/
-------------------------------------------------------------------------------------------------
Treasury Instruments ./4/
-------------------------------------------------------------------------------------------------
Government ./1/ .
-------------------------------------------------------------------------------------------------
Federal ./1/
.
-------------------------------------------------------------------------------------------------
Tax-Free Money Market .
Tax-exempt only
-------------------------------------------------------------------------------------------------
</TABLE>
NOTE: SEE APPENDIX A FOR A DESCRIPTION OF, AND CERTAIN CRITERIA APPLICABLE
TO, EACH OF THESE CATEGORIES OF INVESTMENTS.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 If adverse economic conditions prevail in the banking industry (such as
substantial losses on loans, increases in non-performing assets and
charge-offs and declines in total deposits) the Fund may, for temporary
defensive purposes, invest less than 25% of its total assets in bank
obligations.
4 Issued by the U.S. Treasury.
5 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
6 The Fund may invest in U.S. dollar-denominated obligations (limited to
commercial paper and other notes) issued or guaranteed by a foreign
government. The Fund may also invest in U.S. dollar-denominated
obligations issued or guaranteed by any entity located or organized in a
foreign country that maintains a short-term foreign currency rating in the
highest short-term ratings category by the requisite number of NRSROs The
Fund may not invest more than 25% of its total assets in the securities of
any one foreign government.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
SHORT-TERM
OBLIGATIONS OF ASSET-BACKED AND FOREIGN
CORPORATIONS AND REPURCHASE RECEIVABLES-BACKED GOVERNMENT
OTHER ENTITIES AGREEMENTS SECURITIES/5/ OBLIGATIONS (US$)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
. . .
U.S. entities only
- ---------------------------------------------------------------------------
. . . ./6/
U.S. and foreign
(US$) entities
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
.
(Does not intend
to invest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Investment Policies Matrix continued
<TABLE>
<CAPTION>
TAXABLE TAX-EXEMPT CUSTODIAL UNRATED
FUND MUNICIPALS MUNICIPALS RECEIPTS SECURITIES/9/ INVESTMENT COMPANIES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Obligations ./7/ . . .
Up to 10% of total
assets in other
investment companies
- -------------------------------------------------------------------------------------------------------------
Money Market ./7/ . . .
Up to 10% of total
assets in other
investment companies
- -------------------------------------------------------------------------------------------------------------
Treasury Obligations
- -------------------------------------------------------------------------------------------------------------
Treasury Instruments
- -------------------------------------------------------------------------------------------------------------
Government .
Up to 10% of total
assets in other
investment companies
- -------------------------------------------------------------------------------------------------------------
Federal
- -------------------------------------------------------------------------------------------------------------
Tax-Free Money . . . .
Market At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations (except in investment companies
extraordinary circumstances)/8/
- -------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: SEE APPENDIX A FOR A DESCRIPTION OF, AND CERTAIN CRITERIA APPLICABLE
TO, EACH OF THESE CATEGORIES OF INVESTMENTS.
7 Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
8 Ordinarily expect that 100% of a Fund's portfolio securities will be
invested in municipal obligations, but the Fund may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
9 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality to
First Tier Securities, or to the extent that a Fund may purchase Second
Tier Securities, comparable in quality to Second Tier Securities. In
addition, a Fund holding a security supported by a guarantee or demand
feature may rely on the credit quality of the guarantee or demand feature
in determining the credit quality of the investment.
10 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of the Fund's net assets under normal market conditions.
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
PRIVATE SUMMARY OF
ACTIVITY CREDIT TAXATION FOR
BONDS QUALITY/9/ DISTRIBUTIONS/14/ MISCELLANEOUS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------
. First Tier/12/ Taxable federal and state/15/ May invest in obligations
of the International
Bank for Reconstruction
and Development. Reverse
repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Reverse repurchase agreements
generally exempt from not permitted
state taxation
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements
not permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Under extraordinary circumstances,
generally exempt from may hold cash, U.S. Government
state taxation Securities subject to state taxation
or cash equivalents. Reverse
repurchase agreements not permitted.
- ------------------------------------------------------------------------------------------------------
(Does not First/12/ or Tax-exempt federal May (but does not currently intend
intend to Second Tier/13/ and taxable state/16/ to) invest up to 20% in securities
invest)/10/,/11/ subject to AMT and may temporarily
invest in the taxable money market
instruments described herein.
Reverse repurchase agreements
not permitted.
- ------------------------------------------------------------------------------------------------------
</TABLE>
11 No more than 25% of the value of the Fund's total assets may be invested
in industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
12 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
13 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
14 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
15 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities interest
income.
16 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
PRIME MONEY TREASURY
.Applicable OBLIGATIONS MARKET OBLIGATIONS
- --Not Applicable FUND FUND FUND
- ------------------------------------------------------------
<S> <C> <C> <C>
NAV . . .
Interest Rate . . .
Credit/Default . . .
Liquidity . . .
U.S. Government Securities . . --
Concentration -- -- --
Foreign -- . --
Banking Industry -- . --
Tax -- -- --
- ------------------------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
TAX-FREE
TREASURY MONEY
INSTRUMENTS GOVERNMENT FEDERAL MARKET
FUND FUND FUND FUND
- ---------------------------------------------
<S> <C> <C> <C>
. . . .
. . . .
. . . .
. . . .
-- . . --
-- -- -- .
-- -- -- --
-- -- -- --
-- -- -- .
- ---------------------------------------------
</TABLE>
11
<PAGE>
Risks that apply to all Funds:
.NAV RISK--The risk that a Fund will not be able to maintain a NAV per share of
$1.00 at all times.
.INTEREST RATE RISK--The risk that during periods of rising interest rates, a
Fund's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a Fund's
yield will tend to be higher.
.CREDIT/DEFAULT RISK--The risk that an issuer or guarantor of a security, or a
bank or other financial institution that has entered into a repurchase agree-
ment, may default on its payment obligations. In addition, with respect to the
Tax-Free Money Market Fund, risk of loss from payment default may also exist
where municipal instruments are backed by foreign letters of credit or guaran-
tees.
.LIQUIDITY RISK--The risk that a Fund will be unable to pay redemption proceeds
within the time period stated in this Prospectus, because of unusual market
conditions, an unusually high volume of redemption requests, or other reasons.
Risk that applies to the Prime Obligations, Money Market, Government and
Federal Funds:
.U.S. GOVERNMENT SECURITIES RISK--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Money Market Fund:
.FOREIGN RISK--The risk that a foreign security could lose value as a result of
political, financial and economic events in foreign countries, less publicly
available financial and other information, less stringent foreign securities
regulations and accounting and disclosure standards, or other factors. The
Money Market Fund may not invest more than 25% of its total assets in the
securities of any one foreign government.
.BANKING INDUSTRY RISK--The risk that if the Fund invests more than 25% of its
total assets in bank obligations, an adverse development in the banking indus-
try may affect the value of the Fund's investments more than if the Fund's
investments were not invested to such a degree in the banking industry. Nor-
mally, the Money Market Fund intends to invest more than 25% of its total
assets in bank obligations. Banks may be particularly susceptible to certain
economic factors such as interest rate changes, adverse developments in the
real estate market, fiscal and monetary policy and general economic cycles.
12
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
Risks that apply to the Tax-Free Money Market Fund:
.CONCENTRATION RISK--The risk that if the Fund invests more than 25% of its
total assets in issuers within the same state, industry or economic sector, an
adverse economic, business or political development may affect the value of
the Fund's investments more than if its investments were not so concentrated.
.TAX RISK--The risk that future legislative or administrative changes or court
decisions may materially affect the ability of the Fund to pay federal tax-
exempt dividends. This Fund would not be a suitable investment for IRAs, other
tax-exempt or tax-deferred accounts or for other investors who are not sensi-
tive to the federal, state or local tax consequences of their investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
13
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
Select Shares of the Funds are new and have no performance history. For this
reason, the performance information shown below is for another class of
shares (FST Shares) that is not offered in this Prospectus but would have
similar annual returns because both classes of shares will be invested in
the same portfolio of securities. Annual returns will differ only to the
extent that the classes do not have the same expenses. In reviewing this
performance information, however, you should be aware that FST Shares are
not subject to a service fee while Select Shares are subject to a service
fee of .03 of 1%. If the expenses of the Select Shares were reflected, per-
formance would be reduced.
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's FST
Shares from year to year; and (b) the average annual returns of a Fund's FST
Shares. Investors should be aware that the fluctuation of interest rates is
one primary factor in performance volatility. The bar chart and table assume
reinvestment of dividends and distributions. A Fund's past performance is
not necessarily an indication of how the Fund will perform in the future.
Performance reflects expense limitations in effect. If expense limitations
were not in place, a Fund's performance would have been reduced. You may
obtain a Fund's current yield by calling 1-800-621-2550.
14
<PAGE>
FUND PERFORMANCE
Prime Obligations Fund
TOTAL RETURN CALENDAR YEAR (FST SHARES)
- --------------------------------------------------------------------------------
Best Quarter:
Q1 '91 1.78%
Worst Quarter:
Q2 '93 0.78%
[GRAPH]
1991 6.26%
1992 3.88%
1993 3.18%
1994 4.28%
1995 6.02%
1996 5.41%
1997 5.60%
1998 5.55%
1999 5.18%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR 5 YEARS SINCE INCEPTION
-------------------------------------------------------------------------------
<S> <C> <C> <C>
FST SHARES (Inception 3/8/90) 5.18% 5.55% 5.30%
-------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Money Market Fund
TOTAL RETURN CALENDAR YEAR (FST SHARES)
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.52%
Worst Quarter:
Q2 '99 1.20%
[GRAPH]
1995 6.07%
1996 5.45%
1997 5.63%
1998 5.55%
1999 5.18%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR 5 YEARS SINCE INCEPTION
-------------------------------------------------------------------------------
<S> <C> <C> <C>
FST SHARES (Inception 5/18/94) 5.18% 5.58% 5.50%
-------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
FUND PERFORMANCE
Treasury Obligations Fund
TOTAL RETURN CALENDAR YEAR (FST SHARES)
- --------------------------------------------------------------------------------
Best Quarter:
Q1 '91 1.65%
Worst Quarter:
Q2 '93 0.76%
[GRAPH]
1991 6.08%
1992 3.80%
1993 3.12%
1994 4.13%
1995 5.96%
1996 5.35%
1997 5.50%
1998 5.40%
1999 4.88%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR 5 YEARS SINCE INCEPTION
-------------------------------------------------------------------------------
<S> <C> <C> <C>
FST SHARES (Inception 4/25/90) 4.88% 5.42% 5.14%
-------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Treasury Instruments Fund
TOTAL RETURN CALENDAR YEAR (FST SHARES)
- --------------------------------------------------------------------------------
Best Quarter:
Q2 98 1.28%
Worst Quarter:
Q1 99 1.07%
[GRAPH]
1998 5.05%
1999 4.60%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR SINCE INCEPTION
-------------------------------------------------------------------------------
<S> <C> <C>
FST SHARES (Inception 3/3/97) 4.60% 4.95%
-------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
FUND PERFORMANCE
Government Fund
TOTAL RETURN CALENDAR YEAR (FST SHARES)
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.52%
Worst Quarter:
Q1 '94 0.79%
[GRAPH]
1994 4.26%
1995 6.00%
1996 5.38%
1997 5.54%
1998 5.46%
1999 5.03%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR 5 YEARS SINCE INCEPTION
-------------------------------------------------------------------------------
<S> <C> <C> <C>
FST SHARES (Inception 4/6/93) 5.03% 5.48% 5.04%
-------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Federal Fund
TOTAL RETURN CALENDAR YEAR (FST SHARES)
- --------------------------------------------------------------------------------
Best Quarter:
Q3 '98 1.36%
Worst Quarter:
Q2 '99 1.18%
[GRAPH]
1998 5.41%
1999 5.05%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR SINCE INCEPTION
-------------------------------------------------------------------------------
<S> <C> <C>
FST SHARES (Inception 2/28/97) 5.05% 5.31%
-------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
FUND PERFORMANCE
Tax-Free Money Market Fund
TOTAL RETURN CALENDAR YEAR (FST SHARES)
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.02%
Worst Quarter:
Q1 '99 0.68%
[GRAPH]
1995 3.89%
1996 3.39%
1997 3.54%
1998 3.34%
1999 3.13%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31, 1999 1 YEAR 5 YEARS SINCE INCEPTION
-------------------------------------------------------------------------------
<S> <C> <C> <C>
FST SHARES (Inception 7/19/94) 3.13% 3.46% 3.45%
-------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Fund Fees and Expenses (Select Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Select Shares of a Fund.
<TABLE>
<CAPTION>
PRIME MONEY
OBLIGATIONS MARKET
FUND FUND
- -------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT):
Maximum Sales Charge (Load) Imposed on Purchases None None
Maximum Deferred Sales Charge (Load) None None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None None
Redemption Fees None None
Exchange Fees None None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):/1/
Management Fees/2/ 0.205% 0.205%
Select Service Fees/3/ 0.030% 0.030%
Other Expenses4 0.020% 0.020%
- -------------------------------------------------------------------------------
Total Fund Operating Expenses* 0.255% 0.255%
- -------------------------------------------------------------------------------
</TABLE>
See page 24 for all other footnotes.
* As a result of the current waivers and expense limi-
tations, the estimated "Other Expenses" and "Total
Fund Operating Expenses" of the Funds which are actu-
ally incurred are as set forth below. The waivers and
expense limitations may be terminated at any time at
the option of the Investment Adviser. If this occurs,
"Other Expenses" and "Total Fund Operating Expenses"
may increase without shareholder approval.
<TABLE>
<CAPTION>
PRIME MONEY
OBLIGATIONS MARKET
FUND FUND
-----------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/1/
Management Fees/2/ 0.17% 0.17%
Select Service Fees/3/ 0.03% 0.03%
Other Expenses/4/ 0.01% 0.01%
-----------------------------------------------------------------------------
Total Fund Operating Expenses (after current waivers and
expense limitations) 0.21% 0.21%
-----------------------------------------------------------------------------
</TABLE>
22
<PAGE>
FUND FEES AND EXPENSES
<TABLE>
<CAPTION>
TREASURY TREASURY TAX-FREE
OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MONEY MARKET
FUND FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
None None None None None
None None None None None
None None None None None
None None None None None
0.205% 0.205% 0.205% 0.205% 0.205%
0.030% 0.030% 0.030% 0.030% 0.030%
0.020% 0.040% 0.020% 0.020% 0.020%
- ---------------------------------------------------------------------------------------
0.255% 0.275% 0.255% 0.255% 0.255%
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TREASURY TREASURY TAX-FREE
OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MONEY MARKET
FUND FUND FUND FUND FUND
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.17% 0.17% 0.17% 0.19% 0.17%
0.03% 0.03% 0.03% 0.03% 0.03%
0.01% 0.01% 0.01% 0.01% 0.01%
--------------------------------------------------------------------------------------
0.21% 0.21% 0.21% 0.23% 0.21%
--------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Fund Fees and Expenses continued
/1/The Funds' annual operating expenses are based on estimated amounts for
the current fiscal year.
/2/The Investment Adviser has voluntarily agreed not to impose a portion of
the management fee on the Federal Fund equal to 0.015% of the Federal Fund's
average daily net assets and equal to 0.035% of all other Fund's average
daily net assets. AS A RESULT OF FEE WAIVERS, THE CURRENT MANAGEMENT FEES OF
THE FEDERAL FUND AND ALL OTHER FUNDS IS 0.19% AND 0.17%, RESPECTIVELY, OF
SUCH FUND'S AVERAGE DAILY NET ASSETS. THE WAIVERS MAY BE TERMINATED AT ANY
TIME AT THE OPTION OF THE INVESTMENT ADVISER.
/3/Service Organizations may charge other fees directly to their customers
who are beneficial owners of Select Shares in connection with their custom-
ers' accounts. Such fees may affect the return customers realize with
respect to their investments.
/4/The Investment Adviser has voluntarily agreed to reduce or limit "Other
Expenses" of each Fund (excluding management fees, select service fees, tax-
es, interest, brokerage fees and litigation, indemnification and other
extraordinary expenses) to 0.01% of each Fund's average daily net assets.
24
<PAGE>
FUND FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the waivers and expense limitations) with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in Select
Shares of a Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your invest-
ment has a 5% return each year and that a Fund's operating expenses remain the
same. Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------
<S> <C> <C> <C> <C>
PRIME OBLIGATIONS $26 $82 $144 $324
- ------------------------------------------------------
MONEY MARKET $26 $82 $144 $324
- ------------------------------------------------------
TREASURY OBLIGATIONS $26 $82 $144 $324
- ------------------------------------------------------
TREASURY INSTRUMENTS $28 $89 $155 $350
- ------------------------------------------------------
GOVERNMENT $26 $82 $144 $324
- ------------------------------------------------------
FEDERAL $26 $82 $144 $324
- ------------------------------------------------------
TAX-FREE MONEY MARKET $26 $82 $144 $324
- ------------------------------------------------------
</TABLE>
Service Organizations that invest in Select Shares on behalf of their customers
may charge other fees directly to their customer accounts in connection with
their investments. You should contact your Service Organization for information
regarding such charges. Such fees, if any, may affect the return such customers
realize with respect to their investments.
Certain Service Organizations that invest in Select Shares may receive other
compensation in connection with the sale and distribution of Select Shares or
for services to their customers' accounts and/or the Funds. For additional
information regarding such compensation, see "Shareholder Guide" in the Pro-
spectus and "Other Information" in the Additional Statement.
25
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the Invest-
ment Adviser, merged into The Goldman Sachs Group, Inc. as a result of an
initial public offering. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser also performs the following serv-
ices for the Funds:
.Continually manages each Fund, including the purchase, retention and dispo-
sition of securities and other assets
.Administers each Fund's business affairs
.Performs various recordholder servicing functions (to the extent not pro-
vided by other organizations)
Pursuant to an SEC order, each Taxable and Tax-Advantaged Fund may enter
into principal transactions in certain taxable money market instruments,
including repurchase agreements, with Goldman Sachs.
26
<PAGE>
SERVICE PROVIDERS
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Fund's average daily net assets):
<TABLE>
<CAPTION>
ACTUAL RATE FOR THE
FISCAL YEAR ENDED
FUND CONTRACTUAL RATE DECEMBER 31, 1999
------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.205% 0.17%
------------------------------------------------------------
Money Market 0.205% 0.17%
------------------------------------------------------------
Treasury Obligations 0.205% 0.17%
------------------------------------------------------------
Treasury Instruments 0.205% 0.17%
------------------------------------------------------------
Government 0.205% 0.17%
------------------------------------------------------------
Federal 0.205% 0.17%
------------------------------------------------------------
Tax-Free Money Market 0.205% 0.17%
------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
27
<PAGE>
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
28
<PAGE>
Dividends
Dividends will be distributed monthly. You may choose to have dividends paid
in:
.Cash
.Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time. If you do not indicate any
choice, dividends and distributions will be reinvested automatically in the
applicable Fund.
All or substantially all of each Fund's net investment income will be declared
as a dividend daily. Dividends will normally, but not always, be declared as of
the following times:
<TABLE>
<CAPTION>
<S> <C>
DIVIDEND DECLARATION TIME
FUND (NEW YORK TIME)
- ------------------------------------------------
Prime Obligations 5:00 p.m.
- ------------------------------------------------
Money Market 4:00 p.m.
- ------------------------------------------------
Treasury Obligations 5:00 p.m.
- ------------------------------------------------
Treasury Instruments 4:00 p.m.
- ------------------------------------------------
Government 5:00 p.m.
- ------------------------------------------------
Federal 4:00 p.m.
- ------------------------------------------------
Tax-Free Money Market 4:00 p.m.
- ------------------------------------------------
</TABLE>
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of each
month. Net short-term capital gains, if any, will be distributed in accordance
with federal income tax requirements and may be reflected in a Fund's daily
distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid excessive
fluctuations in the amount of monthly capital gains distributions, a portion of
any net capital gains realized on the disposition of securities during the
months of November and December may be distributed during the subsequent calen-
dar year. Although realized gains and losses on the assets of a Fund are
reflected in the NAV of the Fund, they are not expected to be of an amount
which would affect the Fund's NAV of $1.00 per share.
29
<PAGE>
The income declared as a dividend for the Prime Obligations, Treasury Obliga-
tions and Government Funds is based on estimates of net investment income for
each Fund. Actual income may differ from estimates, and differences, if any,
will be included in the calculation of subsequent dividends.
30
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Select Shares.
HOW TO BUY SHARES
How Can I Purchase Select Shares Of The Funds?
Generally, Select Shares may be purchased only through institutions that
have agreed to provide account administration and maintenance services to
their customers who are the beneficial owners of Select Shares. These insti-
tutions are called "Service Organizations." Customers of a Service Organiza-
tion will normally give their purchase instructions to the Service Organiza-
tion, and the Service Organization will, in turn, place purchase orders with
Goldman Sachs. Service Organizations will set times by which purchase orders
and payments must be received by them from their customers. Generally,
Select Shares may be purchased from the Funds on any business day at their
NAV next determined after receipt of an order by Goldman Sachs from a Serv-
ice Organization. Shares begin earning dividends after the Fund's receipt of
the purchase amount in federal funds. No sales load is charged.
Service Organizations are responsible for transmitting purchase orders and
payments to Goldman Sachs in a timely fashion. Service Organizations should
place a purchase order in writing or by telephone.
<TABLE>
<S> <C>
--------------------------------------------------------
BY WRITING: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------
BY TELEPHONE: 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------
</TABLE>
Before or immediately after placing an initial purchase order, a Service
Organization should complete and send to Goldman Sachs an Account Applica-
tion.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
31
<PAGE>
Service Organizations may send their payments as follows:
. Wire federal funds to The Northern Trust Company ("Northern"), as sub-
custodian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian); OR
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds -
(Name of Fund and Class of Shares), 4900 Sears Tower - 60th Floor, Chica-
go, IL 60606-6372. The Funds will not accept a check drawn on a foreign
bank or a third-party check.
IT IS STRONGLY RECOMMENDED THAT PAYMENT BE EFFECTED BY WIRING FEDERAL FUNDS
TO NORTHERN.
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
IF AN EFFECTIVE ORDER AND FEDERAL FUNDS ARE RECEIVED: DIVIDENDS BEGIN:
--------------------------------------------------------------------------
<S> <C>
MONEY MARKET, TREASURY INSTRUMENTS AND FEDERAL FUNDS:
. By 3:00 p.m. New York time Same business day
. After 3:00 p.m. New York time Next business day
--------------------------------------------------------------------------
PRIME OBLIGATIONS, TREASURY OBLIGATIONS AND GOVERNMENT
FUNDS:
. By 5:00 p.m. New York time Same business day
. After 5:00 p.m. New York time Next business day
--------------------------------------------------------------------------
TAX-FREE MONEY MARKET FUND:
. By 2:00 p.m. New York time Same business day
. After 2:00 p.m. New York time Next business day
--------------------------------------------------------------------------
</TABLE>
What Do I Need To Know About Service Organizations?
Service Organizations may provide the following services in connection with
their customers' investments in Select Shares:
. Acting, directly or through an agent, as the sole shareholder of record
. Maintaining account records for customers
. Processing orders to purchase, redeem or exchange shares for customers
In addition, some (but not all) Service Organizations are authorized to
accept, on behalf of the Trust, purchase, redemption and exchange orders
placed by or on behalf of their customers, and may designate other interme-
diaries to accept such orders, if approved by the Trust. In these cases:
. A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized Service Organization or intermediary
on a business day, and the order will be priced at the Fund's NAV next
determined after such acceptance.
32
<PAGE>
SHAREHOLDER GUIDE
. Service Organizations or intermediaries will be responsible for transmit-
ting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your Service Organization directly to learn whether it is
authorized to accept orders for the Trust.
Pursuant to a select plan adopted by the Trust's Board of Trustees, Service
Organizations are entitled to receive payment for their services from the
Trust of up to .03 of 1% (on an annualized basis) of the average daily net
assets of the Select Shares of the Funds, which are attributable to or held
in the name of the Service Organization for its customers.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Service Organizations and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds.
In addition to Select Shares, each Fund also offers other classes of shares
to investors. These other share classes are subject to different fees and
expenses (which affect performance), and are entitled to different services
than Select Shares. Information regarding these other share classes may be
obtained from your sales representative or from Goldman Sachs by calling the
number on the back cover of this Prospectus.
What Is My Minimum Investment In The Funds?
<TABLE>
<S> <C>
-----------------------------------------------------------
Minimum initial investment $10 million (may be
allocated among the Funds)
-----------------------------------------------------------
Minimum account balance $10 million
-----------------------------------------------------------
Minimum subsequent investments None
-----------------------------------------------------------
</TABLE>
A Service Organization may, however, impose a minimum amount for initial and
subsequent investments in Select Shares and may establish other requirements
such as a minimum account balance. A Service Organization may redeem Select
Shares held by non-complying accounts, and may impose a charge for any spe-
cial services.
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Modify or waive the minimum investment and minimum account balance
requirement.
. Reject any purchase order for any reason.
33
<PAGE>
The Funds may allow Service Organizations to purchase shares with securities
instead of cash if consistent with a Fund's investment policies and opera-
tions and if approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Select Shares is
determined by a Fund's NAV. The Funds calculate NAV as follows:
<TABLE>
<S> <C>
(Value of Assets of the Class)
NAV = - (Liabilities of the Class)
-----------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
<TABLE>
<CAPTION>
FUND NAV CALCULATED
---------------------------------------------------------------------------
<S> <C>
MONEY MARKET, TREASURY INSTRUMENTS, As of the close of regular trading of
FEDERAL AND TAX-FREE MONEY the New York Stock Exchange
MARKET (normally 4:00 p.m. New York time)
on each business day
---------------------------------------------------------------------------
PRIME OBLIGATIONS, TREASURY As of 5:00 p.m. New York time
OBLIGATIONS AND GOVERNMENT on each business day
---------------------------------------------------------------------------
</TABLE>
. NAV per share of each class is calculated by State Street on each business
day. Fund shares will be priced on any day the New York Stock Exchange is
open, except for days on which Chicago, Boston or New York banks are
closed for local holidays.
. On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, each Fund reserves the right to
close at or prior to the BMA recommended closing time. If a Fund does so,
it will cease granting same business day credit for purchase and redemp-
tion orders received after the Fund's closing time and credit will be
given to the next business day.
. The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-
ted by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securi-
ties are valued at amortized cost in accordance with SEC regulations. Amor-
tized cost will normally approximate market value. There can be no assurance
that a Fund will be able at all times to maintain a NAV of $1.00 per share.
34
<PAGE>
SHAREHOLDER GUIDE
HOW TO SELL SHARES
How Can I Sell Select Shares Of The Funds?
Generally, Select Shares may be sold (redeemed) only through Service Organi-
zations. Customers of a Service Organization will normally give their
redemption instructions to the Service Organization, and the Service Organi-
zation will, in turn, place redemption orders with the Funds. GENERALLY,
EACH FUND WILL REDEEM ITS SELECT SHARES UPON REQUEST ON ANY BUSINESS DAY AT
THEIR NAV NEXT DETERMINED AFTER RECEIPT OF SUCH REQUEST IN PROPER FORM. A
Service Organization may request redemptions in writing or by telephone if
the optional telephone redemption privilege is elected on the Account
Application.
<TABLE>
<S> <C>
INSTRUCTIONS FOR
REDEMPTIONS:
--------------------------------------------------------------------
BY WRITING: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------------------
BY TELEPHONE: If you have elected the telephone
redemption privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------------------
</TABLE>
Certain Service Organizations are authorized to accept redemption requests
on behalf of the Funds as described under "What Do I Need To Know About
Service Organizations?" A redemption may also be made with respect to cer-
tain Funds by means of the check redemption privilege described in the Addi-
tional Statement.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing
and signed by an authorized person designated on the Account Application.
The written request may be confirmed by telephone with both the requesting
party and the designated bank account to verify instructions.
. The telephone redemption option may be modified or terminated at any time.
NOTE: IT MAY BE DIFFICULT TO MAKE TELEPHONE REDEMPTIONS IN TIMES OF DRASTIC
ECONOMIC OR MARKET CONDITIONS.
35
<PAGE>
When Will Redemption Proceeds Be Wired?
Redemption proceeds will normally be wired to the bank account designated on
a Service Organization's Account Application as follows:
<TABLE>
<CAPTION>
REDEMPTION REQUEST RECEIVED REDEMPTION PROCEEDS DIVIDENDS
----------------------------------------------------------------------------------
<S> <C> <C>
MONEY MARKET, TREASURY INSTRUMENTS
AND FEDERAL FUNDS:
----------------------------------------------------------------------------------
.By 3:00 p.m. New York time Wired same business day Not earned on day
request is received
.After 3:00 p.m. New York time Wired next business day Earned on day request
is received
----------------------------------------------------------------------------------
PRIME OBLIGATIONS, TREASURY
OBLIGATIONS AND GOVERNMENT FUNDS:
----------------------------------------------------------------------------------
.By 5:00 p.m. New York time Wired same business day Not earned on day
request is received
.After 5:00 p.m. New York time Wired next business day Earned on day request
is received
----------------------------------------------------------------------------------
TAX-FREE MONEY MARKET FUND:
----------------------------------------------------------------------------------
.By 1:00 p.m. New York time Wired same business day Not earned on day
request is received
.After 1:00 p.m. New York time Wired next business day Earned on day request
is received
----------------------------------------------------------------------------------
</TABLE>
. Although redemption proceeds will normally be wired as described above,
each Fund reserves the right to pay redemption proceeds up to three busi-
ness days following receipt of a properly executed wire transfer redemp-
tion request. If you are selling shares you recently paid for by check,
the Fund will pay you when your check has cleared, which may take up to 15
days. If the Federal Reserve Bank is closed on the day that the redemption
proceeds would ordinarily be wired, wiring the redemption proceeds may be
delayed one additional business day.
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of intermediaries or your Service
Organization in the transfer process. If a problem with such performance
arises, you should deal directly with such intermediaries or Service Orga-
nizations.
36
<PAGE>
SHAREHOLDER GUIDE
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate the timely transmittal of redemption requests, Service Organi-
zations may set times by which they must receive redemption requests.
Service Organizations may also require additional documentation from you.
The Trust reserves the right to:
. Redeem the Select Shares of any Service Organization whose account balance
falls below the minimum as a result of a redemption. The Fund will give 60
days' prior written notice to allow a Service Organization to purchase
sufficient additional shares of the Fund in order to avoid such redemp-
tion. Different rules may apply to investors who have established broker-
age accounts with Goldman Sachs in accordance with the terms and condi-
tions of their account agreements.
. Redeem shares in other circumstances determined by the Board of Trustees
to be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distribu-
tions be returned to the Fund as undeliverable or remain uncashed for six
months. In addition, that distribution and all future distributions pay-
able to you will be reinvested at NAV in additional Fund shares. No inter-
est will accrue on amounts represented by uncashed distribution or redemp-
tion checks.
37
<PAGE>
Can I Exchange My Investment From One Fund To Another?
A Service Organization may exchange Select Shares of a Fund at NAV for
shares of the corresponding class of any other Goldman Sachs Fund. The
exchange privilege may be materially modified or withdrawn at any time upon
60 days' written notice.
<TABLE>
<S> <C>
INSTRUCTIONS FOR EXCHANGING SHARES:
-------------------------------------------------------------------------------------
BY WRITING: . Write a letter of instruction that includes:
. The recordholder name(s) and signature(s)
. The account number
. The Fund names and Class of Shares
. The dollar amount to be exchanged
. Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
-------------------------------------------------------------------------------------
BY TELEPHONE: If you have elected the telephone
exchange privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
-------------------------------------------------------------------------------------
</TABLE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically regis-
tered account.
. Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized per-
son designated on the Account Application.
. Exchanges are available only in states where exchanges may be legally
made.
. It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I
Need To Know About Telephone Redemption Requests?" in an effort to prevent
unauthorized or fraudulent telephone exchange requests.
38
<PAGE>
SHAREHOLDER GUIDE
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
What Types Of Reports Will I Be Sent Regarding Investments In Select Shares?
Service Organizations will receive from the Funds annual reports containing
audited financial statements and semi-annual reports. Upon request, Service
Organizations will also be provided with a printed confirmation for each
transaction. Any dividends and distributions paid by the Funds are also
reflected in regular statements issued by the Funds to Service Organiza-
tions. Service Organizations are responsible for providing these or other
reports to their customers who are the beneficial owners of Select Shares in
accordance with the rules that apply to their accounts with the Service
Organizations.
39
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
TAXES ON DISTRIBUTIONS: Except for the Tax-Free Money Market Fund, distribu-
tions of investment income are taxable as ordinary income for federal tax pur-
poses, and may also be subject to state or local taxes. This is true whether
you reinvest your distributions in additional Fund shares or receive them in
cash. To the extent that Fund distributions are attributable to interest on
federal obligations or interest on obligations of your state of residence or
its municipalities or authorities, they will in most cases be exempt from state
and local income taxes. Distributions from the Tax-Free Money Market Fund that
are designated as "exempt interest dividends" are generally not subject to fed-
eral income tax. Distributions of short-term capital gains are taxable to you
as ordinary income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Free Money Market Fund may be a preference item when determining your fed-
eral alternative minimum tax liability. Exempt-interest dividends are also
taken into account in determining the taxable portion of social security or
railroad retirement benefits. Any interest on indebtedness incurred by you to
purchase or carry shares in the Tax-Free Money Market Fund generally will not
be deductible for federal income tax purposes.
OTHER INFORMATION: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
40
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. TREASURY OBLIGATIONS AND U.S. GOVERNMENT SECURITIES. U.S. Treasury
Obligations include securities issued or issued or guaranteed by the U.S.
Treasury ("U.S. Treasury Obligations"). Payment of principal and interest on
these obligations is backed by the full faith and credit of the U.S.
government. U.S. Treasury Obligations include, among other things, the
separately traded principal and interest components of securities guaranteed or
issued by the U.S. Treasury if such components are traded independently under
the Separate Trading of Registered Interest and Principal of Securities program
("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
41
<PAGE>
Some Funds invest in U.S. Treasury Obligations and certain U.S. Government
Securities the interest from which is generally exempt from state income taxa-
tion. Securities generally eligible for this exemption include those issued by
the U.S. Treasury and certain agencies, authorities or instrumentalities of the
U.S. government, including the Federal Home Loan Banks, Federal Farm Credit
Banks, Tennessee Valley Authority and Student Loan Marketing Association.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
BANK OBLIGATIONS. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Funds may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Funds may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Fund invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of opera-
tions and profitability of domestic and foreign banks. Significant developments
in the U.S. banking industry have included increased competition from other
types of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the real estate mar-
kets. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
COMMERCIAL PAPER. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or
42
<PAGE>
APPENDIX A
bank holding companies, corporations, finance companies and other issuers. The
commercial paper purchased by a Fund consists of direct U.S. dollar-denominated
obligations of domestic or, in the case of certain Funds, foreign issuers.
SHORT-TERM OBLIGATIONS. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
REPURCHASE AGREEMENTS. Certain Funds may enter into repurchase agreements with
primary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, certain Funds, together with other registered
investment companies having advisory agreements with the Investment Adviser or
any of its 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.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES. Certain Funds may invest in
asset-backed and receivables-backed securities whose principal and interest
payments are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-backed
and receivables-backed 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 and
receivables-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in such securities will
43
<PAGE>
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. In addition, securities that are backed by credit card, automobile and
similar types of receivables generally do not have the benefit of a security
interest in collateral that is comparable in quality to mortgage assets. There
is the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event of a
default, a Fund may suffer a loss if it cannot sell collateral quickly and
receive the amount it is owed.
FOREIGN GOVERNMENT OBLIGATIONS AND RELATED FOREIGN RISKS. Certain Funds may
invest in foreign government obligations. Foreign government obligations are
U.S. dollar-denominated obligations (limited to commercial paper and other
notes) issued or guaranteed by a foreign government or other entity located or
organized in a foreign country that maintains a short-term foreign currency
rating in the highest short-term ratings category by the requisite number of
NRSROs.
Investments by a Fund in foreign securities, whether issued by a foreign gov-
ernment, bank, corporation or other issuer, may present a greater degree of
risk than investments in securities of domestic issuers because of less public-
ly-available financial and other information, less securities regulation,
potential imposition of foreign withholding and other taxes, war, expropriation
or other adverse governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and generally are not bound by
the accounting, auditing and financial reporting standards applicable to U.S.
banks.
MUNICIPAL OBLIGATIONS. Certain Funds may invest in municipal obligations.
Municipal obligations are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities, and the District of Columbia. Municipal
obligations in which a Fund may invest consist of fixed rate notes and similar
debt instruments; variable and floating rate demand instruments; tax-exempt
commercial paper; municipal bonds; and unrated notes, paper, bonds or other
instruments.
MUNICIPAL NOTES AND BONDS. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds also include lease rental revenue bonds which are
issued by a state or local authority for capital projects and are secured by
annual lease payments from the state or local-
44
<PAGE>
APPENDIX A
ity sufficient to cover debt service on the authority's obligations. Industrial
development bonds ("private activity bonds") are a specific type of revenue
bond backed by the credit and security of a private user and, therefore, have
more potential risk. Municipal bonds may be issued in a variety of forms,
including commercial paper, tender option bonds and variable and floating rate
securities.
TENDER OPTION BONDS. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal
income tax. Certain tender option bonds may be illiquid or may become illiquid
as a result of a credit rating downgrade, a payment default or a disqualifica-
tion from tax-exempt status.
REVENUE ANTICIPATION WARRANTS. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
INDUSTRIAL DEVELOPMENT BONDS. Certain Funds may invest in industrial develop-
ment bonds (private activity bonds). Industrial development bonds are a spe-
cific type of revenue bond backed by the credit and security of a private user,
the interest from which would be an item of tax preference when distributed by
a Fund as "exempt-interest dividends" to shareholders under the AMT.
45
<PAGE>
OTHER MUNICIPAL OBLIGATION POLICIES. Certain Funds may invest 25% or more of
the value of their respective total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting one municipal obligation would also affect the other municipal
obligation. For example, a Fund may invest all of its assets in (a) municipal
obligations the interest of which is paid solely from revenues from 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 obligations whose issuers are in the same
state; or (c) industrial development obligations. Concentration of a Fund's
investments in these municipal obligations will subject the Fund, to a greater
extent than if such investment was not so concentrated, to the risks of adverse
economic, business or political developments affecting the particular state,
industry or other area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and are gener-
ally not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
CUSTODIAL RECEIPTS. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
OTHER INVESTMENT COMPANIES. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of
46
<PAGE>
APPENDIX A
any other investment company, and a prohibition on investing more than 5% of a
Fund's total assets in securities of any one investment company or more than
10% of its total assets in securities of all investment companies. A Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Such other investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the acquiring Fund and will be subject to substantially the
same risks.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring the securities for its portfolio, a Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment Adviser
deems it appropriate.
47
<PAGE>
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in illiq-
uid securities which cannot be disposed of in seven days in the ordinary course
of business at fair value. Illiquid securities include:
.Both domestic and foreign securities that are not readily marketable
.Certain municipal leases and participation interests
.Certain stripped mortgage-backed securities
.Repurchase agreements and time deposits with a notice or demand period of more
than seven days
.Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is oth-
erwise eligible for resale pursuant to Rule 144A under the Securities Act of
1933.
Investing in restricted securities may decrease the liquidity of a Fund's port-
folio.
BORROWINGS. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the Addi-
tional Statement.
DOWNGRADED SECURITIES. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
48
<PAGE>
[This page intentionally left blank]
49
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). The Pre-
mium Money Market Fund terminated as of March 31, 2000. This information has
been audited by Arthur Andersen LLP, whose report, along with a Fund's
financial statements, is included in the Fund's annual report (available
upon request without charge).
PRIME OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999-FST shares $1.00 $0.05 $(0.05)
1999-FST Preferred shares 1.00 0.05 (0.05)
1999-FST Administration shares 1.00 0.05 (0.05)
1999-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1998-FST shares 1.00 0.05 (0.05)
1998-FST Preferred shares 1.00 0.05 (0.05)
1998-FST Administration shares 1.00 0.05 (0.05)
1998-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1997-FST shares 1.00 0.05 (0.05)
1997-FST Preferred shares 1.00 0.05 (0.05)
1997-FST Administration shares 1.00 0.05 (0.05)
1997-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1996-FST shares 1.00 0.05 (0.05)
1996-FST Preferred Shares (commenced May 1) 1.00 0.03 (0.03)
1996-FST Administration shares 1.00 0.05 (0.05)
1996-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1995-FST shares 1.00 0.06 (0.06)
1995-FST Administration shares 1.00 0.06 (0.06)
1995-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
50
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,062,549 0.18% 5.09% 0.23% 5.04%
1.00 5.07 219,711 0.28 4.87 0.33 4.82
1.00 4.91 1,051,831 0.43 4.88 0.48 4.83
1.00 4.65 690,741 0.68 4.60 0.73 4.55
- --------------------------------------------------------------------------------
1.00 5.55 5,831,773 0.18 5.39 0.24 5.33
1.00 5.45 132,558 0.28 5.26 0.34 5.20
1.00 5.29 331,196 0.43 5.14 0.49 5.08
1.00 5.03 336,205 0.68 4.89 0.74 4.83
- --------------------------------------------------------------------------------
1.00 5.60 3,867,739 0.18 5.46 0.23 5.41
1.00 5.50 152,767 0.28 5.38 0.33 5.33
1.00 5.34 241,607 0.43 5.22 0.48 5.17
1.00 5.08 176,133 0.68 4.97 0.73 4.92
- --------------------------------------------------------------------------------
1.00 5.41 3,901,797 0.18 5.29 0.23 5.24
1.00 5.28/c/ 127,126 0.28/c/ 5.19/c/ 0.33/c/ 5.14/c/
1.00 5.14 215,898 0.43 5.06 0.48 5.01
1.00 4.88 115,114 0.68 4.78 0.73 4.73
- --------------------------------------------------------------------------------
1.00 6.02 3,295,791 0.18 5.86 0.22 5.82
1.00 5.75 147,894 0.43 5.59 0.47 5.55
1.00 5.49 65,278 0.68 5.33 0.72 5.29
- --------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1997 - FST shares 1.00 0.06 (0.06)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced May 1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares (commenced July 14) 1.00 0.02 (0.02)
- ------------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
52
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,747,861 0.18% 5.08% 0.22% 5.04%
1.00 5.07 241,179 0.28 4.99 0.32 4.95
1.00 4.92 403,602 0.43 4.81 0.47 4.77
1.00 4.66 305,972 0.68 4.53 0.72 4.49
- ---------------------------------------------------------------------------------
1.00 5.55 4,995,782 0.18 5.40 0.23 5.35
1.00 5.45 93,218 0.28 5.30 0.33 5.25
1.00 5.29 399,474 0.43 5.16 0.48 5.11
1.00 5.03 496,520 0.68 4.86 0.73 4.81
- ---------------------------------------------------------------------------------
1.00 5.63 4,346,519 0.18 5.50 0.23 5.45
1.00 5.53 20,258 0.28 5.44 0.33 5.39
1.00 5.37 221,256 0.43 5.26 0.48 5.21
1.00 5.11 316,304 0.68 4.99 0.73 4.94
- ---------------------------------------------------------------------------------
1.00 5.45 2,540,366 0.18 5.33 0.23 5.28
1.00 5.31/c/ 17,510 0.28/c/ 5.23/c/ 0.33/c/ 5.18/c/
1.00 5.19 165,766 0.43 5.04 0.48 4.99
1.00 4.93 234,376 0.68 4.84 0.73 4.79
- ---------------------------------------------------------------------------------
1.00 6.07 2,069,197 0.15 5.89 0.23 5.81
1.00 5.80 137,412 0.40 5.61 0.48 5.53
1.00 5.41/c/ 4,219 0.65/c/ 4.93/c/ 0.73/c/ 4.85/c/
- ---------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
PREMIUM MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999-FST shares $1.00 $0.05 $(0.05)
1999-FST Preferred shares 1.00 0.05 (0.05)
1999-FST Administration shares 1.00 0.05 (0.05)
1999-FST Service shares 1.00 0.04 (0.04)
- -----------------------------------------------------------------------------------------
1998-FST shares 1.00 0.05 (0.05)
1998-FST Preferred shares 1.00 0.05 (0.05)
1998-FST Administration shares 1.00 0.05 (0.05)
1998-FST Service shares 1.00 0.05 (0.05)
- -----------------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31,
1997-FST shares (commenced August 1) 1.00 0.02 (0.02)
1997-FST Preferred shares (commenced August 1) 1.00 0.02 (0.02)
1997-FST Administration shares (commenced August 1) 1.00 0.02 (0.02)
1997-FST Service shares (commenced August 1) 1.00 0.02 (0.02)
- -----------------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net
assets at Ratio of net Ratio of net
Net asset end Ratio of net investment Ratio of investment
value at of period expenses to income to expenses to income to
end Total (in average net average net average net average net
of period return/b/ 000's) assets assets assets assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.10% $312,507 0.18% 4.96% 0.23% 4.91%
1.00 5.00 50,847 0.28 4.82 0.33 4.77
1.00 4.84 18,670 0.43 4.78 0.48 4.73
1.00 4.58 17,312 0.68 4.44 0.73 4.39
- -------------------------------------------------------------------------------
1.00 5.55 479,851 0.16 5.38 0.29 5.25
1.00 5.45 107,517 0.26 5.29 0.39 5.16
1.00 5.29 13,728 0.41 5.08 0.54 4.95
1.00 5.03 19,655 0.66 4.79 0.79 4.66
- -------------------------------------------------------------------------------
1.00 5.73/c/ 218,192 0.08/c/ 5.59/c/ 0.43/c/ 5.24/c/
1.00 5.62/c/ 558 0.18/c/ 5.50/c/ 0.53/c/ 5.15/c/
1.00 5.47/c/ 1,457 0.33/c/ 5.33/c/ 0.68/c/ 4.98/c/
1.00 5.20/c/ 814 0.58/c/ 5.17/c/ 0.93/c/ 4.82/c/
- -------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
TREASURY OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1997 - FST shares 1.00 0.05 (0.05)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced May 1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.88% $2,320,581 0.18% 4.75% 0.23% 4.70%
1.00 4.78 297,925 0.28 4.67 0.33 4.62
1.00 4.62 1,157,825 0.43 4.53 0.48 4.48
1.00 4.36 569,993 0.68 4.28 0.73 4.23
- --------------------------------------------------------------------------------
1.00 5.40 3,521,389 0.18 5.22 0.23 5.17
1.00 5.29 285,240 0.28 5.20 0.33 5.15
1.00 5.14 1,080,454 0.43 4.94 0.48 4.89
1.00 4.87 501,619 0.68 4.69 0.73 4.64
- --------------------------------------------------------------------------------
1.00 5.50 2,217,943 0.18 5.36 0.23 5.31
1.00 5.40 245,355 0.28 5.32 0.33 5.27
1.00 5.24 738,865 0.43 5.12 0.48 5.07
1.00 4.98 312,991 0.68 4.87 0.73 4.82
- --------------------------------------------------------------------------------
1.00 5.35 2,291,051 0.18 5.22 0.24 5.16
1.00 5.24/c/ 46,637 0.28/c/ 5.11/c/ 0.34/c/ 5.05/c/
1.00 5.09 536,895 0.43 4.97 0.49 4.91
1.00 4.83 220,560 0.68 4.72 0.74 4.66
- --------------------------------------------------------------------------------
1.00 5.96 1,587,715 0.18 5.73 0.23 5.68
1.00 5.69 283,186 0.43 5.47 0.48 5.42
1.00 5.43 139,117 0.68 5.21 0.73 5.16
- --------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
TREASURY INSTRUMENTS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.04 (0.04)
1999 - FST Administration shares 1.00 0.04 (0.04)
1999 - FST Service shares 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------------------------
For the Period Ended December 31,
1997 - FST shares (commenced March 3) 1.00 0.04 (0.04)
1997 - FST Preferred shares (commenced May 30) 1.00 0.03 (0.03)
1997 - FST Administration shares (commenced April 1) 1.00 0.04 (0.04)
1997 - FST Service shares (commenced March 5) 1.00 0.04 (0.04)
- ----------------------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net
assets at Ratio of net Ratio of net
Net asset end Ratio of net investment Ratio of investment
value at of period expenses to income to expenses to income to
end Total (in average net average net average net average net
of period return/b/ 000's) assets assets assets assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.60% $428,732 0.18% 4.51% 0.24% 4.45%
1.00 4.49 208 0.28 4.53 0.34 4.47
1.00 4.34 67,748 0.43 4.29 0.49 4.23
1.00 4.08 42,095 0.68 4.07 0.74 4.01
- -------------------------------------------------------------------------------
1.00 5.05 822,207 0.18 4.74 0.29 4.63
1.00 4.94 2 0.28 4.68 0.39 4.57
1.00 4.79 23,676 0.43 4.62 0.54 4.51
1.00 4.53 17,128 0.68 4.37 0.79 4.26
- -------------------------------------------------------------------------------
1.00 5.25/c/ 496,419 0.18/c/ 5.09/c/ 0.29/c/ 4.98/c/
1.00 5.13/c/ 2 0.28/c/ 5.00/c/ 0.39/c/ 4.89/c/
1.00 4.99/c/ 4,159 0.43/c/ 4.84/c/ 0.54/c/ 4.73/c/
1.00 4.71/c/ 20,177 0.68/c/ 4.62/c/ 0.79/c/ 4.51/c/
- -------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
GOVERNMENT FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1997 - FST shares 1.00 0.05 (0.05)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced May 1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares (commenced May 16) 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
60
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.03% $2,260,275 0.18% 4.91% 0.22% 4.87%
1.00 4.93 181,155 0.28 4.81 0.32 4.77
1.00 4.77 519,266 0.43 4.67 0.47 4.63
1.00 4.51 435,192 0.68 4.35 0.72 4.31
- --------------------------------------------------------------------------------
1.00 5.46 1,563,875 0.18 5.32 0.23 5.27
1.00 5.36 245,628 0.28 5.15 0.33 5.10
1.00 5.20 407,363 0.43 5.06 0.48 5.01
1.00 4.94 699,481 0.68 4.83 0.73 4.78
- --------------------------------------------------------------------------------
1.00 5.54 1,478,539 0.18 5.41 0.24 5.35
1.00 5.43 7,147 0.28 5.34 0.34 5.28
1.00 5.28 299,804 0.43 5.15 0.49 5.09
1.00 5.02 580,200 0.68 4.91 0.74 4.85
- --------------------------------------------------------------------------------
1.00 5.38 858,769 0.18 5.25 0.24 5.19
1.00 5.26/c/ 112 0.28/c/ 5.14/c/ 0.34/c/ 5.08/c/
1.00 5.12 145,108 0.43 5.01 0.49 4.95
1.00 4.86 223,554 0.68 4.74 0.74 4.68
- --------------------------------------------------------------------------------
1.00 6.00 743,884 0.18 5.81 0.24 5.75
1.00 5.74 82,386 0.43 5.54 0.49 5.48
1.00 5.40/c/ 14,508 0.68/c/ 5.08/c/ 0.74/c/ 5.02/c/
- --------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
FEDERAL FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- -----------------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- -----------------------------------------------------------------------------------------
For the Period Ended December 31,
1997 - FST shares (commenced February 28) 1.00 0.05 (0.05)
1997 - FST Preferred shares (commenced May 30) 1.00 0.03 (0.03)
1997 - FST Administration shares (commenced April 1) 1.00 0.04 (0.04)
1997 - FST Service shares (commenced March 25) 1.00 0.04 (0.04)
- -----------------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
62
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.05% $4,206,119 0.18% 4.96% 0.23% 4.91%
1.00 4.94 186,590 0.28 5.05 0.33 5.00
1.00 4.79 789,529 0.43 4.71 0.48 4.66
1.00 4.53 478,635 0.68 4.46 0.73 4.41
- ----------------------------------------------------------------------------------
1.00 5.41 2,346,254 0.18 5.24 0.24 5.18
1.00 5.31 26,724 0.28 5.20 0.34 5.14
1.00 5.15 690,084 0.43 5.02 0.49 4.96
1.00 4.89 321,124 0.68 4.78 0.74 4.72
- ----------------------------------------------------------------------------------
1.00 5.51/c/ 1,125,681 0.18/c/ 5.39/c/ 0.27/c/ 5.30/c/
1.00 5.43/c/ 194,375 0.28/c/ 5.26/c/ 0.37/c/ 5.17/c/
1.00 5.27/c/ 625,334 0.43/c/ 5.15/c/ 0.52/c/ 5.06/c/
1.00 5.00/c/ 228,447 0.68/c/ 4.78/c/ 0.77/c/ 4.69/c/
- ----------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
TAX-FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.03 $(0.03)
1999 - FST Preferred shares 1.00 0.03 (0.03)
1999 - FST Administration shares 1.00 0.03 (0.03)
1999 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------------
1998 - FST shares 1.00 0.03 (0.03)
1998 - FST Preferred shares 1.00 0.03 (0.03)
1998 - FST Administration shares 1.00 0.03 (0.03)
1998 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------------
1997 - FST shares 1.00 0.04 (0.04)
1997 - FST Preferred shares 1.00 0.03 (0.03)
1997 - FST Administration shares 1.00 0.03 (0.03)
1997 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------------
1996 - FST shares 1.00 0.03 (0.03)
1996 - FST Preferred shares (commenced May 1) 1.00 0.02 (0.02)
1996 - FST Administration shares 1.00 0.03 (0.03)
1996 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------------
1995 - FST shares 1.00 0.04 (0.04)
1995 - FST Administration shares 1.00 0.04 (0.04)
1995 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
64
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 3.13% $1,775,327 0.18% 3.12% 0.22% 3.08%
1.00 3.03 31,359 0.28 2.99 0.32 2.95
1.00 2.88 127,967 0.43 2.81 0.47 2.77
1.00 2.62 69,465 0.68 2.61 0.72 2.57
- ----------------------------------------------------------------------------------
1.00 3.34 1,456,002 0.18 3.28 0.23 3.23
1.00 3.24 20,882 0.28 3.17 0.33 3.12
1.00 3.08 146,800 0.43 3.04 0.48 2.99
1.00 2.83 50,990 0.68 2.77 0.73 2.72
- ----------------------------------------------------------------------------------
1.00 3.54 939,407 0.18 3.50 0.24 3.44
1.00 3.43 35,152 0.28 3.39 0.34 3.33
1.00 3.28 103,049 0.43 3.27 0.49 3.21
1.00 3.02 42,578 0.68 3.01 0.74 2.95
- ----------------------------------------------------------------------------------
1.00 3.39 440,838 0.18 3.35 0.23 3.30
1.00 3.30/c/ 28,731 0.28/c/ 3.26/c/ 0.33/c/ 3.21/c/
1.00 3.13 51,661 0.43 3.10 0.48 3.05
1.00 2.88 19,855 0.68 2.85 0.73 2.80
- ----------------------------------------------------------------------------------
1.00 3.89 448,367 0.14 3.81 0.24 3.71
1.00 3.63 20,939 0.39 3.54 0.49 3.44
1.00 3.38 19,860 0.64 3.32 0.74 3.22
- ----------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
Index
<TABLE>
<S> <C> <C> <C>
1 General Investment Management Approach 31 Shareholder Guide
5 Fund Investment Objectives and Strategies 31 How to Buy Shares
10 Principal Risks of the Funds 35 How to Sell Shares
14 Fund Performance 40 Taxation
22 Fund Fees And 41 Appendix A Additional Information
Expenses on Portfolio Risks, Securities and
26 Service Techniques
Providers 50 Appendix B Financial Highlights
29 Dividends
</TABLE>
<PAGE>
Financial Square Funds
Prospectus (FST Select Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower - 60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of
Fund documents, after paying a duplicating fee, by writing to the SEC's Pub-
lic Reference Section, Washington, D.C. 20549-0102 or by electronic request
to: [email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
Goldman Sachs Financial Square Funds/SM/ is a service mark of Goldman Sachs &
Co.
FSPROSELECT
<PAGE>
Prospectus
GOLDMAN SACHS FINANCIAL SQUARE FUNDS/SM/
FST
ADMINISTRATION
SHARES
May 1, 2000
. Prime
Obligations
Fund
. Money Market
Fund
[GRAPHIC]
. Treasury
Obligations Fund
. Treasury
Instruments Fund
. Government Fund
. Federal Fund
. Tax-Free Money
Market Fund
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH A FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A FUND.
<PAGE>
NOT FDIC-INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as Investment
Adviser to the Funds. GSAM is referred to in this Prospectus as the "Invest-
ment Adviser."
Goldman Sachs' Money Market Investment Philosophy:
The Money Market Funds are managed to seek preservation of capital, daily
liquidity and maximum current income. With each Fund, the Investment Adviser
follows a conservative, risk-managed investment process that seeks to:
. Manage credit risk
. Manage interest rate risk
. Manage liquidity
Since 1981, the Investment Adviser has actively managed the Goldman Sachs
Money Market Funds to provide investors with the greatest possible preserva-
tion of principal and income potential.
- --------------------------------------------------------------------------------
Investment Process
1. Managing Credit Risk
The Investment Adviser's process for managing risk emphasizes:
. Intensive Research--the Credit Department, a separate operating entity of
Goldman Sachs, approves all credits for the Funds. Sources for the Credit
Department's analysis include third-party inputs, such as financial
statements and media sources, ratings releases and company meetings, as well
as the Investment Research, Legal and Compliance departments of Goldman
Sachs.
. Timely Updates--A Credit Department-approved list of securities is
continuously communicated on a "real-time" basis to the portfolio management
team via computer link.
The Result: An "Approved" List Of High-quality Credits--the Investment
Adviser's portfolio management team uses this approved list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
1
<PAGE>
2. MANAGING INTEREST RATE RISK
Three main steps are followed in seeking to manage interest rate risk:
. ESTABLISH WEIGHTED AVERAGE MATURITY (WAM) TARGET--WAM (the weighted average
time until the yield of a portfolio reflects any changes in the current
interest rate environment) is constantly revisited and adjusted as market
conditions change. An overall strategy is developed by the portfolio
management team based on insights gained from weekly meetings with both
Goldman Sachs economists and economists from outside the firm.
. IMPLEMENT OPTIMUM PORTFOLIO STRUCTURE--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and each Fund's asset volatility, are used to identify the most
effective portfolio structure.
. CONDUCT RIGOROUS ANALYSIS OF NEW SECURITIES--The Investment Adviser's five-
step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for money
market mutual funds.
3. MANAGING LIQUIDITY
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect liquidity of a money market portfolio include:
. Each Fund's clients and factors that influence their asset volatility;
. Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
. Bid-ask spreads associated with securities in the portfolios.
Benchmarks for the Money Market Funds are the IBC FINANCIAL DATA UNIVERSAL
AVERAGES. Each Fund tracks the IBC Index which best corresponds to the
Fund's eligible investments.
- --------------------------------------------------------------------------------
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
. THE FUNDS: Each Fund's securities are valued by the amortized cost method
as permitted by Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "Act"). Under Rule 2a-7, each Fund may invest only in U.S.
dollar-denominated securities that are determined to present minimal credit
risk and meet certain other criteria, including conditions relating to
maturity, diversification and credit quality. These operating policies may
be more restrictive than the fundamental policies set forth in the State-
ment of Additional Information (the "Additional Statement").
. TAXABLE FUNDS: Prime Obligations, Money Market, Treasury Obligations and
Government Funds.
. TAX-ADVANTAGED FUNDS: Treasury Instruments and Federal Funds.
. TAX-EXEMPT FUND: Tax-Free Money Market Fund.
. THE INVESTORS: The Funds are designed for institutional investors seeking a
high rate of return, a stable net asset value ("NAV") and convenient liqui-
dation privileges. The Funds are particularly suitable for banks, corpora-
tions and other financial institutions that seek investment of short-term
funds for their own accounts or for the accounts of their customers. Shares
of the Government Fund are intended to qualify as eligible investments for
federally chartered credit unions pursuant to Sections 107(7), 107(8) and
107(15) of the Federal Credit Union Act, Part 703 of the National Credit
Union Administration ("NCUA") Rules and Regulations and NCUA Letter Number
155. The Fund intends to review changes in the applicable laws, rules and
regulations governing eligible investments for federally chartered credit
unions, and to take such action as may be necessary so that the investments
of the Fund qualify as eligible investments under the Federal Credit Union
Act and the regulations thereunder. Shares of the Government Fund, however,
may or may not qualify as eligible investments for particular state-chart-
ered credit unions. A state-chartered credit union should consult qualified
legal counsel to determine whether the Government Fund is a permissible
investment under the law applicable to it.
. NAV: Each Fund seeks to maintain a stable NAV of $1.00 per share. There can
be no assurance that a Fund will be able at all times to maintain a NAV of
$1.00 per share.
. MAXIMUM REMAINING MATURITY OF PORTFOLIO INVESTMENTS: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
. DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
3
<PAGE>
. INVESTMENT RESTRICTIONS: Each Fund is subject to certain investment
restrictions that are described in detail under "Investment Restrictions" in
the Additional Statement. Fundamental investment restrictions of a Fund
cannot be changed without approval of a majority of the outstanding shares of
that Fund. The Treasury Obligations Fund's policy of limiting its investments
to U.S. Treasury Obligations (as defined in Appendix A) and related
repurchase agreements is also fundamental. All investment objec-tives and
policies not specifically designated as fundamental are non-fun-damental and
may be changed without shareholder approval.
. DIVERSIFICATION: Diversification can help a Fund reduce the risks of
investing. In accordance with current regulations of the Securities and
Exchange Commission (the "SEC"), each Fund may not invest more than 5% of the
value of its total assets at the time of purchase in the securities of any
single issuer. However, a Fund may invest up to 25% of the value of its total
assets in the securities of a single issuer for up to three business days.
These limitations do not apply to cash, certain repurchase agree-ments, U.S.
Government Securities (as defined in Appendix A) or securities of other
investment companies. In addition, securities subject to certain
unconditional guarantees and securities that are not "First Tier Securi-ties"
as defined by the SEC are subject to different diversification requirements
as described in the Additional Statement.
4
<PAGE>
Fund Investment Objectives and Strategies
INVESTMENT OBJECTIVES
The Prime Obligations, Money Market, Treasury Obligations, Treasury Instru-
ments, Government, Federal and Tax-Free Money Market Funds seek to maximize
current income to the extent consistent with the preservation of capital and
the maintenance of liquidity by investing exclusively in high quality money
market instruments.
Taxable And Tax-Advantaged Funds:
The Prime Obligations and Money Market Funds pursue their investment objec-
tives by investing in U.S. Government Securities, obligations of U.S. banks,
commercial paper and other short-term obligations of U.S. companies, states,
municipalities and other entities and repurchase agreements. The Money Mar-
ket Fund may also invest in U.S. dollar-denominated obligations of foreign
banks, foreign companies and foreign governments. The Treasury Obligations
Fund pursues its investment objective by investing in securities issued by
the U.S. Treasury and repurchase agreements relating to such securities. The
Government Fund pursues its investment objective by investing in U.S. Gov-
ernment Securities and repurchase agreements relating to such securities.
The Treasury Instruments and Federal Funds pursue their investment objec-
tives by limiting their investments to certain U.S. Treasury Obligations and
U.S. Government Securities, respectively, the interest from which is gener-
ally exempt from state income taxation. You should consult your tax adviser
to determine whether distributions from the Treasury Instruments and Federal
Funds (and any other Fund that may hold such obligations) derived from
interest on such obligations are exempt from state income taxation in your
own state.
In order to obtain a rating from a rating organization, the Prime Obliga-
tions, Money Market, Treasury Obligations, Treasury Instruments, Government
and Federal Funds will observe special investment restrictions.
Tax-Exempt Fund:
The Tax-Free Money Market Fund pursues its investment objective by investing
in securities issued by or on behalf of states, territories, and possessions
of the United States and their political subdivisions, agencies, authorities
and instrumentalities, and the District of Columbia, the interest from
which, if any, is in the opinion of bond counsel excluded from gross income
for federal income tax purposes, and not an item of tax preference under the
federal alternative minimum tax ("AMT").
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Funds' annual and semi-annual reports. For more
information see Appendix A.
Investment Policies Matrix
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Bank Commercial
Fund Obligations Securities Obligations Paper
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations ./1/ . . .
U.S. banks only/2/
-------------------------------------------------------------------------------------------------
Money Market ./1/ . . .
Over 25% of total assets U.S. and foreign
must be invested in U.S. (US$) commercial
and foreign (US$) banks/3/ paper
-------------------------------------------------------------------------------------------------
Treasury Obligations ./4/
-------------------------------------------------------------------------------------------------
Treasury Instruments ./4/
-------------------------------------------------------------------------------------------------
Government ./1/ .
-------------------------------------------------------------------------------------------------
Federal ./1/ .
-------------------------------------------------------------------------------------------------
Tax-Free Money Market .
Tax-exempt only
-------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
1 Issued or guaranteed by the U.S. Treasury.
2 Including foreign branches of U.S. banks.
3 If adverse economic conditions prevail in the banking industry (such as
substantial losses on loans, increases in non-performing assets and charge-
offs and declines in total deposits) the Fund may, for temporary defensive
purposes, invest less than 25% of its total assets in bank obligations.
4 Issued by the U.S. Treasury.
5 To the extent required by Rule 2a-7, asset-backed and receivables-backed
securities will be rated by the requisite number of nationally recognized
statistical rating organizations ("NRSROs").
6 The Fund may invest in U.S. dollar-denominated obligations (limited to
commercial paper and other notes) issued or guaranteed by a foreign
government. The Fund may also invest in U.S. dollar-denominated obligations
issued or guaranteed by any entity located or organized in a foreign
country that maintains a short-term foreign currency rating in the highest
short-term ratings category by the requisite number of NRSROs. The Fund may
not invest more than 25% of its total assets in the securities of any one
foreign government.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Short-Term
Obligations of Asset-Backed and Foreign
Corporations and Repurchase Receivables-Backed Government
Other Entities Agreements Securities/5/ Obligations (US$)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
. . .
U.S. entities only
- ---------------------------------------------------------------------------
. . . ./6/
U.S. and foreign
(US$) entities
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
.
- ---------------------------------------------------------------------------
.
(Does not intend
to invest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Investment Policies Matrix continued
<TABLE>
<CAPTION>
Taxable Tax-Exempt Custodial Unrated
Fund Municipals Municipals Receipts Securities/9/ Investment Companies
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Obligations ./7/ . . .
Up to 10% of total
assets in other
investment companies
- --------------------------------------------------------------------------------------------------------------
Money Market ./7/ . . .
Up to 10% of total
assets in other
investment companies
- --------------------------------------------------------------------------------------------------------------
Treasury Obligations
- --------------------------------------------------------------------------------------------------------------
Treasury Instruments
- --------------------------------------------------------------------------------------------------------------
Government .
Up to 10% of total
assets in other
investment companies
- --------------------------------------------------------------------------------------------------------------
Federal
- --------------------------------------------------------------------------------------------------------------
Tax-Free Money . . . .
Market At least 80% of net assets Up to 10% of total
in tax-exempt municipal assets in other
obligations (except in investment companies
extraordinary circumstances)/8/
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Note: See Appendix A for a description of, and certain criteria applicable
to, each of these categories of investments.
7 Will only make such investments when yields on such securities are
attractive compared to other taxable investments.
8 Ordinarily expect that 100% of a Fund's portfolio securities will be
invested in municipal obligations, but the Fund may, for temporary
defensive purposes, hold cash or invest in short-term taxable securities.
9 To the extent permitted by Rule 2a-7, securities without short-term
ratings may be purchased if they are deemed to be of comparable quality to
First Tier Securities, or to the extent that a Fund may purchase Second
Tier Securities, comparable in quality to Second Tier Securities. In
addition, a Fund holding a security supported by a guarantee or demand
feature may rely on the credit quality of the guarantee or demand feature
in determining the credit quality of the investment.
10 If such policy should change, private activity bonds subject to AMT would
not exceed 20% of the Fund's net assets under normal market conditions.
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
Private Summary of
Activity Credit Taxation for
Bonds Quality/9/ Distributions/14/ Miscellaneous
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
. First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not
permitted
- ------------------------------------------------------------------------------------------------------
. First Tier/12/ Taxable federal and state/15/ May invest in obligations
of the International
Bank for Reconstruction
and Development.
Reverse repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not
permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Reverse repurchase agreements not
generally exempt from permitted
state taxation
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and state/15/ Reverse repurchase agreements not
permitted
- ------------------------------------------------------------------------------------------------------
First Tier/12/ Taxable federal and Under extraordinary circumstances,
generally exempt from may hold cash, U.S. Government
state taxation Securities subject to state taxation
or cash equivalents.
Reverse repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------
.
(Does not First/12/ or Tax-exempt federal May (but does not currently intend
intend to Second Tier/13/ and taxable state/16/ to) invest up to 20% in securities
invest)/10/,/11/ subject to AMT and may temporarily
invest in the taxable money market
instruments described herein.
Reverse repurchase agreements not
permitted.
- ------------------------------------------------------------------------------------------------------
</TABLE>
11 No more than 25% of the value of the Fund's total assets may be invested
in industrial development bonds or similar obligations where the non-
governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
12 First Tier Securities are (a) rated in the highest short-term rating
category by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings. U.S. Government Securities are considered First Tier
Securities.
13 Second Tier Securities are (a) rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a
rating, by that NRSRO; or (b) issued or guaranteed by, or otherwise allow
a Fund under certain conditions to demand payment from, an entity with
such ratings.
14 See "Taxation" for an explanation of the tax consequences summarized in
the table above.
15 Taxable in many states except for distributions from U.S. Treasury
Obligation interest income and certain U.S. Government Securities interest
income.
16 Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
9
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. The following
summarizes important risks that apply to the Funds and may result in a loss of
your investment. None of the Funds should be relied upon as a complete invest-
ment program. There can be no assurance that a Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Prime Money Treasury
. Applicable Obligations Market Obligations
- --Not Applicable Fund Fund Fund
- ------------------------------------------------------------
<S> <C> <C> <C>
NAV . . .
Interest Rate . . .
Credit/Default . . .
Liquidity . . .
U.S. Government Securities . . --
Concentration -- -- --
Foreign -- . --
Banking Industry -- . --
Tax -- -- --
- ------------------------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
Tax-Free
Treasury Money
Instruments Government Federal Market
Fund Fund Fund Fund
- ---------------------------------------------
<S> <C> <C> <C>
. . . .
. . . .
. . . .
. . . .
-- . . --
-- -- -- .
-- -- -- --
-- -- -- --
-- -- -- .
- ---------------------------------------------
</TABLE>
11
<PAGE>
Risks that apply to all Funds:
. NAV Risk--The risk that a Fund will not be able to maintain a NAV per share
of $1.00 at all times.
. Interest Rate Risk--The risk that during periods of rising interest rates,
a Fund's yield (and the market value of its securities) will tend to be
lower than prevailing market rates; in periods of falling interest rates, a
Fund's yield will tend to be higher.
. Credit/Default Risk--the risk that an issuer or guarantor of a security, or
a bank or other financial institution that has entered into a repurchase
agree-ment, may default on its payment obligations. In addition, with
respect to the Tax-Free Money Market Fund, risk of loss from payment
default may also exist where municipal instruments are backed by foreign
letters of credit or guaran-tees.
. Liquidity Risk--The risk that a Fund will be unable to pay redemption
proceeds within the time period stated in this Prospectus, because of
unusual market conditions, an unusually high volume of redemption requests,
or other reasons.
Risk that applies to the Prime Obligations, Money Market, Government and
Federal Funds:
. U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
Risks that apply to the Money Market Fund:
. Foreign Risk--The risk that a foreign security could lose value as a result
of political, financial and economic events in foreign countries, less
publicly available financial and other information, less stringent foreign
securities regulations and accounting and disclosure standards, or other
factors. The Money Market Fund may not invest more than 25% of its total
assets in the securities of any one foreign government.
. Banking Industry Risk--The risk that if the Fund invests more than 25% of
its total assets in bank obligations, an adverse development in the banking
indus-try may affect the value of the Fund's investments more than if the
Fund's investments were not invested to such a degree in the banking
industry. Nor-mally, the Money Market Fund intends to invest more than 25%
of its total assets in bank obligations. Banks may be particularly
susceptible to certain economic factors such as interest rate changes,
adverse developments in the real estate market, fiscal and monetary policy
and general economic cycles.
12
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
Risks that apply to the Tax-Free Money Market Fund:
. Concentration Risk--The risk that if the Fund invests more than 25% of its
total assets in issuers within the same state, industry or economic sector,
an adverse economic, business or political development may affect the value
of the Fund's investments more than if its investments were not so
concentrated.
. Tax Risk--The risk that future legislative or administrative changes or
court decisions may materially affect the ability of the Fund to pay
federal tax-exempt dividends. This Fund would not be a suitable investment
for IRAs, other tax-exempt or tax-deferred accounts or for other investors
who are not sensi-tive to the federal, state or local tax consequences of
their investments.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
13
<PAGE>
Fund Performance
HOW THE FUNDS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Fund by showing: (a) changes in the performance of a Fund's Admin-
istration Shares from year to year; and (b) the average annual returns of a
Fund's Administration Shares. Investors should be aware that the fluctuation
of interest rates is one primary factor in performance volatility. The bar
chart and table assume reinvestment of dividends and distributions. A Fund's
past performance is not necessarily an indication of how the Fund will per-
form in the future. Performance reflects expense limitations in effect. If
expense limitations were not in place, a Fund's performance would have been
reduced. You may obtain a Fund's current yield by calling 1-800-621-2550.
14
<PAGE>
FUND PERFORMANCE
Prime Obligations Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.45%
Worst Quarter:
Q2 '93 0.71%
[GRAPH]
1993 2.93%
1994 4.02%
1995 5.75%
1996 5.14%
1997 5.34%
1998 5.29%
1999 4.91%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 11/9/92) 4.91% 5.29% 4.73%
--------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Money Market Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.46%
Worst Quarter:
Q2 '99 1.14%
[GRAPH]
1995 5.80%
1996 5.19%
1997 5.37%
1998 5.29%
1999 4.92%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 5/20/94) 4.92% 5.31% 5.24%
--------------------------------------------------------------------------
</TABLE>
16
<PAGE>
FUND PERFORMANCE
Treasury Obligations Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.44%
Worst Quarter:
Q1 '94 0.72%
[GRAPH]
1994 3.87%
1995 5.69%
1996 5.09%
1997 5.24%
1998 5.14%
1999 4.62%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
--------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 1/21/93) 4.62% 5.16% 4.66%
--------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Treasury Instruments Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '98 1.22%
Worst Quarter:
Q1 '99 1.01%
[GRAPH]
1998 4.79%
1999 4.34%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
-----------------------------------------------------------------
<S> <C> <C>
Administration Shares (Inception 4/1/97) 4.34% 4.68%
-----------------------------------------------------------------
</TABLE>
18
<PAGE>
FUND PERFORMANCE
Government Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 1.45%
Worst Quarter:
Q1 '94 0.73%
[GRAPH]
1994 4.00%
1995 5.74%
1996 5.12%
1997 5.28%
1998 5.20%
1999 4.77%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 9/1/93) 4.77% 5.22% 4.90%
-------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Federal Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q3 '98 1.29%
Worst Quarter:
Q2 '99 1.11%
[GRAPH]
1998 5.15%
1999 4.79%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year Since Inception
-----------------------------------------------------------------
<S> <C> <C>
Administration Shares (Inception 4/1/97) 4.79% 5.05%
-----------------------------------------------------------------
</TABLE>
20
<PAGE>
FUND PERFORMANCE
Tax-Free Money Market Fund
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
Best Quarter:
Q2 '95 0.95%
Worst Quarter:
Q1 '99 0.62%
[GRAPH]
1995 3.63%
1996 3.13%
1997 3.28%
1998 3.08%
1999 2.88%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the period ended December 31, 1999 1 Year 5 Years Since Inception
-------------------------------------------------------------------------
<S> <C> <C> <C>
Administration Shares (Inception 8/1/94) 2.88% 3.20% 3.20%
-------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Fund Fees and Expenses (Administration Shares)
This table describes the fees and expenses that you would pay if you buy and
hold Administration Shares of a Fund.
<TABLE>
<CAPTION>
Prime Money
Obligations Market
Fund Fund
- -------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Fees
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases None None
Maximum Deferred Sales Charge (Load) None None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None None
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses
(expenses that are deducted from fund assets):/1/
Management Fees/2/ 0.205% 0.205%
Administration Fees/3/ 0.250% 0.250%
Other Expenses/4/ 0.025% 0.015%
- -------------------------------------------------------------------------------
Total Fund Operating Expenses* 0.480% 0.470%
- -------------------------------------------------------------------------------
</TABLE>
See page 24 for all other footnotes.
* As a result of the current waivers and expense limita-
tions, "Other Expenses" and "Total Fund Operating
Expenses" of the Funds which are actually incurred are
as set forth below. The waivers and expense limita-
tions may be terminated at any time at the option of
the Investment Adviser. If this occurs, "Other
Expenses" and "Total Fund Operating Expenses" may
increase without shareholder approval.
<TABLE>
<CAPTION>
Prime Money
Obligations Market
Fund Fund
-----------------------------------------------------------------------------
<S> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):/1/
Management Fees/2/ 0.17% 0.17%
Administration Fees/3/ 0.25% 0.25%
Other Expenses/4/ 0.01% 0.01%
-----------------------------------------------------------------------------
Total Fund Operating Expenses (after current waivers and
expense limitations) 0.43% 0.43%
-----------------------------------------------------------------------------
</TABLE>
22
<PAGE>
FUNDS FEES AND EXPENSES
<TABLE>
<CAPTION>
Tax-free
Treasury Treasury Money
Obligations Instruments Government Federal Market
Fund Fund Fund Fund Fund
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
None None None None None
None None None None None
None None None None None
None None None None None
0.205% 0.205% 0.205% 0.205% 0.205%
0.250% 0.250% 0.250% 0.250% 0.250%
0.025% 0.035% 0.015% 0.025% 0.015%
- ----------------------------------------------------------------------------------------------
0.480% 0.490% 0.470% 0.480% 0.470%
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Tax-free
Treasury Treasury Money
Obligations Instruments Government Federal Market
Fund Fund Fund Fund Fund
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.17% 0.17% 0.17% 0.19% 0.17%
0.25% 0.25% 0.25% 0.25% 0.25%
0.01% 0.01% 0.01% 0.01% 0.01%
---------------------------------------------------------------------------------------------
0.43% 0.43% 0.43% 0.45% 0.43%
---------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Fund Fees and Expenses continued
/1/ The Funds' annual operating expenses are based on actual expenses.
/2/ The Investment Adviser has voluntarily agreed not to impose a portion of the
management fee on the Federal Fund equal to 0.015% of the Federal Funds'
aver-age daily net assets and equal to 0.035% of all other Funds' average
daily net assets. As a result of fee waivers, the current management fees of
the Federal Fund and all other Funds is 0.19% and 0.17%, respectively, of
such Fund's average daily net assets. The waivers may be terminated at any
time at the option of the Investment Adviser.
/3/ Service Organizations may charge other fees directly to their customers who
are beneficial owners of Administration Shares in connection with their
custom-ers' accounts. Such fees may affect the return customers realize with
respect to their investments.
/4/ The Investment Adviser has voluntarily agreed to reduce or limit "Other
Expenses" of each Fund (excluding management fees, administration fees,
taxes, interest, brokerage fees and litigation, indemnification and other
extraordi-nary expenses) to 0.01% of each Fund's average daily net assets.
24
<PAGE>
FUND FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Fund (without the waivers and expense limitations) with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in Adminis-
tration Shares of a Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that a Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
Fund 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations $49 $154 $269 $604
- ------------------------------------------------------
Money Market $48 $151 $263 $591
- ------------------------------------------------------
Treasury Obligations $49 $154 $269 $604
- ------------------------------------------------------
TreasurY Instruments $50 $157 $274 $616
- ------------------------------------------------------
Government $48 $151 $263 $591
- ------------------------------------------------------
Federal $49 $154 $269 $604
- ------------------------------------------------------
Tax-Free Money Market $48 $151 $263 $591
- ------------------------------------------------------
</TABLE>
Service Organizations that invest in Administration Shares on behalf of their
customers may charge other fees directly to their customer accounts in connec-
tion with their investments. You should contact your Service Organization for
information regarding such charges. Such fees, if any, may affect the return
such customers realize with respect to their investments.
Certain Service Organizations that invest in Administration Shares may receive
other compensation in connection with the sale and distribution of Administra-
tion Shares or for services to their customers' accounts and/or the Funds. For
additional information regarding such compensation, see "Shareholder Guide" in
the Prospectus and "Other Information" in the Additional Statement.
25
<PAGE>
Service Providers
INVESTMENT ADVISER
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, acts as
Investment Adviser to the Funds. Goldman Sachs registered as an investment
adviser in 1981. The Goldman Sachs Group, L.P., which controlled the Invest-
ment Adviser, merged into The Goldman Sachs Group, Inc. as a result of an
initial public offering. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser also performs the following serv-
ices for the Funds:
. Continually manages each Fund, including the purchase, retention and dispo-
sition of securities and other assets
. Administers each Fund's business affairs
. Performs various recordholder servicing functions (to the extent not pro-
vided by other organizations)
Pursuant to an SEC order, each Taxable and Tax-Advantaged Fund may enter
into principal transactions in certain taxable money market instruments,
including repurchase agreements, with Goldman Sachs.
26
<PAGE>
SERVICE PROVIDERS
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and
payable monthly, at the annual rates listed below (as a percentage of each
respective Fund's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate For the
Fiscal Year Ended
Fund Contractual Rate December 31, 1999
------------------------------------------------------------
<S> <C> <C>
Prime Obligations 0.205% 0.17%
------------------------------------------------------------
Money Market 0.205% 0.17%
------------------------------------------------------------
Treasury Obligations 0.205% 0.17%
------------------------------------------------------------
Treasury Instruments 0.205% 0.17%
------------------------------------------------------------
Government 0.205% 0.17%
------------------------------------------------------------
Federal 0.205% 0.17%
------------------------------------------------------------
Tax-Free Money Market 0.205% 0.17%
------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Funds reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds. Goldman Sachs reserves the right to redeem at any
time some or all of the shares acquired for its own account.
27
<PAGE>
YEAR 2000
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer
and technology issues and related concerns associated with the transition to
Year 2000 and to confirm that its service providers did the same. As a
result of those efforts, Goldman Sachs has not experienced any material dis-
ruptions in its operations in connection with, or following, the transition
to the Year 2000.
28
<PAGE>
Dividends
Dividends will be distributed monthly. You may choose to have dividends paid
in:
. Cash
. Additional shares of the same class of the same Fund
You may indicate your election on your Account Application. Any changes may be
submitted in writing to Goldman Sachs at any time. If you do not indicate any
choice, dividends and distributions will be reinvested automatically in the
applicable Fund.
All or substantially all of each Fund's net investment income will be declared
as a dividend daily. Dividends will normally, but not always, be declared as of
the following times:
<TABLE>
<S> <C>
Dividend Declaration Time
Fund (New York Time)
- ------------------------------------------------
Prime Obligations 5:00 p.m.
- ------------------------------------------------
Money Market 4:00 p.m.
- ------------------------------------------------
Treasury Obligations 5:00 p.m.
- ------------------------------------------------
Treasury Instruments 4:00 p.m.
- ------------------------------------------------
Government 5:00 p.m.
- ------------------------------------------------
Federal 4:00 p.m.
- ------------------------------------------------
Tax-Free Money Market 4:00 p.m.
- ------------------------------------------------
</TABLE>
Dividends will be reinvested as of the last calendar day of each month. Cash
distributions normally will be paid on or about the first business day of each
month. Net short-term capital gains, if any, will be distributed in accordance
with federal income tax requirements and may be reflected in a Fund's daily
distributions.
Each Fund may distribute at least annually other realized capital gains, if
any, after reduction by available capital losses. In order to avoid excessive
fluctuations in the amount of monthly capital gains distributions, a portion of
any net capital gains realized on the disposition of securities during the
months of November and December may be distributed during the subsequent calen-
dar year. Although realized gains and losses on the assets of a Fund are
reflected in the NAV of the Fund, they are not expected to be of an amount
which would affect the Fund's NAV of $1.00 per share.
29
<PAGE>
The income declared as a dividend for the Prime Obligations, Treasury Obliga-
tions and Government Funds is based on estimates of net investment income for
each Fund. Actual income may differ from estimates, and differences, if any,
will be included in the calculation of subsequent dividends.
30
<PAGE>
Shareholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling the Funds' Administration
Shares.
HOW TO BUY SHARES
How Can I Purchase Administration Shares Of The Funds?
Generally, Administration Shares may be purchased only through institutions
that have agreed to provide account administration and maintenance services
to their customers who are the beneficial owners of Administration Shares.
These institutions are called "Service Organizations." Customers of a Serv-
ice Organization will normally give their purchase instructions to the Serv-
ice Organization, and the Service Organization will, in turn, place purchase
orders with Goldman Sachs. Service Organizations will set times by which
purchase orders and payments must be received by them from their customers.
Generally, Administration Shares may be purchased from the Funds on any
business day at their NAV next determined after receipt of an order by
Goldman Sachs from a Service Organization. Shares begin earning dividends
after the Fund's receipt of the purchase amount in federal funds. No sales
load is charged.
Service Organizations are responsible for transmitting purchase orders and
payments to Goldman Sachs in a timely fashion. Service Organizations should
place a purchase order in writing or by telephone.
<TABLE>
--------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------
By Telephone: 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------
</TABLE>
Before or immediately after placing an initial purchase order, a Service
Organization should complete and send to Goldman Sachs the Account Applica-
tion.
In certain instances, the Trust may require a signature guarantee in order
to effect purchase, redemption or exchange transactions. Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial inter-
mediary that is a member of an approved Medallion Guarantee Program or that
is otherwise approved by the Trust. A notary public cannot provide a signa-
ture guarantee.
31
<PAGE>
Service Organizations may send their payments as follows:
. Wire federal funds to The Northern Trust Company ("Northern"), as sub-
custodian for State Street Bank and Trust Company ("State Street") (each
Fund's custodian); or
. Send a check or Federal Reserve draft payable to Goldman Sachs Funds -
(Name of Fund and Class of Shares), 4900 Sears Tower-60th Floor, Chicago,
IL 60606-6372. The Funds will not accept a check drawn on a foreign bank or
a third-party check.
It Is Strongly Recommended That Payment Be Effected By Wiring Federal Funds
To Northern.
It is expected that Federal Reserve drafts will ordinarily be converted to
federal funds on the day of receipt and that checks will be converted to
federal funds within two business days after receipt.
When Do Shares Begin Earning Dividends?
Dividends begin to accrue as follows:
<TABLE>
<CAPTION>
If An Effective Order And Federal Funds Are Received: Dividends Begin:
--------------------------------------------------------------------------
<S> <C>
Money Market, Treasury Instruments and Federal Funds:
. By 3:00 p.m. New York time Same business day
. After 3:00 p.m. New York time Next business day
--------------------------------------------------------------------------
Prime Obligations, Treasury Obligations and Government
Funds:
. By 5:00 p.m. New York time Same business day
. After 5:00 p.m. New York time Next business day
--------------------------------------------------------------------------
Tax-free Money Market Fund:
. By 2:00 p.m. New York time Same business day
. After 2:00 p.m. New York time Next business day
--------------------------------------------------------------------------
</TABLE>
What Do I Need To Know About Service Organizations?
Service Organizations may provide the following services in connection with
their customers' investments in Administration Shares:
. Acting, directly or through an agent, as the sole shareholder of record
. Maintaining account records for customers
. Processing orders to purchase, redeem or exchange shares for customers
In addition, some (but not all) Service Organizations are authorized to
accept, on behalf of the Trust, purchase, redemption and exchange orders
placed by or on behalf of their customers, and may designate other interme-
diaries to accept such orders, if approved by the Trust. In these cases:
. A Fund will be deemed to have received an order in proper form when the
order is accepted by the authorized Service Organization or intermediary on
a business day, and the order will be priced at the Fund's NAV next deter-
mined after such acceptance.
32
<PAGE>
SHAREHOLDER GUIDE
. Service Organizations or intermediaries will be responsible for transmit-
ting accepted orders and payments to the Trust within the time period
agreed upon by them.
You should contact your Service Organization directly to learn whether it is
authorized to accept orders for the Trust.
Pursuant to an administration plan adopted by the Trust's Board of Trustees,
Service Organizations are entitled to receive payment for their services
from the Trust of up to 0.25% (on an annualized basis) of the average daily
net assets of the Administration Shares of the Funds, which are attributable
to or held in the name of the Service Organization for its customers.
The Investment Adviser, Distributor and/or their affiliates may pay addi-
tional compensation from time to time, out of their assets and not as an
additional charge to the Funds, to selected Service Organizations and other
persons in connection with the sale, distribution and/or servicing of shares
of the Funds and other Goldman Sachs Funds.
In addition to Administration Shares, each Fund also offers other classes of
shares to investors. These other share classes are subject to different fees
and expenses (which affect performance), and are entitled to different serv-
ices than Administration Shares. Information regarding these other share
classes may be obtained from your sales representative or from Goldman Sachs
by calling the number on the back cover of this Prospectus.
What Is My Minimum Investment In The Funds?
<TABLE>
----------------------------------------------------
<S> <C>
Minimum initial investment $10 million (may be
allocated among the
Funds)
----------------------------------------------------
Minimum account balance $10 million
----------------------------------------------------
Minimum subsequent investments None
----------------------------------------------------
</TABLE>
A Service Organization may, however, impose a minimum amount for initial and
subsequent investments in Administration Shares and may establish other
requirements such as a minimum account balance. A Service Organization may
redeem Administration Shares held by non-complying accounts, and may impose
a charge for any special services.
33
<PAGE>
What Else Should I Know About Share Purchases?
The Trust reserves the right to:
. Modify or waive the minimum investment and minimum account balance require-
ment.
. Reject any purchase order for any reason.
The Funds may allow Service Organizations to purchase shares with securities
instead of cash if consistent with a Fund's investment policies and opera-
tions and if approved by the Fund's Investment Adviser.
How Are Shares Priced?
The price you pay or receive when you buy, sell or exchange Administration
Shares is determined by a Fund's NAV. The Funds calculate NAV as follows:
(Value of Assets of the Class)
- (Liabilities of the Class)
NAV =
-------------------------------
Number of Outstanding Shares of the Class
<TABLE>
<CAPTION>
FUND NAV CALCULATED
------------------------------------------------------------------------------
<S> <C>
Money Market, Treasury As of the close of regular trading of the New
Instruments, Federal and Tax- York Stock Exchange (normally 4:00 p.m.
Free Money Market New York time) on each business day
------------------------------------------------------------------------------
Prime Obligations, Treasury As of 5:00 p.m. New York time on each
Obligations and Government business day
------------------------------------------------------------------------------
</TABLE>
. NAV per share of each class is calculated by State Street on each business
day. Fund shares will be priced on any day the New York Stock Exchange is
open, except for days on which Chicago, Boston or New York banks are closed
for local holidays.
. On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, each Fund reserves the right to
close at or prior to the BMA recommended closing time. If a Fund does so,
it will cease granting same business day credit for purchase and redemption
orders received after the Fund's closing time and credit will be given to
the next business day.
. The Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as permit-
ted by the SEC.
To help each Fund maintain its $1.00 constant share price, portfolio securi-
ties are valued at amortized cost in accordance with SEC regulations. Amor-
tized cost will
34
<PAGE>
SHAREHOLDER GUIDE
normally approximate market value. There can be no assurance that a Fund
will be able at all times to maintain a NAV of $1.00 per share.
HOW TO SELL SHARES
How Can I Sell Administration Shares Of The Funds?
Generally, Administration Shares may be sold (redeemed) only through Service
Organizations. Customers of a Service Organization will normally give their
redemption instructions to the Service Organization, and the Service Organi-
zation will, in turn, place redemption orders with the Funds. Generally,
Each Fund Will Redeem Its Administration Shares Upon Request On Any Business
Day At Their Nav Next Determined After Receipt Of Such Request In Proper
Form. A Service Organization may request redemptions in writing or by tele-
phone if the optional telephone redemption privilege is elected on the
Account Application.
<TABLE>
--------------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------------
By Telephone: If you have elected the telephone redemption
privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
--------------------------------------------------------------
</TABLE>
Certain Service Organizations are authorized to accept redemption requests
on behalf of the Funds as described under "What Do I Need To Know About
Service Organizations?" A redemption may also be made with respect to cer-
tain Funds by means of the check redemption privilege described in the Addi-
tional Statement.
What Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be liable for any
loss you may incur in the event that the Trust accepts unauthorized tele-
phone redemption requests that the Trust reasonably believes to be genuine.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general policies are
currently in effect:
. All telephone requests are recorded.
. Any redemption request that requires money to go to an account or address
other than that designated on the Account Application must be in writing
and signed by an authorized person designated on the Account Application.
The
35
<PAGE>
written request may be confirmed by telephone with both the requesting
party and the designated bank account to verify instructions.
. The telephone redemption option may be modified or terminated at any time.
Note: It May Be Difficult To Make Telephone Redemptions In Times Of Drastic
Economic Or Market Conditions.
When Will Redemption Proceeds Be Wired?
Redemption proceeds will normally be wired to the bank account designated on
a Service Organization's Account Application as follows:
<TABLE>
<CAPTION>
Redemption Request Received Redemption Proceeds Dividends
--------------------------------------------------------------------------------------
<S> <C> <C>
Money Market, Treasury Instruments
and Federal Funds:
--------------------------------------------------------------------------------------
.By 3:00 p.m. New York time Wired same business day Not earned on day
request is received
.After 3:00 p.m. New York time Wired next business day Earned on day request
is received
--------------------------------------------------------------------------------------
Prime Obligations, Treasury Obligations
and Government Funds:
--------------------------------------------------------------------------------------
.By 5:00 p.m. New York time Wired same business day Not earned on day
request is received
.After 5:00 p.m. New York time Wired next business day Earned on day request
is received
--------------------------------------------------------------------------------------
Tax-free Money Market Fund:
--------------------------------------------------------------------------------------
.By 1:00 p.m. New York time Wired same business day Not earned on day
request is received
.After 1:00 p.m. New York time Wired next business day Earned on day request
is received
--------------------------------------------------------------------------------------
</TABLE>
. Although redemption proceeds will normally be wired as described above,
each Fund reserves the right to pay redemption proceeds up to three busi-
ness days following receipt of a properly executed wire transfer redemption
request. If you are selling shares you recently paid for by check, the Fund
will pay you when your check has cleared, which may take up to 15 days. If
the Federal Reserve Bank is closed on the day that the redemption proceeds
would ordinarily be wired, wiring the redemption proceeds may be delayed
one additional business day.
. Neither the Trust, Goldman Sachs nor any other institution assumes any
responsibility for the performance of intermediaries or your Service Organ-
ization in the transfer process. If a problem with such performance arises,
you should deal directly with such intermediaries or Service Organizations.
36
<PAGE>
SHAREHOLDER GUIDE
What Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
. Additional documentation may be required when deemed appropriate by the
Transfer Agent. A redemption request will not be in proper form until such
additional documentation has been received.
. Service Organizations are responsible for the timely transmittal of redemp-
tion requests by their customers to the Transfer Agent. In order to facili-
tate the timely transmittal of redemption requests, Service Organizations
may set times by which they must receive redemption requests. Service Orga-
nizations may also require additional documentation from you.
The Trust reserves the right to:
. Redeem the Administration Shares of any Service Organization whose account
balance falls below the minimum as a result of a redemption. The Fund will
give 60 days' prior written notice to allow a Service Organization to pur-
chase sufficient additional shares of the Fund in order to avoid such
redemption. Different rules may apply to investors who have established
brokerage accounts with Goldman Sachs in accordance with the terms and con-
ditions of their account agreements.
. Redeem shares in other circumstances determined by the Board of Trustees to
be in the best interest of the Trust.
. Pay redemptions by a distribution in-kind of securities (instead of cash).
If you receive redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
. Reinvest any dividends or other distributions which you have elected to
receive in cash should your check for such dividends or other distributions
be returned to the Fund as undeliverable or remain uncashed for six months.
In addition, that distribution and all future distributions payable to you
will be reinvested at NAV in additional Fund shares. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
Can I Exchange My Investment From One Fund To Another?
A Service Organization may exchange Administration Shares of a Fund at NAV
for shares of the corresponding class of any other Goldman Sachs Fund. The
exchange privilege may be materially modified or withdrawn at any time upon
60 days' written notice.
37
<PAGE>
<TABLE>
<CAPTION>
Instructions For Exchanging Shares:
---------------------------------------------------------------
<S> <C>
By Writing: . Write a letter of instruction that includes:
. The recordholder name(s) and signature(s)
. The account number
. The Fund names and Class of Shares
. The dollar amount to be exchanged
. Mail the request to:
Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
---------------------------------------------------------------
By Telephone: If you have elected the telephone exchange
privilege on your Account Application:
. 1-800-621-2550
(8:00 a.m. to 4:00 p.m. New York time)
---------------------------------------------------------------
</TABLE>
You should keep in mind the following factors when making or considering an
exchange:
. You should obtain and carefully read the prospectus of the Fund you are
acquiring before making an exchange.
. All exchanges which represent an initial investment in a Fund must satisfy
the minimum initial investment requirements of that Fund, except that this
requirement may be waived at the discretion of the Trust.
. Telephone exchanges normally will be made only to an identically registered
account.
. Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the
exchange instructions are in writing and are signed by an authorized person
designated on the Account Application.
. Exchanges are available only in states where exchanges may be legally made.
. It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
. Goldman Sachs may use reasonable procedures described under "What Do I Need
To Know About Telephone Redemption Requests?" in an effort to prevent unau-
thorized or fraudulent telephone exchange requests.
For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should con-
sult your tax adviser concerning the tax consequences of an exchange.
38
<PAGE>
SHAREHOLDER GUIDE
What Types Of Reports Will I Be Sent Regarding Investments In Administration
Shares?
Service Organizations will receive from the Funds annual reports containing
audited financial statements and semi-annual reports. Upon request, Service
Organizations will also be provided with a printed confirmation for each
transaction. Any dividends and distributions paid by the Funds are also
reflected in regular statements issued by the Funds to Service Organiza-
tions. Service Organizations are responsible for providing these or other
reports to their customers who are the beneficial owners of Administration
Shares in accordance with the rules that apply to their accounts with the
Service Organizations.
39
<PAGE>
Taxation
As with any investment, you should consider how your investment in the Funds
will be taxed. The tax information below is provided as general information.
More tax information is available in the Additional Statement. You should con-
sult your tax adviser about the federal, state, local or foreign tax conse-
quences of your investment in the Funds.
Unless your investment is an IRA or other tax-advantaged accounts, you should
consider the possible tax consequences of Fund distributions.
Taxes on Distributions: Except for the Tax-Free Money Market Fund, distribu-
tions of investment income are taxable as ordinary income for federal tax pur-
poses, and may also be subject to state or local taxes. This is true whether
you reinvest your distributions in additional Fund shares or receive them in
cash. To the extent that Fund distributions are attributable to interest on
federal obligations or interest on obligations of your state of residence or
its municipalities or authorities, they will in most cases be exempt from state
and local income taxes. Distributions from the Tax-Free Money Market Fund that
are designated as "exempt interest dividends" are generally not subject to fed-
eral income tax. Distributions of short-term capital gains are taxable to you
as ordinary income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned your Fund shares.
Although distributions are generally treated as taxable to you in the year they
are paid, distributions declared in October, November or December but paid in
January are taxable as if they were paid in December. The Funds will inform
shareholders of the character and tax status of all distributions promptly
after the close of each calendar year.
You should note that a portion of the exempt-interest dividends paid by the
Tax-Free Money Market Fund may be a preference item when determining your fed-
eral alternative minimum tax liability. Exempt-interest dividends are also
taken into account in determining the taxable portion of social security or
railroad retirement benefits. Any interest on indebtedness incurred by you to
purchase or carry shares in the Tax-Free Money Market Fund generally will not
be deductible for federal income tax purposes.
Other Information: When you open your account, you should provide your social
security or tax identification number on your Account Application. By law, each
Fund must withhold 31% of your taxable distributions and any redemption pro-
ceeds if you do not provide your correct taxpayer identification number, or
certify that it is correct, or if the IRS instructs the Fund to do so. Non-U.S.
investors may be subject to U.S. withholding and estate tax.
40
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associated
risks. Additional information is provided in the Additional Statement, which is
available upon request. Among other things, the Additional Statement describes
certain fundamental policies and investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in a Fund's investment
objective, you should consider whether that Fund remains an appropriate invest-
ment in light of your then current financial position and needs.
U.S. Treasury Obligations and U.S. Government Securities. U.S. Treasury
Obligations include securities issued or issued or guaranteed by the U.S.
Treasury ("U.S. Treasury Obligations"). Payment of principal and interest on
these obligations is backed by the full faith and credit of the U.S.
government. U.S. Treasury Obligations include, among other things, the
separately traded principal and interest components of securities guaranteed or
issued by the U.S. Treasury if such components are traded independently under
the Separate Trading of Registered Interest and Principal of Securities program
("STRIPS").
U.S. Government Securities are obligations issued or guaranteed by U.S. govern-
ment agencies, authorities, instrumentalities or sponsored enterprises ("U.S.
Government Securities"). Unlike U.S. Treasury Obligations, U.S. Government
Securities can be supported by either (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Treasury (such as securi-
ties of the Student Loan Marketing Association); (c) the discretionary author-
ity of the U.S. government to purchase certain obligations of the issuer (such
as the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac")); or (d) only the credit of the issu-
er.
U.S. Government Securities are deemed to include (a) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, authorities or instrumentalities;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. Certain of these participations may be regarded as
illiquid. U.S. Government Securities also include zero coupon bonds.
41
<PAGE>
Some Funds invest in U.S. Treasury Obligations and certain U.S. Government
Securities the interest from which is generally exempt from state income taxa-
tion. Securities generally eligible for this exemption include those issued by
the U.S. Treasury and certain agencies, authorities or instrumentalities of the
U.S. government, including the Federal Home Loan Banks, Federal Farm Credit
Banks, Tennessee Valley Authority and Student Loan Marketing Association.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government will provide financial support to U.S. government agencies, authori-
ties, instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
Bank Obligations. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Funds may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Funds may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Fund invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of opera-
tions and profitability of domestic and foreign banks. Significant developments
in the U.S. banking industry have included increased competition from other
types of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the real estate mar-
kets. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby
impact the earnings and financial conditions of banks.
Commercial Paper. A Fund may invest in commercial paper, including variable
amount master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or
42
<PAGE>
APPENDIX A
bank holding companies, corporations, finance companies and other issuers. The
commercial paper purchased by a Fund consists of direct U.S. dollar-denominated
obligations of domestic or, in the case of certain Funds, foreign issuers.
Short-Term Obligations. A Fund may invest in other short-term obligations,
including short-term funding agreements payable in U.S. dollars and issued or
guaranteed by U.S. corporations, foreign corporations or other entities. A
funding agreement is a contract between an issuer and a purchaser that obli-
gates the issuer to pay a guaranteed rate of interest on a principal sum depos-
ited by the purchaser. Funding agreements will also guarantee a stream of pay-
ments over time. A funding agreement has a fixed maturity date and may have
either a fixed or variable interest rate that is based on an index and guaran-
teed for a set time period. Because there is normally no secondary market for
these investments, funding agreements purchased by a Fund may be regarded as
illiquid.
Repurchase Agreements. Certain Funds may enter into repurchase agreements with
primary dealers in U.S. Government Securities and banks affiliated with primary
dealers. Repurchase agreements involve the purchase of securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price.
If the other party or "seller" defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price and the Fund's
cost associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collateral
is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, certain Funds, together with other registered
investment companies having advisory agreements with the Investment Adviser or
any of its 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.
Asset-Backed and Receivables-Backed Securities. Certain Funds may invest in
asset-backed and receivables-backed securities whose principal and interest
payments are collateralized by pools of assets such as auto loans, credit card
receivables, leases, installment contracts and personal property. Asset-backed
and receivables-backed 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 and
receivables-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in such securities will
43
<PAGE>
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. In addition, securities that are backed by credit card, automobile and
similar types of receivables generally do not have the benefit of a security
interest in collateral that is comparable in quality to mortgage assets. There
is the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities. In the event of a
default, a Fund may suffer a loss if it cannot sell collateral quickly and
receive the amount it is owed.
Foreign Government Obligations and Related Foreign Risks. Certain Funds may
invest in foreign government obligations. Foreign government obligations are
U.S. dollar-denominated obligations (limited to commercial paper and other
notes) issued or guaranteed by a foreign government or other entity located or
organized in a foreign country that maintains a short-term foreign currency
rating in the highest short-term ratings category by the requisite number of
NRSROs.
Investments by a Fund in foreign securities, whether issued by a foreign gov-
ernment, bank, corporation or other issuer, may present a greater degree of
risk than investments in securities of domestic issuers because of less public-
ly-available financial and other information, less securities regulation,
potential imposition of foreign withholding and other taxes, war, expropriation
or other adverse governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and generally are not bound by
the accounting, auditing and financial reporting standards applicable to U.S.
banks.
Municipal Obligations. Certain Funds may invest in municipal obligations.
Municipal obligations are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities, and the District of Columbia. Municipal
obligations in which a Fund may invest consist of fixed rate notes and similar
debt instruments; variable and floating rate demand instruments; tax-exempt
commercial paper; municipal bonds; and unrated notes, paper, bonds or other
instruments.
Municipal Notes and Bonds. Municipal notes include tax anticipation notes
("TANs"), revenue anticipation notes ("RANs"), bond anticipation notes
("BANs"), tax and revenue anticipation notes ("TRANs") and construction loan
notes. Municipal bonds include general obligation bonds and revenue bonds. Gen-
eral obligation bonds are backed by the taxing power of the issuing municipal-
ity and are considered the safest type of municipal obligation. Revenue bonds
are backed by the revenues of a project or facility such as the tolls from a
toll bridge. Revenue bonds also include lease rental revenue bonds which are
issued by a state or local authority for capital projects and are secured by
annual lease payments from the state or local-
44
<PAGE>
APPENDIX A
ity sufficient to cover debt service on the authority's obligations. Industrial
development bonds ("private activity bonds") are a specific type of revenue
bond backed by the credit and security of a private user and, therefore, have
more potential risk. Municipal bonds may be issued in a variety of forms,
including commercial paper, tender option bonds and variable and floating rate
securities.
Tender Option Bonds. A tender option bond is a municipal obligation (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 in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which the institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution. 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, 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. An institution will normally not be obligated to accept ten-
dered bonds in the event of certain defaults or a significant downgrading in
the credit rating assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and a
Fund's average portfolio maturity. There is a risk that a Fund will not be con-
sidered the owner of a tender option bond for federal income tax purposes, and
thus will not be entitled to treat such interest as exempt from federal
income tax. Certain tender option bonds may be illiquid or may become illiquid
as a result of a credit rating downgrade, a payment default or a disqualifica-
tion from tax-exempt status.
Revenue Anticipation Warrants. Revenue Anticipation Warrants ("RAWs") are
issued in anticipation of the issuer's receipt of revenues and present the risk
that such revenues will be insufficient to satisfy the issuer's payment obliga-
tions. The entire amount of principal and interest on RAWs is due at maturity.
RAWs, including those with a maturity of more than 397 days, may also be
repackaged as instruments which include a demand feature that permits the
holder to sell the RAWs to a bank or other financial institution at a purchase
price equal to par plus accrued interest on each interest rate reset date.
Industrial Development Bonds. Certain Funds may invest in industrial develop-
ment bonds (private activity bonds). Industrial development bonds are a spe-
cific type of revenue bond backed by the credit and security of a private user,
the interest from which would be an item of tax preference when distributed by
a Fund as "exempt-interest dividends" to shareholders under the AMT.
45
<PAGE>
Other Municipal Obligation Policies. Certain Funds may invest 25% or more of
the value of their respective total assets in municipal obligations which are
related in such a way that an economic, business or political development or
change affecting one municipal obligation would also affect the other municipal
obligation. For example, a Fund may invest all of its assets in (a) municipal
obligations the interest of which is paid solely from revenues from 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 obligations whose issuers are in the same
state; or (c) industrial development obligations. Concentration of a Fund's
investments in these municipal obligations will subject the Fund, to a greater
extent than if such investment was not so concentrated, to the risks of adverse
economic, business or political developments affecting the particular state,
industry or other area of concentration.
Municipal obligations may be backed by letters of credit or other forms of
credit enhancement issued by domestic banks or foreign banks which have a
branch, agency or subsidiary in the United States or by other financial insti-
tutions. The credit quality of these banks and financial institutions could,
therefore, cause a loss to a Fund that invests in municipal obligations. Let-
ters of credit and other obligations of foreign banks and financial institu-
tions may involve risks in addition to those of domestic obligations because of
less publicly available financial and other information, less securities regu-
lation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and are gener-
ally not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks. In addition, the Funds may acquire securities in the
form of custodial receipts which evidence ownership of future interest pay-
ments, principal payments or both on obligations of certain state and local
governments and authorities.
In order to enhance the liquidity, stability or quality of a municipal obliga-
tion, a Fund may acquire the right to sell the obligation to another party at a
guaranteed price and date.
Custodial Receipts. Certain Funds may also acquire U.S. Government Securities
in the form of custodial receipts. Custodial receipts evidence ownership of
future interest payments, principal payments or both on notes or bonds issued
or guaranteed as to principal or interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. For certain securi-
ties law purposes, custodial receipts are not considered obligations of the
U.S. government.
Other Investment Companies. A Fund may invest in securities of other investment
companies subject to statutory limitations prescribed by the Act. These limita-
tions include a prohibition on any Fund acquiring more than 3% of the voting
shares of
46
<PAGE>
APPENDIX A
any other investment company, and a prohibition on investing more than 5% of a
Fund's total assets in securities of any one investment company or more than
10% of its total assets in securities of all investment companies. A Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Such other investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the acquiring Fund and will be subject to substantially the
same risks.
Floating And Variable Rate Obligations. The Funds may purchase floating and
variable rate obligations. The value of these obligations is generally more
stable than that of a fixed rate obligation in response to changes in interest
rate levels. Subject to the conditions for using amortized cost valuation under
the Act, a Fund may consider the maturity of a variable or floating rate obli-
gation to be shorter than its ultimate stated maturity if the obligation is a
U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Fund to receive payment at any time or at spec-
ified intervals not exceeding 397 calendar days. The issuers or financial
intermediaries providing demand features may support their ability to purchase
the obligations by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and letters of
credit, which will ordinarily be irrevocable, both of which may be issued by
domestic banks or foreign banks which have a branch, agency or subsidiary in
the United States. A Fund may purchase variable or floating rate obligations
from the issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a pool of debt
obligations held by a bank or other financial institution.
When-issued Securities And Forward Commitments. The Funds may purchase when-
issued securities and enter into forward commitments. When-issued securities
are securities that have been authorized, but not yet issued. When-issued secu-
rities are purchased in order to secure what is considered to be an advanta-
geous price and yield to a Fund at the time of entering into the transaction. A
forward commitment involves entering into a contract to purchase or sell secu-
rities for a fixed price at a future date beyond the customary settlement peri-
od.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring the securities for its portfolio, a Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment Adviser
deems it appropriate.
47
<PAGE>
Illiquid Securities. Each Fund may invest up to 10% of its net assets in illiq-
uid securities which cannot be disposed of in seven days in the ordinary course
of business at fair value. Illiquid securities include:
. Both domestic and foreign securities that are not readily marketable
. Certain municipal leases and participation interests
. Certain stripped mortgage-backed securities
. Repurchase agreements and time deposits with a notice or demand period of more
than seven days
. Certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is liquid because it is so-called "4(2) commercial paper" or is oth-
erwise eligible for resale pursuant to Rule 144A under the Securities Act of
1933.
Investing in restricted securities may decrease the liquidity of a Fund's port-
folio.
Borrowings. Each Fund may borrow up to 33 1/3% of its total assets from banks
for temporary or emergency purposes. A Fund may not make additional investments
if borrowings exceed 5% of its net assets. For more information, see the Addi-
tional Statement.
Downgraded Securities. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Fund may continue to
hold the security if the Investment Adviser believes it is in the best interest
of the Fund and its shareholders.
48
<PAGE>
[This page intentionally left blank]
49
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or less if the Fund has been
in operation for less than five years). Certain information reflects finan-
cial results for a single Fund share. The total returns in the table repre-
sent the rate that an investor would have earned or lost on an investment in
a Fund (assuming reinvestment of all dividends and distributions). The Pre-
mium Money Market Fund terminated as of March 31, 2000. This information has
been audited by Arthur Andersen LLP, whose report, along with a Fund's
financial statements, is included in the Fund's annual report (available
upon request without charge).
PRIME OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of Period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For The Years Ended December 31,
1999-FST shares $1.00 $0.05 $(0.05)
1999-FST Preferred shares 1.00 0.05 (0.05)
1999-FST Administration shares 1.00 0.05 (0.05)
1999-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1998-FST shares 1.00 0.05 (0.05)
1998-FST Preferred shares 1.00 0.05 (0.05)
1998-FST Administration shares 1.00 0.05 (0.05)
1998-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1997-FST shares 1.00 0.05 (0.05)
1997-FST Preferred shares 1.00 0.05 (0.05)
1997-FST Administration shares 1.00 0.05 (0.05)
1997-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1996-FST shares 1.00 0.05 (0.05)
1996-FST Preferred Shares (commenced May 1) 1.00 0.03 (0.03)
1996-FST Administration shares 1.00 0.05 (0.05)
1996-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
1995-FST shares 1.00 0.06 (0.06)
1995-FST Administration shares 1.00 0.06 (0.06)
1995-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
50
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,062,549 0.18% 5.09% 0.23% 5.04%
1.00 5.07 219,711 0.28 4.87 0.33 4.82
1.00 4.91 1,051,831 0.43 4.88 0.48 4.83
1.00 4.65 690,741 0.68 4.60 0.73 4.55
- --------------------------------------------------------------------------------
1.00 5.55 5,831,773 0.18 5.39 0.24 5.33
1.00 5.45 132,558 0.28 5.26 0.34 5.20
1.00 5.29 331,196 0.43 5.14 0.49 5.08
1.00 5.03 336,205 0.68 4.89 0.74 4.83
- --------------------------------------------------------------------------------
1.00 5.60 3,867,739 0.18 5.46 0.23 5.41
1.00 5.50 152,767 0.28 5.38 0.33 5.33
1.00 5.34 241,607 0.43 5.22 0.48 5.17
1.00 5.08 176,133 0.68 4.97 0.73 4.92
- --------------------------------------------------------------------------------
1.00 5.41 3,901,797 0.18 5.29 0.23 5.24
1.00 5.28/c/ 127,126 0.28/c/ 5.19/c/ 0.33/c/ 5.14/c/
1.00 5.14 215,898 0.43 5.06 0.48 5.01
1.00 4.88 115,114 0.68 4.78 0.73 4.73
- --------------------------------------------------------------------------------
1.00 6.02 3,295,791 0.18 5.86 0.22 5.82
1.00 5.75 147,894 0.43 5.59 0.47 5.55
1.00 5.49 65,278 0.68 5.33 0.72 5.29
- --------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- --------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1997 - FST shares 1.00 0.06 (0.06)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced
May 1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- --------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares (commenced
July 14) 1.00 0.02 (0.02)
- --------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
52
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.18% $8,747,861 0.18% 5.08% 0.22% 5.04%
1.00 5.07 241,179 0.28 4.99 0.32 4.95
1.00 4.92 403,602 0.43 4.81 0.47 4.77
1.00 4.66 305,972 0.68 4.53 0.72 4.49
- ---------------------------------------------------------------------------------
1.00 5.55 4,995,782 0.18 5.40 0.23 5.35
1.00 5.45 93,218 0.28 5.30 0.33 5.25
1.00 5.29 399,474 0.43 5.16 0.48 5.11
1.00 5.03 496,520 0.68 4.86 0.73 4.81
- ---------------------------------------------------------------------------------
1.00 5.63 4,346,519 0.18 5.50 0.23 5.45
1.00 5.53 20,258 0.28 5.44 0.33 5.39
1.00 5.37 221,256 0.43 5.26 0.48 5.21
1.00 5.11 316,304 0.68 4.99 0.73 4.94
- ---------------------------------------------------------------------------------
1.00 5.45 2,540,366 0.18 5.33 0.23 5.28
1.00 5.31/c/ 17,510 0.28/c/ 5.23/c/ 0.33/c/ 5.18/c/
1.00 5.19 165,766 0.43 5.04 0.48 4.99
1.00 4.93 234,376 0.68 4.84 0.73 4.79
- ---------------------------------------------------------------------------------
1.00 6.07 2,069,197 0.15 5.89 0.23 5.81
1.00 5.80 137,412 0.40 5.61 0.48 5.53
1.00 5.41/c/ 4,219 0.65/c/ 4.93/c/ 0.73/c/ 4.85/c/
- ---------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
PREMIUM MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999-FST shares $1.00 $0.05 $(0.05)
1999-FST Preferred shares 1.00 0.05 (0.05)
1999-FST Administration shares 1.00 0.05 (0.05)
1999-FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998-FST shares 1.00 0.05 (0.05)
1998-FST Preferred shares 1.00 0.05 (0.05)
1998-FST Administration shares 1.00 0.05 (0.05)
1998-FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
For the Period Ended December 31,
1997-FST shares (commenced August 1) 1.00 0.02 (0.02)
1997-FST Preferred shares (commenced August
1) 1.00 0.02 (0.02)
1997-FST Administration shares (commenced
August 1) 1.00 0.02 (0.02)
1997-FST Service shares (commenced August
1) 1.00 0.02 (0.02)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
54
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net
assets at Ratio of net Ratio of net
Net asset end Ratio of net investment Ratio of investment
value at of period expenses to income to expenses to income to
end Total (in average net average net average net average net
of period return/b/ 000's) assets assets assets assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.10% $312,507 0.18% 4.96% 0.23% 4.91%
1.00 5.00 50,847 0.28 4.82 0.33 4.77
1.00 4.84 18,670 0.43 4.78 0.48 4.73
1.00 4.58 17,312 0.68 4.44 0.73 4.39
- -------------------------------------------------------------------------------
1.00 5.55 479,851 0.16 5.38 0.29 5.25
1.00 5.45 107,517 0.26 5.29 0.39 5.16
1.00 5.29 13,728 0.41 5.08 0.54 4.95
1.00 5.03 19,655 0.66 4.79 0.79 4.66
- -------------------------------------------------------------------------------
1.00 5.73/c/ 218,192 0.08/c/ 5.59/c/ 0.43/c/ 5.24/c/
1.00 5.62/c/ 558 0.18/c/ 5.50/c/ 0.53/c/ 5.15/c/
1.00 5.47/c/ 1,457 0.33/c/ 5.33/c/ 0.68/c/ 4.98/c/
1.00 5.20/c/ 814 0.58/c/ 5.17/c/ 0.93/c/ 4.82/c/
- -------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
TREASURY OBLIGATIONS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1997 - FST shares 1.00 0.05 (0.05)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced May
1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
56
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.88% $2,320,581 0.18% 4.75% 0.23% 4.70%
1.00 4.78 297,925 0.28 4.67 0.33 4.62
1.00 4.62 1,157,825 0.43 4.53 0.48 4.48
1.00 4.36 569,993 0.68 4.28 0.73 4.23
- ----------------------------------------------------------------------------------------------
1.00 5.40 3,521,389 0.18 5.22 0.23 5.17
1.00 5.29 285,240 0.28 5.20 0.33 5.15
1.00 5.14 1,080,454 0.43 4.94 0.48 4.89
1.00 4.87 501,619 0.68 4.69 0.73 4.64
- ----------------------------------------------------------------------------------------------
1.00 5.50 2,217,943 0.18 5.36 0.23 5.31
1.00 5.40 245,355 0.28 5.32 0.33 5.27
1.00 5.24 738,865 0.43 5.12 0.48 5.07
1.00 4.98 312,991 0.68 4.87 0.73 4.82
- ----------------------------------------------------------------------------------------------
1.00 5.35 2,291,051 0.18 5.22 0.24 5.16
1.00 5.24/c/ 46,637 0.28/c/ 5.11/c/ 0.34/c/ 5.05/c/
1.00 5.09 536,895 0.43 4.97 0.49 4.91
1.00 4.83 220,560 0.68 4.72 0.74 4.66
- ----------------------------------------------------------------------------------------------
1.00 5.96 1,587,715 0.18 5.73 0.23 5.68
1.00 5.69 283,186 0.43 5.47 0.48 5.42
1.00 5.43 139,117 0.68 5.21 0.73 5.16
- ----------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
TREASURY INSTRUMENTS FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.04 (0.04)
1999 - FST Administration shares 1.00 0.04 (0.04)
1999 - FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------------
For the Period Ended December 31,
1997 - FST shares (commenced March 3) 1.00 0.04 (0.04)
1997 - FST Preferred shares (commenced
May 30) 1.00 0.03 (0.03)
1997 - FST Administration shares (commenced
April 1) 1.00 0.04 (0.04)
1997 - FST Service shares (commenced
March 5) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
58
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 4.60% $428,732 0.18% 4.51% 0.24% 4.45%
1.00 4.49 208 0.28 4.53 0.34 4.47
1.00 4.34 67,748 0.43 4.29 0.49 4.23
1.00 4.08 42,095 0.68 4.07 0.74 4.01
- ----------------------------------------------------------------------------------------------------
1.00 5.05 822,207 0.18 4.74 0.29 4.63
1.00 4.94 2 0.28 4.68 0.39 4.57
1.00 4.79 23,676 0.43 4.62 0.54 4.51
1.00 4.53 17,128 0.68 4.37 0.79 4.26
- -----------------------------------------------------------------------------------------------------
1.00 5.25/c/ 496,419 0.18/c/ 5.09/c/ 0.29/c/ 4.98/c/
1.00 5.13/c/ 2 0.28/c/ 5.00/c/ 0.39/c/ 4.89/c/
1.00 4.99/c/ 4,159 0.43/c/ 4.84/c/ 0.54/c/ 4.73/c/
1.00 4.71/c/ 20,177 0.68/c/ 4.62/c/ 0.79/c/ 4.51/c/
- ------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
GOVERNMENT FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- ------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1997 - FST shares 1.00 0.05 (0.05)
1997 - FST Preferred shares 1.00 0.05 (0.05)
1997 - FST Administration shares 1.00 0.05 (0.05)
1997 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1996 - FST shares 1.00 0.05 (0.05)
1996 - FST Preferred shares (commenced May
1) 1.00 0.03 (0.03)
1996 - FST Administration shares 1.00 0.05 (0.05)
1996 - FST Service shares 1.00 0.05 (0.05)
- ------------------------------------------------------------------------------
1995 - FST shares 1.00 0.06 (0.06)
1995 - FST Administration shares 1.00 0.06 (0.06)
1995 - FST Service shares (commenced May
16) 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
60
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.03% $2,260,275 0.18% 4.91% 0.22% 4.87%
1.00 4.93 181,155 0.28 4.81 0.32 4.77
1.00 4.77 519,266 0.43 4.67 0.47 4.63
1.00 4.51 435,192 0.68 4.35 0.72 4.31
- --------------------------------------------------------------------------------
1.00 5.46 1,563,875 0.18 5.32 0.23 5.27
1.00 5.36 245,628 0.28 5.15 0.33 5.10
1.00 5.20 407,363 0.43 5.06 0.48 5.01
1.00 4.94 699,481 0.68 4.83 0.73 4.78
- --------------------------------------------------------------------------------
1.00 5.54 1,478,539 0.18 5.41 0.24 5.35
1.00 5.43 7,147 0.28 5.34 0.34 5.28
1.00 5.28 299,804 0.43 5.15 0.49 5.09
1.00 5.02 580,200 0.68 4.91 0.74 4.85
- --------------------------------------------------------------------------------
1.00 5.38 858,769 0.18 5.25 0.24 5.19
1.00 5.26/c/ 112 0.28/c/ 5.14/c/ 0.34/c/ 5.08/c/
1.00 5.12 145,108 0.43 5.01 0.49 4.95
1.00 4.86 223,554 0.68 4.74 0.74 4.68
- --------------------------------------------------------------------------------
1.00 6.00 743,884 0.18 5.81 0.24 5.75
1.00 5.74 82,386 0.43 5.54 0.49 5.48
1.00 5.40/c/ 14,508 0.68/c/ 5.08/c/ 0.74/c/ 5.02/c/
- --------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
FEDERAL FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.05 $(0.05)
1999 - FST Preferred shares 1.00 0.05 (0.05)
1999 - FST Administration shares 1.00 0.05 (0.05)
1999 - FST Service shares 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
1998 - FST shares 1.00 0.05 (0.05)
1998 - FST Preferred shares 1.00 0.05 (0.05)
1998 - FST Administration shares 1.00 0.05 (0.05)
1998 - FST Service shares 1.00 0.05 (0.05)
- -------------------------------------------------------------------------------
For the Period Ended December 31,
1997 - FST shares (commenced February 28) 1.00 0.05 (0.05)
1997 - FST Preferred shares (commenced May
30) 1.00 0.03 (0.03)
1997 - FST Administration shares (commenced
April 1) 1.00 0.04 (0.04)
1997 - FST Service shares (commenced March
25) 1.00 0.04 (0.04)
- -------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
62
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 5.05% $4,206,119 0.18% 4.96% 0.23% 4.91%
1.00 4.94 186,590 0.28 5.05 0.33 5.00
1.00 4.79 789,529 0.43 4.71 0.48 4.66
1.00 4.53 478,635 0.68 4.46 0.73 4.41
- --------------------------------------------------------------------------------
1.00 5.41 2,346,254 0.18 5.24 0.24 5.18
1.00 5.31 26,724 0.28 5.20 0.34 5.14
1.00 5.15 690,084 0.43 5.02 0.49 4.96
1.00 4.89 321,124 0.68 4.78 0.74 4.72
- --------------------------------------------------------------------------------
1.00 5.51/c/ 1,125,681 0.18/c/ 5.39/c/ 0.27/c/ 5.30/c/
1.00 5.43/c/ 194,375 0.28/c/ 5.26/c/ 0.37/c/ 5.17/c/
1.00 5.27/c/ 625,334 0.43/c/ 5.15/c/ 0.52/c/ 5.06/c/
1.00 5.00/c/ 228,447 0.68/c/ 4.78/c/ 0.77/c/ 4.69/c/
- --------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
TAX-FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
Net asset
value at Net Distributions
beginning investment to
of period income/a/ shareholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31,
1999 - FST shares $1.00 $0.03 $(0.03)
1999 - FST Preferred shares 1.00 0.03 (0.03)
1999 - FST Administration shares 1.00 0.03 (0.03)
1999 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1998 - FST shares 1.00 0.03 (0.03)
1998 - FST Preferred shares 1.00 0.03 (0.03)
1998 - FST Administration shares 1.00 0.03 (0.03)
1998 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1997 - FST shares 1.00 0.04 (0.04)
1997 - FST Preferred shares 1.00 0.03 (0.03)
1997 - FST Administration shares 1.00 0.03 (0.03)
1997 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1996 - FST shares 1.00 0.03 (0.03)
1996 - FST Preferred shares (commenced May
1) 1.00 0.02 (0.02)
1996 - FST Administration shares 1.00 0.03 (0.03)
1996 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
1995 - FST shares 1.00 0.04 (0.04)
1995 - FST Administration shares 1.00 0.04 (0.04)
1995 - FST Service shares 1.00 0.03 (0.03)
- ------------------------------------------------------------------------------
</TABLE>
a Calculated based on the average shares outstanding methodology.
b Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the investment
at the net asset value at the end of the period.
c Annualized.
64
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------
Net Ratio of net Ratio of net
Net asset assets at Ratio of net investment Ratio of investment
value at end expenses to income to expenses to income to
end Total of period average net average net average net average net
of period return/b/ (in 000's) assets assets assets assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 3.13% $1,775,327 0.18% 3.12% 0.22% 3.08%
1.00 3.03 31,359 0.28 2.99 0.32 2.95
1.00 2.88 127,967 0.43 2.81 0.47 2.77
1.00 2.62 69,465 0.68 2.61 0.72 2.57
- --------------------------------------------------------------------------------
1.00 3.34 1,456,002 0.18 3.28 0.23 3.23
1.00 3.24 20,882 0.28 3.17 0.33 3.12
1.00 3.08 146,800 0.43 3.04 0.48 2.99
1.00 2.83 50,990 0.68 2.77 0.73 2.72
- --------------------------------------------------------------------------------
1.00 3.54 939,407 0.18 3.50 0.24 3.44
1.00 3.43 35,152 0.28 3.39 0.34 3.33
1.00 3.28 103,049 0.43 3.27 0.49 3.21
1.00 3.02 42,578 0.68 3.01 0.74 2.95
- --------------------------------------------------------------------------------
1.00 3.39 440,838 0.18 3.35 0.23 3.30
1.00 3.30/c/ 28,731 0.28/c/ 3.26/c/ 0.33/c/ 3.21/c/
1.00 3.13 51,661 0.43 3.10 0.48 3.05
1.00 2.88 19,855 0.68 2.85 0.73 2.80
- --------------------------------------------------------------------------------
1.00 3.89 448,367 0.14 3.81 0.24 3.71
1.00 3.63 20,939 0.39 3.54 0.49 3.44
1.00 3.38 19,860 0.64 3.32 0.74 3.22
- --------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
Index
<TABLE>
<C> <S> <C> <C>
1 General Investment 31 Shareholder Guide
Management Approach 31 How to Buy Shares
5 Fund Investment Objectives 35 How to Sell Shares
and Strategies 40 Taxation
10 Principal Risks of the Funds 41 Appendix A
14 Fund Performance Additional Information on
22 Fund Fees and Expenses Portfolio Risks, Securities
26 Service Providers and Techniques
29 Dividends 50 Appendix B
</TABLE> Financial Highlights
<PAGE>
Financial Square Funds
Prospectus (FST Administration Shares)
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual reports to shareholders.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information ("Additional Statement").
The Additional Statement is incorporated by reference into this Prospectus
(is legally considered part of this Prospectus).
The Funds' annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds, 4900 Sears Tower-60th Floor, Chicago, IL
60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of the Funds' documents are located
online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Fund documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of
Fund documents, after paying a duplicating fee, by writing to the SEC's Pub-
lic Reference Section, Washington, D.C. 20549-0102 or by electronic request
to: [email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO OF GOLDMAN SACHS]
The Funds' investment company registration number is 811-5349.
Goldman Sachs Financial Squares Funds /SM/ is a service mark of Goldman, Sachs
& Co.
FSPROADMM
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
Class A Shares
Class B Shares
Class C Shares
Institutional Shares
Service Shares
GOLDMAN SACHS CONSERVATIVE STRATEGY PORTFOLIO
GOLDMAN SACHS BALANCED STRATEGY PORTFOLIO
GOLDMAN SACHS GROWTH AND INCOME STRATEGY PORTFOLIO
GOLDMAN SACHS GROWTH STRATEGY PORTFOLIO
GOLDMAN SACHS AGGRESSIVE GROWTH STRATEGY PORTFOLIO
(Each a portfolio of Goldman Sachs Trust)
4900 Sears Tower
Chicago, Illinois 60606-6303
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectuses for the Class A, Class B, Class C, Service Shares and
Institutional Shares of Goldman Sachs Conservative Strategy Portfolio, Goldman
Sachs Balanced Strategy Portfolio, Goldman Sachs Growth and Income Strategy
Portfolio, Goldman Sachs Growth Strategy Portfolio and Goldman Sachs Aggressive
Growth Strategy Portfolio dated May 1, 2000, and as may be further amended
and/or supplemented from time to time (the "Prospectus"), which may be obtained
without charge from Goldman, Sachs & Co. by calling the telephone number, or
writing to one of the addresses, listed below.
The audited financial statements and related Report of Arthur Andersen LLP,
the former independent public accountants for each Portfolio, contained in each
Portfolio's 1999 Annual Report are incorporated herein by reference in the
section "Financial Statements." No other portions of the Portfolios' Annual
Report are incorporated herein by reference. PricewaterhouseCoopers LLP,
independent public accountants, have been selected as the independent public
accountants of the Portfolios for the fiscal year ending December 31, 2000.
The date of this Additional Statement is May 1, 2000.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
INTRODUCTION................................................................... B-4
INVESTMENT OBJECTIVES AND POLICIES............................................. B-4
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES........................... B-18
INVESTMENT RESTRICTIONS...................................................... B-58
MANAGEMENT................................................................... B-60
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................... B-79
NET ASSET VALUE.............................................................. B-81
PERFORMANCE INFORMATION...................................................... B-83
SHARES OF THE TRUST.......................................................... B-90
TAXATION..................................................................... B-95
FINANCIAL STATEMENTS......................................................... B-102
OTHER INFORMATION............................................................ B-102
OTHER INFORMATION REGARDING PURCHASES, REDEMPTIONS, EXCHANGES AND
DIVIDENDS.............................................................. B-104
DISTRIBUTION AND SERVICE PLANS............................................... B-107
SERVICE PLAN................................................................. B-112
APPENDIX A..................................................................... 1-A
APPENDIX B..................................................................... 1-B
APPENDIX C (Statement of Intention and Escrow Agreement)....................... 1-C
</TABLE>
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT
Investment Adviser
32 Old Slip
New York, New York 10005
GOLDMAN, SACHS & CO.
Distributor
85 Broad Street
New York, NY 10004
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, Illinois 60606
Toll free .......800-526-7384
B-3
<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 following series of the Trust are described in this
Additional Statement: Goldman Sachs Conservative Strategy Portfolio
("Conservative Strategy Portfolio"), Goldman Sachs Balanced Strategy Portfolio
("Balanced Strategy Portfolio"), Goldman Sachs Growth and Income Strategy
Portfolio ("Growth and Income Strategy Portfolio"), Goldman Sachs Growth
Strategy Portfolio ("Growth Strategy Portfolio") and Goldman Sachs Aggressive
Growth Strategy Portfolio ("Aggressive Growth Strategy Portfolio") (each
referred to herein as a "Portfolio" and collectively referred to as the
"Portfolios"). The Trust assumed its current name on March 22, 1991. The
Trustees of the Trust have authority under the Declaration of Trust to create
and classify shares into separate series and to classify and reclassify any
series of shares into one or more classes without further action by
shareholders. Pursuant thereto, the Trustees have created the Portfolios and
other series. Each Portfolio is each authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares
and Class C Shares. Additional series and classes may be added in the future
from time to time.
Each Portfolio is a separately managed, diversified mutual fund with
its own investment objectives and policies. Each Portfolio has been constructed
as a "fund of funds," which means that it pursues its investment objective
primarily by allocating its investments among other investment portfolios of the
Trust (the "Underlying Funds").
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment
Management Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to each Portfolio. GSAM is sometimes referred to herein as
the "Investment Adviser." Goldman Sachs serves as each Portfolio's distributor
and transfer agent. Each Portfolio's custodian is State Street Bank and Trust
Company ("State Street").
INVESTMENT OBJECTIVES AND POLICIES
Normally, each of the Portfolios will be predominantly invested in
shares of the Underlying Funds. These Underlying Funds currently consist of
the: CORESM Large Cap Value Fund, CORESM U.S. Equity Fund, CORESM Large Cap
Growth Fund, CORESM Small Cap Equity Fund, Capital Growth Fund, Mid Cap Value
Fund (formerly Mid Cap Equity Fund), Small Cap Value Fund, Real Estate
Securities Fund, CORESM International Equity Fund, International Equity Fund,
European Equity Fund, Japanese Equity Fund, International Small Cap Fund,
Emerging Markets Equity Fund, and Asia Growth Fund, (the "Underlying Equity
Funds"); Adjustable Rate Government Fund, Short Duration Government Fund,
Government Income Fund, Core Fixed Income Fund, Global Income Fund and High
Yield Fund (the "Underlying Fixed-Income Funds") and the Financial Square Prime
Obligations Fund. The value of the Underlying Funds' investments, and the net
asset value of the shares of both the Underlying Funds and the Portfolios will
fluctuate with market, economic and, to the extent applicable, foreign exchange
conditions, so that an investment in any of the Portfolios may be worth more or
less when redeemed than when purchased. The following description provides
additional information regarding the Underlying Funds and the types of
investments that the Underlying Funds may make.
B-4
<PAGE>
Description of Underlying Funds
- -------------------------------
CORE Large Cap Value Fund
Objective. This Fund seeks long-term growth of capital and dividend
---------
income. The Fund seeks this objective through a broadly diversified portfolio of
equity securities of large-cap U.S. issuers that are selling at low to modest
valuations relative to general market measures such as earnings, book value and
other fundamental accounting measures, and that are expected to have favorable
prospects for capital appreciation and/or dividend-paying ability.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers, including
foreign issuers that are traded in the United States. The Fund's investments are
selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's expected return, while maintaining
risk, style, capitalization and industry characteristics similar to the Russell
1000 Value Index. The Fund seeks a portfolio composed of companies with above
average capitalizations and low to moderate valuations as measured by
price/earnings ratios, book value and other fundamental accounting measures.
Other. The Fund's investments in fixed-income securities are limited to
-----
securities that are considered cash equivalents.
CORE U.S. Equity Fund
Objective. This Fund seeks long-term growth of capital and dividend
---------
income. The Fund seeks this objective through a broadly diversified portfolio of
large-cap and blue chip equity securities representing all major sectors of the
U.S. economy.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers, including
foreign issuers that are traded in the United States. The Fund's investments are
selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's expected return, while maintaining
risk, style, capitalization and industry characteristics similar to the S&P 500
Index. The Fund seeks a broad representation in most major sectors of the U.S.
economy and a portfolio composed of companies with average long-term earnings
growth expectations and dividend yields.
Other. The Fund's investments in fixed-income securities are limited to
-----
securities that are considered cash equivalents.
CORE Large Cap Growth Fund
Objective. This Fund seeks long-term growth of capital. The Fund seeks
---------
this objective through a broadly diversified portfolio of equity securities of
large cap U.S. issuers that are expected to have better prospects for earnings
growth than the growth rate of the general domestic economy. Dividend income is
a secondary consideration.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers, including
foreign issuers that are traded in the United States. The Fund's investment
adviser emphasizes a company's growth prospects in analyzing equity securities
to be purchased by the Fund. The Fund's investments are selected using both a
variety of quantitative techniques
B-5
<PAGE>
and fundamental research in seeking to maximize the Fund's expected return,
while maintaining risk, style, capitalization and industry characteristics
<PAGE>
below $300 million or increases above $15 billion after purchase, the Fund may,
but is not required to, sell the securities. Dividend income, if any, is an
incidental consideration.
Other. This Fund may invest up to 35% of its total assets in fixed-income
-----
securities, such as government, corporate and bank debt obligations. In
addition, although the Fund will invest primarily in publicly traded U.S.
securities, it may invest up to 25% of its total assets in foreign securities,
including securities of issuers in emerging countries and securities quoted in
foreign currencies.
Small Cap Value Fund
Objective. This Fund seeks long-term growth of capital.
---------
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
at least 65% of its total assets in equity securities of companies with public
stock market capitalizations of $1 billion or less at the time of investment.
Under normal circumstances, the Fund's investment horizon for ownership of
stocks will be two to three years. Dividend income, if any, is an incidental
consideration. If the market capitalization of a company held by the Fund
increases above $1 billion, the Fund may, consistent with its investment
objective, continue to hold the security.
Small Capitalization Companies. This Fund invests in companies which its
------------------------------
investment adviser believes are well managed niche businesses that have the
potential to achieve high or improving returns on capital and/or above average
sustainable growth. The Fund may invest in securities of small market
capitalization companies which may have experienced financial difficulties.
Investments may also be made in companies that are in the early stages of their
life and that the Fund's investment adviser believes have significant growth
potential. The investment adviser believes that the companies in which the Fund
may invest offer greater opportunity for growth of capital than larger, more
mature, better known companies. However, investments in such small market
capitalization companies involve special risks.
Other. This Fund may invest in the aggregate up to 35% of its total assets
-----
in companies with public stock market capitalizations in excess of $1 billion at
the time of investment and in fixed-income securities, such as government,
corporate and bank debt obligations. In addition, although the Fund will invest
primarily in publicly traded U.S. securities, it may invest up to 25% of its
total assets in foreign securities, including securities of issuers in emerging
countries and securities quoted in foreign currencies.
Real Estate Securities Fund
Objective. This Fund seeks total return comprised of long-term growth of
---------
capital and dividend income.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
substantially all and at least 80% of its total assets in a diversified
portfolio of equity securities of issuers that are primarily engaged in or
related to the real estate industry. The Fund expects that a substantial
portion of its assets will be invested in REITs and real estate industry
companies. A "real estate industry company" is a company that derives at least
50% of its gross revenues or net profits from the ownership, development,
construction, financing, management or sale of commercial, industrial or
residential real estate or interests therein.
B-7
<PAGE>
The Fund's investment strategy is based on the premise that property market
fundamentals are the primary determinant of growth, underlying the success of
companies in the real estate industry. The Fund's investment adviser focuses on
companies that can achieve sustainable growth in cash flow and dividend paying
capability. The investment adviser attempts to purchase securities so that its
underlying portfolio will be diversified geographically and by property type.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity REITs
may be affected by changes in the value of the underlying property owned by the
REITs.
Mortgage REITs may be affected by the quality of any credit extended. REITs
are dependent upon management skill, may not be diversified, and are subject to
heavy cash flow dependency, default by borrowers and self-liquidation. REITs are
also subject to the possibilities of failing to qualify for tax free pass-
through of income and failing to maintain their exemptions from investment
company registration. REITs whose underlying properties are concentrated in a
particular industry or geographic region are also subject to risks affecting
such industries and regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline.
Shares of REITs. The Fund may invest without limitation in shares of
---------------
REITs. REITs are pooled investment vehicles that invest primarily in either real
estate or real estate related loans. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. Similar to investment companies
such as the Fund, REITs are not taxed on income distributed to shareholders
provided they comply with several requirements of the Internal Revenue Code of
1986, as amended (the "Code"). The Fund will indirectly bear its proportionate
share of expenses incurred by REITs in which the Fund invests in addition to the
expenses directly by the Fund.
Other. This Fund may invest up to 20% of its total assets in fixed-income
-----
securities, such as government, corporate debt and bank obligations, that offer
the potential to further the Fund's investment objective. In addition, although
the Fund will invest primarily in publicly traded U.S. securities, it may invest
up to 15% of its total assets in foreign securities, including securities of
issuers in emerging countries and securities quoted in foreign currencies.
CORE International Equity Fund
Objective. This Fund seeks long-term growth of capital. The Fund seeks
---------
this objective through a broadly diversified portfolio of equity securities of
large cap companies that are organized outside the United States or whose
securities are principally traded outside the United States.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of companies that are
organized outside the United States or whose securities are principally traded
outside the United States.
B-8
<PAGE>
The Fund may allocate its assets among countries as determined by its
investment adviser from time to time, provided the Fund's assets are invested in
at least three foreign countries. The Fund may invest in securities of issuers
in countries with emerging markets or economies which involve certain risks
which are not present in investments in more developed countries.
The Fund seeks broad representation of large cap issuers across major
countries and sectors of the international economy. The Fund's investments are
selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's expected return, while maintaining
risk, style, capitalization and industry characteristics similar to the EAFE
Index. In addition, the Fund seeks a portfolio composed of companies with
attractive valuations and stronger momentum characteristics than the EAFE Index.
Other. The Fund's investments in fixed-income securities are limited to
-----
securities that are considered to be cash equivalents.
International Equity Fund
Objective. This Fund seeks long-term capital appreciation.
---------
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
substantially all, and at least 65% of its total assets in equity securities of
companies that are organized outside the United States or whose securities are
principally traded outside the United States. The Fund intends to invest in
companies with public stock market capitalizations that are larger than $1
billion at the time of investment.
The Fund may allocate its assets among countries as determined by its
investment adviser from time to time provided that the Fund's assets are
invested in at least three foreign countries.
The Fund expects to invest a substantial portion of its assets in the
securities of issuers located in the developed countries of Western Europe and
in Japan. However, the Fund may also invest in the securities of issuers
located in Australia, Canada, New Zealand and emerging countries. Currently,
emerging countries include among others, most Latin American, African, Asian and
Eastern European nations. Many of the countries in which the Fund may invest
have emerging markets or economies which involve certain risks which are not
present in investments in more developed countries.
Other. Up to 35% of the Fund's total assets may be invested in fixed-
-----
income securities, such as government, corporate and bank debt obligations.
European Equity Fund
Objective. This Fund seeks long-term capital appreciation.
---------
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
substantially all, and at least 65% of its total assets in equity securities of
European companies. Because of its focus, the Fund will be more susceptible to
European economic, market, political and local risks than a fund that is more
geographically diversified. A European issuer is a company that either: (i) has
a class of its securities whose principal securities markets is in a European
country; (ii) derives 50% or more of its total revenue from goods produced,
sales made or services performed in one or more of the European countries; (iii)
maintains 50% or more of its assets in one or more of the European countries; or
(iv) is organized under the
B-9
<PAGE>
laws of, or has a principal office in, a European country. The Fund may allocate
its assets among different countries as determined by its investment adviser
from time to time, provided that the Fund's assets are invested in at least
three European countries. It is currently anticipated that a majority of the
Fund's assets will be invested in the equity securities of large cap companies
located in the developed countries of Western Europe. However, the Fund may also
invest, without limit, in mid cap companies and small cap companies, as well as
companies located in emerging countries. Currently, emerging countries include
among others, most Latin American, African, Asian, most Eastern European
nations, including the states that formerly comprised the Soviet Union and
Yugoslavia.
Other. The Fund may invest in the aggregate up to 35% of its total assets
-----
in equity securities of non-European countries and in fixed-income securities,
such as government, corporate and bank debt obligations.
Japanese Equity Fund
Objective. This Fund seeks long-term capital appreciation.
---------
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
substantially all, and at least 65% of its total assets in equity securities of
Japanese companies. A Japanese issuer is a company that either: (i) has a
class of its securities whose principal securities markets is in Japan; (ii) is
organized under the laws of, or has a principal office in Japan; (iii) derives
50% or more of its total revenue from goods produced, sales made or services
performed in Japan; or (iv) maintains 50% of more or its assets in Japan. The
Fund's concentration in Japanese companies will expose it to the risk of adverse
social, political and economic events which occur in Japan or affect the
Japanese markets.
Other. The Fund may invest in the aggregate up to 35% of its total assets
-----
in equity securities of non-Japanese companies and in fixed-income securities,
such as government, corporate and bank debt obligations. Many of the emerging
countries in which the Fund may invest involve risks that are not present in
investments in more developed countries.
International Small Cap Fund
Objective. This Fund seeks long-term capital appreciation.
---------
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
substantially all, and at least 65% of its total assets in equity securities of
companies with public stock market capitalizations of $1 billion or less at the
time of investment that are organized outside the U.S. or whose securities are
principally traded outside the U.S. The Fund may allocate its assets among
countries as determined by its investment adviser from time to time provided
that the Fund's assets are invested in at least three foreign countries. The
Fund expects to invest a substantial portion of its assets in small cap
securities of companies in the developed countries of Western Europe, Japan and
Asia. However, the Fund may also invest in the securities of issuers located in
Australia, Canada, New Zealand and the emerging countries. Currently, emerging
countries include, among others, most Latin American, African, Asian and Eastern
European nations. Many of the emerging countries in which the Fund may invest
involve risks which are not present in investments in more developed countries.
Other. The Fund may invest in the aggregate up to 35% of its total assets
-----
in equity securities of larger cap companies with public stock market
capitalizations of more than $1 billion at the time of investment and in fixed-
income securities, such as government, corporate and bank debt obligations. If
the
B-10
<PAGE>
market capitalization of a company held by the Fund increases above $1
billion, the Fund may, consistent with its investment objective, continue to
hold the security.
Emerging Markets Equity Fund
Objective. This Fund seeks long-term capital appreciation.
---------
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
substantially all, and at least 65% of its total assets in equity securities of
emerging country issuers. The investment adviser may consider classifications
by the World Bank, the International Finance Corporation or the United Nations
and its agencies in determining whether a country is emerging or developed.
Currently, emerging countries include, among others, most Latin American,
African, Asian and Eastern European nations. The Fund's investment adviser
currently intends that the Fund's investment focus will be in the following
emerging countries as well as any other emerging country to the extent that
foreign investors are permitted by applicable law to make such investments:
Argentina, Botswana, Brazil, Chile, China, Colombia, the Czech Republic, Egypt,
Greece, Hong Kong, Hungary, India, Indonesia, Israel, Jordan, Kenya, Malaysia,
Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, Portugal, Russia,
Singapore, South Africa, South Korea, Sri Lanka, Taiwan, Thailand, Turkey,
Venezuela and Zimbabwe.
An emerging country issuer is any company that either: (i) derives 50% or
more of its total revenue from goods produced, sales made or services performed
in one or more emerging countries; (ii) is organized under the laws of, or has a
principal office in, an emerging country; (iii) maintains 50% or more of its
assets in one or more of the emerging countries; or (iv) has a class of its
securities whose principal securities markets is in an emerging country.
Under normal circumstances, this Fund maintains investments in at least six
emerging countries, and will not invest more than 35% of its total assets in
securities of issuers in any one emerging country. Allocation of the Fund's
investments will depend upon the relative attractiveness of the emerging country
markets and particular issuers. In addition, macro-economic factors and the
portfolio managers' and Goldman Sachs economists' views of the relative
attractiveness of emerging countries and currencies are considered in allocating
the Fund's assets among emerging countries. Concentration of the Fund's assets
in one or a few emerging countries and currencies will subject the Fund to
greater risks than if the Fund's assets were not geographically concentrated.
Investments in emerging countries involve certain risks which are not present in
investments in more developed countries.
Investments in Emerging Countries involve certain risks which are not
present in investments in more developed countries. The Fund may purchase
privately placed equity securities, equity securities of companies that are in
the process of being privatized by foreign governments, securities of issuers
that have not paid dividends on a timely basis, equity securities of issuers
that have experienced difficulties, and securities of companies without
performance records.
Other. The Fund may invest in the aggregate up to 35% of its total assets
-----
in (i) fixed-income securities of private and governmental emerging country
issuers; and (ii) equity and fixed-income securities, such as government,
corporate and bank debt obligations, of issuers in developed countries.
B-11
<PAGE>
Asia Growth Fund
Objective. This Fund seeks long-term capital appreciation.
---------
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
substantially all, and at least 65% of its total assets in equity securities of
Asian issuers. An Asian issuer is any company that either: (i) has a class of
its securities whose principal securities markets is in one or more Asian
countries; (ii) derives 50% or more of its total revenue from goods produced,
sales made or services performed in one or more of the Asian countries; (iii)
maintains 50% or more of its assets in one or more Asian countries; or (iv) is
organized under the laws of, or has a principal office in, an Asian country.
Many of the countries in which the Fund may invest have emerging markets or
economies which involve certain risks which are not present in investments in
more developed countries.
This Fund may allocate its assets among the Asian countries as determined
from time to time by its investment adviser. For purposes of the Fund's
investment policies, Asian countries are China, Hong Kong, India, Indonesia,
Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan
and Thailand as well as any other country in Asia (other than Japan) to the
extent that foreign investors are permitted by applicable law to make such
investments. Allocation of the Fund's investments will depend upon the
investment adviser's view of the relative attractiveness of the Asian markets
and particular issuers. Concentration of the Fund's assets in one or a few of
the Asian countries and Asian currencies will subject the Fund to greater risks
than if the Fund's assets were not geographically concentrated. For example, on
August 31, 1999 (the end of the Fund's last fiscal year), more than 25% of the
Fund's assets were invested in securities traded in Hong Kong.
Other. The Fund may invest in the aggregate up to 35% of its total assets
-----
in equity securities of issuers in non-Asian countries and Japan, and in fixed-
income securities, such as government, corporate and bank debt obligations.
Financial Square Prime Obligations Fund
Objective. This Fund seeks to maximize current income to the extent
---------
consistent with the preservation of capital and the maintenance of liquidity by
investing exclusively in high quality money market instruments.
Primary Investment Focus. This Fund invests in securities of the U.S.
------------------------
Government, its agencies, authorities and instrumentalities, obligations of U.S.
banks, commercial paper, and other short-term obligations of U.S. companies,
states, municipalities and other entities and repurchase agreements. Securities
purchased by the Fund will be determined by its investment adviser to present
minimal credit risks, and will have remaining maturities (as determined in
accordance with regulatory requirements) of 13 months or less at the time of
purchase. The dollar-weighted average maturity of the Fund will not exceed 90
days.
Other. The investments of this Fund are limited by regulations applicable
-----
to money market funds as described in its Prospectus, and do not include many of
the types of investments that are permitted for the other Underlying Funds.
Although this Fund attempts to maintain a stable net asset value of $1.00 per
share, there is no assurance that it will be able to do so on a continuous
basis. Like investments in the other Underlying Funds, an investment in this
Fund is neither insured nor guaranteed by the U.S. Government or any
governmental authority.
B-12
<PAGE>
Adjustable Rate Government Fund
Objective. This Fund seeks to provide a high level of current income,
---------
consistent with low volatility of principal.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be in a range approximately equal to that of the Fund's benchmark, a
six-month to one-year U.S. Treasury security. In addition, under normal
interest rate conditions, the Fund's maximum duration will not exceed two years.
The approximate interest rate sensitivity of the Fund is expected to be
comparable to a nine-month U.S. Treasury bill.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in U.S. Government Securities that are adjustable rate
mortgage pass-through securities and other mortgage securities with periodic
interest rate resets. The remainder of the Fund's assets (up to 35%) may be
invested in other U.S. Government Securities, including fixed rate mortgage
pass-through securities, other securities representing an interest in or
collateralized by adjustable rate and fixed rate mortgage loans ("Mortgage-
Backed Securities") and repurchase agreements collateralized by U.S. Government
Securities. Substantially all of the Fund's assets will be invested in U.S.
Government Securities. 100% of the Fund's portfolio will be invested in U.S.
dollar-denominated securities.
Credit Quality. This Fund invests in U.S. Government Securities and
--------------
repurchase agreements collateralized by such securities.
Other. This Fund may employ certain active management its duration
-----
and term structure and to seek to enhance returns. These techniques include, but
are not limited to, the use of financial futures contracts, option contracts
(including options on futures), mortgage, credit and interest rate swaps and
interest rate floors, caps and collars. The Fund may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into mortgage dollar rolls, repurchase agreements and
other investment practices.
Short Duration Government Fund
Objective. This Fund seeks a high level of current income and secondarily,
---------
in seeking current income, may also consider the potential for capital
appreciation.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the two-year U.S. Treasury
security, plus or minus .5 years. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a two-year U.S. Treasury note.
Investment Sector. This Fund invests, under normal market conditions, at
-----------------
least 65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
Credit Quality. The Fund invests in U.S. Government Securities and
--------------
repurchase agreements collateralized by such securities.
B-13
<PAGE>
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure and to seek to enhance returns. These
techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage, credit and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices.
Government Income Fund
Objective. This Fund seeks a high level of current income, consistent with
---------
safety of principal.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the Lehman Brothers Mutual
Fund Government/Mortgage Index, plus or minus one year. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed six
years. The approximate interest rate sensitivity of the Fund is expected to be
comparable to a five-year U.S. Treasury note.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. The remainder of the Fund's
assets may be invested in non-government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities and corporate securities.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
Credit Quality. This Fund's non-U.S. Government Securities will be rated,
--------------
at the time of purchase, AAA or Aaa by a Nationally Recognized
Statistical Rating Organization (an "NRSRO") or, if unrated, will be
determined by the Fund's investment adviser to be of comparable quality.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure and to seek to enhance returns. These
techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage, credit and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices.
Core Fixed Income Fund
Objective. This Fund seeks a total return consisting of capital
---------
appreciation and income that exceeds the total return of the Lehman
Brothers Aggregate Bond Index (the "Index").
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Aggregate Bond Index, plus or minus one year. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed six years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a five-year U.S. Treasury note.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in fixed-income securities, including U.S. Government
Securities, corporate debt securities, Mortgage-Backed Securities, and Asset-
Backed Securities. The Fund may also invest in custodial receipts, Municipal
Securities and convertible securities. The Fund's investments in non-U.S.
dollar denominated obligations
B-14
<PAGE>
will not exceed 25% of its total assets at the time of investment, of which 10%
may be invested in obligations of issuers in countries with emerging markets or
economies. 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 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 an 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 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, therefore, may
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
of such information and has no liability to any person for any loss arising from
results obtained from the use of the Index data.
Credit Quality. All U.S. dollar-denominated fixed-income securities
--------------
purchased by the Fund will be rated, at the time of purchase, at
least BBB or Baa by an NRSRO or, if unrated, will be determined by the Fund's
investment adviser to be of comparable quality. The non-U.S. dollar-denominated
fixed-income securities in which the Fund may invest will be rated, at the time
of investment, at least AA or Aa by an NRSRO or, if unrated, will be determined
by the Fund's investment adviser to be of comparable quality.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure, to seek to hedge its exposure to foreign
currencies and to seek to enhance returns. These techniques include, but are
not limited to, the use of financial futures contracts, option contracts
(including options on futures), forward foreign currency exchange contracts,
currency options and futures, options on foreign currencies, currency, credit,
mortgage and interest rate swaps and interest rate floors, caps and collars.
Currency management techniques involve risks different from those associated
with investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to increase
total return. The Fund may also employ other investment techniques to seek to
enhance returns, such as lending portfolio securities and entering into mortgage
dollar rolls, repurchase agreements and other investment practices.
Global Income Fund
Objective. This Fund seeks a high total return, emphasizing current
---------
income, and, to a lesser extent, providing opportunities for capital
appreciation.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed 7.5
B-15
<PAGE>
years. The approximate interest rate sensitivity of the Fund is expected to be
comparable to a six-year government bond.
Investment Sector. The Fund invests primarily in a portfolio of high
-----------------
quality fixed-income securities of U.S. and foreign issuers and
enters into transactions in foreign currencies. Under normal market conditions,
the Fund will (i) have at least 30% of its total assets, after considering the
effect of currency positions, denominated in U.S. dollars and (ii) invest in
securities of issuers in at least three countries. The Fund seeks to meet its
investment objective by pursuing investment opportunities in foreign and
domestic fixed-income securities markets and by engaging in currency
transactions to seek to enhance returns and to seek to hedge its portfolio
against currency exchange rate fluctuations.
The fixed-income securities in which the Fund may invest include: (i) U.S.
Government Securities and custodial receipts therefor; (ii) securities issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, instrumentalities or by supranational entities (i.e.,
international organizations designated or supported by governmental entities to
promote economic reconstruction or development, such as the World Bank); (iii)
corporate debt securities; (iv) certificates of deposit and bankers' acceptances
issued or guaranteed by, or time deposits maintained at, U.S. or foreign banks
(and their branches wherever located) having total assets of more than $1
billion; (v) commercial paper; and (vi) Mortgage-Backed and Asset-Backed
Securities.
Credit Quality. All securities purchased by the Fund will be rated, at the
--------------
time of purchase, at least BBB or Baa by an NRSRO. However, the Fund will
invest at least 50% of its total assets in securities rated, at the time of
purchase, AAA or Aaa by an NRSRO. Unrated securities will be determined by the
Fund's investment adviser to be of comparable quality. 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.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure, to seek to hedge its exposure to foreign
currencies and to seek to enhance returns. These techniques include, but are
not limited to, the use of financial futures contracts, option contracts
(including options on futures), forward foreign currency exchange contracts,
currency options and futures, options on foreign currencies, currency, credit,
mortgage and interest rate swaps and interest rate floors, caps and collars.
Currency management techniques involve risks different from those associated
with investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to increase
total return. While the Fund will have both long and short currency positions,
its net long and short foreign currency exposure will not exceed the value of
the Fund's total assets. To the extent that the Fund is fully invested in
foreign securities while also maintaining currency positions, it may be exposed
to greater combined risk. The Fund's net currency positions may expose it to
risks independent of its securities positions. The Fund may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into mortgage dollar rolls, repurchase agreements and
other investment practices. The Fund may purchase securities on a when-issued
or forward commitment basis.
The Fund may invest more than 25% of its total assets in the securities of
corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Fund's investments in such issuers will subject the Fund,
to a greater extent than if investment was more limited, to the risks of adverse
securities markets, exchange rates and social, political or economic events
which may occur in those countries. Not more than 25% of
B-16
<PAGE>
the Fund's total assets will be invested in securities of issuers in any other
single foreign country. The Fund may also invest up to 10% of its total assets
in issuers in countries with emerging markets and economies.
High Yield Fund
Objective. This Fund seeks a high level of current income and may also
---------
consider the potential for capital appreciation.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Lehman Brothers High Yield Bond Index, plus
or minus 2.5 years. In addition, under normal interest rate conditions, the
Fund's maximum duration will not exceed 7.5 years. The approximate interest
rate sensitivity of the Fund is expected to be comparable to a 6-year U.S.
Treasury note.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in high yield, fixed-income securities rated, at the
time of investment, below investment grade. Non-investment grade securities are
securities rated BB, Ba or below by an NRSRO, or, if unrated, determined by the
investment adviser to be of comparable quality. The Fund may invest in all
types of fixed-income securities, including senior and subordinated corporate
debt obligations (such as bonds, debentures, notes and commercial paper),
convertible and non-convertible corporate debt obligations, loan participations,
custodial receipts, municipal securities and preferred stock. The Fund may
invest up to 25% of its total assets in obligations of domestic and foreign
issuers (including securities of issuers located in countries with emerging
markets and economies) which are denominated in currencies other than the U.S.
dollar. Under normal market conditions, the Fund may invest up to 35% of its
total assets in investment grade fixed-income securities, including U.S.
Government Securities. The Fund may also invest in common stocks, warrants,
rights and other equity securities, but will generally hold such equity
investments only when debt or preferred stock of the issuer of such equity
securities is held by the Fund.
Credit Quality. This Fund invests at least 65% of its total assets in
--------------
securities rated BB or Ba or lower at the time of investment or, if unrated,
determined by the Fund's investment adviser to be of comparable quality. The
Fund may purchase securities of issuers in default. Non-investment grade
securities (commonly known as "junk bonds") tend to offer higher yields than
higher rated securities with similar maturities. Non-investment grade securities
are, however, considered speculative and generally involve greater price
volatility and greater risk of loss of principal and interest than higher rated
securities. See "Description of Investment Securities and Practices." A
description of the corporate bond ratings is contained in Appendix A to this
Additional Statement.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure, to seek to hedge its exposure to foreign
securities and to seek to enhance returns. These techniques include, but are
not limited to, the use of financial futures contracts, option contracts
(including options on futures), forward foreign currency exchange contracts,
currency options and futures, and currency, credit, mortgage and interest rate
swaps. Currency management techniques involve risks different from those
associated with investing solely in U.S. dollar-denominated fixed-income
securities of U.S. issuers. It is expected that the Fund will use certain
currency techniques to seek to hedge against currency exchange rate fluctuations
or to seek to increase total return. The Fund may also employ other investment
techniques to seek to enhance returns, such as lending portfolio securities and
entering into repurchase agreements and other investment practices.
B-17
<PAGE>
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES
The Short-Duration Government and Adjustable Rate Government Funds invest
in U.S. Government Securities and related repurchase agreements, and neither of
these Funds, the Government Income Fund nor the Financial Square Prime
Obligations Fund makes foreign investments. The investments of the Financial
Square Prime Obligations Fund are limited by Securities Exchange Commission
("SEC") regulations applicable to money market funds as described in its
prospectus, and do not include many of the types of investments discussed below
that are permitted for the other Underlying Funds. With these exceptions, and
the further exceptions noted below, the following description applies generally
to the Underlying Funds.
As stated in the Prospectus, the Portfolios may also invest a portion of
their assets in high quality, short-term debt obligations and engage in certain
other investment practices. Further information about the Underlying Funds and
their respective investment objectives and policies is included in their
Prospectus and Additional Statements. There is no assurance that any Portfolio
or Underlying Fund will achieve its objective.
Corporate Debt Obligations
Each Underlying Fund (other than the Adjustable Rate Government and Short
Duration Government Funds) may, under normal market conditions, invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. CORE Large Cap Value, CORE U.S. Equity, CORE Large Cap
Growth, CORE Small Cap Equity and CORE International Equity Funds may only
invest in debt securities that are cash equivalents. 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 investment advisers of
the Underlying Funds will attempt to reduce these risks through portfolio
diversification and by analysis of each issuer and its ability to make timely
payments of income and principal, as well as broad economic trends and corporate
developments.
Trust Preferreds. The Government Income, Core Fixed Income, Global Income
----------------
and High Yield Funds may invest in trust preferred securities. A trust preferred
or capital security is a long dated bond (for example 30 years) with preferred
features. The preferred features are that payment of interest can be deferred
for a specified period without initiating a default event. From a bondholder's
viewpoint, the securities are senior in claim to standard preferred but are
junior to other bondholders. From the issuer's viewpoint, the securities are
attractive because their interest is deductible for tax purposes like other
types of debt instruments.
B-18
<PAGE>
High Yield Securities. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group ("Standard & Poor's") or Ba or below by
Moody's Investors Service, Inc. ("Moody's") (or comparable rated and unrated
securities) are commonly referred to as "junk bonds" and are considered
speculative. The ability of their issuers to make principal and interest
payments may be questionable. In some cases, such bonds may be highly
speculative, have poor prospects for reaching investment grade standing and be
in default. As a result, investment in such bonds will entail greater risks than
those associated with investment grade bonds (i.e., bonds rated 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 an Underlying
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 Underlying Fund were investing in higher quality
securities. See Appendix A to this Additional Statement for a description of the
corporate bond and preferred stock ratings by Standard & Poor's, Moody's, Fitch
IBCA, Inc. and Duff & Phelps.
The amount of high yield, fixed-income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest. High yield
securities are also issued by governmental issuers that may have difficulty in
making all scheduled interest and principal payments.
The market values of high yield, fixed-income securities tends to reflect
those individual corporate or municipal 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 the Underlying Funds
may invest, 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 an Underlying Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities
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<PAGE>
are generally unsecured and are often subordinated to the rights of other
creditors of the issuers of such securities. Investment by an Underlying 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 an Underlying Fund of its initial
investment and any anticipated income or appreciation is uncertain. In addition,
an Underlying 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 investments. An Underlying
Fund may be required to liquidate other portfolio securities to satisfy the
Underlying Fund's annual distribution obligations in respect of accrued interest
income on securities which are subsequently written off, even though the
Underlying 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 ability of an Underlying Fund 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 an Underlying Fund's net asset value. A less liquid secondary
market also may make it more difficult for an Underlying 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, an Underlying Fund may have to replace such
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if an Underlying Fund experiences unexpected 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 Underlying Fund's
portfolio and increasing the exposure of the Underlying 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. Investments in non-investment grade
and comparable unrated obligations will be more dependent on the credit analysis
of an Underlying Fund's investment adviser than would be the case with
investments in investment-grade debt obligations. An Underlying Fund's
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 an Underlying Fund's portfolio and evaluates whether
to dispose of
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<PAGE>
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.
Loan Participations. The High Yield Fund may invest in loan participations.
-------------------
Such loans must be to issuers in whose obligations the High Yield Fund may
invest. A loan participation is an interest in a loan to a U.S. or foreign
company or other borrower which is administered and sold by a financial
intermediary. In a typical corporate loan syndication, a number of lenders,
usually banks (co-lenders), lend a corporate borrower a specified sum pursuant
to the terms and conditions of a loan agreement. One of the co-lenders usually
agrees to act as the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fund may take the form
of a direct or co-lending relationship with the corporate borrower, an
assignment of an interest in the loan by a co-lender or another participant, or
a participation in the seller's share of the loan. When the High Yield Fund acts
as co-lender in connection with a participation interest or when the High Yield
Fund acquires certain participation interests, the High Yield Fund will have
direct recourse against the borrower if the borrower fails to pay scheduled
principal and interest. In cases where the High Yield Fund lacks direct
recourse, it will look to the agent bank to enforce appropriate credit remedies
against the borrower. In these cases, the High Yield Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Underlying 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.
Obligations of the United States, Its Agencies, Instrumentalities and Sponsored
Enterprises
Each Underlying Fund may invest in U.S. government securities, which are
obligations issued or guaranteed by the U.S. government and its agencies,
instrumentalities or sponsored enterprises ("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 times of issuance) are
supported by the full faith and credit of the United States of America. Others,
such as obligations issued or guaranteed by U.S. government agencies,
instrumentalities or sponsored enterprises, are supported either by (a) the
right of the issuer to borrow from the U.S. Treasury (such as securities of
Student Loan Marketing Association), (b) the discretionary authority of the U.S.
government to purchase the agency's obligations (such as securities of Federal
National Mortgage Association ("Fannie Mae")) or (c) only the credit of the
issuer (such as securities of the Financing Corporation). The U.S. government is
under no legal obligation, in general, to
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<PAGE>
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 Underlying Fund may also purchase U.S. Government Securities in private
placements, subject to the Underlying Fund's limitation on investment in
illiquid securities.
The Underlying Funds may also 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").
Bank Obligations
Certain of the Underlying Funds may invest in debt obligations issued or
guaranteed by U.S. or foreign banks. Bank obligations, including without
limitation, time deposits, bankers' acceptances and certificates of deposit, may
be general obligations of the parent bank or may be limited to the issuing
branch by 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. 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.
Deferred Interest, Pay-in-Kind and Capital Appreciation Bonds
Certain of the Underlying Funds expect to invest in deferred interest and
capital appreciation bonds and pay-in-kind ("PIK") securities. 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
deferred interest, capital appreciation bonds and PIK securities generally are
more volatile than the market prices of interest bearing securities and are
likely to respond to a greater degree to changes in interest rates than interest
bearing securities having similar maturities and credit quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than
B-22
<PAGE>
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.
Deferred interest, capital appreciation and PIK securities involve the
additional risk that, unlike securities that periodically pay interest to
maturity, an Underlying 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, an Underlying 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 Underlying 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, an Underlying Fund may be required to
liquidate other portfolio securities to obtain sufficient cash to satisfy
federal tax distribution requirements applicable to the Underlying Fund. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable.
Zero Coupon Bonds
An Underlying Fund's investment in fixed-income securities may include zero
coupon bonds, which are debt obligations issued or purchased at a significant
discount from face value. The discount approximates the total amount of
interest the bonds would have accrued and compounded over the period until
maturity. Zero coupon bonds do not require the periodic payment of interest.
Such investments benefit the issuer by mitigating its need for cash to meet debt
service but also require a higher rate of return to attract investors who are
willing to defer receipt of such cash. Such investments may experience greater
volatility in market value than debt obligations which provide for regular
payments of interest. In addition, if an issuer of zero coupon bonds held by an
Underlying Fund defaults, the Underlying Fund may obtain no return at all on its
investment. Each Fund will accrue income on such investments for each taxable
year which (net of deductible expenses, if any) is distributable to shareholders
and which, because no cash is generally received at the time of accrual, may
require the liquidation of other portfolio securities to obtain sufficient cash
to satisfy the Underlying Fund's distribution obligations.
Variable and Floating Rate Securities
The interest rates payable on certain fixed-income securities in which an
Underlying 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.
Permissible investments for certain of the Underlying Funds include
"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 inherent in inverse floaters is associated with greater
volatility in their market values.
B-23
<PAGE>
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities for
purposes of each Fund's limitation on illiquid investments.
Custodial Receipts
Each Underlying 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.
Municipal Securities
Certain of the Underlying Funds may invest in bonds, notes and other
instruments issued by or on behalf of states, territories and possessions of the
United States (including the District of Columbia) and their political
subdivisions, agencies or instrumentalities ("Municipal Securities").
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.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the Government Income, High Yield and
Core Fixed Income Funds. Thus, the issue may not be said to be publicly
offered. Unlike some securities that are not publicly offered, a secondary
market exists for many Municipal Securities that were not publicly offered
initially and such securities may be readily marketable.
B-24
<PAGE>
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.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. Municipal Securities include 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 foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover an Underlying Fund's original
investment. To the extent that an Underlying 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 an Underlying Fund's limitation on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by an Underlying Fund may be determined
by its 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
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<PAGE>
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by an Underlying Fund.
Certain Underlying Funds may purchase participations in Municipal
Securities held by a commercial bank or other financial institution. Such
participations provide an Underlying Fund with the right to a pro rata undivided
interest in the underlying Municipal Securities. In addition, such
participations generally provide an Underlying 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. An Underlying 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 advisors, the interest from such
participation is exempt from regular federal income tax.
Auction Rate Securities. Municipal Securities also include 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.
An Underlying Fund's investments in auction rate securities of closed-end
funds are subject to the limitations prescribed by the Act. An Underlying Fund
will indirectly bear its proportionate share of any management and other fees
paid by such closed-end funds in addition to the advisory fees payable directly
by the Underlying Funds.
Other Types of Municipal Securities. Other types of Municipal Securities in
-----------------------------------
which certain of the Underlying Funds may invest include municipal notes, tax-
exempt commercial paper, pre-refunded municipal bonds, industrial development
bonds, tender option bonds and insured municipal obligations.
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 an Underlying Fund's portfolio are
called prior to the maturity, the Underlying 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 Underlying Fund's return on its portfolio
securities.
Mortgage Loans and Mortgage-Backed Securities
General Characteristics. Certain of the Underlying Funds may invest in
-----------------------
Mortgage-Backed Securities as described in the Prospectuses. 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, multifamily (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, multifamily dwelling units,
individual condominiums, townhouses, duplexes, triplexes, fourplexes, row
houses, individual units in planned unit developments
B-26
<PAGE>
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 an Underlying Fund purchases Mortgage-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 an Underlying
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 an Underlying 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"). 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.
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.
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<PAGE>
ARMs also have the risk of prepayments. The rate of principal prepayments
with respect to ARMs has fluctuated in recent years. As with fixed-rate
mortgage loans, ARMs may be subject to a greater rate of principal repayments in
a declining interest rate environment 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.
Conversely, if prevailing interest rates rise significantly, ARMs may prepay
more slowly. 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 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 an Underlying Fund's portfolio and, therefore, in the net
asset value of an Underlying 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. These regulations
may impair the ability of a mortgage lender to enforce its rights under the
mortgage documents. These regulations may adversely affect the Underlying Funds'
investments in Mortgage-Backed Securities (including those issued or guaranteed
by the U.S. government, its agencies or instrumentalities) by delaying the
Underlying 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.
B-28
<PAGE>
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to the then-current
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of the
mortgage loan. If a court relieves a borrower's obligation to repay
amounts otherwise due on a mortgage loan, the mortgage loan servicer will
not be required to advance such amounts, and any loss may be borne by the
holders of securities backed by such loans. In addition, numerous federal
and state consumer protection laws impose 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"), collateralized mortgage obligations and stripped
Mortgage-Backed Securities. An Underlying Fund is permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with its investment policies and objective.
An Underlying Fund's investments in Mortgage-Backed Securities may include
securities issued or guaranteed by the U.S. Government or one of its agencies,
authorities, instrumentalities or sponsored enterprises, such as the Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac").
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 guaranty, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
B-29
<PAGE>
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the FHA or guaranteed by the Veterans Administration ("VA").
However, the Mortgage Loans in Fannie Mae Pools are primarily conventional
Mortgage Loans. The lenders originating and servicing the Mortgage Loans are
subject to certain eligibility requirements established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
Freddie Mac Certificates. 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
multifamily 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.
B-30
<PAGE>
Mortgage Pass-Through Securities. As described in the Prospectuses,
--------------------------------
certain of the Underlying Funds may invest in both government guaranteed and
privately issued mortgage pass-through securities ("Mortgage Pass-Throughs");
that is, fixed or adjustable rate Mortgage-Backed Securities which provide for
monthly payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
Description of Certificates. Mortgage Pass-Throughs may be issued in one or
---------------------------
more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate. Generally,
each certificate will evidence the specified interest of the holder thereof in
the payments of principal or interest or both in respect of the mortgage pool
comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related mortgage
pass-through rate (less the amount, if any, of retained yield) with respect to
each mortgage loan will generally be paid to the servicer as a servicing fee.
Since certain adjustable rate mortgage loans included in a mortgage pool may
provide for deferred interest (i.e., negative amortization), the amount of
interest actually paid by a mortgagor in any month may be less than the amount
of interest accrued on the outstanding principal balance of the related mortgage
loan during the relevant period at the applicable mortgage interest rate. In
such event, the amount of interest that is treated as deferred interest will be
added to the principal balance of the related mortgage loan and will be
distributed pro rata to certificate-holders as principal of such mortgage loan
when paid by the mortgagor in subsequent monthly payments or at maturity.
Ratings. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
B-31
<PAGE>
Credit Enhancement. Credit support falls generally into two categories: (i)
------------------
liquidity protection and (ii) protection against losses resulting from default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event 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
B-32
<PAGE>
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.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
---------------------------------------------------------------------
Obligations. An Underlying 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 Freddie Mac or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
Mortgage-Backed Securities represent direct ownership interests in, a pool of
mortgage loans or Mortgage-Backed Securities the payments on which are used to
make payments on the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Underlying 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
B-33
<PAGE>
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.
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 PAC 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. Certain of the Underlying 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 or by private issuers. 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 an Underlying Fund's
limitation on investments in illiquid securities. An Underlying Fund's
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.
B-34
<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.
Certain Underlying Funds may invest in asset-backed securities. Like
Mortgage-Backed Securities, asset-backed 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, an Underlying 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 an
Underlying 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.
Futures Contracts and Options on Futures Contracts
Each Underlying Fund may purchase and sell futures contracts and may also
purchase and write options on futures contracts. The CORE Large Cap Value, CORE
Large Cap Growth and CORE Small Cap Equity Funds may only enter into such
transactions with respect to a representative index. The CORE U.S. Equity Fund
may enter into futures contracts only with respect to the S&P 500 Index. The
other Funds may purchase and sell futures contracts based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices. An Underlying 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 Commodity Futures Trading Commission ("CFTC").
Futures contracts entered into by an Underlying 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 exchange or boards of
trade, including the execution, delivery
B-35
<PAGE>
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, an Underlying 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, an
Underlying 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 prices are rising, an Underlying 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. Similarly, an
Underlying Fund may purchase and sell futures contracts on a specified currency
in order to seek to increase total return or to hedge against changes in
currency exchange rates. An Underlying Fund may purchase futures contracts on
foreign currency to establish the price in U.S. dollars of a security quoted or
denominated in such currency that such Fund has acquired or expects to acquire.
The Underlying Fixed-Income Funds may also use futures contracts to manage their
term structure, sector selection and duration in accordance with their
investment objectives and policies.
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 an Underlying Fund will usually liquidate futures
contracts on securities or currency in this manner, an Underlying Fund may
instead make or take delivery of the underlying securities or currency whenever
it appears economically advantageous for the Underlying Fund 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 an Underlying
Fund owns or proposes to acquire or the exchange rate of currencies in which
portfolio securities are denominated or quoted. An Underlying 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 securities held by a Fund or
securities with characteristics similar to those of a Fund's portfolio
securities. Similarly, certain Underlying Funds may sell futures contracts on
any currency in which its portfolio securities are quoted or denominated or in
one currency to seek to hedge against fluctuations in the value of securities
quoted or denominated in a different currency if there is an established
historical pattern of correlation between the two currencies. If, in the opinion
of an Underlying Fund's investment adviser, there is a sufficient degree of
correlation between price trends for an Underlying Fund's portfolio securities
and
B-36
<PAGE>
futures contracts based on other financial instruments, securities indices or
other indices, the Underlying Fund may also enter into such futures contracts as
part of its hedging strategy. Although under some circumstances prices of
securities in an Underlying Fund's portfolio may be more or less volatile than
prices of such futures contracts, its investment adviser will attempt to
estimate the extent of this volatility difference based on historical patterns
and compensate for any such differential by having the Underlying Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Underlying 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 an Underlying Fund's portfolio
securities would be substantially offset by a decline in the value of the
futures position.
On other occasions, an Underlying Fund may take a "long" position by
purchasing such futures contracts. This would be done, for example, when an
Underlying 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
or rates that are currently available.
Options on Futures Contracts. The acquisition of put and call options on
----------------------------
futures contracts will give an Underlying 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, an Underlying 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 an Underlying Fund's
assets. By writing a call option, an Underlying 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 an Underlying Fund intends to
purchase. However, an Underlying 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 an Underlying
Fund in writing options on futures is potentially unlimited and may exceed the
amount of the premium received. An Underlying Fund 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. An Underlying Fund's ability to establish and close out positions on
such options will be subject to the development and maintenance of a liquid
market.
Other Considerations. An Underlying Fund will engage in futures
--------------------
transactions and related options transactions only for bona fide hedging as
defined in the regulations of the CFTC or to seek to increase total return to
the extent permitted by such regulations.
In addition to bona fide hedging, a CFTC regulation permits an Underlying
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 such 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. Transactions in futures contracts and
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related options may also be limited by certain requirements that must be met in
order for an Underlying Fund to qualify as a regulated investment company for
federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in certain cases, require an Underlying Fund
to segregate cash or liquid assets 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,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for an Underlying 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 an Underlying Fund may be exposed to risk of loss.
Perfect correlation between an Underlying Fund's futures positions and
portfolio positions will be difficult to achieve because no futures contracts
based on individual equity or corporate fixed-income securities are currently
available. In addition, it is not possible for an Underlying Fund to hedge
fully or perfectly against currency fluctuations affecting the value of
securities quoted or 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 an Underlying Fund's trading in
futures depends upon the ability of its investment adviser to analyze correctly
the futures markets.
Options on Securities and Securities Indices
Writing Covered Options. Certain of the Underlying Funds may write (sell)
-----------------------
covered call and put options on any securities in which they may invest or on
any securities index composed of securities in which it may invest. An
Underlying 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 an
Underlying 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 an Underlying Fund are
covered, which means that such Fund will own the securities subject to the
option as long as the option is outstanding or such Fund will use the other
methods described below. An Underlying Fund's purpose in writing covered call
options is to realize greater income than would be realized on portfolio
securities transactions alone. However, an Underlying Fund may forego the
opportunity to profit from an increase in the market price of the underlying
security.
A put option written by an Underlying Fund would obligate such 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 an Underlying 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
Underlying Fund. However, in return for the option premium, an Underlying 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.
Call and put options written by an Underlying Fund will also be considered
to be covered to the extent that the Underlying Fund's liabilities under such
options are wholly or partially offset by its rights under call and put options
purchased by the Underlying Fund or by an offsetting forward contract which,
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by virtue of its exercise price or otherwise, reduces an Underlying Fund's net
exposure on its written option position.
An Underlying Fund may also write (sell) covered call and put options on
any securities index consisting 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.
An Underlying Fund may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index, or by having an absolute and immediate right to acquire such
securities without additional cash consideration (or for additional cash
consideration which has been segregated by the Underlying Fund) upon conversion
or exchange of other securities in its portfolio. An Underlying Fund may cover
call and put options on a securities index by segregating cash or liquid assets
with a value equal to the exercise price or by using the other methods described
above.
An Underlying 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."
Purchasing Options. Each Underlying Fund (other than Financial Square Prime
------------------
Obligations Fund) may purchase put and call options on any securities in which
it may invest or options on any securities index composed of securities in which
it may invest. An Underlying Fund would also be able to enter into closing sale
transactions in order to realize gains or minimize losses on options it had
purchased.
An Underlying Fund may purchase call options in anticipation of an increase
in the market value of securities of the type in which it may invest. The
purchase of a call option would entitle an Underlying Fund, in return for the
premium paid, to purchase specified securities at a specified price during the
option period. An Underlying Fund would ordinarily realize a gain if, during the
option period, the value of such securities exceeded the sum of the exercise
price, the premium paid and transaction costs; otherwise such an Underlying Fund
would realize either no gain or a loss on the purchase of the call option.
An Underlying Fund may purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts"), or in
securities in which it may invest. The purchase of a put option would entitle
an Underlying 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 an Underlying Fund's securities. Put options may also be purchased by
an Underlying Fund for the purpose of affirmatively benefiting from a decline in
the price of securities which it does not own. An Underlying Fund would
ordinarily realize a gain on the purchase of a call option if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to more than cover the premium and transaction costs;
otherwise such an Underlying 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 portfolio securities.
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<PAGE>
An Underlying Fund would purchase put and call options on securities
indices for the same purposes as it would purchase options on individual
securities. For a description of options on securities indices, see "Writing
Covered Options" above.
Yield Curve Options. Each Underlying Fixed-Income Fund and Real Estate
-------------------
Securities 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.
An Underlying Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, an Underlying Fund may
purchase a call option on the yield spread between two securities if the
Underlying 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. An Underlying Fund may also purchase or write yield
curve options in an effort to increase current income if, in the judgment of its
investment adviser, the Underlying 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 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 an Underlying Fund will be "covered." A call
(or put) option is covered if an Underlying 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 Underlying Fund's net liability under the
two options. Therefore, an Underlying Fund's liability for such a covered option
is generally limited to the difference between the amount of the Underlying
Fund's liability under the option written by the Underlying Fund less the value
of the option held by the Underlying 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
at 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 an
Underlying Fund is unable to effect a closing purchase transaction with respect
to covered options it has written, the Underlying Fund will not be able to sell
the underlying securities or dispose of segregated assets until the options
expire or are exercised. Similarly, if an Underlying Fund is unable to effect a
closing sale transaction with respect to options it has purchased, it will have
to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one
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<PAGE>
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.
An Underlying Fund may purchase and sell both options that are traded on
U.S. and foreign exchanges and options traded over-the-counter with broker-
dealers who make markets in these options. The ability to terminate over-the-
counter options is more limited than with exchange-traded options and may
involve the risk that broker-dealers participating in such transactions will not
fulfill their obligations.
Transactions by an Underlying Fund in options will be subject to
limitations established by each of the exchanges, boards of trade or other
trading facilities 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. Thus, the number of options which an Underlying Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Underlying Funds' investment advisers. An exchange,
board of trade or other trading facility may order the liquidation of positions
found to be in excess of these limits, and it may impose certain other
sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to seek to
increase total return involves the risk of loss if an 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 an investment adviser to predict future price fluctuations and
the degree of correlation between the options and securities markets. If an
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.
Warrants and Stock Purchase Rights
Certain of the Underlying Funds may invest a portion of their assets in
warrants or rights (including those acquired in units or attached to other
securities) which entitle the holder to buy equity securities at a specific
price for a specific period of time. An Underlying Fund will invest in warrants
and rights only if such securities are deemed appropriate by its investment
adviser for investment by the Underlying Fund. Warrants and rights have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer.
Foreign Investments
Investments in foreign securities may offer potential benefits not
available from investments solely in U.S. dollar-denominated or quoted
securities of domestic issuers. Such benefits may include the opportunity to
invest in foreign issuers that appear, in the opinion of an Underlying Fund's
investment adviser, to offer the potential for better long-term growth of
capital and income than investments in U.S. securities, the opportunity to
invest in foreign countries with economic policies or business cycles different
from those of the United States and the opportunity to reduce fluctuations in
portfolio value by taking advantage of foreign securities markets that do not
necessarily move in a manner parallel to U.S. markets.
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<PAGE>
Investing in foreign securities also involves, however, certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. dollar-denominated or quoted securities of
U.S. issuers. Investments in foreign securities usually involve currencies of
foreign countries. Accordingly, any Underlying Fund that invests in foreign
securities 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. An Underlying Fund may be subject to
currency exposure independent of its securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad. To the extent that a
substantial portion of an Underlying Fund's total assets, adjusted to reflect
the Underlying Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Underlying
Fund will be more susceptible to the risk of adverse economic and political
developments within those countries. In addition, if the currency in which an
Underlying Fund receives dividends, interest or other 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 Underlying 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 U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States 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 Underlying Fund endeavors to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of foreign securities 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 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 some of an Underlying Fund's assets are uninvested and no return is
earned on such assets. The inability of an Underlying Fund to make intended
security purchases due to settlement problems could cause the Underlying Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to an
Underlying Fund due to subsequent declines in value of the portfolio securities
or, if the Underlying 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 affect an Underlying Fund's investments in those
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<PAGE>
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, resource self-sufficiency and
balance of payments position.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs"), Global Depository Receipts
("GDRs"), European Depository Receipts ("EDRs") or other similar instruments
representing securities of foreign issuers (together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent an Underlying Fund acquires Depository Receipts through banks
which do not have a contractual relationship with the foreign issuer of the
security underlying the Depository Receipts to issue and service such Depository
Receipts (unsponsored), there may be an increased possibility that the
Underlying Fund would not become aware of and be able to respond to corporate
actions such as stock splits or rights offerings involving the foreign issuer in
a timely manner. In addition, the lack of information may result in
inefficiencies in the valuation of such instruments. Investment in Depository
Receipts does not eliminate all the risks inherent in investing in securities of
non-U.S. issuers. The market value of Depository Receipts is dependent upon the
market value of the underlying securities and fluctuations in the relative value
of the currencies in which the Depository receipts and the underlying securities
are quoted. However, by investing in Depository Receipts, such as ADRs, that
are quoted in U.S. dollars, a Fund may avoid currency risks during the
settlement period for purchases and sales.
As described more fully below, certain of the Underlying Funds may invest
in countries with emerging economies or securities markets. Political and
economic structures in many of such countries may be undergoing significant
evolution and rapid development, and such countries may lack the social,
political and economic stability characteristic of more developed countries.
Certain of such countries may have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks described above, including the risks
of nationalization or expropriation of assets, may be heightened. See "Investing
in Emerging Markets" below.
Investing in Emerging Markets. The CORE International Equity,
-----------------------------
International Equity, European Equity, Japanese Equity, International Small
Cap, Emerging Markets Equity and Asia Growth Funds are intended for long-term
investors who can accept the risks associated with investing primarily in
equity and equity-related securities of foreign issuers, including emerging
country issuers, as well as the risks associated with investments quoted or
denominated in foreign currencies. The Growth and Income, Capital Growth, Mid
Cap Value, Small Cap Value and Real Estate Securities Funds may invest, to a
lesser extent, in equity and equity-related securities of foreign issuers,
including emerging country issuers. The Core Fixed Income, Global Income and
High Yield Funds may invest in debt securities of foreign issuers, including
emerging country issuers, and in fixed income securities quoted or denominated
in a currency other than U.S. dollars.
Investments in debt securities of emerging market issuers involve special
risks. The development of a market for such securities is a relatively recent
phenomenon, and each of the securities markets of the emerging countries is less
liquid and subject to greater price volatility and has a smaller market
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<PAGE>
capitalization than the U.S. securities markets. In certain countries, there
may be few publicly traded securities, and the market may be dominated by a few
issuers or sectors. Issuers and securities markets in such countries are not
subject to as extensive and frequent accounting, financial and other reporting
requirements or as comprehensive government regulations as are issuers and
securities markets in the U.S. In particular, the assets and profits appearing
on the financial statements of emerging country issuers may not reflect their
financial position or results of operations in the same manner as financial
statements for U.S. issuers. Substantially less information may be publicly
available about emerging country issuers than is available about issuers in the
United States.
Emerging country securities markets are typically marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain emerging countries are in the earliest
stages of their development. A Fund's investments in emerging countries are
subject to the risk that the liquidity of particular instruments, or instruments
generally in such countries, will shrink or disappear suddenly and without
warning as a result of adverse economic, market or political conditions, or
adverse investor perceptions, whether or not accurate. Even the markets for
relatively widely traded securities in emerging countries may not be able to
absorb, without price disruptions, a significant increase in trading volume or
trades of a size customarily undertaken by institutional investors in the
securities markets of developed countries. The limited size of many of the
securities markets can cause prices to be erratic for reasons apart from factors
that affect the soundness and competitiveness of the securities issuers. For
example, prices may be unduly influenced by traders who control prices in these
markets. 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 limited liquidity of emerging country
securities may also affect an Underlying Fund's ability to accurately value its
portfolio securities or to acquire or dispose of such securities at the price
and times it wishes to do so. The risks associated with reduced liquidity may
be particularly acute to the extent that an Underlying Fund needs cash to meet
redemption requests, to pay dividends and other distributions or to pay its
expenses.
Transaction costs, including brokerage commissions or dealer mark-ups, in
emerging countries may be higher than in the United States and other developed
securities markets. In addition, existing laws and regulations are often
inconsistently applied. 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 market countries, archaic
legal systems may have an adverse impact on an Underlying 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 market countries. Similarly, the rights of investors in
emerging market companies may be more limited than those of shareholders of U.S.
corporations.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees. These restrictions may limit an
Underlying Fund's investment in certain emerging countries and may increase the
expenses of the Underlying Fund. Certain emerging countries require government
approval prior to investments by foreign persons or limit investment 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 company available for purchase by nationals. In
addition, the repatriation of both investment income and capital from several of
the emerging
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<PAGE>
countries is subject to restrictions which require government consents or
prohibit repatriation entirely for a period of time. Even where there is no
outright restriction on repatriation of capital, the mechanics of repatriation
may affect certain aspects of the operation of an Underlying Fund. An Underlying
Fund may be required to establish special custodial or other arrangements before
investing in certain emerging countries.
Each of the emerging countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. This instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; (v) ethnic, religious and racial disaffection or
conflict; and (vi) the absence of developed legal structures governing foreign
private investments and private property. Such economic, political and social
instability could disrupt the principal financial markets in which the
Underlying Funds may invest and adversely affect the value of the Underlying
Funds' assets. A Fund's investments could in the future be adversely affected by
any increase in taxes or by political, economic or diplomatic developments.
Certain Funds intend to seek investment opportunities within the former "east
bloc" countries in Eastern Europe. See "Fund Investment Objective and Policies"
in the Fund's prospectus. All or a substantial portion of such investments may
be considered "not readily marketable" for purposes of the limitations set forth
below. For example, most Eastern European countries have had a centrally
planned, socialist economy since shortly after World War II. The governments of
a number of Eastern European countries currently are implementing reforms
directed at political and economic liberalization, including efforts to
decentralize the economic decision-making process and move towards a market
economy. However, business entities in many Eastern European countries do not
have any recent history of operating in a market-oriented economy, and the
ultimate impact of Eastern European countries' attempts to move toward more
market-oriented economies is currently unclear. In addition, any change in the
leadership or policies of Eastern European countries may halt the expansion of
or reverse the liberalization of foreign investment policies now occurring and
adversely affect existing investment opportunities.
The economies of 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 payments. 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 are vulnerable to weakness in
world prices for their commodity exports.
An Underlying Fund's income and, in some cases, capital gains from foreign
stocks and securities will be subject to applicable taxation in certain of the
countries in which it invests, and treaties between the U.S. and such countries
may not be available in some cases to reduce the otherwise applicable tax rates.
Foreign markets may also have different clearance and settlement procedures
and in certain U.S. 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. Delays in settlement could result in
temporary periods when a portion of an Underlying Fund's assets is uninvested
and no return is earned thereon. The inability of an Underlying Fund to make
intended security purchases or sales due to
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settlement problems could result either in losses to the Underlying Fund due to
subsequent declines in value of the portfolio securities or, if the Underlying
Fund has entered into a contract to sell the securities, could result in
possible liability of the Underlying Fund to the purchaser. The creditworthiness
of the local securities firms used by a Fund in emerging countries may not be as
sound as the creditworthiness of firms used in more developed countries, thus
subjecting the Fund to a greater risk if a securities firm defaults in the
performance of its responsibilities.
Investing in Japan. The Japanese Equity Fund invests in the equity
------------------
securities of Japanese companies. Japan's economy, the second-largest in the
world, has grown substantially over the last three decades. The boom in Japan's
equity and property markets during the expansion of the late 1980's supported
high rates of investment and consumer spending on durable goods, but both of
these components of demand have since retreated sharply following the decline in
asset prices. Japan's economic growth in the 1990's has been substantially below
the levels of earlier decades. Its economy has drifted between modest growth and
recession. Profits have fallen sharply, unemployment has reached a historical
high and consumer confidence is low. The banking sector continues to suffer from
non-performing loans and this economy is subject to deflationary pressures.
Numerous discount-rate cuts since its peak in 1991, a succession of fiscal
stimulus packages, support plans for the debt-burdened financial system and
spending for reconstruction following the Kobe earthquake may help to contain
the recessionary forces, but substantial uncertainties remain. In calendar year
1998, Japan's gross national product contracted by 2.8%, its worst performance
in the post-war period.
In addition to the cyclical downturn, Japan is suffering through structural
adjustments. The Japanese have seen a deterioration of their competitiveness
due to high wages, a strong currency and structural rigidities. Finally, Japan
is reforming its political process and deregulating its economy. This has
brought about turmoil, uncertainty and a crisis of confidence.
While the Japanese governmental system itself seems stable, the dynamics of
the country's politics have been unpredictable in recent years. The economic
crisis of 1990-92 brought the downfall of the conservative Liberal Democratic
Party, which had ruled since 1955. Since then, the country has seen a series of
unstable multi-party coalitions and several prime ministers come and go, because
of politics as well as personal scandals. With the pending formation of a
three-party coalition government, the political environment appears to be in the
process of stabilizing. However, should the political instability continue,
efforts to establish effective economic and fiscal policies may be hampered.
Future political developments may lead to changes in policy that might adversely
affect the Fund's investments.
Japan's heavy dependence on international trade has been adversely affected
by trade tariffs and other protectionist measures as well as the economic
condition of its trading partners. While Japan subsidizes its agricultural
industry, only 19% of its land is suitable for cultivation and it is only 50%
self-sufficient in food production. Accordingly, it is highly dependent on large
imports of wheat, sorghum and soybeans. In addition its export industry, its
most important economic sector, depends on imported raw materials and fuels,
including iron ore, copper, oil and many forest products. Japan's high volume of
exports, such as automobiles, machine tools and semiconductors, has caused trade
tensions, particularly with the United States. Some trade agreements, however,
have been implemented to reduce these tensions. The relaxing of official and de
facto barriers to imports, or hardships created by any pressures brought by
trading partners, could adversely affect Japan's economy. A substantial rise in
world oil or commodity prices could also have a negative affect. The Japanese
Yen has fluctuated widely over the past year. As of September 1999, the Yen had
restrengthened. The strength of the yen itself may prove an impediment to strong
continued exports and economic recovery, because it makes Japanese goods sold in
other countries more expensive and reduces the value of foreign earnings
repatriated to Japan. Because the Japanese
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economy is so dependent on exports, any fall-off in exports may be seen as a
sign of economic weakness, which may adversely affect the market.
Geologically, Japan is located in a volatile area of the world, and has
historically been vulnerable to earthquakes, volcanoes and other natural
disasters. As demonstrated by the Kobe earthquake in January of 1995, in which
5,000 people were killed and billions of dollars of damage was sustained, these
natural disasters can be significant enough to affect the country's economy.
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
an Underlying Fund may have limited recourse in the event of a default. During
periods of economic uncertainty, the market prices of sovereign debt, and an
Underlying Fund's net asset value, may be more volatile than prices of debt
obligations of U.S. issuers. In the past, the governments of certain emerging
markets have encountered difficulties in servicing their debt obligations,
withheld payments of principal and interest and declared moratoria on the
payment of principal and interest on their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
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 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. Certain of the Underlying
Funds may enter into forward foreign currency exchange contracts for hedging
purposes and to seek to protect against anticipated changes in future foreign
currency exchange rates. Certain of the Underlying Funds may also enter into
forward foreign currency exchange contracts 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 between
currency traders
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(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 an Underlying 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 often, but not always, effected with the currency trader
who is a party to the original forward contract.
An Underlying Fund may enter into forward foreign currency exchange
contracts in several circumstances. First, when an Underlying Fund enters into a
contract for the purchase or sale of a security denominated or quoted in a
foreign currency, or when an Underlying Fund anticipates the receipt in a
foreign currency of dividend or interest payments on such a security which it
holds, the Underlying Fund may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying transactions, the Underlying Fund will attempt to protect
itself against an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when an Underlying Fund's 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 an Underlying 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 an Underlying 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 an Underlying 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 an Underlying Fund's foreign assets.
Certain of the Underlying Funds may engage in cross-hedging by using
forward contracts in one currency to hedge against fluctuations in the value of
securities quoted or denominated in a different currency if an Underlying Fund's
investment adviser determines that there is a pattern of correlation between the
two currencies. These Funds may also purchase and sell forward contracts to seek
to increase total return when an Underlying Fund's investment adviser
anticipates that the foreign currency will appreciate or depreciate in value,
but securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Underlying Fund's portfolio.
Unless otherwise covered, cash or liquid assets of an Underlying Fund will
be segregated in an amount equal to the value of the Underlying 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 cash or liquid assets will be segregated so that the value of the
account will equal the amount of an Underlying Fund's commitments with respect
to such
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contracts. Although the contracts are not presently regulated by the CFTC, the
CFTC may in the future assert authority to regulate these contracts. If this
happens an Underlying Fund's ability to utilize forward foreign currency
exchange contracts may be restricted. Certain of the Underlying Funds will not
enter into a forward contract with a term of greater than one year.
While an Underlying Fund may enter into forward contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while an Underlying Fund may benefit from such transactions,
unanticipated changes in currency prices may result in a poorer overall
performance for the Underlying Fund than if it had not engaged in any such
transactions. Moreover, there may be imperfect correlation between an Underlying
Fund's portfolio holdings of securities quoted or denominated in a particular
currency and forward contracts entered into by such Fund. Such imperfect
correlation may cause an Underlying Fund to sustain losses which will prevent
the Underlying Fund from achieving a complete hedge or expose the Underlying
Fund to risk of foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. 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 an Underlying Fund of
unrealized profits, transaction costs or the benefits of a currency hedge or
force the Underlying Fund to cover its purchase or sale commitments, if any, at
the current market price.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive an Underlying Fund of unrealized profits,
transaction costs or the benefits of a currency hedge or force the Underlying
Fund to cover its purchase or sale commitments, if any, at the current market
price. An Underlying Fund will not enter into such transactions unless the
credit quality of the unsecured senior debt or the claims-paying ability of the
counterparty is considered to be investment grade by its investment adviser.
Writing and Purchasing Currency Call and Put Options. Certain of the
Underlying Funds may, to the extent they invest in foreign securities, write
covered put and call options and purchase put and call options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of foreign portfolio securities and against increases in the U.S. dollar
cost of foreign securities to be acquired. As with other kinds of option
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. If
and when an Underlying Fund seeks to close out an option, the Underlying 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 an Underlying Fund's
position, the Underlying Fund may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies written or purchased
by an Underlying Fund will be traded on U.S. and foreign exchanges or over-the-
counter.
Options on currency may be used for either hedging or cross-hedging
purposes, which involves writing or purchasing options on one currency to hedge
against changes in exchange rates for a different currency with a pattern of
correlation, or to seek to increase total return when an Underlying Fund's
investment adviser anticipates that the currency will appreciate or depreciate
in value, but the securities quoted or denominated in that currency do not
present attractive investment opportunities and are not included in the
Underlying Fund's portfolio.
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A call option written by an Underlying Fund obligates an Underlying Fund to
sell a specified currency to the holder of the option at a specified price if
the option is exercised before the expiration date. A put option written by an
Underlying Fund would obligate an Underlying Fund to purchase a specified
currency from the option holder at a specified price if the option is exercised
at any time before the expiration date. The writing of currency options
involves a risk that an Underlying 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. For a description of how to
cover written put and call options, see "Writing Covered Options" above.
An Underlying Fund may terminate its obligations under a written call or
put option by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." An Underlying Fund
may enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by the Underlying Fund.
An Underlying Fund would normally purchase call options on foreign currency
in anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by an Underlying Fund are quoted or denominated. The
purchase of a call option would entitle the Underlying Fund, in return for the
premium paid, to purchase specified currency at a specified price during the
option period. An Underlying 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 Underlying Fund
would realize either no gain or a loss on the purchase of the call option.
An Underlying Fund would normally purchase put options in anticipation of a
decline in the U.S. dollar value of the currency in which securities in its
portfolio are quoted or denominated ("protective puts"). The purchase of a put
option would entitle an Underlying Fund, in exchange for the premium paid, to
sell specified currency at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the U.S. dollar value of an Underlying Fund's portfolio securities
due to currency exchange rate fluctuations. An Underlying 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 Underlying Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above,
certain Underlying Funds may use options on currency to seek to increase total
return. These Funds may write (sell) covered put and call options on any
currency in order to realize greater income than would be realized on portfolio
securities transactions alone. However, in writing covered call options for
additional income, an Underlying Fund may forego the opportunity to profit from
an increase in the market value of the underlying currency. Also, when writing
put options, an Underlying Fund accepts, 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.
Special Risks Associated With Options on Currency. An exchange traded
option position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time. For
some options, no secondary market on an exchange
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may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that an Underlying Fund
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the sale of underlying securities pursuant to the
exercise of put options. If an Underlying Fund as a covered call option writer
is unable to effect a closing purchase transaction in a secondary market, it may
not be able to sell the underlying currency (or security quoted or denominated
in that currency) until the option expires or it delivers the underlying
currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
An Underlying Fund may purchase and write over-the-counter options to the
extent consistent with its limitation on investments in illiquid securities.
Trading in over-the-counter options is subject to the risk that the other party
will be unable or unwilling to close out options purchased or written by an
Underlying Fund.
The amount of the premiums which an Underlying Fund may pay or receive may
be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option purchasing and writing
activities.
Mortgage Dollar Rolls
Certain of the Underlying Funds may enter into mortgage "dollar rolls" in
which an Underlying 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, an Underlying Fund loses the right to receive
principal and interest paid on the securities sold. However, an Underlying 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 an Underlying 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. An Underlying Fund will segregate 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 Underlying Funds treat
mortgage dollar rolls as two separate transactions; one involving the purchase
of a security and a separate transaction involving a sale. The Underlying 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 an Underlying Fund sells the security becomes insolvent,
an Underlying Fund's right to purchase or repurchase the mortgage-related
securities subject to the mortgage dollar roll may be restricted and the
instrument which an Underlying Fund is required to repurchase may be worth less
than an instrument which an Underlying Fund originally held. Successful use of
mortgage dollar rolls will depend upon the ability of an Underlying Fund's
investment adviser to manage an Underlying Fund's interest rate and
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mortgage prepayments exposure. For these reasons, there is no assurance that
mortgage dollar rolls can be successfully employed.
Convertible Securities
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligations of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than non-
convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, an Underlying Fund's investment adviser will
give primary emphasis to the attractiveness of the Underlying common stock.
Convertible debt securities are equity investments for purposes of each Fund's
investment policies.
Currency Swaps, Mortgage Swaps, Credit Swaps, Index Swaps and Interest Rate
Swaps, Caps, Floors and Collars
Certain Underlying Funds may enter into currency swaps for both hedging
purposes and to seek to increase total return. In addition, certain of the
Underlying Fixed-Income Funds and Real Estate Securities Fund may enter into
mortgage, credit, index and interest rate swaps and other interest rate swap
arrangements such as rate caps, floors and collars, for hedging purposes or to
seek to increase total return. Currency swaps involve the exchange by an
Underlying Fund with another party of their respective rights to make or receive
payments in specified currencies. Interest rate swaps involve the exchange by
an Underlying 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. Index swaps
involve the exchange by an Underlying Fund with another party of the respective
amounts payable with respect to a notional principal amount at interest rates
equal to two specified indices. 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. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payment of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling the interest rate floor. An interest rate collar is the
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates. Since interest rate, mortgage and
currency swaps and interest rate caps, floors and collars are individually
negotiated, each Fund expects to achieve an acceptable degree of correlation
between its portfolio investments and its swap, cap, floor and collar positions.
An Underlying Fund will enter into interest rate mortgage and index swaps only
on a net basis, which means that the two payment streams are netted out, with
the Underlying Fund receiving or paying, as
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the case may be, only the net amount of the two payments. Interest rate, index
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, index and mortgage swaps is limited to the net amount of interest payments
that the Underlying Fund is contractually obligated to make. If the other party
to an interest rate, index or mortgage swap defaults, the Underlying Fund's risk
of loss consists of the net amount of interest payments that the Underlying 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 an Underlying 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 or otherwise, the Underlying Funds and their investment
advisers believe that transactions do not constitute senior securities under the
Act and, accordingly, will not treat them as being subject to an Underlying
Fund's borrowing restrictions.
An Underlying Equity Fund will not enter into swap transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party thereto is considered to be investment grade by its investment adviser.
The Underlying Fixed-Income Funds will not enter into any mortgage, interest
rate 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. The 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 their equivalent ratings or,
if unrated by such rating agencies, determined to be of comparable quality by
the applicable investment adviser. If there is a default by the other party to
such a transaction, an Underlying Fund will have contractual remedies pursuant
to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid
in comparison with the markets for other similar instruments which are traded in
the interbank market. The investment advisers, under the supervision of the
Board of Trustees, are responsible for determining and monitoring the liquidity
of the Underlying Funds' transactions in swaps, caps, floors and collars.
The use of interest rate, mortgage, credit, index 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 an Underlying Fund's
investment adviser is incorrect in its forecasts of market values, interest
rates and currency exchange rates, the investment performance of an Underlying
Fund would be less favorable than it would have been if this investment
technique were not used.
Equity Swaps
Each Underlying Equity Fund may enter into equity swap contracts to invest
in a market without owning or taking physical custody of securities in
circumstances in which direct investment is restricted for legal reasons or is
otherwise impracticable. Equity swaps may also be used for hedging purposes or
to seek to increase total return. The counterparty to an equity swap contract
will typically be a bank, investment banking firm or broker/dealer. Equity swaps
may be structured in different ways. For example, a counterparty may agree to
pay the Underlying Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in the
particular stocks (or an index of stocks), plus the dividends that would have
been received on those stocks. In these cases, the
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Underlying Fund may agree to pay to the counterparty a floating rate of interest
on the notional amount of the equity swap contract plus the amount, if any, by
which that notional amount would have decreased in value had it been invested in
such stocks. Therefore, the return to the Underlying Fund on the equity swap
contract should be the gain or loss on the notional amount plus dividends on the
stocks less the interest paid by the Underlying Fund on the notional amount. In
other cases, the counterparty and the Underlying Fund may each agree to pay the
other the difference between the relative investment performances that would
have been achieved if the notional amount of the equity swap contract had been
invested in different stocks (or indices of stocks).
An Underlying Fund will enter into equity swaps only on a net basis, which
means that the two payment streams are netted out, with the Underlying Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Payments may be made at the conclusion of an equity swap contract or
periodically during its term. Equity swaps do not involve the delivery of
securities or other underlying assets. Accordingly, the risk of loss with
respect to equity swaps is limited to the net amount of payments that an
Underlying Fund is contractually obligated to make. If the other party to an
equity swap defaults, an Underlying Fund's risk of loss consists of the net
amount of payments that such Fund is contractually entitled to receive, if any.
Inasmuch as these transactions are entered into for hedging purposes or are
offset by segregated cash or liquid assets to cover the Underlying Fund's
potential exposure, the Underlying Funds and their investment advisers believe
that transactions do not constitute senior securities under the Act and,
accordingly, will not treat them as being subject to an Underlying Fund's
borrowing restrictions.
An Underlying Equity Fund will not enter into equity swap transactions
unless the unsecured commercial paper, senior debt or claims paying ability of
the other party thereto is considered to be investment grade by the investment
adviser.
Real Estate Investment Trusts
The Underlying Equity Funds may invest in shares of REITs. REITs are pooled
investment vehicles which invest primarily in income producing real estate or
real estate related loans or interest. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. Like regulated investment
companies such as the Underlying Funds, REITs are not taxed on income
distributed to shareholders provided they comply with certain requirements under
the Code. An Underlying Fund will indirectly bear its proportionate share of any
expenses paid by REITs in which it invests in addition to the expenses paid by
an Underlying Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers, self-
liquidation, and the possibilities of failing to qualify for the exemption from
tax for distributed income under the Code and failing to maintain their
exemptions from the Act. REITs (especially mortgage REITs) are also subject to
interest rate risks.
B-54
<PAGE>
Lending of Portfolio Securities
Each Underlying 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, U.S. government securities or letters of intent maintained on
a current basis at an amount at least equal to the market value of the
securities loaned. An Underlying 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, an Underlying 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. An
Underlying Fund would not have the right to vote any securities having voting
rights during the existence of the loan, but an Underlying 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 an Underlying Fund's investment adviser to be of good
standing, and when, in the judgment of the 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 an Underlying Fund (including the loan
collateral).
Cash received as collateral for securities lending transactions may be
invested in other investment eligible securities. Investing the collateral
subjects it to market depreciation or appreciation, and the Underlying Fund is
responsible for any loss that may result from its investment of the borrowed
collateral.
When-Issued Securities and Forward Commitments
Each Underlying 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 an Underlying 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. An
Underlying Fund will generally 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, an
Underlying Fund may dispose of or negotiate a commitment after entering into it.
An Underlying Fund may also sell securities it has committed to purchase before
those securities are delivered to the Fund on the settlement date. The
Underlying Funds may realize a capital gain or loss in connection with these
transactions. For purposes of determining an Underlying Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. An Underlying Fund is required to segregate until three
days prior to the settlement date, cash and liquid assets in an amount
sufficient to meet the purchase price unless the Fund's obligations are
otherwise covered. Securities purchased or sold on a when-issued or forward
commitment basis involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the security
to be sold increases prior to the settlement date.
B-55
<PAGE>
Investment in Unseasoned Companies
Each Underlying Fund may invest a portion of its net assets in companies
(including predecessors) which have operated less than three years, except that
this limitation does not apply to debt securities which have been rated
investment grade or better by at least one NRSRO. The securities of such
companies may have limited liquidity, which can result in their being priced
higher or lower than might otherwise be the case. In addition, investments in
unseasoned companies are more speculative and entail greater risk than do
investments in companies with an established operating record.
Other Investment Companies
Each of the Underlying Funds may make limited investments in the securities
of other investment companies including, pursuant to an exemptive order obtained
from the SEC, money market funds for which the Investment Adviser or any of its
affiliates serves as investment adviser. An Underlying 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 other
fees paid by the Underlying Fund. However, to the extent that the Underlying
Fund invests in a money market fund for which the Investment Adviser or any of
its affiliates acts as adviser, the advisory and administration fees payable by
the Underlying Fund to the investment adviser or its affiliates will be reduced
by an amount equal to the Underlying Fund's proportionate share of the advisory
and administration fees paid by such money market fund to the investment adviser
or its affiliates.
Each Underlying Equity Fund may also invest in SPDRs. SPDRs are interests
in a unit investment trust ("UIT") that may be obtained from the UIT or
purchased in the secondary market (SPDRs are listed on the American Stock
Exchange). The UIT will issue SPDRs in aggregations known as "Creation Units" in
exchange for a "Portfolio Deposit" consisting of (a) a portfolio of securities
substantially similar to the component securities ("Index Securities") of the
Standard & Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash
payment equal to a pro rata portion of the dividends accrued on the UIT's
portfolio securities since the last dividend payment by the UIT, net of expenses
and liabilities, and (c) a cash payment or credit ("Balancing Amount") designed
to equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, an Underlying Fund must accumulate enough SPDRs to reconstitute a
Creation Unit. The liquidity of small holdings of SPDRs, therefore, will depend
upon the existence of a secondary market. Upon redemption of a Creation Unit,
the Underlying Fund will receive Index Securities and cash identical to the
Portfolio Deposit required of an investor wishing to purchase a Creation Unit
that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Underlying Funds could result in losses on SPDRs.
Certain Underlying 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. Certain Underlying Funds may also invest in
World Equity Benchmark Shares ("WEBS") and similar securities that invest in
securities included in foreign securities indices.
B-56
<PAGE>
Repurchase Agreements
Each Underlying Fund may enter into repurchase agreements with dealers in
U.S. government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount of
their repurchase obligation. Certain Underlying Funds may also enter into
repurchase agreements involving certain foreign government securities. A
repurchase agreement is an arrangement under which an Underlying 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 an Underlying Fund's custodian. The repurchase price may be higher
than the purchase price, the difference being income to an Underlying Fund, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to an Underlying Fund together with the repurchase price on repurchase.
In either case, the income to an Underlying 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 an Underlying Fund to the seller of the
security. For other purposes, it is not always clear whether a court would
consider the security purchased by an Underlying Fund subject to a repurchase
agreement as being owned by an Underlying Fund or as being collateral for a loan
by an Underlying 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, an Underlying 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 value of the security. If the
court characterizes the transaction as a loan and an Underlying Fund has not
perfected a security interest in the security, an Underlying 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, an Underlying Fund
would be at risk of losing some or all of the principal and interest involved in
the transaction.
The Underlying Fund's 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), an Underlying 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, an Underlying Fund, together with other registered investment
companies having advisory agreements with the Investment Adviser or its
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.
Reverse Repurchase Agreements
Certain Underlying Funds 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. The Core Fixed Income, Global Income
and High Yield Funds may
B-57
<PAGE>
also enter into reverse repurchase agreements involving certain 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 segregates cash
or liquid assets that have a value equal to or greater than the repurchase
price. The account is then continuously monitored by its investment adviser to
make sure that an appropriate value is maintained. Reverse repurchase agreements
are considered to be borrowings under the Act.
Restricted and Illiquid Securities
The Underlying Funds may not invest more than 15% (10% in the case of
Financial Square Prime Obligations Fund) of their net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, certain SMBS, certain municipal leases and participation
interests, certain over-the-counter options, repurchase agreements and time
deposits with a notice or demand period of more than seven days, and certain
restricted securities, unless it is determined, based upon a continuing review
of the trading markets for the specific instrument, that such instrument is
liquid. Certain commercial paper issued in reliance on Section 4(2) of the
Securities Act of 1933 (the "1933 Act") is treated like Rule 144A Securities.
The Trustees have adopted guidelines under which the Underlying Funds'
investment advisers determine and monitor the liquidity of the Underlying Funds'
portfolio securities. This investment practice could have the effect of
increasing the level of illiquidity in an Underlying Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these instruments.
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 may make them less liquid. The amount of
the discount from the prevailing market price is expected to vary depending upon
the type of security, the character of the issuer, the party who will bear the
expenses of registering the restricted securities and prevailing supply and
demand conditions.
Portfolio Turnover
Each Underlying 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 (as defined in the Act) of the outstanding voting
securities of the affected Portfolio. The investment objective of each
Portfolio and all other investment policies or practices of each Portfolio are
considered by the Trust not to be fundamental and accordingly may be changed
without shareholder approval. For purposes of the Act, "majority" means the
lesser of (a) 67% or more of the shares of the Trust or a Portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the Trust
or a Portfolio are present or represented by proxy, or (b) more than 50% of the
shares of the Trust or a Portfolio. For purposes of the following limitations,
any limitation which involves a maximum percentage shall not be considered
violated unless an excess over the
B-58
<PAGE>
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by, a Portfolio. With
respect to the Portfolios' fundamental investment restriction no. 3, asset
coverage of at least 300% (as defined in the Act), inclusive of any amounts
borrowed, must be maintained at all times.
As a matter of fundamental policy, a Portfolio may not:
(1) make any investment inconsistent with the Portfolio's
classification as a diversified company under the Act;
(2) invest 25% or more of its total assets in the securities of one
or more issuers conducting their principal business activities in
the same industry (excluding investment companies and the U.S.
Government or any of 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;
(3) borrow money, except (a) the Portfolio 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 Portfolio may, to the extent permitted by
applicable law, borrow up to an additional 5% of its total
assets for temporary purposes, (c) the Portfolio may obtain such
short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the Portfolio
may purchase securities on margin to the extent permitted by
applicable law and (e) the Portfolio may engage transactions in
mortgage dollar rolls which are accounted for as financings;
(4) make loans, except through (a) the purchase of debt obligations
in accordance with the Portfolio'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 Portfolio may be deemed
to be an underwriting;
(6) purchase, hold or deal in real estate, although a Portfolio 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 Portfolio as a result of the ownership of
securities;
B-59
<PAGE>
(7) invest in commodities or commodity contracts, except that the
Portfolio may invest in currency and financial instruments and
contracts that are commodities or commodity contracts;
(8) issue senior securities to the extent such issuance would violate
applicable law.
Notwithstanding any other fundamental investment restriction or policy,
each Portfolio may invest some or all of its assets in a single open-end
investment company or series thereof with substantially the same investment
objective, restrictions and policies as the Portfolio.
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Portfolio may not:
(a) Invest in companies for the purpose of exercising control or
management (but this does not prevent a Portfolio from purchasing
a controlling interest in one or more of the Underlying Funds
consistent with its investment objective and policies).
(b) Invest more than 15% of the Portfolio'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.
(c) Purchase additional securities if the Portfolio's borrowings
(excluding covered mortgage dollar rolls) exceed 5% of its net
assets.
(d) Make short sales of securities, except short sales against the
box.
The Underlying Funds in which the Portfolios may invest have adopted
certain investment restrictions which may be more or less restrictive than those
listed above, thereby allowing a Portfolio to participate in certain investment
strategies indirectly that are prohibited under the fundamental and non-
fundamental investment restrictions and policies listed above. The investment
restrictions of these Underlying Funds are set forth in their respective
Additional Statements.
MANAGEMENT
The Trustees of the Trust are responsible for deciding matters of general
policy and reviewing the actions of the Investment Adviser, distributor and
transfer agent. The officers of the Trust conduct and supervise each Portfolio's
daily business operations.
Information pertaining to the Trustees and officers of the Trust is
set forth below together with their respective positions and a brief statement
of their principal occupations during the past five years. Trustees and
officers deemed to be "interested persons" of the Trust for purposes of the Act
are indicated by an asterisk.
B-60
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- --------------------
Ashok N. Bakhru, 58 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 (1984-1999); 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); and Trustee, Citizens
Scholarship Foundation of America
(since 1998).
B-61
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- --------------------
*David B. Ford, 54 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered investment
New York, NY 10005 company) (since October 1997);
Director, Commodities Corp. LLC
(futures and commodities traders)
(since April 1997); Managing Director,
J. Aron & Company (commodity dealer
and risk management advisor) (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 (since
November 1995); Co-Head and Director,
Goldman Sachs Funds Management, L.P.
(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
32 Old Slip & President Variable Insurance Trust (registered
New York, NY 10005 investment company) (since October
1997); Trustee, Trust For Credit
Unions (registered investment company)
(since March 1998); Managing Director,
Goldman Sachs Asset Management Group
(since November 1997); President,
Goldman Sachs Funds Group (since April
1996); and President, MFS Retirement
Services Inc., of Massachusetts
Financial Services (prior thereto).
B-62
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- --------------------
*John P. McNulty, 47 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered investment
New York, NY 10005 company) (since October 1997);
Managing Director, Goldman Sachs
(since November 1996); Head of
Investment Management Division (since
September 1999); General Partner, J.
Aron & Company (commodity dealer and
risk management adviser) (since
November 1995); Director and Co-Head,
Goldman Sachs Funds Management L. P.
(since November 1995); Director,
Goldman Sachs Asset Management
International (since January 1996);
Co-Head, GSAM (November 1995-September
1999); Director, Global Capital
Reinsurance (insurance) (since 1989);
Director, Commodities Corp. LLC (since
April 1997); Limited Partner of
Goldman Sachs (1994 - November 1995);
Trustee, Trust for Credit Unions
(registered investment company)
(January 1996 - March 1998).
Mary P. McPherson, 64 Trustee Trustee - Goldman Sachs Variable
The Andrew W. Mellon Insurance Trust (registered investment
Foundation company) (since October 1997); Vice
140 East 62/nd/ Street President, The Andrew W. Mellon
New York, NY 10021 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, Josiah Macy,
Jr. Foundation (health and educational
programs) (since 1977); Director of
the Philadelphia Contributionship
(insurance) (since 1985); Director
Emeritus, Amherst College (1986-1998);
Director, Dayton Hudson Corporation
(general retailing merchandising)
(1988-1997); Director, The Spencer
Foundation (educational research)
(since 1993); member of PNC Advisory
Board (banking) (since 1993); and
Director, American School of Classical
Studies in Athens (since 1997).
B-63
<PAGE>
Name, Age Positions Principal Occupations(s)
and Address With Trust During Past 5 Years
- ----------- ---------- --------------------
*Alan A. Shuch, 50 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment company) (since October
1997); Limited Partner, Goldman
Sachs (since December 1994);
Consultant to GSAM (since December
1994).
Jackson W. Smart, Jr., 69 Trustee Trustee - Goldman Sachs Variable
One Northfield Plaza, insurance Trust (registered
Suite 218 investment company) (since October
Northfield, IL 60093 1997); President, Board Member and
Senior Advisor, Smart Properties,
Inc. (since January 2000);
Chairman, Executive Committee and
Director, First Commonwealth, Inc.
(a managed dental care company)
(January 1996-August 1999);
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
Northwestern Healthcare (since
1980).
William H. Springer, 70 Trustee Trustee - Goldman Sachs Variable
701 Morningside Drive Insurance Trust (registered
Lake Forest, IL 60045 investment company) (since October
1997); Director, The Walgreen Co.
(a retail drug store business)
(April 1988-January 2000); 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).
B-64
<PAGE>
Name, Age Positions Principal Occupations(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
Richard P. Strubel, 60 Trustee Trustee - Goldman Sachs Variable
500 Lake Cook Road Insurance Trust (registered
Suite 150 investment company) (since October
Deerfield, IL 60015 1997); President and COO, UNext.com
(provider of educational services
via the internet) (since 1999);
Director, Gildan Activewear Inc.
(since February 1999); Director of
Kaynar Technologies Inc. (since
March 1997); Managing Director,
Tandem Partners, Inc. (1990-1999);
President and Chief Executive
Officer, Microdot, Inc. (a
diversified manufacturer of
fastening systems and connectors)
(January 1984 -October 1994);
Trustee, Northern Institutional
Funds (since December 1982); and
Director, Cantilever Technologies,
Inc. (since 1999).
*Nancy L. Mucker, 50 Vice President Vice President - Goldman Sachs
4900 Sears Tower Variable Insurance Trust
Chicago, IL 60606 (registered investment company)
(since 1997); Vice President and
Co-Manager of Funds Group
Shareholder Servicing, Goldman
Sachs (since April 1985).
*John M. Perlowski, 35 Treasurer Treasurer - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment 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
4900 Sears Tower Variable Insurance Trust
Chicago, IL 60606 (registered investment company)
(since October 1997); Managing
Director, Goldman Sachs (since
October 1999); Vice President of
GSAM (April 1997-December 1999);
and Vice President and General
Manager, First Data Corporation -
Investor Services Group (1994 to
1997).
B-65
<PAGE>
Name, Age Positions Principal Occupations(s)
and Address With Trust During Past 5 Years
- ----------- ---------- --------------------
*Jesse Cole, 36 Vice President Vice President - Goldman Sachs
4900 Sears Tower Variable Insurance Trust
Chicago, IL 60606 (registered investment company
(since 1998); Vice President, GSAM
(June 1998 to Present); Vice
President, AIM Management Group,
Inc. (investment advisor) (April
1996-June 1998); and Assistant Vice
President, The Northern Trust
Company (June 1987-April 1996).
*Philip V. Giuca, Jr., 37 Assistant Assistant Treasurer - Goldman Sachs
32 Old Slip Treasurer Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); and Vice President,
Goldman Sachs (May 1992-Present).
*Michael J. Richman, 39 Secretary Secretary - Goldman Sach Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment 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, Goldman Sachs (since
June 1992); and Assistant General
Counsel of Goldman Sachs (June 1992
to December 1998).
*Howard B. Surloff, 34 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); Assistant General
Counsel, GSAM and General Counsel
to the U.S. Funds Group (since
December 1997); Assistant General
Counsel and Vice President, Goldman
Sachs (since November 1993 and May
1994, respectively); and Counsel to
the Funds Group, GSAM (November
1993- December 1997).
B-66
<PAGE>
Name, Age Positions Principal Occupations(s)
and Address With Trust During Past 5 Years
- ----------- ---------- --------------------
*Valerie A. Zondorak, 34 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); Assistant General
Counsel, GSAM and Assistant General
Counsel to the Funds Group (since
December 1997); Vice President and
Assistant General Counsel, Goldman
Sachs (since March 1997); Counsel
to the Funds Group, GSAM (March
1997 -December 1997); and Associate
of Shereff, Friedman, Hoffman &
Goodman (September 1990 to February
1997).
*Deborah A. Farrell, 28 Assistant
32 Old Slip Secretary Assistant Secretary - Goldman Sachs
New York, NY 10005 Variable Insurance Trust
(registered 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); and Executive Secretary,
Goldman Sachs (January 1994 -
January 1996).
*Kaysie P. Uniacke, 39 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); Managing Director,
GSAM (since 1997); Vice President
and Senior Portfolio Manager, GSAM
(1988 to 1997).
*Elizabeth D. Anderson, 30 Assistant Assistant Secretary - Goldman Sachs
32 Old Sli Secretary Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since December 1997); Portfolio
Manager, GSAM (since April 1996);
Junior Portfolio Manager, GSAM
(1995 -April 1996); and Funds
Trading Assistant, GSAM (1993 -
1995).
B-67
<PAGE>
Name, Age Positions Principal Occupations(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
*Amy E. Belanger, 30 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1999); Vice President,
Goldman Sachs (since June 1999);
Counsel, Goldman Sachs (since
1998); and Associate, Dechert Price
& Rhoads (September 1996 - 1998).
Each interested Trustee and officer of the Trust holds comparable positions
with certain other investment companies of which Goldman Sachs, GSAM or one of
their affiliates is the investment adviser, administrator and/or distributor.
As of March 17, 2000, the Trustees and officers of the Trust as a group owned
less than 1% of the outstanding shares of beneficial interest of each Portfolio.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
B-68
<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 December
31, 1999:
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from Goldman Sachs Trust
Benefits and the Goldman Sachs
Aggregate Accrued as Funds Complex
Compensation Part of (including the
Name of Trustee From the Portfolios/2/ Portfolios' Expenses Portfolios)/3/
- --------------- --------------------- -------------------- -------------
<S> <C> <C> <C>
Ashok N. Bakhru1/1/ $10,422 $0 $159,884
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson 7,742 0 118,716
Alan A. Shuch 0 0 0
Jackson W. Smart 7,742 0 118,716
William H. Springer 7,742 0 118,716
Richard P. Strubel 7,742 0 118,716
</TABLE>
/1/ Includes compensation as Chairman of the Board of Trustees.
/2/ Reflects amount paid by the Portfolios described in this Additional
Statement during the fiscal year ended December 31, 1999.
/3/ The Goldman Sachs Funds complex consists of Goldman Sachs Trust and Goldman
Sachs Variable Insurance Trust. Goldman Sachs Trust consisted of 51 mutual
funds, including 5 asset allocation portfolios, on December 31, 1999.
Goldman Sachs Variable Insurance Trust consisted of 16 mutual funds on
December 31, 1999 .
Class A Shares of the Portfolios 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.
The Trust, its Investment Adviser and principal underwriter have adopted
codes of ethics under Rule 17j-1 of the Act that permit personnel subject to
their particular code of ethics to invest in securities, including securities
that may be purchased or held by a Portfolio or an Underlying Fund.
Management Services
As stated in the Portfolios' Prospectus, GSAM, 32 Old Slip, New York, New
York 10005, serves as Investment Adviser to the Portfolios and, except as noted,
to each Underlying Fund. Goldman Sachs Funds Management, L.P. ("GSFM") serves as
investment adviser to the CORE U.S. Equity, Capital Growth, Adjustable Rate
Government and Short Duration Government Funds. Goldman Sachs Asset Management
International ("GSAMI") serves as investment adviser to the International
Equity, European Equity, Japanese Equity, International Small Cap, Emerging
Markets Equity, Asia Growth and Global Income Funds. As a company with unlimited
liability under the laws of England, GSAMI is regulated by the
B-69
<PAGE>
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "Service Providers" in the Portfolios' Prospectus for a description of the
Investment Adviser's duties to the Portfolios.
The Goldman Sachs Group, L.P., which controlled the Portfolios' Investment
Adviser and the investment adviser of each Underlying Fund, merged into The
Goldman Sachs Group, Inc. as a 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, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan,
Montreal, 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. Goldman Sachs has agreed to permit
the Portfolios and Underlying Funds to use the name "Goldman Sachs" or a
derivative thereof as part of each Portfolio's and Fund's name for as long as a
Portfolio's or Fund's Management Agreement is in effect.
The Underlying Funds' 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.
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.
In managing the Underlying Funds, the Underlying Funds' investment advisers
have access to 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 movement
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 structuring Adjustable Rate Government Fund's and Short Duration
Government Fund's respective securities portfolios, their investment adviser
will review the existing overall economic and mortgage market trends. The
investment adviser will then study yield spreads, the implied volatility and
B-70
<PAGE>
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 advisers expect to utilize Goldman Sachs' sophisticated
option-adjusted analytics to help make strategic asset allocations within the
markets for U.S. government, Mortgage-Backed and other securities and to employ
this technology periodically to re-evaluate the Funds' investments as market
conditions change. Goldman Sachs has also developed a prepayment model designed
to estimate mortgage prepayments and cash flows under different interest rate
scenarios. Because a Mortgage-Backed Security incorporates the borrower's right
to prepay the mortgage, the investment advisers use a sophisticated option-
adjusted spread (OAS) model to measure expected returns. A security's OAS is a
function of the level and shape of the yield curve, volatility and the
particular 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 advisers consider it a
better way to measure a security's expected return and absolute and relative
values than yield to maturity. In using OAS technology, the investment advisers
will first evaluate the absolute level of a security's OAS considering its
liquidity and its interest rate, volatility and prepayment sensitivity. The
investment advisers will then analyze its value relative to alternative
investments and to its own investments. The investment advisers will also
measure a security's interest rate risk by computing an option adjusted duration
(OAD). The investment advisers believe a security's OAD is a better measurement
of its price sensitivity than cash flow duration, which systematically misstates
portfolio duration. The investment advisers also evaluate returns for different
mortgage market sectors and evaluates the credit risk of individual securities.
This sophisticated technical analysis allows the investment advisers to develop
portfolio and trading strategies using Mortgage-Backed Securities that are
believed to be superior investments on a risk-adjusted basis and which provide
the flexibility to meet the respective Funds' 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 advisers also expect to use OAS-based pricing methods to calculate
projected security returns under different, discrete interest rate scenarios,
and Goldman Sachs' proprietary prepayment model to generate yield estimates
under these scenarios. The OAS, scenario returns, expected returns, and yields
of securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The investment advisers will use OAS analytics to choose what they believe
is an appropriate portfolio of investments for an Underlying 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 advisers will
also take into account important market criteria like the available supply and
relative liquidity of various mortgage securities in structuring the portfolio.
The Underlying Funds' investment advisers also expect to use OAS analytics
to evaluate the mortgage market on an ongoing basis. Changes in the relative
value of various Mortgage-Backed Securities could suggest tactical trading
opportunities for the Underlying Funds. The investment advisers will have access
to both current market analysis as well as historical information on the
relative value
B-71
<PAGE>
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 Underlying Funds' investment
advisers, on a non-exclusive basis, use of its mortgage prepayment model, OAS
model and any other proprietary services which it now has or may develop, to the
extent such services are made available to other similar customers. Use of
these services by the Underlying Funds' investment advisers with respect to an
Underlying 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
Underlying Funds' 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 an Underlying Fund's investments.
In allocating assets among foreign countries and currencies for the
Underlying Funds which can invest in foreign securities, the Underlying Funds'
investment advisers 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 advisers 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' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for an Underlying Fund given its
investment objectives and criteria.
The management agreements for the Portfolios and the Underlying Funds
provide that their investment advisers (and their affiliates) may render similar
services to others as long as the services provided by them thereunder are not
impaired thereby.
The Portfolios' management agreement was most recently approved by the
Trustees, including a majority of the Trustees who are not parties to the
management agreement or "interested persons" (as such term is defined in the
Act) of any party thereto (the "non-interested Trustees"), on April 25, 2000.
These arrangements were approved by the sole shareholder of the Balanced
Strategy, Growth and Income Strategy, Growth Strategy and Aggressive Growth
Strategy Portfolios on January 1, 1998, and of the Conservative Strategy
Portfolio on February 3, 1999 by consent action to satisfy conditions imposed by
the SEC in connection with the registration of shares of the Portfolio. The
management agreement will remain in effect until June 30, 2001 and 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 Portfolio or a majority of the Trustees, and (b) the vote of a majority of
the non-interested Trustees, cast in person at a meeting called for the purpose
of voting on such approval. The management agreement will terminate
automatically with respect to a Portfolio if assigned (as defined in the Act)
and is terminable at any time without penalty by the Trustees or by vote of a
majority of the outstanding voting securities of the
B-72
<PAGE>
affected Portfolio on 60 days' written notice to the Investment Adviser and by
the Investment Adviser on 60 days' written notice to the Trust.
Under the management agreement, the Investment Adviser also: (i) supervises
all non-advisory operations of each Portfolio; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of each Portfolio; (iii) arranges
for at each Portfolio's expense (a) the preparation of all required tax returns,
(b) the preparation and submission of reports to existing shareholders, (c) the
periodic updating of prospectuses and statements of additional information and
(d) the preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains each Portfolio's records; and (v) provides office
space and all necessary office equipment and services.
Pursuant to the management agreement, the Investment Advisers are entitled
to receive the contractual fees listed below, payable monthly of such
Portfolio's average daily net assets.
Asset Allocation Fee Asset Allocation Fee
Portfolio With Limitations Without Limitations
--------- -------------------- --------------------
Conservative Strategy .15% .35%
Balanced Strategy .15% .35%
Growth and Income Strategy .15% .35%
Growth Strategy .15% .35%
Aggressive Growth Strategy .15% .35%
B-73
<PAGE>
The fees paid by the Portfolios for services rendered under the
management agreement were as follows (with and without the fee limitations that
were then in effect) for the period ended December 31:
<TABLE>
<CAPTION>
1999 1998
==== ====
With Fee Without Fee With Fee Without Fee
Limitations Limitations Limitations Limitations
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Conservative Strategy/1/ $ 14,735 $ 34,384 N/A N/A
Balanced Strategy/2/ 151,574 353,673 $78,025 $182,558
Growth and Income Strategy/2/ 661,611 1,543,759 356,735 834,668
Growth Strategy/2/ 461,317 1,076,406 253,545 593,231
Aggressive Growth Strategy/2/ 177,161 413,376 94,065 219,795
</TABLE>
___________________
/1/ The Conservative Strategy Portfolio commenced operations on February 8,
1999.
/2/ The Balanced Strategy, Growth and Income Strategy, Growth Strategy and
Aggressive Growth Strategy Portfolios commenced operations on January 2,
1998.
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 Portfolios and the Underlying Funds or impede their investment
activities.
Goldman Sachs and its affiliates, including, without limitation, the
Investment Adviser and its advisory affiliates, have proprietary interests in,
and may manage or advise with respect to, accounts or funds (including separate
accounts and other funds and collective investment vehicles) which have
investment objectives similar to those of the Portfolios and the Underlying
Funds and/or which engage in transactions in the same types of securities,
currencies and instruments as the Underlying 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 Underlying Funds invest, which could have an adverse impact on each
Underlying Fund's (and, consequently, each Portfolio's) performance. Such
transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Investment Adviser's and its advisory
affiliates' asset management activities, will be executed independently of the
Underlying Funds' transactions and thus at prices or rates that may be more or
less favorable. When the Investment Adviser and its advisory affiliates seek to
purchase or sell the same assets for their managed accounts, including the
Underlying Funds, the assets actually purchased or sold may be allocated among
the accounts on a basis determined in its good faith discretion to be equitable.
In some cases, this system may adversely affect the size or the price of the
assets purchased or sold for the Underlying Funds.
From time to time, the Underlying 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 Adviser and/or its affiliates will not initiate or recommend certain
types of transactions in certain securities or instruments with respect to which
the Investment Adviser and/or its affiliates are performing services or when
position limits have been reached.
B-74
<PAGE>
In connection with their management of the Underlying Funds, the
Underlying Funds' 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 Underlying 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
Underlying Funds and it is not anticipated that the investment advisers will
have access to such information for the purpose of managing the Underlying
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 Underlying Funds.
The results of each Underlying 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 an Underlying Fund. Moreover, it is possible that an
Underlying Fund will sustain losses during periods in which Goldman Sachs and
its affiliates achieve significant profits on their trading for proprietary or
other accounts. The opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Underlying 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 an Underlying
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 Underlying 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 Underlying Fund invests.
In addition, certain principals and certain of the employees of the
Underlying Funds' 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 Portfolios should be aware.
The Underlying Funds' investment advisers may enter into transactions and
invest in currencies or instruments on behalf of an Underlying Fund in which
customers of Goldman Sachs serve as the counterparty, principal or issuer. In
such cases, such party's interests in the transaction will be adverse to the
interests of an Underlying Fund, and such party may have no incentive to assure
that the Underlying 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 an Underlying Fund invests or which may be based on the
performance of an Underlying Fund. The Underlying Funds may, subject to
applicable law, purchase investments which are the subject of an
B-75
<PAGE>
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
Underlying 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 Portfolios. To the extent
affiliated transactions are permitted, the Underlying Funds will deal with
Goldman Sachs and its affiliates on an arms-length basis.
Each Underlying Fund will be required to establish business relationships
with its counterparties based on the Underlying 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 an Underlying Fund's establishment of its
business relationships, nor is it expected that an Underlying Fund's
counterparties will rely on the credit of Goldman Sachs or any of its affiliates
in evaluating the Underlying 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 an Underlying Fund in order to increase
the assets of the Underlying Fund. Increasing an Underlying Fund's assets may
enhance investment flexibility and diversification and may contribute to
economies of scale that tend to reduce the Underlying Fund's expense ratio.
Goldman Sachs reserves the right to redeem at any time some or all of the shares
of an Underlying Fund acquired for its own account. A large redemption of
shares of an Underlying Fund by Goldman Sachs could significantly reduce the
asset size of the Underlying Fund, which might have an adverse effect on the
Underlying Fund's investment flexibility, portfolio diversification and expense
ratio. Goldman Sachs will consider the effect of redemptions on an Underlying
Fund and other shareholders in deciding whether to redeem its shares.
It is possible that an Underlying Fund's holdings 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 Underlying Funds' flexibility in
purchases and sales of securities. When Goldman Sachs is engaged in an
underwriting or other distribution of securities of an entity, the Underlying
Funds' investment advisers may be prohibited from purchasing or recommending the
purchase of certain securities of that entity for the Underlying Funds.
Distributor and Transfer Agent
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive Distributor of shares of the Portfolios pursuant to a "best efforts"
arrangement as provided by a distribution agreement with the Trust on behalf of
each Portfolio. Shares of the Portfolios are offered and sold on a continuous
basis by Goldman Sachs, acting as agent. Pursuant to the distribution
agreement, after the Portfolios' Prospectus and periodic reports have been
prepared, set in type and mailed to shareholders, Goldman Sachs will pay for the
printing and distribution of copies thereof used in connection with the offering
to prospective investors. Goldman Sachs will also pay for other supplementary
sales literature and advertising costs. Goldman Sachs has entered into sales
agreements with certain investment dealers and financial service firms (the
"Authorized Dealers") to solicit subscriptions for Class A, Class B and Class C
Shares of each of the Portfolios 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
Portfolio shares.
B-76
<PAGE>
Goldman Sachs retained approximately the following commissions on sales
of Class A, Class B and Class C Shares during the period ended December 31:
<TABLE>
<CAPTION>
1999 1998
==== ====
<S> <C> <C>
Conservative Strategy/1/ $ 4,000 N/A
Balanced Strategy/2/ 41,000 $156,000
Growth and Income Strategy/2/ 129,000 858,000
Growth Strategy/2/ 124,000 593,000
Aggressive Growth Strategy/2/ 52,000 243,000
</TABLE>
___________________
/1/ The Conservative Strategy Portfolio commenced operations on February 8,
1999.
/2/ The Balanced Strategy, Growth and Income Strategy, Growth Strategy and
Aggressive Growth Strategy Portfolios commenced operations on January 2,
1998.
Goldman Sachs, 4900 Sears Tower, Chicago, IL 60606, also serves as the
Portfolios' transfer and dividend disbursing agent. Under its transfer agency
agreement with the Trust, Goldman Sachs has undertaken with the Trust with
respect to each Portfolio to: (i) record the issuance, transfer and redemption
of shares, (ii) provide purchase and redemption confirmations 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 of 0.04% of average daily net assets with respect
to each Portfolio's Institutional and Service Shares and 0.19% of average daily
net assets with respect to each Portfolio's Class A, Class B and Class C Shares.
As compensation for the services rendered to the Portfolios' by Goldman
Sachs as transfer and dividend disbursing agent and the assumption by Goldman
Sachs of the expenses related thereto, Goldman Sachs is entitled to receive fees
from each Portfolio as stated in the Prospectus. For the periods ended December
31, 1999 and 1998, the amounts paid to Goldman Sachs by each Portfolio were as
follows under the schedules then in effect:
<TABLE>
<CAPTION>
1999 1998
==== ====
<S> <C> <C>
Conservative Strategy/1/ $ 18,627 N/A
Balanced Strategy/2/ 189,653 $157,025
Growth and Income Strategy/2/ 803,333 414,136
Growth Strategy/2/ 576,665 399,850
Aggressive Growth Strategy/2/ 220,841 209,288
</TABLE>
___________________
/1/ The Conservative Strategy Portfolio commenced operations on February 8,
1999.
/2/ The Balanced Strategy, Growth and Income Strategy, Growth Strategy and
Aggressive Growth Strategy Portfolios commenced operations on January 2,
1998.
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 Portfolios are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
B-77
<PAGE>
Expenses
The Trust, on behalf of each Portfolio, is responsible for the payment
of each Portfolio's respective expenses. The expenses include, without
limitation, the fees payable to the Investment Adviser, service fees paid to
Service Organizations, the fees and expenses payable to 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 and auditing fees and expenses (including the
cost of legal and certain accounting services rendered by employees of GSAM and
Goldman Sachs with respect to the Trust), expenses of preparing and setting in
type prospectuses, statements of additional information, proxy material, reports
and notices and the printing and distributing of the same to the Trust's
shareholders and regulatory authorities, any expenses assumed by a Portfolio
pursuant to its distribution and service plans, compensation and expenses of its
"non-interested" Trustees and extraordinary expenses, if any, incurred by the
Trust. Except for fees under any service plan or distribution and service plan
applicable to a particular class and transfer agency fees, all Portfolio
expenses are borne on a non-class specific basis.
The imposition of the Investment Adviser's fees, as well as other
operating expenses, will have the effect of reducing the total return to
investors. From time to time, the Investment Adviser may waive receipt of is
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.
The Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" (excluding management, distribution and service fees, taxes,
transfer agency fees, interest, brokerage, litigation, indemnification costs and
other extraordinary expenses) for the Portfolios to the extent such expenses
exceed the percentage of average daily net assets specified in the Portfolios'
Prospectuses. Such reductions or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the Investment Adviser
in its discretion at any time.
The amounts of certain "Other Expenses" of each Portfolio then in
existence that were reduced or otherwise limited were as follows under the
expense limitations that were then in effect for the period ended December 31:
<TABLE>
<CAPTION>
1999 1998
==== ====
<S> <C> <C>
Conservative Strategy/1/ $262,794 N/A
Balanced Strategy/2/ 262,656 $224,065
Growth and Income Strategy/2/ 255,735 372,932
Growth Strategy/2/ 244,702 324,585
Aggressive Growth Strategy/2/ 244,198 231,575
</TABLE>
___________________
/1/ The Conservative Strategy Portfolio commenced operations February 8,
1999.
/2/ The Balanced Strategy, Growth and Income Strategy, Growth Strategy and
Aggressive Growth Strategy Portfolios commenced operations on January 2,
1998.
B-78
<PAGE>
Fees and expenses of legal counsel, registering shares of a Portfolio,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Portfolio may also bear an allocable portion of the Investment Adviser's
costs of performing certain accounting services not being provided by a
Portfolio's custodian.
Custodian and Sub-Custodians
State Street, 1776 Heritage Drive, North Quincy, Massachusetts 02171,
is the custodian of the Trust's portfolio securities and cash. State Street
also maintains the Trust's accounting records. State Street may appoint
domestic and foreign sub-custodians from time to time to hold certain securities
purchased by the Trust and to hold cash for the Trust.
Independent Public Accountants
For the fiscal year ended December 31, 1999, Arthur Andersen, LLP,
former independent public accountants, 225 Franklin Street, Boston,
Massachusetts 02110, served as auditors of the Portfolios.
PricewaterhouseCoopers LLP, independent public accountants, 160 Federal Street,
Boston, Massachusetts 02110, have been selected as auditors of the Portfolios of
the Trust for the fiscal year ending December 31, 2000. In addition to audit
services, PricewaterhouseCoopers LLP will prepare the Trust's federal and state
tax returns, and will provide consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Adviser is responsible with respect to the Portfolios
(and the particular investment adviser is responsible with respect to the
Underlying Funds) for decisions to buy and sell securities, the selection of
brokers and dealers to effect the transactions and the negotiation of brokerage
commissions, if any. Purchases and sales of securities on a securities exchange
are effected through brokers who charge a commission for their services. Orders
may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Goldman Sachs.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of a security usually includes a profit to
the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid.
The portfolio transactions for the Underlying Fixed-Income Funds are
generally effected at a net price without a broker's commission (i.e., a dealer
is dealing with an Underlying 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 are
traded on exchanges at fixed commission rates.
In placing orders for portfolio securities of an Underlying Fund, the
Underlying Funds' investment advisers are generally required to give primary
consideration to obtaining the most favorable execution and net price available.
This means that an investment adviser will seek to execute each transaction at a
price and commission, if any, which provides the most favorable total cost or
proceeds reasonably attainable in the circumstances. As permitted by Section
28(e) of the Securities Exchange Act of 1934, the Underlying
B-79
<PAGE>
Fund may pay a broker who provides brokerage and research services an amount of
disclosed commission in excess of the commission which another broker would have
charged for effecting that transaction. Such practice is subject to a good faith
determination by the Trustees that such commission is reasonable in light of the
services provided and to such policies as the Trustees may adopt from time to
time. While the Underlying Funds' investment advisers generally seek reasonably
competitive spreads or commissions, an Underlying Fund will not necessarily be
paying the lowest spread or commission available. Within the framework of this
policy, the investment advisers will consider research and investment services
provided by brokers or dealers who effect or are parties to portfolio
transactions of an Underlying Fund, the investment advisers and their
affiliates, or their other clients. Such research and investment services are
those which brokerage houses customarily provide to institutional investors and
include research reports on particular industries and companies, economic
surveys and analyses, recommendations as to specific securities and other
products or services (e.g., quotation equipment and computer related costs and
expenses), advice concerning the value of securities, the advisability of
investing in, purchasing or selling securities, the availability of securities
or the purchasers or sellers of securities, furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts, effecting securities
transactions and performing functions incidental thereto (such as clearance and
settlement) and providing lawful and appropriate assistance to the investment
advisers in the performance of their decision-making responsibilities. Such
services are used by the investment advisers in connection with all of their
investment activities, and some of such services obtained in connection with the
execution of transactions for an Underlying 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 an Underlying Fund, and the
services furnished by such brokers may be used by the investment advisers 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 an Underlying Fund as well as shares of other
investment companies or accounts managed by the Underlying Funds' investment
advisers. This policy does not imply a commitment to execute all portfolio
transactions through all broker-dealers that sell shares of the Underlying Fund.
On occasions when an Underlying Fund's investment adviser deems the
purchase or sale of a security to be in the best interest of an Underlying Fund
as well as its other customers (including any other fund or other investment
company or advisory account for which such investment adviser acts as investment
adviser or sub-investment adviser), the investment adviser, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for the Underlying Fund with those to be sold or purchased for
such other customers in order to obtain the best net price and most favorable
execution under the circumstances. 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
equitable and consistent with its fiduciary obligations to such Underlying Fund
and such other customers. In some instances, this procedure may adversely
affect the price and size of the position obtainable for an Underlying Fund.
Commission rates in the U.S. are established pursuant to negotiations
with the broker based on the quality and quantity of execution services provided
by the broker in the light of generally prevailing rates. The allocation of
orders among brokers and the commission rates paid are reviewed periodically by
the Trustees.
B-80
<PAGE>
Subject to the above considerations, the Underlying Funds' investment
advisers may use Goldman Sachs as a broker for an Underlying Fund. In order for
Goldman Sachs to effect any portfolio transactions for an Underlying 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 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.
During the fiscal year ended December 31, 1999, the Portfolios acquired
and sold securities of their regular broker-dealers: Donaldson, Lufkin &
Jenrette, Swiss Bank Corp., Salomon Smith Barney, Nations Bank, Bear Stearns,
Lehman Brothers, ABN Amro Securities, Barclays Bank, Deutsche Bank and Morgan
Stanley Dean Witter. At December 31, 1999, the following Portfolios 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): Conservative
Strategy: Morgan Stanley Dean Witter ($33); Growth Strategy: Morgan Stanley
Dean Witter ($198); Balanced Strategy: Morgan Stanley Dean Witter ($66).
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good
faith the fair value of securities of each Portfolio. In accordance with
procedures adopted by the Trustees, the net asset value per share of each class
of each Portfolio is calculated by determining the value of the net assets
attributed to each class of that Portfolio 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, 3:00
p.m. Chicago time and 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, Labor Day, Thanksgiving Day and Christmas Day.
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 Portfolio may
compute its net asset value as of any time permitted pursuant to any exemption,
order or statement of the SEC or its staff.
In determining the net asset value of a Portfolio, the net asset value
of the Underlying Funds' shares held by the Portfolio will be their net asset
value at the time of computation. Financial Square Prime Obligations Fund
values all of its portfolio securities using the amortized cost valuation method
pursuant to Rule 2a-7 under the Act. Portfolio securities of the other
Underlying Funds for which accurate market quotations are available are valued
as follows: (a) securities listed on any U.S. or foreign stock exchange or on
the National Association of Securities Dealers Automated Quotations System
("NASDAQ") will be valued at the last sale price on the exchange or system in
which they are principally traded on the valuation date. If there is no sale on
the valuation day, securities traded will be valued at the closing bid price, or
if closing a bid price is not available, at either the exchange or system-
defined close price on the exchange or system in which such securities are
principally traded. If the relevant exchange or system has not closed by
B-81
<PAGE>
the above-mentioned time for determining the Underlying Fund's net asset value,
the securities will be valued at the last sale price or, if not available, at
the bid price at the time the net asset value is determined; (b) over-the-
counter securities not quoted on NASDAQ will be valued at the last sale price on
the valuation day or, if no sale occurs, at the last bid price at the time net
asset value is determined; (c) equity securities for which no prices are
obtained under sections (a) or (b) hereof, 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 their fair value in
accordance with procedures approved by the Board of Trustees; (d) fixed-income
securities with a remaining maturity of 60 days or more for which accurate
market quotations are readily available will normally be valued according to
dealer-supplied bid quotations or bid quotations from a recognized pricing
service (e.g., Merrill Lynch, J.J. Kenny, Muller Data Corp., Bloonberg, EJV,
Reuters or Standard & Poor's); (e) fixed-income securities for which quotations
are not readily available are valued by the investment adviser based on
valuation models that take into account spread and daily yield changes on
government securities in the appropriate market (i.e. matrix pricing); (f) debt
securities with a remaining maturity of 60 days or less are valued by the
particular investment adviser at amortized cost, which the Trustees have
determined to approximate fair value; and (g) all other instruments, 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 in accordance with the valuation procedures 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 Underlying 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 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
an Underlying 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 Portfolio 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 Portfolio and constitute the
underlying assets of that Portfolio or series. The underlying assets of each
Portfolio will be segregated on the books of account, and will be charged with
the liabilities in respect of such Portfolio and with a share of the general
liabilities of the Trust. Expenses of the Trust with respect to the Portfolios
and the other series of the Trust are generally allocated in proportion to the
net asset values of the respective Portfolios or series except where allocations
of direct expenses can otherwise be fairly made.
B-82
<PAGE>
PERFORMANCE INFORMATION
A Portfolio may from time to time quote or otherwise use total return,
yield and/or distribution rate information in advertisements, shareholder
reports or sales literature. Average annual total return and yield are computed
pursuant to formulas specified by the SEC.
Yield is computed by dividing net investment income earned during a
recent thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
The 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 or maximum public offering price 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 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
Portfolio 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 Portfolio may
furnish total return calculations based on investments at various sales charge
levels or at NAV. Any performance information which is based on a Portfolio's
net asset value per share would be reduced if any applicable sales charge were
taken into account. In addition to the above, each Portfolio 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 Portfolios' 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
Portfolios.
Thirty-day yield, distribution rate and average annual total return are
calculated separately for each class of shares of each Portfolio. Each class of
shares of each Portfolio is subject to different fees and expenses and may have
different returns for the same period.
B-83
<PAGE>
Occasionally, statistics may be used to specify Portfolio volatility or
risk. Measures of volatility or risk are generally used to compare a
Portfolio's net asset value or performance relative to a market index. One
measure of volatility is beta. Beta is the volatility of a Portfolio relative
to the total market. A beta of more than 1.00 indicates volatility greater than
the market, and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average, over a specified period of time. The premise is that greater
volatility connotes greater risk undertaken in achieving performance.
From time to time the Trust may publish an indication of a Portfolio's
past performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc., Morningstar Mutual Funds, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Micropal, Barron's,
Business Week, Consumer's Digest, Consumer's Report, Investors Business Daily,
The New York Times, Kiplinger's Personal Finance Magazine, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Trust may also advertise
information which has been provided to the NASD for publication in regional and
local newspapers. In addition, the Trust may from time to time advertise a
Portfolio's performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed-Income Analysis and Mutual Fund Indices (which measure total
return and average current yield for the mutual fund industry and rank mutual
fund performance); (b) the CDA Mutual Fund Report published by CDA Investment
Technologies, Inc. (which analyzes price, risk and various measures of return
for the mutual fund industry); (c) the Consumer Price Index published by the
U.S. Bureau of Labor Statistics (which measures changes in the price of goods
and services); (d) Stocks, Bonds, Bills and Inflation published by Ibbotson
Associates (which provides historical performance figures for stocks, government
securities and inflation); (e) the Salomon Brothers' World Bond Index (which
measures the total return in U.S. dollar terms of government bonds, Eurobonds
and foreign bonds of ten countries, with all such bonds having a minimum
maturity of five years); (f) the Lehman Brothers Aggregate Bond Index or its
component indices; (g) the Standard & Poor's Bond Indices (which measure yield
and price of corporate, municipal and U.S. Government bonds); (h) the J.P.
Morgan Global Government Bond Index; (i) other taxable investments including
certificates of deposit (CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds, commercial paper and
repurchase agreements; (j) Donoghues' Money Fund Report (which provides industry
averages for 7-day annualized and compounded yields of taxable, tax-free and
U.S. Government money funds); (k) the Hambrecht & Quist Growth Stock Index; (l)
the NASDAQ OTC Composite Prime Return; (m) the Russell Midcap Index; (n) the
Russell 2000 Index - Total Return; (o) Russell 1000 Growth Index-Total Return;
(p) the Value-Line Composite-Price Return; (q) the Wilshire 4500 Index; (r) the
FT-Actuaries Europe and Pacific Index; (s) historical investment data supplied
by the research departments of Goldman Sachs, Lehman Brothers, First Boston
Corporation, Morgan Stanley (including the EAFE Indices, the Morgan Stanley
Capital International Combined Asia ex Japan Free Index and the Morgan Stanley
Capital International Emerging Markets Free Index), Salomon Brothers, Merrill
Lynch, Donaldson Lufkin and Jenrette or other providers of such data; (t)
CDA/Wiesenberger Investment Companies Services or Wiesenberger Investment
Companies Service; (u) The Goldman Sachs Commodities Index; (v) information
produced by Micropal, Inc.; (w) the Shearson Lehman Government/Corporate (Total)
Index; (x) Shearson Lehman Government Index; (y) Merrill Lynch 1-3 Year Treasury
Index; (z) Merrill Lynch 2-Year Treasury Curve Index; (aa) the Salomon Brothers
Treasury Yield Curve Rate of Return Index; (bb) the Payden & Rygel 2-Year
Treasury Note Index; (cc) 1 through 3 year U.S. Treasury Notes; (dd) constant
maturity U.S. Treasury yield indices; (ee) the London Interbank Offered Rate;
(ff) historical data concerning the performance of adjustable and fixed-rate
mortgage loans; and (gg) the Tokyo Price Index. The composition of the
investments in such indices and the characteristics of such benchmark
investments are
B-84
<PAGE>
not identical to, and in some cases are very different from,those of the
Portfolios and the Underlying Funds. 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 a Portfolio to calculate
its performance figures.
Information used in advertisements 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;
. 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 (for example, common
stocks, small company stocks, taxable money market funds, U.S.
Treasury securities, adjustable rate mortgage securities,
government securities and municipal bonds) over time. However,
the characteristics of these securities are not identical to, and
may be very different from, those of a Portfolio;
. the dollar and non-dollar based returns of various market indices
(i.e., Morgan Stanley Capital International EAFE Index, FT-
Actuaries Europe & Pacific Index and the Standard & Poor's Index
of 500 Common Stocks) over varying periods of time;
. total stock market capitalizations of specific countries and
regions on a global basis;
B-85
<PAGE>
. performance of securities markets of specific countries and
regions;
. value of a dollar amount invested in a particular market or type of
security over different periods of time;
. volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund
Average/ All Taxable Index) over varying periods of time;
. credit ratings of domestic government bonds in various countries;
. price volatility comparisons of types of securities over different
periods of time; and
. price and yield comparisons of a particular security over different
periods of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
B-86
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
Assuming no voluntary
waiver of fees and no
expense reimbursements
------------------------
Assumes Assumes
Maximum Maximum
Applicable Assumes Applicable Assumes
Sales No sales Sales No Sales
Portfolio Class Time Period Charge* Charge Charge* Charge
--------- ------ ----------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Conservative Strategy A 2/8/99-12/31/99 - Since inception (.26)% 5.52% (2.79)% 2.86%
Conservative Strategy B 2/8/99-12/31/99 - Since inception (.26)% 4.92% (2.89)% 2.27%
Conservative Strategy C 2/8/99-12/31/99 - Since inception 3.76% 4.79% 1.11% 2.14%
Conservative Strategy Institutional 2/8/99-12/31/99 - Since inception N/A 6.04% N/A 3.37%
Conservative Strategy Service 2/8/99-12/31/99 - Since inception N/A 5.56% N/A 2.89%
Balanced Strategy A 1/1/99-12/31/99 - One Year 4.50% 10.58% 4.03% 10.08%
Balanced Strategy A 1/2/98-12/31/99 - Since inception 5.46% 8.47% 4.73% 7.74%
Balanced Strategy B 1/1/99-12/31/99 - One Year 4.51% 9.66% 4.01% 9.16%
Balanced Strategy B 1/2/98-12/31/99 - Since inception 5.72% 7.70% 5.02% 7.00%
Balanced Strategy C 1/1/99-12/31/99 - One Year 8.60% 9.63% 8.10% 9.13%
Balanced Strategy C 1/2/98-12/31/99 - Since inception 7.72% 7.72% 7.03% 7.03%
Balanced Strategy Institutional 1/1/99-12/31/99 - One Year N/A 10.92% N/A 10.42%
Balanced Strategy Institutional 1/2/98-12/31/99 - Since inception N/A 8.95% N/A 8.25%
Balanced Strategy Service 1/1/99-12/31/99 - One Year N/A 10.47% N/A 9.97%
Balanced Strategy Service 1/2/98-12/31/99 - Since inception N/A 8.38% N/A 7.69%
Growth and Income Strategy A 1/1/99-12/31/99 - One Year 9.46% 15.79% 9.18% 15.50%
Growth and Income Strategy A 1/2/98-12/31/99 - Since inception 8.00% 11.09% 7.61% 10.69%
Growth and Income Strategy B 1/1/99-12/31/99 - One Year 9.86% 14.95% 9.57% 14.66%
Growth and Income Strategy B 1/2/98-12/31/99 - Since inception 8.40% 10.31% 8.04% 9.95%
Growth and Income Strategy C 1/1/99-12/31/99 - One Year 13.92% 14.94% 13.63% 14.65%
</TABLE>
B-87
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(AVERAGE OF ANNUAL TOTAL RETURN)
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes
Maximum Maximum
Applicable Assumes Application Assumes
Sales No sales Sales No Sales
Portfolio Class Time Period Charge* Charge Charge* Charge
--------- ----- ----------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Strategy C 1/2/98-12/31/99 - Since inception 10.29% 10.29% 9.93% 9.93%
Growth and Income Strategy Institutional 1/1/99-12/31/99 - One Year N/A 16.14% N/A 15.50%
Growth and Income Strategy Institutional 1/2/98-12/31/99 - Since inception N/A 11.47% N/A 11.12%
Growth and Income Strategy Service 1/1/99-12/31/99 - One Year N/A 15.60% N/A 15.31%
Growth and Income Strategy Service 1/2/98-12/31/99 - Since inception N/A 10.94% N/A 10.58%
Growth Strategy A 1/1/99-12/31/99 - One Year 14.20% 20.85% 13.88% 20.53%
Growth Strategy A 1/2/98-12/31/99 - Since inception 9.33% 12.46% 8.87% 11.99%
Growth Strategy B 1/1/99-12/31/99 - One Year 14.82% 19.87% 14.49% 19.54%
Growth Strategy B 1/2/98-12/31/99 - Since inception 9.82% 11.66% 9.39% 11.23%
Growth Strategy C 1/1/99-12/31/99 - One Year 18.95% 19.96% 18.62% 19.63%
Growth Strategy C 1/2/98-12/31/99 - Since inception 11.69% 11.69% 11.25% 11.25%
Growth Strategy Institutional 1/1/99-12/31/99 - One Year N/A 21.24% N/A 20.91%
Growth Strategy Institutional 1/2/98-12/31/99 - Since inception N/A 12.80% N/A 12.37%
Growth Strategy Service 1/1/99-12/31/99 - One Year N/A 20.62% N/A 20.29%
Growth Strategy Service 1/2/98-12/31/99 - Since inception N/A 12.26% N/A 11.82%
</TABLE>
B-88
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
Assuming no voluntary
waiver of fees and no
expense reimbursements
------------------------
Assumes Assumes
Maximum Maximum
Applicable Assumes Applicable Assumes
Sales No sales Sales No Sales
Fund Class Time Period Charge* Charge Charge* Charge
---- ----- ----------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Strategy A 1/1/99-12/31/99 - One Year 18.51% 25.39% 18.03% 24.89%
Aggressive Growth Strategy A 1/2/98-12/31/99 - Since inception 10.27% 13.43% 9.57% 12.71%
Aggressive Growth Strategy B 1/1/99-12/31/99 - One Year 19.39% 24.41% 18.89% 23.91%
Aggressive Growth Strategy B 1/2/98-12/31/99 - Since inception 10.82% 12.63% 10.14% 11.95%
Aggressive Growth Strategy C 1/1/99-12/31/99 - One Year 23.35% 24.35% 22.85% 23.85%
Aggressive Growth Strategy C 1/2/98-12/31/99 - Since inception 12.66% 12.66% 11.99% 11.99%
Aggressive Growth Strategy Institutional 1/1/99-12/31/99 - One Year N/A 25.74% N/A 25.24%
Aggressive Growth Strategy Institutional 1/2/98-12/31/99 - Since inception N/A 13.71% N/A 13.03%
Aggressive Growth Strategy Service 1/1/99-12/31/99 - One Year N/A 25.17% N/A 24.67%
Aggressive Growth Strategy Service 1/2/98-12/31/99 - Since inception N/A 13.31% N/A 12.63%
</TABLE>
- ----------------------
All returns are average annual total returns except for the Conservative
Strategy Portfolio which is an aggregate total return since the Portfolio has
not completed a full 12 months of operations.
* Total return reflects a maximum initial sales charge of 5.5% for Class A
Shares, the assumed deferred sales charge for Class B
Shares (5% maximum declining to 0% after six years) and the assumed
deferred sales charge for Class C Shares (1% if redeemed within 12 months
of purchase).
B-89
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From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived by an investment in a Portfolio.
Such advertisements or information may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Investment
Adviser's views as to markets, the rationale for a Portfolio's investments and
discussions of a Portfolio's current asset allocation.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by the Investment Adviser 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 the Investment Adviser'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 materials which highlight or summarize the
services provided in support of an asset allocation program.
A Portfolio's performance data will be based on historical results and will
not be intended to indicate future performance. A Portfolio's total return,
yield and distribution rate will vary based on market conditions, portfolio
expenses, portfolio investments and other factors. The value of a Portfolio's
shares will fluctuate and an investor's shares may be worth more or less than
their original cost upon redemption.
The Trust may, at its discretion, from time to time make a list of a
Portfolio's holdings available to investors upon request.
SHARES OF THE TRUST
Each Portfolio is a series of Goldman Sachs Trust, which was formed under
the laws of the state of Delaware on January 28, 1997. The Trustees have
authority under the Trust's Declaration of Trust to create and classify shares
of beneficial interest in separate series, without further action by
shareholders. The Trustees also have authority to classify and reclassify the
shares of the Portfolios into one or more classes of shares. As of the date of
this Additional Statement, the Trustees have authorized the issuance of five
classes of shares in each Portfolio: Institutional Shares, Service Shares, Class
A Shares, Class B Shares and Class C Shares.
Each Institutional Share, Service Share, Class A Share, Class B Share and
Class C Share of a Portfolio represents a proportionate interest in the assets
belonging to the applicable class of the Portfolio. All expenses of a Portfolio
are borne at the same rate by each class of shares, except that fees under
Service Plan are borne exclusively by Service Shares, fees under the
Distribution and Service Plan are borne exclusively by Class A Shares, Class B
Shares or Class C Shares, and transfer agency fees may be borne at different
rates by different share classes. The Trustees may determine in the future that
it is appropriate to
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allocate other expenses differently between classes of shares and may do so to
the extent consistent with the rules of the SEC and positions of the Internal
Revenue Service. Each class of shares may have different minimum investment
requirements and be entitled to different shareholder services. 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 Portfolio under a Plan for services provided to the
institution's customers.
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 Portfolio attributable to Service Shares.
Class A Shares are sold, with an initial sales charge, through brokers and
dealers who are members of the National Association of Securities Dealers, Inc.
and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Portfolios 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 Shares and Class C Shares of the Portfolios are sold subject to a
contingent deferred sales charge through brokers and dealers who are members of
the National Association of Securities Dealers, Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class B Shares
and Class C Shares bear the cost of distribution (Rule 12b-1) fees at the
aggregate rate of up to 0.75% of the average daily net assets attributed to
Class B Shares and Class C Shares. Class B Shares and Class C Shares also bear
the cost of a service fee at an annual rate of up to 0.25% of the average daily
net assets attributed to Class B Shares and Class C Shares.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, 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 Portfolio. Dividends paid by each
Portfolio, 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 differences in expenses discussed
above. 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.
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<PAGE>
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Portfolio 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 Portfolios' 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.
Portfolio shares and any dividends and distributions paid by the Portfolios are
reflected in account statements from the Transfer Agent.
As of March 17, 2000, the following entity owned of record or beneficially
more than 5% of the outstanding Class A shares of the Balanced Strategy
Portfolio: Edward Jones & Co., 201 Progress Pkwy., Maryland Hts., MO 63043
(13%).
As of March 17, 2000, the following entity owned of record or beneficially
more than 5% of the outstanding Class A shares of the Growth & Income Strategy
Portfolio: Edward Jones & Co., 201 Progress Pkwy., Maryland Hts., MO 63043
(15%).
As of March 17, 2000, the following entity owned of record or beneficially
more than 5% of the outstanding Class A shares of the Growth Strategy Portfolio:
Edward Jones & Co., 201 Progress Pkwy., Maryland Hts., MO 63043 (12%).
As of March 17, 2000, the following entity owned of record or beneficially
more than 5% of the outstanding Class A shares of the Aggressive Growth Strategy
Portfolio: Edward Jones & Co., 201 Progress Pkwy., Maryland Hts., MO 63043
(10%).
As of March 17, 2000, the following entity owned of record or beneficially
more than 5% of the outstanding Class B shares of the Conservative Strategy
Portfolio: Merrill Lynch Pierce Fenner & Smith, For the Sole Benefit of It's
Customers, Attn: Service Team Sec#, Goldman Sachs Funds, 4800 Deer Lake Drive
East, 3rd Fl., Jacksonville, FL 32246 (58%).
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 to assets specifically allocated to such class or series. In addition,
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
B-92
<PAGE>
to shareholders including the elections 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 Declaration of Trust
and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers, employees and agents of the Trust unless the recipient is adjudicated
(i) to be liable by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of such person's
office or (ii) not to have acted in good faith in the reasonable belief that
such person's actions were in the best interest of the Trust. The Declaration of
Trust provides that, if any shareholder or former shareholder of any series is
held personally liable solely by reason of being or having been a shareholder
and not because of the shareholder's acts or omissions or for some other reason,
the shareholder or former shareholder (or heirs, executors, administrators,
legal representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The Trust,
acting on behalf of any affected series, must, upon request by such shareholder,
assume the defense of any claim made against such shareholder for any act or
obligation of the series and satisfy any judgment thereon from the assets of the
series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust, series or its respective
shareholders. The factors and events that the Trustees may take into account in
making such determination include (i) the inability of the Trust or any
successor series or class to maintain its assets at an appropriate size; (ii)
changes in laws or regulations governing the Trust, series or class or affecting
assets of the type in which it invests; or (iii) economic developments or trends
having a significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company with
substantially the same investment objective, restrictions and policies.
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would adversely affect the voting rights
of shareholders; (ii) that is required by law to be approved by shareholders;
(iii) that would amend the provisions of the
B-93
<PAGE>
Declaration of Trust regarding amendments and supplements thereto; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
Shareholder and Trustee Liability
Under Delaware law, the shareholders of the Portfolios are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard this risk, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of a Portfolio. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Portfolio for all loss suffered by a shareholder as a result of
an obligation of the series. The Declaration of Trust also provides that a
series shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders
of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of such claim. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the
Portfolio for the expense of any such advisers in the event that the Trustees
determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
B-94
<PAGE>
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in each Portfolio. 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 each
Portfolio. The summary is based on the laws in effect on the date of this
Additional Statement, which are subject to change.
General
The following is only a summary of certain additional tax considerations
generally affecting each Portfolio that are not described in the Prospectuses.
The discussions below and in the Prospectuses are not intended as substitutes
for careful tax planning.
Each Portfolio and each Underlying Fund is a separate taxable entity. Each
of the Portfolios and the Underlying Funds intends to qualify for each taxable
year as a regulated investment company under Subchapter M of the Internal
Revenue Code, as amended (the "Code").
There are certain tax requirements that all Portfolios and Underlying Funds
must follow in order to avoid federal taxation. In its efforts to adhere these
requirements, the Funds may have to limit their investment activities in some
types of instruments. Qualification as a regulated investment company under the
Code requires, among other things, that (a) a Portfolio or Fund derive at least
90% of its gross income 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) such Portfolio or 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 such Portfolio's or Fund's 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 such
Portfolio's or Fund's total assets and to not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total (gross) assets is invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies) or two or more issuers controlled by the Portfolio or the Fund and
engaged in the same, similar or related trades or businesses.
If a Portfolio or Fund complies with such provisions, then in any taxable
year in which such Portfolio or Fund 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 accrued original
issue discount and market discount income, income from securities lending, any
net short-term capital gain in excess of net long-
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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, such Portfolio or
Fund (but not its shareholders) will be relieved of federal income tax on any
income of the Portfolio or Fund, including long-term capital gains, distributed
to shareholders. In this connection, dividends received by a Portfolio from an
Underlying Fund, other than capital gain distributions, are treated as ordinary
income to the Portfolio. Distributions from an Underlying Fund designated as
capital gain distributions are treated as long-term capital gains. In addition,
upon the sale or other disposition by a Portfolio of shares of an Underlying
Fund or other investment, the Portfolio will generally realize a capital gain or
loss which will be long-term or short-term, generally depending upon the
Portfolio's holding period.
If a Portfolio or Fund retains any investment company taxable income or
"net capital gain" (the excess of net long-term capital gain over net short-term
capital loss), it will be subject to a tax at regular corporate rates on the
amount retained. If a Portfolio or Fund retains any net capital gain, the
Portfolio may designate the retained amount as undistributed capital gains 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 rate capital gain, as the case may be, their shares
of such undistributed amount, and (ii) will be entitled to credit their
proportionate shares of the tax paid by the Portfolio or 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 Portfolio or Fund will be
increased by an amount equal to a percentage of the amount of undistributed net
capital gain included in the shareholder's gross income. Each Portfolio and each
Underlying Fund intends to distribute for each taxable year to its shareholders
all or substantially all of its investment company taxable income, net capital
gain and any net tax-exempt interest. Exchange control or other foreign laws,
regulations or practices may restrict repatriation of investment income, capital
or the proceeds of securities sales by foreign investors such as the CORE
International Equity, International Equity, European Equity, Japanese Equity,
International Small Cap, Emerging Markets Equity, Asia Growth or Global Income
Funds and may therefore make it more difficult for such a Fund to satisfy the
distribution requirements described above, as well as the excise tax
distribution requirements described below. However, each Portfolio and each
Underlying Fund generally expects to be able to obtain sufficient cash to
satisfy such requirements from new investors, the sale of securities or other
sources. If for any taxable year a Portfolio or 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 without any deduction for
dividends paid, and its distributions to shareholders will be taxable as
ordinary dividends to the extent of its current and accumulated earnings and
profits.
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As of December 31, 1999, the following Portfolios had approximately the
following amounts of capital loss carryforwards for U.S. federal tax purposes.
<TABLE>
Amount Year of Expiration
------ ------------------
<S> <C> <C>
Conservative Strategy Portfolio -- --
Balanced Strategy Portfolio -- --
Growth and Income Strategy Portfolio $5,807,000 2000-2007
Growth Strategy Portfolio 9,066,000 2000-2007
Aggressive Growth Strategy Portfolio 4,741,000 2000-2007
</TABLE>
Note: For federal income tax purposes, each Portfolio or 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.
In order to avoid a 4% federal excise tax, each Portfolio and each
Underlying 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 all taxable ordinary income and the excess of capital gains over
capital losses for the previous year that were not distributed for such year and
on which the Portfolio or Fund paid no federal income tax. For federal income
tax purposes, dividends declared by a Portfolio or Fund in October, November or
December to shareholders of record on a specified date in such a month and paid
during January of the following year are taxable to such shareholders as if
received on December 31 of the year declared. The Portfolios and the Underlying
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.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains and losses. Certain of the futures
contracts, forward contracts and options held by an Underlying 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 an Underlying 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 an Underlying Fund, the Fund may be required to
defer the recognition of losses on futures contracts, forward contracts, and
options or underlying securities or foreign currencies to the extent of any
unrecognized gains on related positions held by such Underlying 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 an Underlying Fund's
distributions to shareholders. Application of certain requirements for
qualification as a regulated investment company and/or these tax rules to
certain investment practices, such as dollar rolls, or certain derivatives such
as interest rate swaps, floors, caps and collars and currency, mortgage or index
swaps may be unclear in some respects, and an Underlying Fund may therefore be
required to limit its participation in such transactions. Certain
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<PAGE>
tax elections may be available to an Underlying Fund to mitigate some of the
unfavorable consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by an Underlying Fund. Under
these rules, foreign exchange gain or loss realized 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 an Underlying 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 of the foregoing currency
transactions or instruments could exceed net investment income otherwise
calculated for accounting purposes with the result being either no dividends
being paid or a portion of an Underlying Fund's dividends being treated as a
return of capital for tax purposes, nontaxable to the extent of a shareholder's
tax basis in his shares and, once such basis is exhausted, generally giving rise
to capital gains.
An Underlying Fund's investment in zero coupon securities, deferred
interest securities, certain structured securities or other securities bearing
original issue discount or, if an Underlying 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, the
Underlying Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold.
If, as may occur for certain of the Underlying Funds, more than 50% of an
Underlying Fund's total assets at the close of any taxable year consists of
stock or securities of foreign corporations, the Underlying Fund may file an
election with the Internal Revenue Service pursuant to which shareholders of the
Underlying 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 the Underlying 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.
If an Underlying 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 foreign taxes paid by an Underlying
Fund, although such shareholders will be required to include their shares of
such taxes in gross income if the election is made.
While a Portfolio will be able to deduct the foreign taxes that it will be
treated as receiving from an Underlying Fund if the election is made, the
Portfolio will not itself be able
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to elect to treat its foreign taxes as paid by its shareholders. Accordingly,
the shareholders of the Portfolio will not have an option of claiming a foreign
tax credit for foreign taxes paid by the Underlying Funds, while persons who
invest directly in such Underlying Funds may have that option.
If an Underlying Fund acquires stock (including, under proposed
regulations, an option to acquire stock such as is inherent in a convertible
bond) in certain foreign corporations that receive at least 75% of their annual
gross income from passive sources (such as interest, dividends, rents, royalties
or capital gain) or hold at least 50% of their assets in investments producing
such passive income ("passive foreign investment companies"), the Underlying
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
stock in such companies, even if all income or gain actually received by the
Underlying Fund is timely distributed to its shareholders. The Underlying Fund
would not be able to pass through to its shareholders any credit or deduction
for such a tax. In some cases, elections may be available that would ameliorate
these adverse tax consequences, but such elections would require the Underlying
Fund to include certain amounts as income or gain (subject to the distribution
requirements described above) without a concurrent receipt of cash. Each Fund
may limit and/or manage its holdings in passive foreign investment companies to
minimize its tax liability or maximize its return from these investments.
Investments in lower-rated securities may present special tax issues for an
Underlying 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 an Underlying 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 payments received on obligations in
default should be allocated between principal and income; and whether exchanges
of debt obligations in a workout context are taxable. These and other issues
will be addressed by an Underlying Fund, in the event it invests in such
securities, in order to seek to eliminate or minimize any adverse tax
consequences.
Taxable U.S. Shareholders - Distributions
For U.S. federal income tax purposes, distributions by a Portfolio
generally will be taxable to shareholders who are subject to tax. 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 they would have received had they elected to receive cash
and will have a cost basis in each share received equal to such amount divided
by the number of shares received.
Distributions from investment company taxable income for the year will be
taxable as ordinary income. Distributions designated as derived from a
Portfolio's dividend income, if any, that would be eligible for the dividends
received deduction if such Portfolio were not a regulated investment company may
be eligible for the dividends-received deduction for corporate shareholders.
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 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. The entire
dividend, including the deducted amount, is considered in determining the
excess, if any, of a corporate shareholder's adjusted
B-99
<PAGE>
current earnings over its alternative minimum taxable income, which may increase
its liability for the federal alternative minimum tax, and the dividend may, if
it is treated as an "extraordinary dividend" under the Code, reduce such
shareholder's tax basis in its shares of a Portfolio. Capital gain dividends
(i.e., dividends from net capital gain), if designated as such in a written
notice to shareholders mailed not later than 60 days after a Portfolio's taxable
year closes, will be taxed to shareholders as long-term capital gain regardless
of how long shares have been held by shareholders, but are not eligible for the
dividends-received deduction for corporations. Such long-term capital gain will
generally be 20%-rate gain. Distributions, if any, that are in excess of a
Portfolio's current and accumulated earnings and profits will first reduce a
shareholder's tax basis in his shares and, after such basis is reduced to zero,
will generally constitute capital gains to a shareholder who holds his shares as
capital assets.
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. (To aid in computing its tax basis, a
shareholder should generally retain its account statements for the period that
it held shares.) 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. In general, the maximum long-term capital
gain rate will be 20% for gains on assets held more than one year. 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 Portfolio shares is properly treated as a sale for tax purposes,
as is assumed in this discussion. If a shareholder receives 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 a sale or redemption of such shares, 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. All or a portion
of any sales load paid upon the purchase of shares of a Portfolio will not be
taken into account in determining gain or loss on the redemption or exchange of
such shares within 90 days after their purchase to the extent the redemption
proceeds are reinvested, or the exchange is effected, without payment of an
additional sales load pursuant to the reinvestment or exchange privilege. The
load not taken into account will be added to the tax basis of the newly acquired
shares. Additionally, any loss realized on a sale or redemption of shares of a
Portfolio may be disallowed under "wash sale" rules to the extent the shares
disposed of are replaced with other shares of the same Portfolio 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 such
Portfolio. If disallowed, the loss will be reflected in an adjustment to the
basis of the shares acquired.
B-100
<PAGE>
Each Portfolio may be required to withhold, as "backup withholding,"
federal income tax at a rate of 31% from dividends (including capital gain
dividends) and share redemption and exchange proceeds to individuals and other
non-exempt shareholders who fail to furnish such Portfolio with a correct
taxpayer identification number ("TIN") certified under penalties of perjury, or
if the Internal Revenue Service or a broker notifies the Portfolio that the
payee is subject to backup withholding as a result of failing to properly report
interest or dividend income to the Internal Revenue Service or that the TIN
furnished by the payee to the Portfolio is incorrect, or if (when required to do
so) the payee fails to certify under penalties of perjury that it is not subject
to backup withholding. A Portfolio may refuse to accept an application that does
not contain any required TIN or certification that the TIN provided is correct.
If the backup withholding provisions are applicable, any such dividends and
proceeds, whether paid in cash or reinvested in additional 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 a
shareholder does not have a TIN, it should apply for one immediately by
contacting the local office of the Social Security Administration or the
Internal Revenue Services. Backup withholding could apply to payments relating
to a shareholder's account while it is waiting receipt of a TIN. Special rules
apply for certain entities. For example, for an account established under a
Uniform Gifts for Transfer to Minors Act, the TIN of the minor should be
furnished.
Non-U.S. Shareholders
The discussion above relates solely to U.S. federal income tax law as it
applies to "U.S. persons" subject to tax under such law. Shareholders who, as to
the United States, are not "U.S. persons" (i.e., are nonresident aliens, foreign
corporations, fiduciaries of foreign trusts or estates, foreign partnerships or
other non-U.S. investors) generally will be subject to U.S. federal withholding
tax at the rate of 30% on distributions treated as ordinary income unless the
tax is reduced or eliminated pursuant to a tax treaty or the dividends are
effectively connected with a U.S. trade or business of the shareholder. In the
latter 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 Portfolio
which are designated as undistributed capital gains, to a non-U.S. shareholder
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.
Any capital gain realized by a non-U.S. shareholder upon a sale or
redemption of shares of a Portfolio 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 U.S., or in the case of a shareholder who
is a nonresident alien individual, the shareholder is present in the U.S. for
183 days or more during the taxable year and certain other conditions are met.
Non-U.S. persons who fail to furnish a Portfolio with an IRS Form W-8 or an
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from the Portfolios.
B-101
<PAGE>
State and Local
Each Portfolio and each Underlying Fund may be subject to state or local
taxes in jurisdictions in which such Portfolio or Underlying Fund, as the case
may be, may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of such Portfolio and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such Portfolio may have tax consequences for
shareholders different from those of a direct investment in the securities held
by the Portfolio or the Underlying Funds. Shareholders should consult their own
tax advisers concerning these matters.
FINANCIAL STATEMENTS
The audited financial statements and related reports of Arthur Andersen
LLP, the former independent public accountants for each Portfolio, contained in
each Portfolio's 1999 Annual Report are hereby incorporated by reference. Copies
of the Annual Report may be obtained without charge by calling Goldman, Sachs &
Co., toll free at 800-526-7384. No other portions of the Portfolios' Annual
Report are incorporated hereby by reference. PricewaterhouseCoopers LLP have
been selected as auditors of the Portfolios of the Trust for the fiscal year
ending December 31, 2000.
OTHER INFORMATION
Each Portfolio will normally redeem shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Portfolio during any 90-day
period for any one shareholder. Each Portfolio, however, reserves the right to
pay redemptions exceeding $250,000 or 1% of the net asset value of the Portfolio
at the time of redemption by a distribution in kind of securities (instead of
cash) from such Portfolio. The securities distributed in kind would be readily
marketable and would be valued for this purpose using the same method employed
in calculating the Portfolio's net asset value per share. See "Net Asset Value."
If a shareholder receives redemption proceeds in kind, the shareholder should
expect to incur transaction costs upon the disposition of the securities
received in the redemption.
The right of a shareholder to redeem shares and the date of payment by each
Portfolio 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 Portfolio 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
Portfolio. (The Trust may also suspend or postpone the recordation of the
transfer of shares upon the occurrence of any of the foregoing conditions.)
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have
B-102
<PAGE>
been omitted from the Prospectus and this Additional Statement pursuant to the
rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in Washington,
D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
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. In some, but not all, cases these payments will be pursuant to a
Distribution and Service Plan or Service Plan described in the Prospectuses and
the following sections. 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") for the sale and distribution
of shares of the Portfolios and/or for the servicing of those shares. These
payments ("Additional Payments") would be in addition to the payments by the
Portfolios described in the Portfolios' Prospectus 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 Portfolios and payments for
providing extra employee training and information relating to the Portfolios;
"listing" fees for the placement of the Portfolios on an Intermediary's list of
mutual funds available for purchase by its customers; "finders" or "referral"
fees for directing investors to the Portfolios; "marketing support" fees for
providing assistance in promoting the sale of the Portfolios' 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 the shareholder servicing and
processing fees paid by the Portfolios. 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 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.
B-103
<PAGE>
OTHER INFORMATION REGARDING PURCHASES,
REDEMPTIONS, EXCHANGES AND DIVIDENDS
(Class A, Class B 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.
Maximum Sales Charges
=====================
Class A Shares of each Portfolio are sold at a maximum sales charge of
5.5%. Using the offering price per share, as of December 31, 1999, the maximum
offering price of each Portfolio's Class A shares would be as follows:
<TABLE>
<CAPTION>
Net Asset Maximum Offering Price
Value Sales Charge to Public
----- ------------ ---------
<S> <C> <C> <C>
Conservative Strategy $10.17 5.5% $10.76
Balanced Strategy $10.99 5.5% $11.63
Growth and Income Strategy $11.71 5.5% $12.39
Growth Strategy $12.24 5.5% $12.95
Aggressive Growth Strategy $12.61 5.5% $13.34
</TABLE>
Other Purchase Information
==========================
The sales load waivers on the Portfolios' 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 Portfolio 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 a Portfolio and its Transfer Agent. Since the
Portfolios 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 a
Portfolio involves special procedures and will require the beneficial owner to
obtain historical purchase information about the shares in the account from the
Authorized Dealer.
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Portfolio shares. Some
may establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their
clients for other investment or administrative services and may independently
establish and charge additional amounts to their clients for such services,
which charges would reduce a client's return.
B-104
<PAGE>
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
Portfolios and Class A Shares of any other Goldman Sachs Fund (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example,
if a shareholder owns shares with a current market value of $65,000 and
purchases additional Class A Shares of the Balanced Strategy Portfolio 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 Portfolios may not be aggregated with Class A Shares purchased
subject to a sales charge. Class A Shares of the Portfolios 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 Portfolios 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 Portfolios 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 Portfolios' shares to
eligible persons; and (ii) notification to the Portfolios at the time of
purchase that the investor is eligible for this right of accumulation.
Statement of Intention - (Class A)
==================================
If a shareholder anticipates purchasing at least $100,000 of Class A Shares
of a Portfolio 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
Portfolio 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 or her
Authorized Dealer must inform Goldman Sachs that the Statement is in effect each
time shares are purchased. There is no obligation to purchase the full amount
of shares indicated in the Statement. A shareholder may include the value of all
Class A Shares on which a sales charge has previously been paid as an
"accumulation credit" toward the completion of the Statement, but a price
readjustment will be made only on Class A Shares purchased within ninety (90)
days before submitting the Statement. The Statement authorizes the Transfer
Agent to hold in escrow a sufficient number of shares which can be redeemed to
make up any difference in the sales charge on the amount actually invested. For
purposes of satisfying the amount specified on the Statement, the gross amount
of each investment, exclusive of any appreciation on shares previously
purchased, will be taken into account.
B-105
<PAGE>
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
=================================================
You may receive dividends and distributions in additional shares of the
same class of the Portfolio in which you have invested or you 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 you hold Class
A Shares of a Portfolio, or ILA Class B or Class C Units of the Prime
Obligations Portfolio, if you hold Class B or Class C Shares of a Portfolio (the
"ILA Portfolios").
A Portfolio shareholder should obtain and read the prospectus relating to
any other Goldman Sachs Fund or ILA Portfolio (as defined in the Prospectus) and
its shares or units and consider its investment objective, policies and
applicable fees before electing cross-reinvestment into that Fund or Portfolio.
The election to cross-reinvest dividends and capital gain distributions will not
affect the tax treatment of such dividends and distributions, which will be
treated as received by the shareholder and then used to purchase shares of the
acquired fund. Such reinvestment of dividends and distributions in shares of
other Goldman Sachs Funds or in units of ILA Portfolios is available only in
states where such reinvestment may legally be made.
Automatic Exchange Program
==========================
A Portfolio shareholder may elect to exchange automatically a specified
dollar amount of shares of a Portfolio into an identical account or an account
registered in a different name or with a different address, social security or
other taxpayer identification number, provided that the account in the acquired
fund has been established, appropriate signatures have been obtained and the
minimum initial investment requirement has been satisfied. A Portfolio
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 Portfolio 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 Portfolio at net asset value. The Transfer Agent acts
as agent for the shareholder in redeeming sufficient full and fractional shares
to provide the amount of the systematic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right
to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written
notice to the shareholder. Withdrawal payments should not be considered to be
dividends, yield or income. If periodic withdrawals continuously exceed new
purchases and reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and
B-106
<PAGE>
ultimately exhausted. The maintenance of a withdrawal plan concurrently with
purchases of additional Class A, Class B or Class C Shares would be
disadvantageous because of the sales charge imposed on purchases of Class A
Shares or the imposition of a CDSC on redemptions of Class A, Class B and Class
C Shares. The CDSC applicable to Class B and Class C Shares redeemed under a
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.
DISTRIBUTION AND SERVICE PLANS
(Class A, Class B and Class C Shares Only)
As described in the Prospectus, the Trust has adopted, on behalf of Class
A, Class B and Class C Shares of each Portfolio, distribution and service plans
(each a "Plan") pursuant to Rule 12b-1 under the Act.
The Plans for each Portfolio were most recently approved on April 25, 2000
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 Portfolio's average daily net
assets attributable to Class A, Class B and Class C Shares, respectively, of
such Portfolio. Under the Plans for Class B and Class C Shares, Goldman Sachs is
also entitled to receive a separate fee for personal and account maintenance
services equal to an annual basis of 0.25% of each Portfolio'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 contingent deferred sales charge 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 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 Portfolios' Class A, Class B and Class C Shares.
Under each Plan, Goldman Sachs, as distributor of each Portfolio'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.
B-107
<PAGE>
The Plans will remain in effect until May 1, 2001 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 Portfolio 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 Portfolio 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 outstanding Class A, Class B or Class C Shares, respectively, of the
applicable Portfolio and share class. If a Plan was terminated by the Trustees
of the Trust and no successor plan was adopted, the Portfolio 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 will 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 Portfolios and
their Class A, Class B and Class C Shareholders.
For the period ended December 31, 1998 and 1999, the distribution and
service fees paid to Goldman Sachs by each Portfolio then in existence pursuant
to the Class A, Class B and Class C Plans were as follows:
<TABLE>
<CAPTION>
Period Ended December 31, 1999
---------------------------------------------------------------------------------
Class A Plan Class B Plan Class C Plan
============ ============ ============
<S> <C> <C> <C>
Conservative Strategy/1/ $ 2,748 $ 60,259 $ 26,721
Balanced Strategy 101,716 336,432 251,595
Growth and Income Strategy 462,094 1,381,257 949,729
Growth Strategy 313,869 1,120,232 648,606
Aggressive Growth Strategy 127,296 414,513 233,626
</TABLE>
<TABLE>
<CAPTION>
Period Ended December 31, 1998
---------------------------------------------------------------------------------
Class A Plan Class B Plan Class C Plan
============ ============ ============
<S> <C> <C> <C>
Conservative Strategy/1/ N/A N/A N/A
Balanced Strategy/2/ $86,263 $156,644 $130,311
Growth and Income Strategy/2/ 381,299 737,771 564,141
Growth Strategy/2/ 267,938 587,857 366,555
Aggressive Growth Strategy/2/ 94,953 240,609 125,878
</TABLE>
- ---------------------
1 The Conservative Strategy Portfolio commenced operations on February 8,
1999.
2 The Balanced Strategy, Growth and Income Strategy, Growth Strategy and
Aggressive Growth Strategy Portfolios commenced operations on January 2,
1998.
B-108
<PAGE>
During the period ended December 31, 1999, Goldman Sachs incurred the
following expenses in connection with distribution under the Class A Plan of
each applicable Portfolio with Class A Shares then in existence:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & its Sales and Travel than Current Literature and
to Dealers1 Personnel Expenses Shareholders Advertising
------------ ------------ ---------- ------------ --------------
Period Ended December 31, 1999:
<S> <C> <C> <C> <C> <C>
Conservative Strategy $ 2,482 $ 10,392 $ 13,466 $ 913 $ 4,050
Balanced Strategy 191,956 69,690 90,271 5,951 26,962
Growth and Income Strategy 727,354 149,657 194,682 12,593 57,772
Growth Strategy 435,032 120,645 159,253 10,410 47,384
Aggressive Growth Strategy 215,449 97,763 126,316 8,365 37,746
</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-109
<PAGE>
During the period ended December 31, 1999, Goldman Sachs incurred the
following expenses in connection with distribution under the Class B Plan of
each applicable Portfolio with Class B Shares then in existence:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & its Sales and Travel than Current Literature and
To Dealers1 Personnel Expenses Shareholders Advertising
------------ ------------ ---------- ------------ --------------
Period Ended December 31, 1999:
<S> <C> <C> <C> <C> <C>
Conservative Strategy $ 55,924 $ 49,441 $ 61,967 $ 4,321 $ 18,802
Balanced Strategy 521,071 55,889 74,653 4,919 22,282
Growth and Income Strategy 2,090,816 105,484 144,761 9,356 42,921
Growth Strategy 2,118,427 103,561 139,425 9,145 41,524
Aggressive Growth Strategy 463,071 76,908 102,506 6,788 30,615
</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-110
<PAGE>
During the period ended December 31, 1999, Goldman Sachs incurred the
following expenses in connection with distribution under the Class C Plan of
each applicable Portfolio with Class C Shares then in existence:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & its Sales and Travel than Current Literature and
to Dealers1 Personnel Expenses Shareholders Advertising
------------ ------------ ---------- ------------ --------------
Period Ended December 31, 1999:
<S> <C> <C> <C> <C> <C>
Conservative Strategy $ 15,314 $26,156 $ 34,222 $2,290 $10,268
Balanced Strategy 274,732 41,882 56,102 3,685 16,733
Growth and Income Strategy 1,075,731 73,116 100,310 6,474 29,734
Growth Strategy 731,373 60,211 81,310 5,326 24,204
Aggressive Growth Strategy 258,537 43,151 57,235 3,807 17,115
</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-111
<PAGE>
SERVICE PLAN
(Service Shares Only)
The foregoing tables reflect amount expended by Goldman Sachs, which
amounts are in excess of the compensation received by Goldman Sachs under the
Plants. The payments under the Plans were used by Goldman Sachs to compensate
it for the expenses shown above on a pro-rate basis.
Each Portfolio 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 Portfolio will enter into agreements with
Service Organizations which purchase Service Shares of the Portfolio 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 Portfolio, (c) answer questions and handle
correspondence from customers regarding their accounts, (d) process customer
orders to purchase, redeem and exchange Service Shares of a Portfolio, 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 Portfolio, (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
Portfolio, including obtaining information from a Portfolio, working with a
Portfolio to correct errors and resolve problems and providing statistical and
other information to a Portfolio. As compensation for such services, a
Portfolio 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 Portfolio attributable to or held in the name of such Service
Organization; provided, however, that the fee paid for personal and account
maintenance services shall not exceed 0.25% such average daily net assets.
The amount of the service fees paid by each Portfolio then in existence to
Service Organizations was as follows for the period ended December 31:
<TABLE>
<CAPTION>
1999 1998
==== ====
<S> <C> <C>
Conservative Strategy/1/ $ 104 N/A
Balanced Strategy/2/ 2,295 $1,358
Growth and Income Strategy/2/ 8,917 3,734
Growth Strategy/2/ 3,115 820
Aggressive Growth Strategy/2/ 639 306
</TABLE>
___________________
1 Commenced operations on February 8, 1999.
2 The Balanced Strategy, Growth and Income Strategy, Growth Strategy and
Aggressive Growth Strategy Portfolios commenced operations on January 2,
1998.
B-112
<PAGE>
Each Portfolio has adopted its Plan pursuant to Rule 12b-1 under the 1940
Act in order to avoid any possibility that payments to the Service Organizations
pursuant to the Service Agreements might violate the 1940 Act. Rule 12b-1,
which was adopted by the SEC under the Act, regulates the circumstances under
which an investment company or series thereof may bear expenses associated with
the distribution of its shares. In particular, such an investment company or
series thereof cannot engage directly or indirectly in financing any activity
which is primarily intended to result in the sale of shares issued by the
company unless it has adopted a plan pursuant to, and complies with the other
requirements of, such Rule. The Trust believes that fees paid for the services
provided in the Plan and described above are not expenses incurred primarily for
effecting the distribution of Service Shares. However, should such payments be
deemed by a court or the SEC to be distribution expenses, such payments would be
duly authorized by the Plan.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Portfolio in connection with the investment of fiduciary
assets in Service Shares of such Portfolio. 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 Portfolios. 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 Plan or the related Service Agreements, most recently voted
to approve each Portfolio's Plan and related Service Agreements at a meeting
called for the purpose of voting on such Plan and Service Agreements on April
25, 2000. The Plan and Service Agreements will remain in effect until May 1,
2001 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 Service
Shareholders of the affected Portfolio, and all material amendments of the Plan
must also be approved by the Board of Trustees in the manner described above.
The Plan may be terminated at any time by a majority of the Board of Trustees as
described above or by vote of a majority of the outstanding Service Shares of
the affected Portfolio. The Service Agreements may be terminated at any time,
without payment of any penalty, by vote of a majority of the Board of Trustees
as described above or by a vote of a majority of the outstanding Service Shares
of the affected Portfolio on not more than sixty (60) days' written notice to
any other party to the Service Agreements. The Service Agreements will
terminate automatically if assigned. So long as the Plan is in effect, the
selection and nomination of those Trustees who are not interested persons will
be committed to the discretion of the Trust's Nominating Committee, which
consists of all of the non-interested members of the Board of Trustees. The
Board of Trustees has determined that, in its judgment, there is a reasonable
likelihood that a Portfolio's Plan will benefit such Portfolio and its holders
of Service Shares.
B-113
<PAGE>
APPENDIX A
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
opinion of the credit worthiness of an obligor with respect to financial
obligations having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard and 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 S&P 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.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of S&P's analysis for
credit ratings on any issuer or issue. Currency of repayment is a key factor in
this analysis. An obligor's capacity to repay foreign obligations may be lower
than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings assigned to specific issues. Foreign currency issuer ratings are also
distinguished from local currency issuer ratings to identify those instances
where sovereign risks make them different for the same issuer.
1-A
<PAGE>
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 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 best 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 uncertain 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
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial 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 Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial 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 Financial 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."
"TBW-3" - This designation represents Thomson Financial 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 Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as non-
investment grade and therefore speculative.
3-A
<PAGE>
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 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 S&P believes that
such payments will be made during such grace period. The "D" rating
4-A
<PAGE>
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.
"c" - The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
p - The letter `p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* - Continuance of the ratings is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
"r" - The `r' highlights derivative, hybrid and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns as a result of noncredit risks. Examples of such obligations
are securities with principal or interest return indexed to equities,
commodities or currencies; currency swaps and options; and interest-only and
principal-only mortgage securities. The absence of an `r' symbol should not be
taken as an indication that an obligation will exhibit no volatility or
variability in total return.
N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy. Debt obligations of issuers
outside the United States and its territories are rated on the same basis as
domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
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 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
5-A
<PAGE>
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.
"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. This is the
lowest investment grade category.
"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.
6-A
<PAGE>
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. This is the lowest
investment grade category.
"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.
"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. The ratings of obligations
in this category are based on their prospects for achieving partial or full
recovery in a reorganization of the obligor. While expected recovery values are
highly speculative and cannot be estimated with any precision, the following
serve as general guidelines: "DDD" obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. "DD"
indicates potential recoveries in the range of 50%-90%, and "D" the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or
7-A
<PAGE>
without a formal reorganization process. Entities rated "DD" or "D" are
generally undergoing a formal reorganization or liquidation process; those rated
"DD" are likely to satisfy a higher portion of their outstanding obligations,
while entities rated "D" have a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories .
`NR' indicates that Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
Thomson Financial 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 Financial 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," - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
8-A
<PAGE>
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"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 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 a
very strong capacity to pay debt service 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. Margins of
protection 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.
"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.
9-A
<PAGE>
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.
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.
1-B
<PAGE>
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 world wide 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 Trust 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
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
4-B
<PAGE>
APPENDIX C
Statement of Intention
(applicable only to Class A shares)
If a shareholder anticipates purchasing $50,000 or more of Class A Shares
of a Fund alone or in combination with Class A Shares of another Goldman Sachs
Fund within a 13-month period, 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
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS -- INSTITUTIONAL LIQUID ASSETS
FINANCIAL SQUARE FUNDS
________________________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
ILA SHARES
ILA ADMINISTRATION SHARES
ILA SERVICE SHARES
ILA CLASS B SHARES
ILA CLASS C SHARES
CASH MANAGEMENT SHARES
FST SHARES
FST SERVICE SHARES
FST ADMINISTRATION SHARES
FST PREFERRED SHARES
FST SELECT SHARES
________________________________________________________________________________
Goldman Sachs Trust (the "Trust") is an open-end management investment company
(or mutual fund) which includes the Goldman Sachs - Institutional Liquid Assets
Portfolios and Financial Square Funds. This Statement of Additional Information
relates solely to the offering of (a) ILA Shares, ILA Administration Shares and
ILA Service Shares of: Prime Obligations Portfolio ("ILA Prime Obligations
Portfolio"), Money Market Portfolio ("ILA Money Market Portfolio"), Treasury
Obligations Portfolio ("ILA Treasury Obligations Portfolio"), Treasury
Instruments Portfolio ("ILA Treasury Instruments Portfolio"), Government
Portfolio ("ILA Government Portfolio"), Federal Portfolio ("ILA Federal
Portfolio"), Tax-Exempt Diversified Portfolio ("ILA Tax-Exempt Diversified
Portfolio"), Tax-Exempt California Portfolio ("ILA Tax-Exempt California
Portfolio") and Tax-Exempt New York Portfolio ("ILA Tax-Exempt New York
Portfolio") (individually, an "ILA Portfolio" and collectively the "ILA
Portfolios"); (b) ILA Class B and Class C Shares of ILA Prime Obligations
Portfolio; (c) Cash Management Shares of: ILA Prime Obligations Portfolio, ILA
Money Market Portfolio, ILA Government Portfolio, ILA Tax-Exempt Diversified
Portfolio, ILA Tax-Exempt California Portfolio and ILA Tax-Exempt New York
Portfolio; and (d) FST Shares, FST Service Shares, FST Administration Shares,
FST Preferred Shares and FST Select Shares of: Goldman Sachs - Financial Square
Prime Obligations Fund ("FS Prime Obligations Fund"), Goldman Sachs - Financial
Square Money Market Fund ("FS Money Market Fund"), Goldman Sachs - Financial
Square Treasury Obligations Fund ("FS Treasury Obligations Fund"), Goldman
Sachs - Financial Square Treasury Instruments Fund ("FS Treasury Instruments
Fund"), Goldman Sachs - Financial Square Government Fund ("FS Government Fund"),
Goldman Sachs - Financial Square Federal Fund ("FS Federal Fund") and Goldman
Sachs - Financial Square Tax-Free Money Market Fund ("FS Tax-Free Fund")
(individually, a "Fund," collectively the "Financial Square Funds" and together
with the ILA Portfolios, the "Series").
The terms "share" and "shares" may be used interchangeably herein to refer to
shares of the Series.
<PAGE>
Goldman Sachs Asset Management ("GSAM" or the "Investment Adviser"), a unit of
the Investment Management Division of Goldman, Sachs & Co. ("Goldman Sachs"),
serves as the Series' investment adviser. Goldman Sachs serves as distributor
and transfer agent to the Series.
The Goldman Sachs Funds offer banks, corporate cash managers, investment
advisers and other institutional investors a family of professionally-managed
mutual funds, including money market, fixed income and equity funds, and a range
of related services. All products are designed to provide clients with the
benefit of the expertise of GSAM and its affiliates in security selection, asset
allocation, portfolio construction and day-to-day management.
The hallmark of the Goldman Sachs Funds is personalized service, which reflects
the priority that Goldman Sachs places on serving clients' interests. Service
Organizations, as defined below, and other Goldman Sachs clients will be
assigned an Account Administrator ("AA"), who is ready to help with questions
concerning their accounts. During business hours, Service Organizations and
other Goldman Sachs clients can call their AA through a toll-free number to
place purchase or redemption orders or to obtain Series and account information.
The AA can also answer inquiries about rates of return and portfolio
composition/holdings, and guide Service Organizations through operational
details. A Goldman Sachs client can also utilize the SMART personal computer
software system which allows Service Organizations to purchase and redeem shares
and also obtain Series and account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with each Prospectus relating to the ILA Shares, ILA
Administration Shares, ILA Service Shares, ILA Class B Shares, ILA Class C
Shares, ILA Cash Management Shares, FST Shares, FST Service Shares, FST
Administration Shares, FST Preferred Shares and FST Select Shares each dated May
1, 2000 as may be further amended and supplemented from time to time. A copy of
each Prospectus may be obtained without charge from Service Organizations, as
defined below, or by calling Goldman, Sachs Co. at 1-800-621-2550 or by writing
Goldman, Sachs Co., 4900 Sears Tower, Chicago, Illinois 60606.
The audited financial statements and related report of Arthur Andersen LLP, the
former independent public accountants for each Series, contained in each Series'
1999 annual report are incorporated herein by reference in the section
"Financial Statements." No other portions of the Series' Annual Report are
incorporated by reference. PricewaterhouseCoopers LLP, independent public
accountants, have been selected as the independent public accountants of the
Series for the fiscal year ending December 31, 2000.
The date of this Additional Statement is May 1, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
-----------
<S> <C>
INVESTMENT POLICIES AND PRACTICES OF THE SERIES.............................1
INVESTMENT LIMITATIONS.....................................................37
TRUSTEES AND OFFICERS......................................................42
THE INVESTMENT ADVISER, DISTRIBUTOR AND TRANSFER AGENT.....................53
PORTFOLIO TRANSACTIONS.....................................................61
NET ASSET VALUE............................................................63
REDEMPTIONS................................................................64
CALCULATION OF YIELD QUOTATIONS............................................65
TAX INFORMATION............................................................75
ORGANIZATION AND CAPITALIZATION............................................80
CUSTODIAN AND SUBCUSTODIAN.................................................87
INDEPENDENT ACCOUNTANTS....................................................87
FINANCIAL STATEMENTS.......................................................88
OTHER INFORMATION..........................................................88
ADMINISTRATION PLANS.......................................................90
SERVICE PLANS..............................................................93
SELECT PLAN................................................................98
DISTRIBUTION AND SERVICE PLANS.............................................99
APPENDIX A................................................................A-1
APPENDIX B................................................................B-1
</TABLE>
<PAGE>
INVESTMENT POLICIES AND PRACTICES OF THE SERIES
Each Series is a separate pool of assets which pursues its investment
objective through separate investment policies. Each Series other than ILA Tax-
Exempt California Portfolio and ILA Tax-Exempt New York Portfolio is a
diversified, open-end management investment company. The ILA Tax-Exempt
California Portfolio and ILA Tax-Exempt New York Portfolio are non-diversified
open-end management investment companies. Capitalized terms used but not
defined herein have the same meaning as in the Prospectus. The following
discussion elaborates on the description of each Series' investment policies and
practices contained in the Prospectus:
U.S. Government Securities
Each Series (except the ILA Treasury Obligations Portfolio, ILA Treasury
Instruments Portfolio, ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt
California Portfolio and ILA Tax-Exempt New York Portfolio and FS Treasury
Obligations Fund, FS Treasury Instruments Fund and FS Tax-Free Fund) may invest
in U.S. Government Securities. U.S. Government Securities are deemed to include
(a) securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government, its agencies,
authorities or instrumentalities and (b) participations in loans made to foreign
governments or their agencies that are so guaranteed. The secondary market for
certain of these participations is limited. Such participations may therefore
be regarded as illiquid.
Each Series (except the ILA Tax-Exempt Diversified Portfolio, ILA Tax-
Exempt California Portfolio, ILA Tax-Exempt New York Portfolio and FS Tax-Free
Fund) may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. The principal and
interest components of selected securities are traded independently under the
Separate Trading of Registered Interest and Principal of Securities program
("STRIPS"). Under the STRIPS program, the principal and interest components are
individually numbered and separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the component parts
independently.
Custodial Receipts
Each Series (other than ILA Treasury Obligations Portfolio, ILA Treasury
Instruments Portfolio, ILA Government Portfolio, ILA Federal Portfolio, FS
Treasury Obligations Fund, FS Treasury Instruments Fund, FS Government Fund, and
FS Federal Fund) may also acquire U.S. Government Securities in the form of
custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain U.S. Government notes or bonds. Such notes
and bonds are held in custody by a bank on behalf of the owners. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). Although custodial receipts are not considered U.S.
Government Securities for certain securities law purposes, the securities
underlying such receipts are issued or guaranteed as to principal and interest
by the U.S. Government, its agencies, authorities or instrumentalities.
-1-
<PAGE>
Bank and Corporate Obligations
Each Series (other than ILA Treasury Obligations Portfolio, ILA Treasury
Instruments Portfolio, ILA Government Portfolio, ILA Federal Portfolio, FS
Treasury Obligations Fund, FS Treasury Instruments Fund, FS Government Fund and
FS Federal Fund) may invest in commercial paper, including variable amount
master demand notes and asset-backed commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or bank holding companies, corporations, and finance companies. The commercial
paper purchased by the Series consists of direct U.S. dollar-denominated
obligations of domestic or, in the case of ILA Money Market Portfolio and FS
Money Market Fund, foreign issuers. The ILA Tax-Exempt Diversified Portfolio,
ILA Tax-Exempt California Portfolio, ILA Tax-Exempt New York Portfolio and FS
Tax-Free Fund may invest only in tax-exempt commercial paper. Bank obligations
in which the ILA Prime Obligations Portfolio, ILA Money Market Portfolio, FS
Prime Obligations Fund and FS Money Market Fund may invest include certificates
of deposit, unsecured bank promissory notes, bankers' acceptances, fixed time
deposits and other debt obligations. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Fixed time deposits are
bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
The ILA Money Market Portfolio and FS Money Market Fund will invest more
than 25% of their total assets in bank obligations (whether foreign or
domestic), including bank commercial paper. However, if adverse economic
conditions prevail in the banking industry (such as substantial losses on loans,
increases in non-performing assets and charge-offs and declines in total
deposits) these Funds may, for defensive purposes, temporarily invest less than
25% of their total assets in bank obligations. As a result, the Funds may be
especially affected by favorable and adverse developments in or related to the
banking industry. The activities of U.S. banks and most foreign banks are
subject to comprehensive regulations which, in the case of U.S. regulations,
have undergone substantial changes in the past decade. The enactment of new
legislation or regulations, as well as changes in interpretation and enforcement
of current laws, may affect the manner of operations and profitability of
domestic and foreign banks. Significant developments in the U.S. banking
industry have included increased competition from other types
-2-
<PAGE>
of financial institutions, increased acquisition activity and geographic
expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the market for real
estate. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby impact
the earnings and financial conditions of banks.
The ILA Prime Obligations Portfolio, ILA Money Market Portfolio, FS Prime
Obligations Fund and FS Money Market Fund may invest in other short-term
obligations, including short-term funding agreements payable in U.S. dollars and
issued or guaranteed by U.S. corporations, foreign corporations (with respect to
the ILA Money Market Portfolio and FS Money Market Fund) or other entities. A
funding agreement is a contract between an issuer and a purchaser that obligates
the issuer to pay a guaranteed rate of interest on a principal sum deposited by
the purchaser. Funding agreements will also guarantee a stream of payments over
time. A funding agreement has a fixed maturity date and may have either a fixed
or variable interest rate that is based on an index and guaranteed for a set
time period. Because there is no secondary market for these investments, any
such funding agreement purchased by a Series will be regarded as illiquid.
Repurchase Agreements
Each Series (other than the ILA Treasury Instruments Portfolio, ILA Tax-
Exempt Diversified Portfolio, ILA Tax-Exempt California Portfolio, ILA Tax-
Exempt New York Portfolio, FS Treasury Instruments Fund and FS Tax-Free Fund)
may enter into repurchase agreements with primary dealers in U.S. Government
Securities and banks affiliated with such primary dealers. A repurchase
agreement is an arrangement under which the purchaser (i.e., the Series)
purchases a U.S. Government Security or other high quality short-term debt
obligation (the "Obligation") and the seller agrees, at the time of sale, to
repurchase the Obligation at a specified time and price. The ILA Federal
Portfolio and FS Federal Fund may, but do not presently intend to, invest in
repurchase agreements.
Custody of the Obligation will be maintained by the Series' custodian or
subcustodian for the duration of the agreement. The repurchase price may be
higher than the purchase price, the difference being income to the Series, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Series together with the repurchase price on repurchase. In
either case, the income to the Series is unrelated to the interest rate on the
Obligation subject to the repurchase agreement. The value of the purchased
securities, including accrued interest, will at all times equal or exceed the
value of the repurchase agreement.
Repurchase agreements pose certain risks for all entities, including the
Series, that utilize them. Such risks are not unique to the Series but are
inherent in repurchase agreements. The Series seek to minimize such risks by,
among others, the means indicated below, but because of the inherent legal
uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
-3-
<PAGE>
For purposes of the Investment Company Act of 1940, as amended (the "Act"),
and generally, for tax purposes, a repurchase agreement is deemed to be a loan
from the Series to the seller of the Obligation. It is not clear whether for
other purposes a court would consider the Obligation purchased by the Series
subject to a repurchase agreement as being owned by the Series or as being
collateral for a loan by the Series to the seller.
If, in the event of bankruptcy or insolvency proceedings against the seller
of the Obligation, a court holds that the Series does not have a perfected
security interest in the Obligation, the Series may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, a Series would be at risk of losing some or
all of the principal and income involved in the transaction. To minimize this
risk, the Series utilize custodians and subcustodians that the Investment
Adviser believes follow customary securities industry practice with respect to
repurchase agreements, and the Investment Adviser analyzes the creditworthiness
of the obligor, in this case the seller of the Obligation. But because of the
legal uncertainties, this risk, like others associated with repurchase
agreements, cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, a Series 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 the value of the Obligation.
Apart from risks associated with 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 Obligation subject to the repurchase
agreement becomes less than the repurchase price (including accrued interest),
the Series will direct the seller of the Obligation to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement equals or exceeds the repurchase price.
Each Series may not invest in repurchase agreements maturing in more than
seven days and securities which are not readily marketable if, as a result
thereof, more than 10% of the net assets of that Series (taken at market value)
would be invested in such investments. Certain repurchase agreements which
mature 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, each Series (other than the ILA Treasury Instruments
Portfolio, ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt California
Portfolio, ILA Tax-Exempt New York Portfolio, FS Treasury Instruments Fund and
FS Tax-Free Fund), together with other registered investment companies having
management agreements with the Investment Adviser or any of its 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.
-4-
<PAGE>
Foreign Securities
The ILA Money Market Portfolio and FS Money Market Fund may invest in
certificates of deposit, commercial paper, unsecured bank promissory notes,
bankers' acceptances, fixed time deposits and other debt obligations issued or
guaranteed by major foreign banks which have more than $1 billion in total
assets at the time of purchase, U.S. branches of such foreign banks (Yankee
obligations), foreign branches of such foreign banks and foreign branches of
U.S. banks. The ILA Prime Obligations Portfolio and FS Prime Obligations Fund
may invest in certificates of deposit, commercial paper, unsecured bank
promissory notes, bankers' acceptances, fixed time deposits and other
obligations issued by foreign branches of U.S. banks. The ILA Tax-Exempt
Diversified Portfolio, ILA Tax-Exempt California Portfolio, ILA Tax-Exempt New
York Portfolio and FS Tax-Free Fund may also invest in municipal instruments
backed by letters of credit or other forms of credit enhancement issued by
foreign banks which have a branch, agency or subsidiary in the U.S. Under
current Securities and Exchange Commission ("SEC") rules relating to the use of
the amortized cost method of portfolio securities valuation, the ILA Money
Market Portfolio and FS Money Market Fund are restricted to purchasing U.S.
dollar-denominated securities, but are not otherwise precluded from purchasing
securities of foreign issuers.
The ILA Money Market Portfolio and FS Money Market Fund may invest in U.S.
dollar-denominated obligations (limited to commercial paper and other notes)
issued or guaranteed by a foreign government. The ILA Money Market Portfolio and
FS Money Market Fund may also invest in U.S. dollar-denominated obligations
issued or guaranteed by any entity located or organized in a foreign country
that maintains a short-term foreign currency rating in the highest short-term
ratings category by the requisite number of nationally recognized statistical
rating organizations ("NRSRO's"). The ILA Money Market Portfolio and FS Money
Market Fund may not invest more than 25% of their total assets in the securities
of any one foreign government.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
Asset-Backed and Receivables-Backed Securities
The ILA Prime Obligations Portfolio, ILA Money Market Portfolio, FS Prime
Obligations Fund and FS Money Market Fund may invest in asset-backed and
receivables-backed securities. Asset-backed and receivables-backed securities
represent participations in, or are secured by and payable from, pools of assets
such as motor vehicle installment sale contracts, installment loan contracts,
leases of various types of real and personal property, receivables from
revolving credit (credit card) agreements, corporate receivables and other
categories of
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receivables. Such asset pools are securitized through the use of privately-
formed trusts or special purpose vehicles. 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 or other credit enhancements may be present. The value of
a Series' investments in asset-backed and receivables-backed securities may be
adversely affected by prepayment of the underlying obligations. In addition, the
risk of prepayment may cause the value of these investments to be more volatile
than a Series' other investments.
Through the use of trusts and special purpose corporations, various types
of assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being securitized in pass-through structures
similar to the mortgage pass-through structures. Consistent with their
respective investment objectives and policies, the Series may invest in these
and other types of asset-backed securities that may be developed in the future.
This Additional Statement will be amended or supplemented as necessary to
reflect the ILA Prime Obligations Portfolio, ILA Money Market Portfolio, FS
Prime Obligations Fund and FS Money Market Fund intention to invest in asset-
backed securities with characteristics that are materially different from the
securities described in the preceding paragraph. However, a Series will
generally not invest in an asset-backed security if the income received with
respect to its investment constitutes rental income or other income not treated
as qualifying income under the 90% test described in "Tax Information" below.
In general, the collateral supporting these securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments in
response to interest rate fluctuations.
As set forth below, several types of asset-backed and receivables-backed
securities have already been offered to investors, including for example,
Certificates for Automobile Receivables(SM) ("CARS(SM)") and interests in pools
of credit card receivables. CARS(SM) represent undivided fractional interests in
a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS(SM) are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS(SM) may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors 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
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due. There is the possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, the securities may
contain elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor or servicer. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that the receipt of payments on the losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transactions or through a combination of such approaches. The degree of credit
support provided for each issue is generally based on historical information
reflecting the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated or failure of the credit
support could adversely affect the value of or return on an investment in such a
security.
The availability of asset-backed securities may be affected by legislative
or regulatory developments. It is possible that such developments could require
the ILA Prime Obligations Portfolio, ILA Money Market Portfolio, FS Prime
Obligations Fund and FS Money Market Fund to dispose of any then existing
holdings of such securities.
To the extent consistent with its investment objectives and policies, each
of the ILA Prime Obligations Portfolio, ILA Money Market Portfolio, FS Prime
Obligations Fund and FS Money Market Fund may invest in new types of mortgage
related securities and in other asset-backed securities that may be developed in
the future.
Forward Commitments and When-Issued Securities
Each Series may purchase securities on a when-issued basis and enter into
forward commitments. These transactions involve a commitment by the Series 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, but may be traded over-the-counter.
A Series 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, a Series may
dispose of or renegotiate a commitment after entering into it. A Series also may
sell securities it has committed to purchase before those securities are
delivered to the Series on the settlement date. The Series may realize a capital
gain or loss in connection with these transactions; distributions from any net
capital gains would be taxable to its shareholders.
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For purposes of determining a Series' average dollar weighted maturity, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date.
When a Series purchases securities on a when-issued or forward commitment
basis, the Series will segregate cash or liquid assets having a value
(determined daily) at least equal to the amount of the Series' purchase
commitments. Alternatively, a Series may enter into off-setting contracts for
the forward sale of other securities that it owns. In the case of a forward
commitment to sell portfolio securities subject to such commitment, the Series
will segregate the portfolio securities while the commitment is outstanding.
These procedures are designed to ensure that the Series will maintain sufficient
assets at all times to cover its obligations under when-issued purchases and
forward commitments.
Variable Amount Master Demand Notes
Each Series (other than the ILA Treasury Obligations Portfolio, ILA
Treasury Instruments Portfolio, ILA Federal Portfolio, FS Treasury Obligations
Fund, FS Treasury Instruments Fund, and FS Federal Fund) may purchase variable
amount master demand notes. These obligations permit the investment of
fluctuating amounts at varying rates of interest pursuant to direct arrangements
between a Series, as lender, and the borrower. Variable amount master demand
notes are direct lending arrangements between the lender and borrower and are
not generally transferable, nor are they ordinarily rated. A Series may invest
in them only if the Investment Adviser believes that the notes are of comparable
quality to the other obligations in which that Series may invest.
Variable Rate and Floating Rate Obligations
The interest rates payable on certain fixed income securities in which a
Series 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 Series (other than the ILA Treasury Obligations Portfolio, ILA
Treasury Instruments Portfolio, ILA Federal Portfolio, FS Treasury Obligations
Fund, FS Treasury Instruments Fund and FS Federal Fund) may purchase variable
and floating rate demand instruments that are tax-exempt municipal obligations
or other debt securities issued by corporations and other non-governmental
issuers that possess a floating or variable interest rate adjustment formula.
These instruments permit a Series to demand payment of the principal balance
plus unpaid accrued interest upon a specified number of days' notice to the
issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument.
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The terms of the variable or floating rate demand instruments that a Series
may purchase provide that interest rates are adjustable at intervals ranging
from daily up to six months, and the adjustments are based upon current market
levels, the prime rate of a bank or other appropriate interest rate adjustment
index as provided in the respective instruments. Some of these instruments are
payable on demand on a daily basis or on not more than seven days' notice.
Others, such as instruments with quarterly or semi-annual interest rate
adjustments, may be put back to the issuer on designated days on not more than
thirty days' notice. Still others are automatically called by the issuer unless
the Series instructs otherwise. The Trust, on behalf of the Series, intends to
exercise the demand only (1) upon a default under the terms of the debt
security; (2) as needed to provide liquidity to a Series; (3) to maintain the
respective quality standards of a Series' investment portfolio; or (4) to attain
a more optimal portfolio structure. A Series will determine the variable or
floating rate demand instruments that it will purchase in accordance with
procedures approved by the Trustees to minimize credit risks. To be eligible for
purchase by a Series, a variable or floating rate demand instrument which is
unrated must have high quality characteristics similar to other obligations in
which the Series may invest. The Investment Adviser may determine that an
unrated variable or floating rate demand instrument meets a Series' quality
criteria by reason of being backed by a letter of credit, guarantee, or demand
feature issued by an entity that meets the quality criteria for the Series.
Thus, either the credit of the issuer of the obligation or the provider of the
credit support or both will meet the quality standards of the Series.
As stated in the Prospectuses, the Series may consider the maturity of a
long-term variable or floating rate demand instrument to be shorter than its
ultimate stated maturity under specified conditions. The acquisition of variable
or floating rate demand notes for a Series must also meet the requirements of
rules issued by the SEC applicable to the use of the amortized cost method of
securities valuation. The Series will also consider the liquidity of the market
for variable and floating rate instruments, and in the event that such
instruments are illiquid, the Series' investments in such instruments will be
subject to the limitation on illiquid investments.
Each Series (other than ILA Treasury Obligations Portfolio, ILA Treasury
Instruments Portfolio, ILA Government Portfolio, ILA Federal Portfolio, FS
Treasury Obligations Fund, FS Treasury Instruments Fund, FS Government Fund and
FS Federal Fund) may invest in participation interests in variable or floating
rate tax-exempt obligations held by financial institutions (usually commercial
banks). Such participation interests provide the Series with a specific
undivided interest (up to 100%) in the underlying obligation and the right to
demand payment of its proportional interest in the unpaid principal balance plus
accrued interest from the financial institution upon a specific number of days'
notice. In addition, the participation interest generally is backed by an
irrevocable letter of credit or guarantee from the institution. The financial
institution usually is entitled to a fee for servicing the obligation and
providing the letter of credit.
Restricted and Other Illiquid Securities
A Series may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "1933 Act"),
including restricted securities that can be
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offered and sold to "qualified institutional buyers" under Rule 144A under the
1933 Act. However, a Series will not invest more than 10% of the value of its
net assets in securities which are illiquid, which includes fixed time deposits
with a notice or demand period of more than seven days that cannot be traded on
a secondary market and restricted securities. The Board of Trustees has adopted
guidelines under which the Investment Adviser determines and monitors the
liquidity of restricted securities subject to the oversight of the Trustees.
Restricted securities (including securities issued under Rule 144A and
commercial paper issued under Section 4(2) of the 1933 Act) which are determined
to be liquid will not be deemed to be illiquid investments for purposes of the
foregoing restriction. Since it is not possible to predict with assurance that
the market for restricted securities will continue to be liquid, the Investment
Adviser will monitor each Series' investments in these securities, focusing on
such important factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in a Series to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
Municipal Obligations
The ILA Prime Obligations Portfolio, ILA Money Market Portfolio, ILA Tax-
Exempt Diversified Portfolio, ILA Tax-Exempt California Portfolio, ILA Tax-
Exempt New York Portfolio, FS Prime Obligations Fund, FS Money Market Fund, and
FS Tax-Free Fund may invest in municipal obligations. Municipal obligations are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies, authorities and
instrumentalities and the District of Columbia to obtain funds for various
public purposes. The interest on most of these obligations is generally exempt
from regular federal income tax. The two principal classifications of municipal
obligations are "notes" and "bonds." The ILA Prime Obligations Portfolio, ILA
Money Market Portfolio, FS Prime Obligations Fund and FS Money Market Fund may
invest in municipal obligations when yields on such securities are attractive
compared to other taxable investments.
Notes. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal notes
include tax anticipation notes, revenue anticipation notes, bond anticipation
notes, tax and revenue anticipation notes, construction loan notes, tax-exempt
commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal or state aid. Tax anticipation notes and revenue
anticipation notes are generally issued in anticipation of various seasonal
revenues such as income, sales, use, and business taxes. Bond anticipation notes
are sold to provide interim financing in anticipation of long-term financing in
the market. In most cases, these monies provide for the repayment of the notes.
Tax-exempt commercial paper consists of short-term unsecured promissory notes
issued by a state or local government or an authority or agency thereof. The
Series which invest
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in municipal obligations may also acquire securities in the form of custodial
receipts which evidence ownership of future interest payments, principal
payments or both on certain state and local governmental and authority
obligations when, in the opinion of bond counsel, if any, interest payments with
respect to such custodial receipts are excluded from gross income for federal
income tax purposes, and in the case of the ILA Tax-Exempt California and ILA
Tax-Exempt New York Portfolios, exempt from California and New York (city and
state) personal income taxes, respectively. Such obligations are held in custody
by a bank on behalf of the holders of the receipts. These custodial receipts are
known by various names, including "Municipal Receipts" ("MRs") and "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATS"). There are a number
of other types of notes issued for different purposes and secured differently
from those described above.
Bonds. Municipal bonds, which generally meet longer term capital needs and
have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of public
projects including the construction or improvement of schools, highways and
roads, water and sewer systems and a variety of other public purposes. The basic
security of general obligation bonds is the issuer's pledge of its faith,
credit, and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Private activity bonds (a term that includes certain types of bonds the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental shares), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. Each Series (other than the ILA Treasury Obligations Portfolio,
ILA Treasury Instruments Portfolio, ILA Government Portfolio, ILA Federal
Portfolio, FS Treasury
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Obligations Fund, FS Treasury Instruments Fund, FS Government and FS Federal
Funds) may invest in private activity bonds. The ILA Tax-Exempt New York
----------------
Portfolio will limit its investments in private activity bonds to not more than
20% of its net assets under normal market conditions. The ILA Tax-Exempt
Diversified Portfolio, ILA Tax-Exempt California Portfolio and FS Tax-Free Fund
do not intend to invest in private activity bonds if the interest from such
bonds would be an item of tax preference to shareholders under the federal
alternative minimum tax. If such policy should change in the future, such
investments would not exceed 20% of the net assets of each of the ILA Tax-Exempt
Diversified Portfolio, ILA Tax-Exempt California Portfolio and the FS Tax-Free
Fund under normal market conditions. The ILA Tax-Exempt Diversified Portfolio,
ILA Tax-Exempt California Portfolio, ILA Tax-Exempt New York Portfolio and FS
Tax-Free Fund do not intend to invest more than 25% of the value of their
respective total assets in private activity bonds or similar obligations where
non-governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry.
Municipal bonds with a series of maturity dates are called serial bonds.
The serial bonds which the Series may purchase are limited to short-term serial
bonds---those with original or remaining maturities of thirteen months or less.
The Series may purchase long-term bonds provided that they have a remaining
maturity of thirteen months or less or, in the case of bonds called for
redemption, the date on which the redemption payment must be made is within
thirteen months. The Series may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Series' commitment to put
the bond back to the issuer at par at a designated time within thirteen months
and the issuer's commitment to so purchase the bond at such price and time.
The Series which invest in municipal obligations may invest in tender
option bonds. A tender option bond is a municipal obligation (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 in conjunction with the agreement
of a third party, such as a bank, broker-dealer or other financial institution,
pursuant to which such institution grants the security holder the option, at
periodic intervals, to tender its 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 bond, 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 by, or a significant downgrading in the credit rating
assigned to, the issuer of the bond.
The tender option will be taken into consideration in determining the
maturity of tender option bonds and the average portfolio maturity of a Series.
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.
Consequently, tender option bonds are deemed to be liquid unless, in the
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opinion of the Investment Adviser, the credit quality of the bond issuer and the
financial institution is deemed, in light of the relevant Series' credit quality
requirements, to be inadequate.
Although the ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt
California Portfolio, ILA Tax-Exempt New York Portfolio and FS Tax-Free Fund
intend to invest in tender option bonds the interest on which will, in the
opinion of counsel for the issuer and sponsor or counsel selected by the
Investment Adviser, be excluded from gross income for federal income tax
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Series 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. A
similar risk exists for certain other investments subject to puts or similar
rights. Additionally, the federal income tax treatment of certain other aspects
of these investments, including the proper tax treatment of tender options and
the associated fees, in relation to various regulated investment company tax
provisions is unclear. The ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt
California Portfolio, ILA Tax-Exempt New York Portfolio and FS Tax-Free Fund
intend to manage their respective portfolios in a manner designed to eliminate
or minimize any adverse impact from the tax rules applicable to these
investments.
In addition to general obligation bonds, revenue bonds and serial bonds,
there are a variety of hybrid and special types of municipal obligations as well
as numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
The ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt California
Portfolio, ILA Tax-Exempt New York Portfolio and FS Tax-Free Fund may purchase
municipal instruments that are backed by letters of credit issued by foreign
banks that have a branch, agency or subsidiary in the United States. Such
letters of credit, like other obligations of foreign banks, may involve credit
risks in addition to those of domestic obligations, including risks relating to
future political and economic developments, nationalization, foreign
governmental restrictions such as exchange controls and difficulties in
obtaining or enforcing a judgment against a foreign bank (including branches).
For the purpose of investment restrictions of the Series, the
identification of the "issuer" of municipal obligations that are not general
obligation bonds is made by the Investment Adviser on the basis of the
characteristics of the obligation as described above, the most significant of
which is the source of funds for the payment of principal of and interest on
such obligations.
An entire issue of municipal obligations may be purchased by one or a small
number of institutional investors such as one of the Series. Thus, the issue
may not be said to be publicly offered. Unlike securities which must be
registered under the 1933 Act prior to offer and sale, municipal obligations
which are not publicly offered may nevertheless be readily marketable. A
secondary market may exist for municipal obligations which were not publicly
offered initially.
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Municipal obligations purchased for a Series may be subject to the Series'
policy on holdings of illiquid securities. The Investment Adviser determines
whether a municipal obligation is liquid based on whether it may be sold in a
reasonable time consistent with the customs of the municipal markets (usually
seven days) at a price (or interest rate) which accurately reflects its value.
The Investment Adviser believes that the quality standards applicable to each
Series' investments enhance liquidity. In addition, stand-by commitments and
demand obligations also enhance liquidity.
Yields on municipal obligations depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation and the quality of the
issue. High quality municipal obligations tend to have a lower yield than lower
rated obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
Investing in California
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per share and the interest
income of, the ILA Tax-Exempt California Portfolio, or result in the default of
existing obligations, including obligations which may be held by the ILA Tax-
Exempt California Portfolio. The following section provides only a brief summary
of the complex factors affecting the financial condition of California, and is
based on information obtained from California, as publicly available prior to
the date of this Statement of Additional Information. The information contained
in such publicly available documents has not been independently verified. It
should be noted that the creditworthiness of obligations issued by local issuers
may be unrelated to the creditworthiness of California, and that there is no
obligation on the part of California to make payment on such local obligations
in the event of default in the absence of a specific guarantee or pledge
provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved significantly since 1994, with ratings increases since 1996. The
ratings of certain related debt of other issuers for which California has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to California's
rating. Should the financial condition of California deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by California, its public authorities or
local governments could be adversely affected.
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Economic Factors
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 34 million represents about
12-1/2% of the total United States population and grew by 26% in the 1980s, more
than double the national rate. Population growth slowed to less than 1% annually
in 1994 and 1995, but rose to almost 2% in the final years of the 1990's. During
the early 1990's, net population growth in the State was due to births and
foreign immigration, but in recent years, in-migration from the other states has
increased and once more represents net positive growth.
Total personal income in the State, at an estimated $964 billion in 1999,
accounts for almost 13% of all personal income in the nation. Total employment
is over 15 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Recovery did not
begin in California until 1994, later than the rest of the nation, but since
that time California's economy has outpaced the national average. By the end of
1999, unemployment in the State was at its lowest level in three decades.
Economic indicators show a steady and strong recovery underway in California
since the start of 1994 particularly in high technology manufacturing and
services, including computer software, electronic manufacturing and motion
picture/television production, and other services, entertainment and tourism,
and both residential and commercial construction. International economic
problems starting in 1997 had some moderating impact on California's economy,
but negative impacts, such as a sharp drop in exports to Asia which hurt the
manufacturing and agricultural sectors, were offset by increased exports to
Latin American and other nations, and a greater strength in services, computer
software and construction. With economic conditions in many Asian countries
recovering in 1999, that year had the strongest economic growth in the State for
the entire decade. Current forecasts predict continued strong growth of the
State's economy in 2000, with slower growth predicted in 2001 and beyond. Any
delay or reversal of the recovery may create new shortfalls in State revenues.
Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California Municipal Obligations may
be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full cash
value of the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except under new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.
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Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This system
has resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13, but it was upheld by the U.S. Supreme Court in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax." Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a two-
thirds vote. Further, any general purpose tax which was imposed, extended or
increased without voter approval after December 31, 1994 must be approved by a
majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
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The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post-
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. For at least the last ten years, appropriations subject to limitation
have been under the State's limit. State appropriations are estimated to be $3.8
billion under the limit for fiscal year 1999-2000.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California municipal obligations or on the ability of the
State or local
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governments to pay debt service on such California municipal obligations. It is
not possible, at the present time, to predict the outcome of any pending
litigation with respect to the ultimate scope, impact or constitutionality of
these Articles or the impact of any such determinations upon State agencies or
local governments, or upon their ability to pay debt service on their
obligations. Further initiatives or legislative changes in laws or the
California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of January
1, 2000, the State had outstanding approximately $20.5 billion of long-term
general obligation bonds, plus $681 million of general obligation commercial
paper which will be refunded by long-term bonds in the future, and $6.7 billion
of lease-purchase debt supported by the State General Fund. The State also had
about $13.7 billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In FY 1998-99, debt service on general
obligation bonds and lease purchase debt was approximately 4.4% of General Fund
revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1998-1999 were the
California personal income tax (53 percent of total revenues), the sales tax (32
percent), bank and corporation taxes (10 percent), and the gross premium tax on
insurance (2 percent). An estimated 20% of personal income tax receipts (10% of
total General Fund) is derived from capital gains realizations and stock option
income. While these sources have been extraordinarily strong in the past few
years, they are particularly volatile; any sustained drop in stock market levels
could have a significant impact on these revenues.
The State maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for financial
reporting purposes in the General Fund balance. Because of the recession and an
accumulated budget deficit, no reserve was budgeted in the SFEU from 1992-93 to
1995-96.
Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (Proposition 98) was enacted which
(subject to suspension by a two-thirds vote of the Legislature and the Governor)
guarantees local school districts and community college districts a minimum
share of State General Fund revenues (currently about 35 percent).
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Recent Budgets. As a result of the severe economic recession from 1990-94
and other factors, during this period the State experienced substantial revenue
shortfalls, and greater than anticipated social service costs. The State
accumulated and sustained a budget deficit in the budget reserve, the SFEU,
approaching $2.8 billion at its peak at June 30, 1993. The Legislature and
Governor responded to these deficits by enacting a series of fiscal steps
between FY1991-92 and FY1994-95, including significant cuts in health and
welfare and other program expenditures, tax increases, transfers of program
responsibilities and some funding sources from the State to local governments,
and transfer of about $3.6 billion in annual local property tax revenues
primarily from cities and counties to local school districts, thereby reducing
State funding for schools. The budget deficits also led to cash flow shortfalls
which led the State to use external cash flow borrowing over the end of the
fiscal year for several years to fund the deficit.
With the economic recovery which began in 1994, the State's financial
condition improved markedly in the years from FY1995-96 onward, with a
combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on the actions taken in
earlier years. The State's cash position also improved, and no external deficit
borrowing has occurred over the fiscal year since FY 1994-95.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97, $2.1 billion in 1997-98, and $1.6 billion in
1998-99) than were initially planned when the budgets were enacted. These
additional funds were largely directed to school spending as mandated by
Proposition 98, and to make up shortfalls from reduced federal health and
welfare aid in 1995-96 and 1996-97. The accumulated budget deficit from the
recession years was finally eliminated. The Department of Finance estimates
that the State's budget reserve (the SFEU) totaled about $1.8 billion at June
30, 1998 and $3.1 billion at June 30, 1999.
The growth in General Fund revenues since the end of the recession resulted
in significant increases in State funding for local school districts under
Proposition 98. From the recession level of about $4,300 per pupil, annual State
funding has increased to over $6,000 per pupil in FY 1999-2000. A significant
amount of the new moneys have been directed to specific educational reforms,
including reduction of class sizes in many grade levels. The improved budget
condition also allowed annual increases in support for higher education in the
State, permitting increased enrollment and reduction of student fees.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal law,
new time limits are placed on receipt of welfare aid. Generally, health and
welfare costs have been contained even during the recent period of economic
recovery, with the first real increases (after inflation) in welfare support
levels occurring in 1999-2000.
One of the most important elements of the 1998-99 Budget Act was agreement
on substantial tax cuts. The largest of these was a phased-in cut in the Vehicle
License Fee (an
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annual tax on the value of cars registered in the State, the "VLF"). Starting on
January 1, 1999, the VLF has been reduced by 25 percent. Under pre-existing law,
VLF funds are automatically transferred to cities and counties, so the new
legislation provided for the General Fund to make up the reductions. If State
General Fund revenues continue to grow above certain targeted levels in future
years, the cut could reach as much as 67.5 percent by the year 2003. The initial
25 percent VLF cut will be offset by about $500 million in General Fund money in
FY 1998-99, and $1 billion annually for future years. Other tax cuts in FY 1998-
99 included an increase in the dependent credit exemption for personal income
tax filers, restoration of a renter's tax credit for taxpayers, and a variety of
business tax relief measures. The total cost of these tax cuts was estimated at
$1.4 billion for FY 1998-99.
FY 1999-2000 Budget. The 1999-00 Budget Act was signed on June 29, 1999,
only the second time in the decade the budget was in place at the start of the
fiscal year. After the Governor used his line-item veto power to reduce
expenditures by about $581 million, the final spending plan called for about
$63.7 billion of General Fund expenditures, $16.1 billion of Special Fund
expenditures, and $1.5 billion in bond funded expenditures. The Governor's final
budget actions left the SFEU with an estimated balance of $881 million at June
30, 2000, but the Governor also reduced spending to set aside $300 million for
future appropriation for either employee pay raises or potential litigation
costs.
The final Budget Act generally provided increased funding for a wide range
of programs. Education spending under Proposition 98 received the largest
increase (over $2.3 billion above 1998-99), with other significant increases for
higher education, health and welfare, natural resources and capital outlay. The
budget provides several hundred million dollars in direct new aid to cities and
counties.
The final spending plan includes several targeted tax cuts for businesses,
totaling under $100 million in 1999-00. The plan also includes a one-time, one-
year additional cut of 10 percent in the Vehicle License Fee for calendar year
2000. This cut will cost the General Fund about $500 million in each of 1999-00
and 2000-01 to make up lost funds for local governments. Under the 1998 law, the
VLF cut to 35 percent would become permanent in the year 2001 if General Fund
revenues reach a certain specified level in 2000-01. Current estimates indicate
this level will be reached.
In January, 2000, the Governor released his proposed budget for fiscal year
2000-01 (the "2000 Governor's Budget"), which also included updated revenue and
expenditure projections for 1999-2000. Reflecting the continued strong economy
in the State, the Administration revised its revenue estimates upward by $2.1
billion to $65.2 billion; expenditures were also projected to increase by a like
amount. The Administration's projected balance in the SFEU at June 30, 2000
increased from about $880 million to over $2.4 billion. In February, 2000 the
State Legislative Analyst's Office ("LAO") released a report with more recent
revenue estimates, based in part on actual revenues for December, 1999 and
January, 2000, which were not available for the 2000 Governor's Budget. In the
fourth quarter of 1999, personal income tax revenues were 17% higher than the
year-earlier period. The LAO Report indicated revenues in 1999-2000 could be as
much as $2.1 billion higher than the 2000 Governor's Budget estimate.
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Although, as noted, the Administration projected a budget reserve in the
SFEU of about $2.4 billion on June 30, 1999, the General Fund fund balance on
that date also reflects $1.0 billion of "loans" which the General Fund made to
local schools in the recession years, representing cash outlays above the
mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1999-2000 Budget Act contained a $350 million
appropriation from the General Fund toward this settlement.
Proposed FY 2000-01 Budget. In the 2000 Governor's Budget, the
Administration proposed General Fund expenditures of $68.8 billion, based on
expected revenues of $68.2 billion (including $390 million from the tobacco
litigation settlement and sale of assets). The proposal included a balance in
the SFEU at June 30, 2001 of $1.2 billion, plus set-aside of an additional $600
million for legal contingencies and legislative initiatives. The Governor
proposed substantial additional funding for K-12 schools, higher education,
capital outlay and other programs. The February, 2000 LAO Report indicated
General Fund revenues for 2000-01 could be as much as $2.1 billion higher than
projected in the 2000 Governor's Budget (in addition to the $2.1 billion
additional revenue for 1999-2000), assuming continued strong economic growth in
the State and in the stock market. Final decisions for the 2000-01 Budget will
be made by the Governor and Legislature by July, 2000.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
Bond Rating
The ratings on California's long-term general obligation bonds were reduced
in the early 1990's from "AAA" levels which had existed prior to the recession.
After 1996, the three major rating agencies raised their ratings of California's
general obligation bonds, which as of February, 2000 were assigned ratings of
"AA-" from Standard & Poor's, "Aa3" from Moody's and "AA" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
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Legal Proceedings
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include reductions in welfare
payments and the use of certain cigarette tax funds for health costs. All of
these cases are subject to further proceedings and appeals, and if California
eventually loses, the final remedies may not have to be implemented in one year.
The State recently lost cases involving a smog impact fee on out-of-state
automobiles (total liability of about $560 million) and certain corporate tax
credits ($100 million). The Administration has proposed payment of the smog
impact fee claims from current revenues.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs.
In 1997, a new program provided for the State to substantially take over
funding for local trial courts (saving cities and counties some $400 million
annually). For the last several years, the State has also provided $100 million
annually to support local law enforcement costs. In 1999-2000, the State
provided $150 million in grants to cities and counties, and an additional $50
million to cities for jail booking costs. The Legislature has enacted a more
comprehensive plan to restore some funds to local governments, contained in a
proposed constitutional amendment which will be on the November, 2000 ballot for
voter approval.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or
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the rate of growth, of State assistance to local governments may continue to be
reduced. Any such reductions in State aid could compound the serious fiscal
constraints already experienced by many local governments, particularly
counties. Los Angeles County, the largest in the State, was forced to make
significant cuts in services and personnel, particularly in the health care
system, in order to balance its budget in FY1995-96 and FY1996-97. Orange
County, which emerged from Federal Bankruptcy Court protection in June 1996, has
significantly reduced county services and personnel, and faces strict financial
conditions following large investment fund losses in 1994 which resulted in
bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new CalWORKs system on local governments is still unknown.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
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earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time which challenges the constitutionality
of such lease arrangements, the California Supreme Court issued a ruling in
August, 1998 which reconfirmed the legality of these financing methods.
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Other Considerations
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
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disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such legislation
will be enacted. Nor is it possible, at present, to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event has had any long-term negative economic impact.
Any California Municipal Obligation in the Fund could be affected by an
interruption of revenues because of damaged facilities, or, consequently, income
tax deductions
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for casualty losses or property tax assessment reductions. Compensatory
financial assistance could be constrained by the inability of (i) an issuer to
have obtained earthquake insurance coverage rates; (ii) an insurer to perform on
its contracts of insurance in the event of widespread losses; or (iii) the
federal or State government to appropriate sufficient funds within their
respective budget limitations.
Special Considerations Relating to New York Municipal Obligations
Some of the significant financial considerations relating to the ILA Tax-
Exempt New York Portfolio's investments in New York Municipal Obligations are
summarized below. This summary information is not intended to be a complete
description and is principally derived from the Annual Information Statement of
the State of New York as supplemented and contained in official statements
relating to issues of New York Municipal Obligations that were available prior
to the date of this Statement of Additional Information. The accuracy and
completeness of the information contained in those official statements have not
been independently verified.
State Economy. New York is one of the most populous states in the nation
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and has a relatively high level of personal wealth. The State's economy is
diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
State per capita personal income has historically been significantly higher
than the national average, although the ratio has varied substantially. Because
New York City (the "City") is a regional employment center for a multi-state
region, State personal income measured on a residence basis understates the
relative importance of the State to the national economy and the size of the
base to which State taxation applies.
There can be no assurance that the State economy will not experience worse-
than-predicted results, with corresponding material and adverse effects on the
State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the
------------
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.
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State law requires the Governor to propose a balanced budget each year. In
recent years, the State has closed projected budget gaps of $5.0 billion (1995-
96), $3.9 billion (1996-97), $2.3 billion (1997-98) and less than $1 billion
(1998-99). The State's current fiscal year began on April 1, 1999 and ends on
March 31, 2000. On March 31, 1999, the State adopted the debt service portion of
the State budget for the 1999-2000 fiscal year; four months later, on August 4,
1999, it enacted the remainder of the budget. The Governor approved the budget
as passed by the Legislature. Prior to passing the budget in its entirety for
the current fiscal year, the State enacted appropriations that permitted the
State to continue its operations.
In 1999-2000, General Fund disbursements, including transfers to support
capital projects, debt service and other funds, are estimated at $37.36 billion,
an increase of $868 million or 2.38 percent over 1998-99. Projected spending
under the 1999-2000 enacted budget is $215 million above the Governor's
Executive Budget recommendations, including 30-day amendments. This change is
the net result of spending actions that occurred during negotiations on the
Budget. The increase in General Fund spending is comprised of $1.1 billion in
legislative additions to the Executive Budget (primarily in education), offset
by various actions, including re-estimates of required spending based on year-
to-date results and the identification of certain other resources that offset
spending, such as $250 million from commencing the process of privatizing the
Medical Malpractice Insurance Association ("MMIA"), $250 million from the
retention of the Debt Reduction Reserve Fund within the General Fund and about
$100 million in excess fund balances. The MMIA was established in 1983 to
provide excess liability insurance to doctors and medical providers. Legislation
enacted with the 1999-2000 budget initiates the process of MMIA privatization
and transfers excess fund balances to the State.
The 1999-2000 enacted budget provides for $831 million in new funding for
public schools, the largest year-to-year increase in State history. The budget
also enacts several new tax cuts valued at $375 million when fully phased in by
2003-04. None of the $1.82 billion cash surplus from 1998-99 is assumed to
support spending in 1999-2000, but instead is reserved to help offset the costs
of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 Financial Plan projects a closing balance of $2.85 billion in
the General Fund. The balance is comprised of the $1.82 billion surplus from
1998-99 that has been set aside to finance already-enacted tax cuts, $473
million in the Tax Stabilization Reserve Fund ("TSRF"), $250 million in the Debt
Reduction Reserve Fund ("DRRF"), $107 million in the Contingency Reserve Fund
("CRF"), and $200 million in the Community Projects Fund ("CPF"), which finances
legislative initiatives. The State expects to close 1999-2000 with cash balances
in these funds at their highest level ever.
Preliminary analysis by the Division of Budget ("DOB") indicates that the
State will have a 2000-01 budget gap of approximately $1.9 billion, or about
$300 million above the 1999-2000 Executive Budget estimate (after adjusting for
the projected costs of collective bargaining). This estimate includes an
assumption for the projected costs of new collective bargaining agreements, $500
million in assumed operating efficiencies, as well as the planned application of
approximately $615 million of the $1.82 billion tax reduction reserve. The DOB
will formally update its projections of receipts and disbursements for future
years as part of the Governor's
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2000-01 Executive Budget submission. The revised expectations for these years
will reflect the cumulative impact of tax reductions and spending commitments
enacted over the last several years as well as new 2000-01 Executive Budget
recommendations.
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions except those required to be accounted
for in another fund. It is the State's largest fund and received almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1999-2000 fiscal year, the General Fund (exclusive of transfers) is
expected to account for approximately 47.1 percent of all Governmental Funds
disbursements and 69.3 percent of total State Funds disbursements. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types.
Total General Fund receipts and transfers in 1999-2000 are now projected to
be $39.31 billion, an increase of $2.57 billion from the $36.74 billion recorded
in 1998-99. This total includes $35.93 billion in tax receipts, $1.36 billion in
miscellaneous receipts, and $2.02 billion in transfers from other funds. The
transfer of the $1.82 billion surplus recorded in 1998-99 to the 1999-2000
fiscal period has the effect of exaggerating the growth in State receipts from
year to year by depressing reported 1998-99 figures and inflating 1999-2000
projections.
Receipts from user taxes and fees are projected to total $7.35 billion, an
increase of $105 million from reported collections in the prior year. The sales
tax component of this category accounts for virtually all of the 1999-2000
growth. Growth in base sales tax yield, after adjusting for tax law and other
changes, is projected at 5.6 percent. Modest increases in motor fuel and auto
rental tax receipts over 1998-99 levels are also expected. However, receipts
from other user taxes and fees are estimated to decline by $177 million.
The yield of other excise taxes in this category, particularly the
cigarette and alcoholic beverage taxes, show long-term declining trends.
General Fund declines in 1999-2000 motor vehicle fee receipts, in contrast,
reflect statutory fee reductions and an increased amount of collections
earmarked to the Dedicated Highway and Bridge Trust Fund.
Significant statutory changes in this category during the 1999-2000
legislative session include: delaying until March 1, 2000 the implementation of
the exemption from State sales tax of clothing and footwear priced under $110;
providing week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear priced under $500; enactment of a variety of small sales
tax exemptions including certain equipment used in providing telecommunications
service for sale, property and services used in theatrical productions, computer
hardware used to design Internet web sites, and building materials used in
farming; a reduction in the beer tax rate; and an expanded exemption from the
alcoholic beverage tax for small brewers.
Following the pattern of the last two fiscal years, education programs
receive the largest share of new funding contained in the 1999-2000 Financial
Plan. School aid is expected to grow by $831 million or 8.58 percent over 1998-
99 levels (on a State fiscal year basis). Outside of
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education, the largest growth in spending is for State Operations ($207 million,
including $100 million reserved for possible collective bargaining costs), Debt
Service ($183 million), and mental hygiene programs, including funding for a
cost of living increase for care providers ($114 million). These increases were
offset, in part, by spending reductions or actions in health and social welfare
($280 million), and in general State charges ($222 million).
Under the 1999-2000 enacted budget, General Fund spending on school aid is
projected at $10.52 billion on a State fiscal year basis, an increase of $831
million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. It also
funds the balance of aid payable for the 1998-99 school year that is due
primarily in the first quarter of the 1999-2000 fiscal year. For all other
educational programs, disbursements are projected to grow by $78 million to
$2.99 billion.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan.
These forces may affect the State unpredictably from fiscal year to fiscal year
and are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. The projections assume
no changes in federal tax law, which could substantially alter the current
receipts forecast. In addition, these projections do not include funding for new
collective bargaining agreements after the current contracts expire. Actual
results, however, could differ materially and adversely from their projections,
and those projections may be changed materially and adversely from time to time.
Debt Limits and Outstanding Debt. There are a number of methods by which
--------------------------------
the State of New York may incur debt. Under the State Constitution, the State
may not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued general obligation bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitutional
authorization, directly guarantee certain obligations of the State of New York's
authorities and public benefit corporations ("Authorities"). Payments of debt
service on New York State general obligation and New York State-guaranteed bonds
and notes are legally enforceable obligations of the State of New York.
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The State employs additional long-term financing mechanisms, lease-purchase
and contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but are not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the LGAC to restructure the way the State
makes certain local aid payments.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of higher-than-
projected tax receipts and in lower-than-expected entitlement spending. The
State assumes that the 2000-01 Financial Plan will achieve $500 million in
savings from initiatives by State agencies to deliver services more efficiently,
workforce management efforts, maximization of federal and non-General Fund
spending offsets, and other actions necessary to help bring projected
disbursements and receipts into balance. The projections do not assume any gap-
closing benefit from the potential settlement of State claims against the
tobacco industry.
Spending from Debt Service Funds are estimated at $3.64 billion in 1999-
2000, up $370 million or 11.31 percent from 1998-99. Transportation purposes,
including debt service on bonds issued for State and local highway and bridge
programs financed through the New York State Thruway Authority and supported by
the Dedicated Highway and Bridge Trust Fund, account for $124 million of the
year-to-year growth. Debt service for educational purposes, including State and
City University programs financed through the Dormitory Authority, will increase
by $80 million. The remaining growth is for a variety of programs in mental
health and corrections, and for general obligation financings.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
5, 1999, S&P affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding limited-
liability State lease purchase and contractual obligations from A to Baa1. On
February 28, 1994, Moody's reconfirmed its A rating on the State's general
obligation long-term indebtedness. On March 20, 1998, Moody's assigned the
highest commercial paper rating of P-1 to the short-term notes of the State. On
March 5, 1999, Moody's affirmed its A2 rating with a stable outlook to the
State's general obligations.
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New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation. Certain litigation pending against New York State or its
----------
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (4) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to non-
Indian consumers on Indian reservations; (5) a challenge to the Governor's
application of his constitutional line item veto authority; and (6) a challenge
to the enactment of the Clean Water/Clean Air Bond Act of 1996.
Several actions challenging the constitutionality of legislation enacted
during the 1990 legislative session which changed actuarial funding methods for
determining state and local contributions to state employee retirement systems
have been decided against the State. As a result, the Comptroller developed a
plan to restore the State's retirement systems to prior funding levels. Such
funding is expected to exceed prior levels by $116 million in fiscal 1996-97,
$193 million in fiscal 1997-98, peaking at $241 million in fiscal 1998-99.
Beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than that required under the prior
funding method. As a result of the United States Supreme Court decision in the
case of State of Delaware v. State of New York, on January 21, 1994, the State
entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's 1994-
95 fiscal year. Litigation challenging the constitutionality of the treatment of
certain moneys held in a reserve fund was settled in June 1996 and certain
amounts in a Supplemental Reserve Fund previously credited by the State against
prior State and local pension contributions were paid in 1998.
The legal proceedings noted above involve State finances, State programs
and miscellaneous cure rights, tort, real property and contract claims in which
the State is a defendant and the monetary damages sought are substantial,
generally in excess of $100 million. These proceedings could affect adversely
the financial condition of the State in the current fiscal year or thereafter.
Adverse developments in these proceedings, other proceedings for which there are
unanticipated, unfavorable and material judgments, or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
financial plan. An adverse decision in any of these proceedings could exceed the
amount of the reserve established in the State's financial plan for the payment
of judgments and, therefore, could affect the ability of the State to maintain a
balanced financial plan.
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Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in part,
-----------
to the fiscal stability of its Authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations, particularly with respect to debt that is State-
supported or State-related.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, New York
State has provided financial assistance through appropriations, in some cases of
a recurring nature, to certain of the Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or otherwise, for debt service. This operating assistance is expected to
continue to be required in future years. In addition, certain statutory
arrangements provide for State local assistance payments otherwise payable to
localities to be made under certain circumstances to certain Authorities. The
State has no obligation to provide additional assistance to localities whose
local assistance payments have been paid to Authorities under these
arrangements. However, in the event that such local assistance payments are so
diverted, the affected localities could seek additional State funds.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since 1995. As a
result of the structural imbalances in JDA's capital structure, and defaults in
its loan portfolio and loan guarantee program incurred between 1991 and 1996,
JDA would have experienced a debt service cash flow shortfall had it not
completed its recent refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
New York City and Other Localities. The fiscal health of the State may
----------------------------------
also be impacted by the fiscal health of its localities, particularly the City,
which has required and continues to require significant financial assistance
from the State. The City depends on State aid both to enable the City to balance
its budget and to meet its cash requirements. There can be no
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assurance that there will not be reductions in State aid to the City from
amounts currently projected or that State budgets will be adopted by the April 1
statutory deadline or that any such reductions or delays will not have adverse
effects on the City's cash flow or expenditures. In addition, the Federal budget
negotiation process could result in a reduction in or a delay in the receipt of
Federal grants which could have additional adverse effects on the City's cash
flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the borrowing
ability of both the City and New York State. In that year the City lost access
to the public credit markets. The City was not able to sell short-term notes to
the public again until 1979. In 1975, S&P suspended its A rating of City bonds.
This suspension remained in effect until March 1981, at which time the City
received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998, S&P
assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications. On March 9, 1999, S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.
Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded approximately $28 billion of the City's general obligations from Baa1
to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's general
obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion
outstanding general obligation bonds from A- to A.
New York City is heavily dependent on New York State and federal assistance
to cover insufficiencies in its revenues. There can be no assurance that in the
future federal and State assistance will enable the City to make up its budget
deficits. To help alleviate the City's financial difficulties, the Legislature
created the Municipal Assistance Corporation ("MAC") in 1975. Since its
creation, MAC has provided, among other things, financing assistance to the City
by refunding maturing City short-term debt and transferring to the City funds
received from sales of MAC bonds and notes. MAC is authorized to issue bonds and
notes payable from certain stock transfer tax revenues, from the City's portion
of the State sales tax derived in the City and, subject to certain prior claims,
from State per capita aid otherwise payable by the State to the City. Failure by
the State to continue the imposition of such taxes, the reduction of the rate of
such taxes to rates less than those in effect on July 2, 1975, failure by the
State to pay such aid revenues and the reduction of such aid revenues below a
specified level are included among the events of default in the resolutions
authorizing MAC's long-term debt. The occurrence of an event of default may
result in the acceleration of the maturity of all or a portion of MAC's debt.
MAC bonds and notes constitute general obligations of MAC and do not constitute
an enforceable obligation or debt of either the State or the City.
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Since 1975, the City's financial condition has been subject to oversight
and review by the New York State Financial Control Board (the "Control Board")
and since 1978 the City's financial statements have been audited by independent
accounting firms. To be eligible for guarantees and assistance, the City is
required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the Financial
Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal years,
relating to the City, the Board of Education ("BOE") and City University of New
York ("CUNY") and reflected the City's expense and capital budgets for the 1998
fiscal year, which were adopted on June 6, 1997. The 1998-2001 Financial Plan
projected revenues and expenditures for the 1998 fiscal year balanced in
accordance with GAAP. The 1998-99 Financial Plan projected General Fund receipts
(including transfers from other funds) of $36.22 billion, an increase of $1.02
billion over the estimated 1997-1998 level. Recurring growth in the State
General Fund tax base was projected to be approximately six percent during 1998-
99, after adjusting for tax law and administrative changes. This growth rate is
lower than the rates for 1996-97 or 1997-98, but roughly equivalent to the rate
for 1995-96.
Although the City has consistently maintained balanced budgets and is
projected to achieve balanced operating results for the current fiscal year,
there can be no assurance that the gap-closing actions proposed in the 1998-2001
Financial Plan can be successfully implemented or that the City will maintain a
balanced budget in future years without additional State aid, revenue increases
or expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.
The projections set forth in the 1998-2001 Financial Plan were based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
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Implementation of the 1998-2001 Financial Plan is also dependent upon the
City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. Despite this additional financing mechanism, the
City currently projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. Indebtedness subject to the
constitutional debt limit includes liability on capital contracts that are
expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation which is currently on
appeal to the Court of Appeals were voided, projected contracts for the City
capital projects would exceed the City's debt limit. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.
The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short-term obligations within their fiscal
year of issuance. Although the City's 1998 fiscal year financial plan projected
$2.4 billion of seasonal financing, the City expected to undertake only
approximately $1.4 billion of seasonal financing. The City issued $2.4 billion
of short-term obligations in fiscal year 1997. The delay in the adoption of the
State's budget in certain past fiscal years has required the City to issue
short-term notes in amounts exceeding those expected early in such fiscal years.
Certain localities, in addition to the City, have experienced financial
problems and have requested and received additional New York State assistance
during the last several State fiscal years. The potential impact on the State of
any future requests by localities for additional assistance is not included in
the State's projections of its receipts and disbursements for the fiscal year.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
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The 1998-99 budget included $29.4 million in unrestricted aid targeted to
57 municipalities across the State. Other assistance for municipalities with
special needs totals more than $25.6 million. Twelve upstate cities received
$24.2 million in one-time assistance from a cash flow acceleration of State aid.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
From time to time, federal expenditure reductions could reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
the State, the City or any of the Authorities were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. Long-range potential problems of declining urban population,
increasing expenditures and other economic trends could adversely affect
localities and require increasing the State assistance in the future.
Year 2000 Compliance. In April 1999 the State Comptroller released an
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audit on the State's Year 2000 compliance. The audit, which reviewed the State's
Y2K compliance activities through October 1998, found that the State had made
progress in achieving Y2K compliance, but needed to improve its activities in
several areas, including data interchanges and contingency planning. The Office
for Technology (OFT) will continue to monitor compliance progress for the States
mission-critical and high-priority systems and is reporting compliance progress
to the Governor's office on a quarterly basis. The 1999-2000 enacted budget
allocates $19 million for priority embedded systems and $20 million for
unanticipated expenses related to bringing technology into Y2K compliance.
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Standby Commitments
In order to enhance the liquidity, stability or quality of municipal
obligations, the ILA Prime Obligations Portfolio, ILA Money Market Portfolio,
ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt California Portfolio, ILA
Tax-Exempt New York Portfolio, FS Prime Obligations Fund, FS Money Market Fund
and FS Tax-Free Fund each 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 put, demand feature or "standby commitment," depending on its
characteristics. The aggregate price which a Series 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
the Series. 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 the
Series.
Management of the Trust understands that the Internal Revenue Service has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. Institutional Tax-Exempt
Assets, the predecessor company of which ILA Tax-Exempt Diversified Portfolio
and ILA Tax-Exempt California Portfolio were series, has received a ruling from
the Internal Revenue Service to the effect that it is considered the owner of
the municipal obligations subject to standby commitments so that the interest on
such instruments will be tax-exempt income to it. (Such rulings do not, however,
serve as precedent for other taxpayers, are applicable only to the taxpayer
requesting the ruling and have, on occasion, been reversed by the Internal
Revenue Service.) The Internal Revenue Service has subsequently announced that
it will not ordinarily issue advance ruling letters as to the identity of the
true owner of property in cases involving the sale of securities or
participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the
seller or a third party. Each of the ILA Tax-Exempt Diversified Portfolio, ILA
Tax-Exempt California Portfolio, ILA Tax-Exempt New York Portfolio and FS Tax-
Free Fund intends to take the position that it is the owner of any municipal
obligations acquired subject to a standby commitment or acquired or held with
certain other types of put rights and that its distributions of tax-exempt
interest earned with respect to such municipal obligations will be tax-exempt
for its shareholders. There is no assurance that standby commitments will be
available to a Series nor has any Series assumed that such commitments will
continue to be available under all market conditions.
Borrowings. A Series can borrow money from banks in amounts not exceeding one-
third of its total assets. Borrowings involve leveraging. If the securities held
by a Series decline in value while these transactions are outstanding, the
Series' market value will decline in value by proportionately more than the
decline in value of the securities.
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<PAGE>
Non-Diversified Status
Since the ILA Tax-Exempt California Portfolio and ILA Tax-Exempt New York
Portfolio are "non-diversified" under the Act, each is subject only to
applicable tax requirements. Under federal tax laws, the ILA Tax-Exempt
California Portfolio and ILA Tax-Exempt New York Portfolio may, with respect to
50% of their total assets, invest up to 25% of their 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 each Series' total
assets, (1) the Series 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
Series may 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 Internal Revenue Code of
1986, as amended (the "Code").
INVESTMENT LIMITATIONS
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed with respect to any Series without
the approval of the majority of outstanding voting securities of that Series.
The investment objective of each ILA Portfolio (except the ILA Tax-Exempt
California and ILA Tax-Exempt New York Portfolios' objective of providing
shareholders with income exempt from California State and New York State and New
York City personal income tax, respectively) cannot be changed without approval
of a majority of the outstanding shares of that ILA Portfolio. The investment
objective of each Financial Square Fund and all other investment policies or
practices of the Series, except as stated in this paragraph, are considered by
the Trust not to be fundamental and accordingly may be changed without
shareholder approval. As a matter of fundamental policy, at least 80% of the net
assets of each of the ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt
California Portfolio, ILA Tax-Exempt New York Portfolio and FS Tax-Free Fund
will ordinarily be invested in municipal obligations, the interest from which is
in the opinion of bond counsel, if any, excluded from gross income for federal
income tax purposes. In addition, as a matter of fundamental policy, at least
65% of the total assets of each of the ILA Tax-Exempt California Portfolio and
ILA Tax- Exempt New York Portfolio will be invested in California and New York
municipal obligations, respectively, except in extraordinary circumstances. Each
of these four Series may temporarily invest in taxable money market instruments
or, in the case of the ILA Tax-Exempt California and ILA Tax-Exempt New York
Portfolio, in municipal obligations that are not California or New York
municipal obligations, respectively, when acceptable California and New York
obligations are not available or when the Investment Adviser believes that the
market conditions dictate a defensive posture.
As defined in the Act and the rules thereunder and as used in the
Prospectuses and this Statement of Additional Information, "a majority of the
outstanding voting securities" of a Series means the lesser of (1) 67% of the
shares of that Series present at a meeting if the holders of more than 50% of
the outstanding shares of that Series are present in person or by proxy, or (2)
more than 50% of the outstanding shares of that Series. Investment restrictions
that involve a
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<PAGE>
maximum percentage of securities or assets shall not be considered to be
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 or on behalf of, a Series, with the exception of borrowings
permitted by Investment Restriction (3).
Accordingly, the Trust may not, on behalf of any Series (except for FS
Government Fund):
(1) Make any investment inconsistent with the Series' classification
as a diversified company under the Act. This restriction does not, however,
apply to any Series classified as a non-diversified company under the Act.
(2) Purchase securities if such purchase would cause more than 25% in
the aggregate of the market value of the total assets of a Series to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to, and each Series (other than the FS Money Market
Fund) reserves freedom of action, when otherwise consistent with its
investment policies, to concentrate its investments in obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities,
obligations (other than commercial paper) issued or guaranteed by U.S.
banks and U.S. branches of U.S. or foreign banks and repurchase agreements
and securities loans collateralized by such U.S. government obligations or
such bank obligations. The FS Money Market Fund may concentrate its
investments in obligations issued or guaranteed by the U.S. government, its
agencies and instrumentalities and repurchase agreements and securities
loans collateralized by such obligations and will invest more than 25% of
its total assets in obligations issued or guaranteed by banks (whether
foreign or domestic) and repurchase agreements and securities loans
collateralized by such obligations. However, if adverse economic conditions
prevail in the banking industry, the FS Money Market Fund may, for
defensive purposes, temporarily invest less than 25% of the value of its
total assets in such obligations. Notwithstanding the foregoing, the ILA
Money Market Portfolio will invest more than 25% of the value of its total
assets in bank obligations (whether foreign or domestic) except that if
adverse economic conditions prevail in the banking industry, the ILA Money
Market Portfolio may, for defensive purposes, temporarily invest less than
25% of its total assets in bank obligations. 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.
(3) Borrow money, except that (a) the Series 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
Series may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the Series
may obtain such short-term credit as may be necessary for the
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<PAGE>
clearance of purchases and sales of portfolio securities and (d) the Series
may purchase securities on margin to the extent permitted by applicable
law.
(4) Make loans, except (a) through the purchase of debt obligations
in accordance with each Series' investment objective and policies, (b)
through repurchase agreements with banks, brokers, dealers and other
financial institutions, (c) with respect to the Financial Square Funds,
loans of securities as permitted by applicable law, and (d) with respect to
the ILA Portfolios, loans of securities.
(5) Underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Series may be deemed to be an
underwriting.
(6) Purchase, hold or deal in real estate, although the Series may
purchase and sell securities that are secured by real estate or interests
therein, securities of real estate investment trusts and mortgage-related
securities and may hold and sell real estate acquired by the Series as a
result of the ownership of securities.
(7) Invest in commodities or commodity contracts, except that the
Series may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) Issue senior securities to the extent such issuance would violate
applicable law.
FS Government Fund may not:
(1) With respect to 75% of its total assets taken at market value,
invest more than 5% of the value of the total assets of that Series in the
securities of any one issuer, except U.S. Government securities and
repurchase agreements collateralized by U.S. Government securities. This
restriction does not, however, apply to any Series classified as a non-
diversified company under the Act.
(2) With respect to 75% of its total assets taken at market value,
purchase the securities of any one issuer if, as a result of such purchase,
that Series would hold more than 10% of the outstanding voting securities
of that issuer. This restriction does not, however, apply to any Series
classified as a non-diversified company under the Act.
(3) Borrow money, except from banks on a temporary basis for
extraordinary or emergency purposes, provided that a Series is required to
maintain asset coverage of 300% for all borrowings and that no purchases of
securities will be made if such borrowings exceed 5% of the value of the
Series' assets. This restriction does not apply to cash collateral received
as a result of portfolio securities lending.
(4) Mortgage, pledge or hypothecate its assets except to secure
permitted borrowings.
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<PAGE>
(5) Act as underwriter of the securities issued by others, except to
the extent that the purchase of securities in accordance with a Series'
investment objective and policies directly from the issuer thereof and the
later disposition thereof may be deemed to be underwriting.
(6) Purchase securities if such purchase would cause more than 25% in
the aggregate of the market value of the total assets of a Series to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to, and the Series reserves freedom of action, when
otherwise consistent with its investment policies, to concentrate its
investments in U.S. Government Securities, obligations (other than
commercial paper) issued or guaranteed by U.S. banks, and U.S. branches of
foreign banks and repurchase agreements and securities loans collateralized
by U.S. Government Securities or such bank obligations. (For the purposes
of this restriction, state and municipal governments and their agencies and
authorities are not deemed to be industries, and 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. Such
concentration may be effected when the Investment Adviser determines that
risk adjusted returns in such industries are considered favorable relative
to other industries.)
(7) Issue senior securities, except as appropriate to evidence
indebtedness that a Series is permitted to incur and except for shares of
existing or additional series of the Trust.
(8) Purchase or sell real estate (excluding securities secured by
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodities contracts. The Trust reserves the freedom to
hold and to sell real estate acquired for any Series as a result of the
ownership of securities.
(9) Make loans to other persons, except loans of portfolio securities
and except to the extent that the purchase of debt obligations in
accordance with such Series' investment objective and policies may be
deemed to be loans.
(10) Purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for
the clearance of transactions), make short sales of securities, maintain a
short position, or invest in or write puts, calls or combinations thereof
(except that a Series may acquire puts in connection with the acquisition
of a debt instrument).
(11) Invest in other companies for the purpose of exercising control
or management.
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<PAGE>
Each Series except the ILA Treasury Obligations Portfolio, ILA Treasury
Instruments Portfolio, ILA Federal Portfolio, FS Treasury Obligation Fund, FS
Treasury Instruments Fund, and FS Federal Fund, may, notwithstanding any other
fundamental investment restriction or policy, invest some or all of its assets
in a single open-end investment company or series thereof with substantially the
same investment objectives, restrictions and policies as the Series.
As money market funds, the Series must also comply, as a non-fundamental
policy, with Rule 2a-7 under the Act. While a detailed and technical rule, Rule
2a-7 has three basic requirements: portfolio maturity, portfolio quality and
portfolio diversification. Portfolio maturity. Rule 2a-7 requires that the
maximum maturity (as determined in accordance with Rule 2a-7) of any security in
a Series' portfolio may not exceed 13 months and a Portfolio's average portfolio
maturity may not exceed 90 days. Portfolio quality. A money market fund may only
invest in First Tier and Second Tier securities (as defined in the Rule and the
Prospectuses). Each Series, other than the ILA Tax-Exempt Diversified Portfolio,
ILA Tax-Exempt California Portfolio, ILA Tax-Exempt New York Portfolio, and FS
Tax-Free Fund (the "Tax-Exempt Series"), as a matter of non-fundamental policy,
only invests in First Tier securities. Portfolio diversification. The ILA Prime
Obligations, ILA Money Market, ILA Government, ILA Treasury Obligations, ILA
Treasury Instruments, ILA Federal and ILA Tax-Exempt Diversified Portfolios, FS
Prime Obligations, FS Government, FS Treasury Obligations, FS Money Market, FS
Federal, FS Treasury Instruments and FS Tax-Free Funds may not invest more than
5% of their total assets in the securities of any one issuer (except U.S.
Government Securities, repurchase agreements collateralized by such securities
and certain securities subject to a guarantee or unconditional demand feature).
Each of such Series may, however, invest up to 25% of its total assets in the
First Tier Securities of a single issuer for a period of up to three business
days after the purchase thereof. ILA Tax-Exempt New York and ILA Tax-Exempt
California Portfolios, with respect to 75% of their respective total assets, may
not invest more than 5% of their total assets in the securities of any one
issuer (except U.S. Government Securities, repurchase agreements collateralized
by such securities and certain securities subject to a guarantee or
unconditional demand feature); provided that such Series may not invest more
than 5% of their respective total assets in the securities of a single issuer
unless the securities are First Tier Securities. Subject to certain exceptions,
immediately after the acquisition of any demand features or guarantees (i.e.,
generally, the right to sell the security at a price equal to its approximate
amortized cost (for a demand feature) or principal amount (for a guarantee) plus
accrued interest), with respect to 75% of the assets of a Series, no more than
10% of the Series' total assets may be invested in securities issued by or
subject to demand features or guarantees issued by the same issuer. In the case
of the Tax-Exempt Series (which are the only Series that are permitted to invest
in Second Tier securities), subject to certain exceptions immediately after the
acquisition of a demand feature or guarantee that is a Second Tier security, no
more than 5% of the Tax-Exempt Series' total assets may be invested in
securities or demand features or guarantees issued by the institution that
issued the demand feature or guarantee. The Tax-Exempt Series' investment in
Second Tier securities that are conduit securities (which, generally, are
municipal securities involving an agreement or arrangement providing for payment
by a person other than the issuer of the municipal security) that are not U.S.
Government Securities or securities with a guarantee by a non-controlled person,
may not exceed 1% of the Series' total
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<PAGE>
assets. Also, the Tax-Exempt Series' investment in Second Tier conduit
securities of all issuers combined may not exceed 5% of the Series' total
assets. Securities which are rated in the highest short-term rating category by
at least two NRSROs, or if only one NRSRO has assigned a rating, by that NRSRO
are "First Tier securities." Securities rated in the top two short-term rating
categories by at least two NRSROs or by the only NRSRO which has assigned a
rating, but which are not First Tier securities are "Second Tier securities."
Unrated securities may also be First Tier or Second Tier securities if they are
of comparable quality as determined by the Investment Adviser. In accordance
with certain rules, the rating of demand feature or guarantee of a security may
be deemed to be the rating of the underlying security. NRSROs include S&P,
Moody's, Duff and Phelps, Inc., Fitch IBCA Inc., and Thomson BankWatch, Inc. For
a description of their rating categories, see Appendix A.
"Value" for the purposes of all investment restrictions means the value
used in determining a Series' net asset value. "U.S. Government Securities"
shall mean securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities.
In addition to the fundamental policies mentioned above, the Board of
Trustees of the Trust has adopted the following non-fundamental policies with
respect to the Financial Square Funds which may be changed or amended by action
of the Board of Trustees without approval of shareholders. Accordingly, the
Trust may not, on the behalf of any Series:
(a) Invest in companies for the purpose of exercising control or
management.
(b) Invest more than 10% of a Series' 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.
(c) Purchase additional securities if the Series' borrowings exceed 5% of
its net assets.
(d) Make short sales of securities, except short sales against the box.
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for deciding matters of general
policy and reviewing the actions of the Investment Adviser, distributor and
transfer agent. The officers of the Trust conduct and supervise each Series
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.
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<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
Ashok N. Bakhru, 58 Chairman Chairman of the Board and Trustee -
P.O. Box 143 & Trustee Goldman Sachs Variable Insurance
Lima, PA 19037 Trust (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
(1984-1999); 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); and
Trustee, Citizens Scholarship
Foundation of America (since 1998).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
*David B. Ford, 54 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment company) (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 (since November
1995); Co-Head and Director, Goldman
Sachs Funds Management, L.P. (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
32 Old Slip President Variable Insurance Trust (registered
New York, NY 10005 investment company) (since October
1997); Trustee, Trust for Credit
Unions (registered investment
company)(since March 1998); Managing
Director, Goldman Sachs Asset
Management Group (since November
1997); President, Goldman Sachs Funds
Group (since April 1996); and
President, MFS Retirement Services
Inc., of Massachusetts Financial
Services (prior thereto).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
*John P. McNulty, 47 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment company) (since October
1997); Managing Director, Goldman
Sachs (since November 1996); Head of
Investment Management Division (since
September 1999); General Partner, J.
Aron & Company (commodity dealer and
risk management adviser) (since
November 1995); Director and Co-Head,
Goldman Sachs Funds Management L.P.
(since November 1995); Director,
Goldman Sachs Asset Management
International (since January 1996);
Co-Head, GSAM (November 1995 -
September 1999); Director, Global
Capital Reinsurance (insurance)
(since 1989); Director, Commodities
Corp. LLC (since April 1997); Limited
Partner of Goldman Sachs
(1994-November 1995); and Trustee,
Trust for Credit Unions (registered
investment company) (January
1996-March 1998).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
Mary P. McPherson, 64 Trustee Trustee - Goldman Sachs Variable
The Andrew W. Mellon Insurance Trust (registered
Foundation investment company) (since October
140 East 62/nd/ Street 1997); Vice President, The Andrew W.
New York, NY 10021 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, Josiah Macy,
Jr. Foundation (health education
programs) (since 1977); Director of
the Philadelphia Contributionship
(insurance) (since 1985); Director
Emeritus, Amherst College
(1986-1998); Director, Dayton Hudson
Corporation (general retailing
merchandising) (1988-1997); Director,
The Spencer Foundation (educational
research) (since 1993); member of PNC
Advisory Board (banking) (since
1993); and Director, American School
of Classical Studies in Athens (since
1997).
*Alan A. Shuch, 50 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment company) (since October
1997); Limited Partner, Goldman Sachs
(since December 1994); Consultant to
GSAM (since December 1994).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
Jackson W. Smart, Jr., 69 Trustee Trustee - Goldman Sachs Variable
One Northfield Plaza Insurance Trust (registered
Suite 218 investment company) (since October
Northfield, IL 60093 1997); President, Board Member and
Senior Advisor, Smart Properties,
Inc. (since January 2000); Chairman,
Executive Committee and Director,
First Commonwealth, Inc. (a managed
dental care company) (January
1996-August 1999); 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 Northwestern
Healthcare (since 1980).
William H. Springer, 70 Trustee Trustee - Goldman Sachs Variable
701 Morningside Drive Insurance Trust (registered
Lake Forest, IL 60045 investment company) (since October
1997); Director, The Walgreen Co. (a
retail drug store business) (April
1988-January 2000); Director of
Baker, Fentress & Co. (a closed-end,
non-diversified management investment
company) (April 1992-Present); and
Chairman and Trustee, Northern
Institutional Funds (April 1984).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
Richard P. Strubel, 60 Trustee Trustee - Goldman Sachs Variable
500 Lake Cook Road Insurance Trust (registered
Suite 150 investment company) (since October
Deerfield, IL 60015 1997); President and COO, UNext.com
(provider of educational services via
the internet) (since 1999); Director,
Gildan Activewear Inc. (since
February 1999); Director of Kaynar
Technologies, Inc. (since March
1997); Managing Director, Tandem
Partners, Inc. (1990-1999); President
and Chief Executive Officer,
Microdot, Inc. (a diversified
manufacturer of fastening systems and
connectors) (January 1984-October
1994); Trustee, Northern
Institutional Funds (since December
1982); and Director, Cantilever
Technologies, Inc. (since 1999).
*Nancy L. Mucker, 50 Vice President Vice President - Goldman Sachs
4900 Sears Tower Variable Insurance Trust (registered
Chicago, IL 60606 investment company) (since 1997);
Vice President and Co-Manager of
Funds Group Shareholder Servicing,
Goldman Sachs (since April 1985).
*John M. Perlowski, 35 Treasurer Treasurer - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Vice President, Goldman Sachs (since
July 1995); and Banking Director,
Investors Bank and Trust (November
1993 to July 1995).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
*James A. Fitzpatrick, 39 Vice President Vice President - Goldman Sachs
4900 Sears Tower Variable Insurance Trust (registered
Chicago, IL 60606 investment company) (since October
1997); Managing Director, Goldman
Sachs (since October 1999); Vice
President of GSAM (April
1997-December 1999); and Vice
President and General Manager, First
Data Corporation - Investor Services
Group (1994 to 1997).
*Jesse Cole, 36 Vice President Vice President - Goldman Sachs
4900 Sears Tower Variable Insurance Trust (registered
Chicago, IL 60606 investment company) (since 1998);
Vice President, GSAM (since June
1998); 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
32 Old Slip Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997); and
Vice President, Goldman Sachs (May
1992-Present).
*Michael J. Richman, 39 Secretary Secretary - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment 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>
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<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
*Howard B. Surloff, 34 Assistant Secretary Assistant Secretary - Goldman Sachs
32 Old Slip Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Assistant General Counsel, GSAM and
General Counsel to the U.S. Funds
Group (since December 1997);
Assistant General Counsel and Vice
President, Goldman Sachs (since
November 1993 and May 1994,
respectively); and Counsel to the Funds
Group, GSAM (November 1993 - December
1997).
*Valerie A. Zondorak, 34 Assistant Secretary Assistant Secretary - Goldman Sachs
32 Old Slip Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Assistant General Counsel, GSAM and
Assistant General Counsel to the
Funds Group (since December 1997);
Vice President and Assistant General
Counsel, Goldman Sachs (since March
1997); Counsel to the Funds Group,
GSAM (March 1997-December 1997); and
Associate of Shereff, Friedman,
Hoffman & Goodman (September 1990 to
February 1997).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
*Deborah Farrell, 28 Assistant Secretary Assistant Secretary - Goldman Sachs
32 Old Slip Variable Insurance Trust (registered
New York, NY 10005 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); and Executive Secretary,
Goldman Sachs (January 1994 - January
1996).
*Kaysie P. Uniacke, 39 Assistant Secretary Assistant Secretary - Goldman Sachs
32 Old Slip Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Managing Director, GSAM (since 1997);
Vice President and Senior Portfolio
Manager, GSAM (1988 to 1997).
*Elizabeth D. Anderson, 30 Assistant Secretary Assistant Secretary - Goldman Sachs
32 Old Slip Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Portfolio Manager, GSAM (since April
1996); Junior Portfolio Manager, GSAM
(1995-April 1996); and Funds Trading
Assistant, GSAM (1993-1995).
*Amy E. Belanger, 30 Assistant Secretary Assistant Secretary - Goldman Sachs
32 Old Slip Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1999);
Vice President, Goldman Sachs (since
June 1999); Counsel, Goldman Sachs
(since 1998); and Associate of
Dechert Price & Rhoads (September
1996-1998).
</TABLE>
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<PAGE>
Each interested Trustee and officer holds comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or an affiliate
thereof is the Investment Adviser and/or distributor. As of March 17, 2000 the
Trustees and officers of the Trust as a group owned less than 1% of the
outstanding shares of beneficial interest of each of the Series.
The Trust pays each Trustee, other than those who are "interested
persons" of Goldman Sachs, a fee for each Trustee meeting attended and an annual
fee. Such Trustees are also reimbursed for travel expenses incurred in
connection with attending such meetings.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1999:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman
Aggregate Accrued as Sachs Trust and the
Compensation Part of Goldman Sachs Funds
from the Series' complex (including the
Name of Trustee Series Expenses Series)/2/
- --------------- ------ -------- ----------
<S> <C> <C> <C>
Ashok N. Bakhru1 23,884 $0 $159,884
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson 17,716 0 118,716
Alan A. Shuch 0 0 0
Jackson W. Smart, Jr. 17,716 0 118,716
William H. Springer 17,716 0 118,716
Richard P. Strubel 17,716 0 118,716
</TABLE>
/1/ Includes compensation as Chairman of the Board of Trustees.
/2/ The Goldman Sachs Funds Complex consists of Goldman Sachs Trust and
Goldman Sachs Variable Insurance Trust. Goldman Sachs Trust consisted of
51 mutual funds, including the 17 money market funds, on December 31, 1999.
Goldman Sachs Variable Insurance Trust consisted of 16 mutual funds on
December 31, 1999.
-52-
<PAGE>
THE INVESTMENT ADVISER, DISTRIBUTOR AND TRANSFER AGENT
The Investment Adviser
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. GSAM, 32 Old Slip, New York, New York 10005, a unit of the
IMD of Goldman Sachs, serves as the Investment Adviser to the Series. Under the
Management Agreement between Goldman Sachs on behalf of GSAM and the Trust on
behalf of the Series, GSAM, subject to the supervision of the Board of Trustees
of the Trust and in conformity with the stated policies of each Series, acts as
Investment Adviser and directs the investments of the Series. In addition, GSAM
administers the Series' business affairs and, in connection therewith, furnishes
the Trust with office facilities and (to the extent not provided by the Trust's
custodian, transfer agent, or other organizations) clerical, recordkeeping and
bookkeeping services and maintains the financial and account records required to
be maintained by the Trust. As compensation for these services and for assuming
expenses related thereto, the Trust pays GSAM a fee, computed daily and paid
monthly, at an annual rate of .35% and .205% of each ILA Portfolio's and
Financial Square Fund's average daily net assets, respectively. GSAM has agreed
to reduce or otherwise limit the operating expenses of the respective Series,
excluding, among other categories of expenses, taxes, interest, brokerage and
litigation, indemnification and other extraordinary expenses, on an annualized
basis, as described in the Series Prospectus. The amount of such reductions or
limits, if any, are calculated monthly and are based on the cumulative
difference between a Series' estimated annualized expense ratio and the expense
limit for that Series. This amount will be reduced by any prior payments related
to the current fiscal year. GSAM voluntarily agreed to waive a portion of its
management fee for each Financial Square Fund during the fiscal year ended
December 31, 1999. Goldman Sachs has agreed to permit the Financial Square Funds
and the ILA Portfolios to use the name "Goldman Sachs" or a derivative thereof
as part of each Financial Square Fund's name for as long as the Management
Agreement is in effect.
Goldman Sachs has authorized any of its directors, partners, officers and
employees who have been elected or appointed to the position of Trustee or
officer of the Trust to serve in the capacities in which they have been elected
and appointed.
The Trust, on behalf of each Series, is responsible for all expenses other
than those expressly borne by GSAM under the Series' Management Agreement. The
expenses borne by shares of each Series include, without limitation, the fees
payable to GSAM, the fees and expenses under the Trust's distribution,
administration and service plans, the fees and expenses of the Series'
custodian, fees and expenses of the Series' transfer agent, filing fees for the
registration or qualification of shares under federal or state securities laws,
expenses of the organization of the Series, taxes (including income and excise
taxes, if any), interest, costs of liability insurance, fidelity bonds,
indemnification or contribution, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Series for violation of any law, legal and auditing and tax fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs with respect to the Series), expenses of preparing
and setting in type prospectuses, statements of additional information,
-53-
<PAGE>
proxy material, reports and notices, the printing and distribution of the same
to shareholders and regulatory authorities, its proportionate share of the
compensation and expenses of its "non-interested" Trustees, and extraordinary
expenses incurred by the Series.
The Management Agreement entered into on behalf of the ILA Portfolios (the
"ILA Management Agreement") was most recently approved by the Board of Trustees,
including the "non-interested" Trustees, on April 25, 2000 and by the
shareholders of each ILA Portfolio (other than the ILA Treasury Instruments and
ILA Tax-Exempt New York Portfolios) on April 19, 1990 and by the shareholders of
the ILA Treasury Instruments and ILA Tax-Exempt New York Portfolios on June 3,
1991. The ILA Management Agreement will remain in effect until June 30, 2001 and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by a majority of the Trustees or by a vote of a
majority of the outstanding voting securities of the particular ILA Portfolio,
as defined in the Act, and, in either case, by a majority of "non-interested"
Trustees.
For the fiscal years ended December 31, 1999, December 31, 1998 and
December 31, 1997 the amount of the management fee incurred by each ILA
Portfolio was as follows:
<TABLE>
<CAPTION>
ILA Portfolio 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
Prime Obligations Portfolio $ 3,897,948 $3,665,907 $4,412,869
Money Market Portfolio 6,253,719 5,096,528 3,744,112
Treasury Obligations Portfolio 2,329,913 2,662,028 2,682,436
Treasury Instruments Portfolio 2,367,541 1,719,014 1,250,151
Government Portfolio 1,521,689 1,703,454 2,258,653
Federal Portfolio 11,279,837 7,835,799 5,630,323
Tax-Exempt Diversified Portfolio 5,795,921 4,968,471 4,244,463
Tax-Exempt California Portfolio 2,537,365 2,294,224 1,803,245
Tax-Exempt New York Portfolio 635,270 412,164 300,711
</TABLE>
GSAM agreed not to impose a portion of its advisory fees for the fiscal
years ended December 31, 1998 and December 31, 1997 with respect to the ILA
Money Market, ILA Treasury Instruments, ILA Federal, ILA Tax-Exempt Diversified
and ILA Tax-Exempt New York Portfolios. Had such fees been imposed, the
following additional fees would have been incurred for the periods indicated:
<TABLE>
<CAPTION>
ILA Portfolio 1998 1997
------------- ---- ----
<S> <C> <C>
Money Market Portfolio $ 224,681 $ 525,057
Treasury Instruments Portfolio 781,082 1,551,858
Federal Portfolio 1,942,882 3,925,458
Tax-Exempt Diversified Portfolio 1,016,544 1,543,881
Tax-Exempt New York Portfolio 67,141 93,920
</TABLE>
-54-
<PAGE>
In addition, GSAM assumed certain expenses related to the operations of
each ILA Portfolio during various periods of 1999, 1998, and 1997 to the extent
such expenses would have caused each ILA Portfolio's total expenses to exceed,
on an annualized basis, certain contractual or voluntary expense limitations.
Had these expenses not been assumed, the following additional expenses would
have been incurred for such years:
<TABLE>
<CAPTION>
ILA Portfolio 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
Prime Obligations Portfolio $41,962 $ 46,293 $160,669
Money Market Portfolio 0 297,382 67,224
Treasury Obligations Portfolio 0 87,462 6,756
Treasury Instruments Portfolio 0 159,394 80,196
Government Portfolio 90,702 114,600 30,990
Federal Portfolio 0 234,644 44,904
Tax-Exempt Diversified Portfolio 0 0 1,052
Tax-Exempt California Portfolio 0 0 21,406
Tax-Exempt New York Portfolio 17,287 141,226 25,375
</TABLE>
The ILA Tax-Exempt California Portfolio has entered into certain expense
offset arrangements with the custodian resulting in a reduction in the
Portfolio's expenses. For the fiscal year ended December 31, 1999, the
Portfolio's custody fees were reduced by approximately $77,882 under such
arrangement.
The FS Management Agreement entered into on behalf of the Financial Square
Funds was most recently approved by the Trustees, including the "non-interested"
Trustees, on April 25, 2000. The Financial Square Funds' shareholders approved
the FS Management Agreement on April 21, 1997. The FS Management Agreement will
remain in effect until June 30, 2001 and will continue in effect thereafter only
if such continuance is specifically approved at least annually by a majority of
the Trustees or by a vote of a majority of the outstanding voting securities of
the particular Financial Square Fund (as defined in the Act) and, in either
case, by a majority of "non-interested" Trustees.
Prior to May 1, 1997, the Financial Square Funds then in operation had
separate investment advisory and administration agreements. Effective May 1,
1997 the services under such agreements were combined in the Management
Agreement (the "FS Management Agreement"). The services required to be performed
for the Financial Square Funds and the combined advisory and administration fees
payable by the Financial Square Funds under the former advisory and
administration agreements are identical to the services and fees under the FS
Management Agreement. For the fiscal years ended December 31, 1999, December 31,
1998, and December 31, 1997 the amounts of the management fee (including both
advisory and administration fees) incurred by each Financial Square Fund were as
follows:
-55-
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Financial Square Fund
---------------------
<S> <C> <C> <C>
FS Prime Obligations Fund $13,046,992 $ 9,711,034 $8,706,734
FS Money Market Fund 13,441,727 10,320,883 8,298,316
FS Treasury Obligations Fund 7,132,148 7,933,124 5,329,826
FS Government Fund 5,080,264 4,643,079 3,562,882
FS Tax-Free Fund 2,961,099 2,406,049 1,405,152
FS Treasury Instruments Fund/(1)/ 736,284 733,510 383,414
FS Federal Fund/(1)/ 6,939,787 4,301,134 1,623,443
</TABLE>
________________________
/(1)/ FS Treasury Instruments Fund and FS Federal Fund commenced operations on
March 3, 1997 and February 28, 1997, respectively.
During the periods presented, GSAM agreed voluntarily that it would not
impose a portion of its management fee. Had such fees been imposed, the
following additional fees (including both advisory and administration fees)
would have been incurred by these Series for the periods indicated:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Financial Square Fund
---------------------
<S> <C> <C> <C>
FS Prime Obligations Fund $2,686,147 $1,999,543 $1,792,563
FS Money Market Fund 2,767,248 2,124,889 1,708,477
FS Treasury Obligations Fund 1,468,383 1,633,292 1,097,197
FS Government Fund 1,048,119 955,928 733,442
FS Tax-Free Fund 609,445 494,669 289,296
FS Treasury Instruments Fund/(1)/ 151,607 151,018 80,267
FS Federal Fund/(1)/ 1,428,690 885,516 344,281
</TABLE>
________________________
/(1)/ FS Treasury Instruments Fund and FS Federal Fund commenced operations on
March 3, 1997 and February 28, 1997, respectively.
In addition, GSAM assumed certain expenses related to the operations of
each Financial Square Fund during various periods of 1999, 1998 and 1997 to the
extent such expenses would have caused each Fund's total expenses to exceed, on
an annualized basis, certain contractual or voluntary expense limitations. Had
these expenses not been assumed, the Series would have incurred the following
additional expenses:
-56-
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Financial Square Fund
---------------------
<S> <C> <C> <C>
FS Prime Obligations Fund $619,596 $957,241 $718,967
FS Money Market Fund 571,930 412,192 791,686
FS Treasury Obligations Fund 382,968 694,383 574,345
FS Government Fund 128,911 319,735 512,637
FS Tax-Free Fund 0 183,532 166,670
FS Treasury Instruments Fund/(1)/ 103,016 298,407 162,710
FS Federal Fund/(1)/ 393,045 384,419 567,341
</TABLE>
__________________________
/(1)/ FS Treasury Instruments Fund and FS Federal Fund commenced operations on
March 3, 1997 and February 28, 1997, respectively.
The ILA Management and FS Management Agreements provide that GSAM shall
not be liable to an ILA Portfolio or Financial Square Fund for any error of
judgment by GSAM or for any loss sustained by the ILA Portfolio or Financial
Square Fund except in the case of GSAM's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. The ILA Management and FS Management
Agreements also provide that they shall terminate automatically if assigned and
that they may be terminated with respect to any particular ILA Portfolio or
Financial Square Fund without penalty by vote of a majority of the Trustees or a
majority of the outstanding voting securities of that ILA Portfolio or Financial
Square Fund on 60 days' written notice to GSAM or by GSAM without penalty at any
time on 90 days' (60 days with respect to an Financial Square Fund) written
notice to the Trust.
In managing the Goldman Sachs Money Market Funds, GSAM will draw upon the
Goldman Sachs Credit Department. The Credit Department provides credit risk
management for our portfolios through a team of 108 professionals who contribute
a combination of industry analysis, fund-specific expertise and global capacity
(through their local presence in foreign markets). The credit department
continuously monitors all issuers approved for investment by the money market
funds by monitoring news stories, business developments, financial information
and ratings, as well as occasional discussion with issuer management and rating
agency analysts. The Credit Department receives rating agency reports and rating
change information electronically and via fax as well as reports from Goldman's
Research Department. Specifically with respect to managing the ILA Tax-Exempt
Diversified Portfolio, ILA Tax-Exempt California Portfolio, ILA Tax-Exempt New
York Portfolio and FS Tax-Free Money Market Fund, GSAM will draw upon the
extensive research generated by Goldman Sachs' Municipal Credit Group. The
Credit Group's research team continually reviews current information regarding
the issuers of municipal and other tax-exempt securities, with particular focus
on long-term creditworthiness, short-term liquidity, debt service costs,
liability structures, and administrative and economic characteristics.
The Distributor and Transfer Agent
Goldman Sachs, 85 Broad Street, New York, NY 10004 acts as principal
underwriter and distributor of each Series' shares. Shares of the Series are
offered and sold on a continuous basis
-57-
<PAGE>
by Goldman Sachs, acting as agent. The Distribution Agreement between Goldman
Sachs and the Trust was most recently approved by the Trustees on April 25,
2000. Goldman Sachs retained approximately $800, $2,000, $10,530 of commissions
on redemptions of ILA Class B and ILA Class C shares during 1999, 1998 and 1997,
respectively. Goldman Sachs also serves as the Series' transfer agent. Goldman
Sachs provides customary transfer agency services to the Series, including the
handling of shareholder communications, the processing of shareholder
transactions, the maintenance of shareholder account records, payment of
dividends and distributions and related functions. For these services, Goldman
Sachs receives .04% (on an annualized basis) of the average daily net assets
with respect to each class of each ILA Portfolio. Goldman Sachs currently
imposes no fees under its transfer agency agreement with the Financial Square
Funds.
For the fiscal years ended December 31, 1999, December 31, 1998 and
December 31, 1997 the ILA Portfolios incurred transfer agency fees as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Prime Obligations Portfolio $ 445,314 $ 438,389 $ 535,143
Money Market Portfolio 714,161 608,138 487,902
Treasury Obligations Portfolio 266,274 304,232 306,564
Treasury Instruments Portfolio 270,576 285,734 320,230
Government Portfolio 173,909 194,680 258,132
Federal Portfolio 1,289,124 1,117,564 1,092,179
Tax-Exempt Diversified Portfolio 662,391 684,002 661,525
Tax-Exempt California Portfolio 289,985 262,197 206,085
Tax-Exempt New York Portfolio 72,603 54,776 45,100
</TABLE>
Goldman Sachs is one of the largest international investment banking
firms in the United States. Founded in 1869, Goldman Sachs is a major investment
banking and brokerage firm providing a broad range of financing and investment
services both in the United States and abroad. As of September 1, 1999, the
Investment Management Division ("IMD") was established as a new operating
division of Goldman Sachs. This newly created entity includes GSAM. GSAM, 32 Old
Slip, New York, New York 10005, acts as Investment Adviser to the Series.
Goldman Sachs registered as an investment adviser in 1981. The Goldman Sachs
Group, L.P., which controlled the Investment Adviser, merged into The Goldman
Sachs Group, Inc. as a result of an initial public offering. As of December 31,
1999, GSAM, along with other units of IMD, had assets under management of
approximately $258.5 billion.
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 Series or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Investment Adviser and its advisory affiliates have proprietary interests in,
and may manage or advise, accounts or funds (including separate accounts and
other funds and collective investment vehicles) which
-58-
<PAGE>
have investment objectives similar to those of the Series and/or which engage in
transactions in the same types of securities, currencies and instruments as the
Series. 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 Series invest, which could have an
adverse impact on each Series performance. Such transactions, particularly in
respect of proprietary accounts or customer accounts other than those included
in the Investment Adviser's and its advisory affiliates' asset management
activities, will be executed independently of the Series' transactions and thus
at prices or rates that may be more or less favorable. When the Investment
Adviser and its advisory affiliates seek to purchase or sell the same assets for
their managed accounts, including the Series, the assets actually purchased or
sold may be allocated among the accounts on a basis determined in its good faith
discretion to be equitable. In some cases, this system may adversely affect the
size or the price of the assets purchased or sold for the Series.
From time to time, the Series' 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 Adviser, and/or its
affiliates, will not initiate or recommend certain types of transactions in
certain securities or instruments which the Investment Adviser and/or its
affiliates are performing services or when position limits have been reached.
In connection with their management of the Series, the Investment Adviser
may have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Investment Adviser will not
be under any obligation, however, to effect transactions on behalf of the Series
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 Series and it is not anticipated that the
Investment Adviser will have access to such information for the purpose of
managing the Series. 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 Adviser in managing the
Series.
The results of each Series' investment activities may differ
significantly from the results achieved by the Investment Adviser and its
affiliates for their proprietary accounts or other 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 Series. Moreover, it is possible that a
Series 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.
-59-
<PAGE>
An investment policy committee which may include partners of Goldman
Sachs and its affiliates may develop general policies regarding a Series'
activities, but will not be involved in the day-to-day management of such
Series. In such instances, those individuals may, as a result, obtain
information regarding the Series' 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 Series invests.
In addition, certain principals and certain of the employees of the
Investment Adviser are also principals or employees of Goldman Sachs or its
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 Series should be aware.
The Investment Adviser may enter into transactions and invest in
instruments 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 Series, and such party may have no
incentive to assure that the Series 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 Series invest or which may be based on the performance
of a Series. The Series 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 Series. 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 Series will deal with Goldman Sachs
and its affiliates on an arms-length basis.
Each Series will be required to establish business relationships with its
counterparties based on the Series' own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Series' establishment of its business relationships, nor is it
expected that a Series' counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Series' creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Series in order to increase the
assets of the Series. Increasing a Series' assets may enhance investment
flexibility and diversification and may contribute to economies of scale that
tend to reduce a Series' expense ratio. Goldman Sachs reserves the right to
redeem at any time some or all of the shares of a Series acquired for its own
account. A large redemption of shares of a Series by Goldman Sachs could
significantly reduce the asset size of the Series, which might have an adverse
effect on a Series' investment flexibility, portfolio diversification and
expense ratio. Goldman Sachs will consider the effect of redemptions on a Series
and other shareholders in deciding whether to redeem its shares.
-60-
<PAGE>
It is possible that a Series' holdings 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 Series' flexibility in purchases and
sales of securities. When Goldman Sachs is engaged in an underwriting or other
distribution of securities of an entity, the Series' Investment Adviser may be
prohibited from purchasing or recommending the purchase of certain securities of
that entity for the Series.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Series and of all other
accounts managed by GSAM for execution with many firms. GSAM uses its best
efforts to obtain execution of portfolio transactions at prices which are
advantageous to each Series and at reasonably competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, GSAM will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation, reliability,
experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread or commission, if any. Securities purchased and
sold by the Series are generally traded in the over-the-counter market on a net
basis (i.e., without commission) through broker-dealers and banks acting for
their own account rather than as brokers, or otherwise involve transactions
directly with the issuer of such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in many
types of municipal and money market instruments. Its activities in this regard
could have some effect on the markets for those instruments which the Series
buy, hold or sell. An order has been granted by the SEC under the Act which
permits the Series to deal with Goldman Sachs in transactions in certain taxable
securities in which Goldman Sachs acts as principal. As a result, the Series may
trade with Goldman Sachs as principal subject to the terms and conditions of
such exemption.
Under the Act, the Series are prohibited from purchasing any instrument
of which Goldman Sachs is a principal underwriter during the existence of an
underwriting or selling syndicate relating to such instrument, absent an
exemptive order (the order referred to in the preceding paragraph will not apply
to such purchases) or the adoption of and compliance with certain procedures
under the Act. The Trust has adopted procedures which establish, among other
things, certain limitations on the amount of debt securities that may be
purchased in any single offering and on the amount of the Trust's assets that
may be invested in any single offering. Accordingly, in view of Goldman Sachs'
active role in the underwriting of debt securities, a Series' ability to
purchase debt securities in the primary market may from time to time be limited.
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<PAGE>
In certain instances there may be securities which are suitable for more
than one Series as well as for one or more of the other clients of GSAM.
Investment decisions for each Series and for GSAM's other clients are made with
a view to achieving their respective investment objectives. It may develop that
a particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same Investment Adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security in a particular transaction as far as a Series is concerned. Each
Series believes that over time its ability to participate in volume transactions
will produce better executions for the Series.
During the fiscal year ended December 31, 1999, the Series acquired and
sold securities of their regular broker/dealers: Donaldson, Lufkin and Jenrette,
Swiss Bank Corp., Salomon Smith Barney, NationsBank, Barclays Bank, ABN Amro
Securities, Deutsche Bank, Lehman Brothers, Bear Stearns and Morgan Stanley Dean
Witter.
As of December 31, 1999, each ILA Portfolio held the following amounts of
securities of its regular broker/dealers, as defined in Rule 10b-1 under the
Act, or their parents ($ in thousands): ILA Prime Obligations Portfolio:
Donaldson, Lufkin and Jenrette ($126,504), Barclays Bank ($73,794), Morgan
Stanley Dean Witter ($31,502); ILA Money Market Portfolio: Donaldson, Lufkin and
Jenrette ($95,004), Salomon Smith Barney ($19,883), Barclays Bank ($55,419),
Deutsche Bank ($39,997), Morgan Stanley Dean Witter ($46,426); ILA Government
Portfolio: Donaldson, Lufkin and Jenrette ($7,704), Barclays Bank ($4,494), ABN
Amro Securities ($15,000); ILA Treasury Obligations Portfolio: Donaldson,
Lufkin and Jenrette ($20,071), Salomon Smith Barney ($32,000 and $40,000),
Barclays Bank ($23,042), ABN Amro Securities ($32,000), Bear Stearns ($32,000),
Morgan Stanley Dean Witter ($24,000).
As of December 31, 1999, each Financial Square Fund held the following
amounts of securities of its regular broker/dealers as defined in Rule 10b-1
under the Act, or their parents ($ in thousands): Financial Square Prime
Obligations Fund: Donaldson, Lufkin and Jenrette ($188,100), Salomon Smith
Barney ($74,544), NationsBank ($50,000), Barclays Bank ($109,725), Bear Stearns
($44,855), Morgan Stanley Dean Witter ($284,439); Financial Square Money Market
Fund: Donaldson, Lufkin and Jenrette ($49,508), Salomon Smith Barney ($49,946),
Barclays Bank ($72,711), Bear Stearns ($149,926), Swiss Bank Corp. ($71,482); CS
First Boston ($95,000); Financial Square Treasury Obligations Fund: Donaldson,
Lufkin and Jenrette ($492,976), Salomon Smith Barney ($188,000), Barclays Bank
($396,236), ABN Amro Securities ($193,000), Bear Stearns ($188,000), Morgan
Stanley Dean Witter ($176,000); Financial Square Government Fund: Donaldson,
Lufkin and Jenrette ($217,512), Barclays Bank ($126,882), ABN Amro Securities
($100,000), Morgan Stanley Dean Witter ($132,000).
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<PAGE>
NET ASSET VALUE
The net asset value per share of each Series (except for FS Prime
Obligations Fund, FS Government Fund, and FS Treasury Obligations Fund) is
determined by the Series' custodian as of the close of regular trading on the
New York Stock Exchange (normally, but not always, 4:00 p.m. New York time) (in
the case of the FS Prime Obligations Fund, FS Government Fund, and FS Treasury
Obligations Fund, net asset value is determined normally, but not always, at
5:00 p.m. New York time) on each Business Day. A Business Day means any day on
which the New York Stock Exchange is open, except for days on which Chicago,
Boston or New York banks are closed for local holidays. Such holidays include:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's Day,
Thanksgiving Day and Christmas Day.
In the event that the New York Stock Exchange adopts 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 Series may compute
its net asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
Each Series' securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $ 1.00 per
share, which the Board of Trustees has determined to be in the best interest of
each Series and its shareholders. This method involves valuing a security at
cost on the date of acquisition and thereafter assuming a constant accretion of
a discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a
Series would receive if it sold the instrument. During such periods, the yield
to an investor in a Series may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on shares of a Series may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Series resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Series would be able to obtain a somewhat higher yield if he or she purchased
shares of the Series on that day, than would result from investment in a fund
utilizing solely market values, and existing investors in the Series would
receive less investment income. The converse would apply in a period of rising
interest rates.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, each Series' price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
each Series by the Trustees, at such intervals as they deem appropriate, to
determine whether the Series' net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per share based on amortized cost, as well as
review of methods used to calculate the deviation. If such deviation exceeds
1/2 of 1%, the Trustees will promptly consider what action, if any, will be
initiated. In the event the Trustees determine that a deviation exists which
may
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result in material dilution or other unfair results to investors or existing
shareholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redeeming shares in kind; or establishing a net asset
value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00, the
Trustees have the authority (1) to reduce or increase the number of shares
outstanding on a pro rata basis, and (2) to offset each shareholder's pro rata
portion of the deviation between the net asset value per share and $1.00 from
the shareholder's accrued dividend account or from future dividends. Each Series
may hold cash for the purpose of stabilizing its net asset value per share.
Holdings of cash, on which no return is earned, would tend to lower the yield on
such Series' shares.
In order to continue to use the amortized cost method of valuation for
each Series' investments, the Series must comply with Rule 2a-7. See
"Investment Restrictions."
The proceeds received by each Series for each 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 Series and constitute the underlying assets of that Series. The
underlying assets of each Series will be segregated on the books of account, and
will be charged with the liabilities in respect to such Series and with a share
of the general liabilities of the Trust. Expenses with respect to the Series
are to be allocated in proportion to the net asset values of the respective
Series except where allocations of direct expenses can otherwise be fairly made.
In addition, within each Series, ILA Shares, ILA Administration Shares, ILA
Service Shares, ILA Class B and Class C Shares, ILA Cash Management Shares, FST
Shares, FST Administration Shares, FST Service Shares, FST Preferred Shares and
FST Select Shares (if any) will be subject to different expense structures (see
"Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of shares of a Series and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed for regular trading other than customary weekend and holiday
closings or during which trading on the New York Stock Exchange is restricted,
(ii) when the SEC determines that a state of emergency exists which may make
payment or transfer not reasonably practicable, (iii) as the SEC may by order
permit for the protection of the shareholders of the Trust or (iv) at any other
time when the Trust may, under applicable laws and regulations, suspend payment
on the redemption of the Series' shares.
The Trust agrees to redeem shares of each Series solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Series during any 90-day
period for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Series' portfolio. The
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<PAGE>
securities distributed in such a distribution would be valued at the same value
as that assigned to them in calculating the net asset value of the shares being
redeemed. If a shareholder receives a distribution in kind, he or she should
expect to incur transaction costs when he or she converts the securities to
cash.
A FST shareholder of any Financial Square Fund with balances in excess of
$100 million may elect to have a special account with State Street for the
purpose of redeeming shares from its account in that Series by check. When
State Street receives a completed signature card and authorization form, the
shareholder will be provided with a supply of checks. Checks drawn on this
account may be payable to the order of any person in any amount of $500 or more,
but cannot be certified. The payee of the check may cash or deposit it like any
other check drawn on a bank. When such a check is presented to State Street for
payment, a sufficient number of full and fractional shares will be redeemed to
cover the amount of the check. Cancelled checks will be returned to the
shareholder by State Street. The Trust and Goldman Sachs each reserves the
right to waive the minimum requirement.
The check redemption privilege enables a shareholder to receive the
dividends declared on the shares to be redeemed until such time as the check is
processed. Because of this feature, the check redemption privilege may not be
used for a complete liquidation of an account. If the amount of a check is
greater than the value of shares held in the shareholder's account, the check
will be returned unpaid, and the shareholder may be subject to extra charges.
Goldman Sachs reserves the right to impose conditions on, limit the
availability of or terminate the check redemption privilege at any time with
respect to a particular shareholder or shareholders in general. The Trust and
State Street reserve the right at any time to suspend the check redemption
privilege and intend to do so in the event that federal legislation or
regulations impose reserve requirements or other restrictions deemed by the
Trustees to be adverse to the interests of the Series.
CALCULATION OF YIELD QUOTATIONS
From time to time, each Series may advertise its yield, effective yield,
tax-equivalent yield, tax-equivalent effective yield and total return. Yield,
effective yield, tax-equivalent yield, tax-equivalent effective yield and total
return are calculated separately for each class of shares of a Series. Each
type of share is subject to different fees and expenses and may have differing
yields for the same period.
Each Series' yield quotations are calculated by a standard method
prescribed by the rules of the SEC. Under this method, the yield quotation is
based on a hypothetical account having a balance of exactly one share at the
beginning of a seven-day period.
The yield of a Series refers to the income generated by an investment in
that Series over a seven-day period (which period will be stated in the
advertisement). This income is then annualized; that is, the amount of income
generated by the investment during that week is
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assumed to be generated each week over a 52 week period and is shown as a
percentage of the investment. The yield quotation is computed as follows: the
net change, exclusive of capital changes and income other than investment income
(i.e., realized gains and losses from the sale of securities and unrealized
appreciation and depreciation), in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the base period is
determined by dividing the net change in account value by the value of the
account at the beginning of the base period. This base period return is then
multiplied by 365/7 with the resulting yield figure carried to the nearest 100th
of 1%. Such yield quotation shall take into account all fees that are charged to
a Series.
Each Series also may advertise a quotation of effective yield for a 7-
calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding 1 to that return, raising the sum to the 365/7 power and subtracting one
from the result, according to the following formula:
Effective Yield = [(base period return + 1)365/7] - 1
The effective yield will be slightly higher than the yield because of the
compounding effect of reinvestment.
The ILA Treasury Instruments Portfolio, ILA Federal Portfolio, ILA Tax-
Exempt Diversified Portfolio, ILA Tax-Exempt California Portfolio, ILA Tax-
Exempt New York Portfolio, FS Treasury Instruments Fund, FS Federal Fund, and FS
Tax-Free Fund may also advertise a tax-equivalent yield and tax-equivalent
effective yield. Tax-equivalent yield is computed by dividing that portion of a
Series' yield (as computed above) which is tax-exempt by one minus a stated
income tax rate and adding the quotient to that portion, if any, of the yield of
the Series that is not tax-exempt. Tax-equivalent effective yield is computed
by dividing that portion of a Series' effective yield (as computed above) which
is tax-exempt by one minus a stated income tax rate and adding the quotient to
that portion, if any, of the effective yield of the Series that is not tax-
exempt.
Total return is determined by computing the percentage change in value of
$1,000 invested at the maximum public offering price for a specified period,
assuming reinvestment of all dividends and distributions at net asset value.
The total return calculation assumes a complete redemption of the investment at
the end of the relevant period. Each Series may furnish total return
calculations based on cumulative, average, year-by-year or other basis for
various specified periods by means of quotations, charts, graphs or schedules.
Unlike bank deposits or other investments which pay a fixed yield or
return for a stated period of time, the investment results for a Series are
based on historical performance and will fluctuate from time to time. Any
presentation of a Series' yield, effective yield, tax-equivalent yield, tax-
equivalent effective yield or total return for any prior period should not be
considered a representation of what an investment may earn or what a Series'
yield, effective yield, tax equivalent yield, tax equivalent effective yield or
total return may be in any future period. Return is a function of portfolio
quality, composition, maturity and market conditions as well as
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of the expenses allocated to each Series. The return of a Series may not be
comparable to other investment alternatives because of differences in the
foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate return.
The yield performance below is for each class of shares of the ILA
Portfolios, which would have similar yields because each class of shares will be
invested in the same portfolio of securities. Yields will differ only to the
extent that classes do not have the same expenses. In reviewing this
performance information, you should be aware that ILA Shares have no service
fee, ILA Administration Shares have a .15% administration fee, ILA Service
Shares have a .40% service fee, ILA Class B and Class C Shares have a .75%
distribution fee and a .25% service fee with respect to ILA Prime Obligations
Portfolio and Cash Management Shares have a .50% service fee and a .50%
distribution fee. The yield, effective yield, tax-equivalent yield and tax-
equivalent effective yield of each ILA Portfolio for the seven-day period ended
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
ILA Prime Obligations Portfolio:
ILA Shares 5.14% 5.27% N/A N/A
ILA Administration Shares 4.99% 5.11% N/A N/A
ILA Service Shares 4.74% 4.85% N/A N/A
ILA Class B Shares 4.14% 4.22% N/A N/A
ILA Class C Shares 4.14% 4.22% N/A N/A
Cash Management Shares 4.57% 4.67% N/A N/A
ILA Money Market Portfolio:
ILA Shares 5.36% 5.50% N/A N/A
ILA Administration Shares 5.21% 5.34% N/A N/A
ILA Service Shares 4.96% 5.08% N/A N/A
Cash Management Shares 4.79% 4.90% N/A N/A
ILA Treasury Obligations Portfolio:
ILA Shares 4.50% 4.60% N/A N/A
ILA Administration Shares 4.35% 4.44% N/A N/A
ILA Service Shares 4.10% 4.18% N/A N/A
ILA Treasury Instruments Portfolio:
ILA Shares 4.87% 4.99% N/A N/A
ILA Administration Shares 4.72% 4.83% N/A N/A
ILA Service Shares 4.47% 4.57% N/A N/A
ILA Government Portfolio:
ILA Shares 5.33% 5.47% N/A N/A
ILA Administration Shares 5.18% 5.31% N/A N/A
ILA Service Shares 4.93% 5.05% N/A N/A
Cash Management Shares 4.76% 4.87% N/A N/A
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
ILA Federal Portfolio:
ILA Shares 5.29% 5.43% N/A N/A
ILA Administration Shares 5.14% 5.27% N/A N/A
ILA Service Shares 4.89% 5.01% N/A N/A
ILA Tax-Exempt Diversified Portfolio:
ILA Shares 4.13% 4.22% 6.84% 6.99%
ILA Administration Shares 3.98% 4.06% 6.59% 6.72%
ILA Service Shares 3.73% 3.80% 6.18% 6.29%
Cash Management Shares 3.56% 3.62% 5.85% 5.99%
ILA Tax-Exempt California Portfolio*
ILA Shares 3.67% 3.74% 6.08% 6.19%
ILA Administration Shares 3.52% 3.58% 5.83% 5.93%
ILA Service Shares** 3.27% 3.32% 5.41% 5.50%
Cash Management Shares 3.10% 3.15% 5.13% 5.22%
ILA Tax-Exempt New York Portfolio***
ILA Shares 4.08% 4.16% 6.75% 6.89%
ILA Administration Shares 3.93% 4.00% 6.51% 6.62%
ILA Service Shares** 3.68% 3.74% 6.09% 6.19%
Cash Management Shares 3.51% 3.57% 5.81% 5.91%
</TABLE>
______________________
* Tax-equivalent yields would be 6.85%, 6.57%, 6.10% and 5.79% for the ILA
Shares, ILA Administration Shares, ILA Service Shares and Cash Management
Shares, respectively, when taking California State taxes into account.
Tax-equivalent effective yields would be 6.98%, 6.68%, 6.20% and 5.88% for
the ILA Shares, ILA Administration Shares, ILA Service Shares and Cash
Management Shares, respectively, when taking California State taxes into
account.
** Assuming such Shares had been outstanding and were subject to maximum
service fees.
*** Tax-equivalent yields would be 7.25%, 6.99%, 6.54% and 6.24% for the ILA
Shares, ILA Administration Shares, ILA Service Shares and Cash Management
Shares, respectively, when taking New York State taxes into account, and
7.56%, 7.28%, 6.82%, and 6.51%, respectively, when taking New York City
taxes into account. Tax equivalent effective yields would be 7.39%, 7.11%,
6.65% and 6.35%, respectively, when taking New York State taxes into
account, and 7.71%, 7.41%, 6.93% and 6.62%, respectively, when taking New
York City taxes into account.
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The information set forth in the foregoing table reflects certain
reductions and expense limitations voluntarily agreed to by the Investment
Adviser. See "The Investment Adviser, Distributor and Transfer Agent." In the
absence of such fee reductions and expense limitations, the yield of each ILA
Portfolio for the same period would have been as follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
ILA Prime Obligations Portfolio:
ILA Shares 5.13% 5.26% N/A N/A
ILA Administration Shares 4.98% 5.10% N/A N/A
ILA Service Shares 4.73% 4.84% N/A N/A
ILA Class B Shares 4.13% 4.21% N/A N/A
ILA Class C Shares 4.13% 4.21% N/A N/A
Cash Management Shares 4.56% 4.66% N/A N/A
ILA Money Market Portfolio:
ILA Shares 5.36% 5.50% N/A N/A
ILA Administration Shares 5.21% 5.34% N/A N/A
ILA Service Shares 4.96% 5.08% N/A N/A
Cash Management Shares 4.36% 4.47% N/A N/A
ILA Treasury Obligations Portfolio:
ILA Shares 4.50% 4.60% N/A N/A
ILA Administration Shares 4.35% 4.44% N/A N/A
ILA Service Shares 4.10% 4.18% N/A N/A
ILA Treasury Instruments Portfolio:
ILA Shares 4.87% 4.99% N/A N/A
ILA Administration Shares 4.72% 4.83% N/A N/A
ILA Service Shares 4.47% 4.57% N/A N/A
ILA Government Portfolio:
ILA Shares 5.31% 5.45% N/A N/A
ILA Administration Shares 5.16% 5.29% N/A N/A
ILA Service Shares 4.91% 5.03% N/A N/A
Cash Management Shares 4.74% 4.85% N/A N/A
ILA Federal Portfolio:
ILA Shares 5.29% 5.43% N/A N/A
ILA Administration Shares 5.14% 5.27% N/A N/A
ILA Service Shares 4.89% 5.01% N/A N/A
ILA Tax-Exempt Diversified Portfolio:
ILA Shares 4.13% 4.22% 6.84% 6.99%
ILA Administration Shares 3.98% 4.06% 6.59% 6.72%
ILA Service Shares 3.73% 3.80% 6.18% 6.29%
Cash Management Shares 3.13% 3.19% 5.42% 5.56%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
ILA Tax-Exempt California Portfolio*
ILA Shares 3.67% 3.74% 6.08% 6.19%
ILA Administration Shares 3.52% 3.58% 5.83% 5.93%
ILA Service Shares** 3.27% 3.32% 5.41% 5.50%
Cash Management Shares 2.67% 2.72% 4.70% 4.79%
ILA Tax-Exempt New York Portfolio***
ILA Shares 4.08% 4.16% 6.75% 6.89%
ILA Administration Shares 3.93% 4.00% 6.51% 6.62%
ILA Service Shares** 3.68% 3.74% 6.09% 6.19%
Cash Management Shares 3.51% 3.57% 5.81% 5.91%
</TABLE>
- --------------------
* Tax-equivalent yields would be 6.85%, 6.57%, 6.10% and 5.79% for the ILA
Shares, ILA Administration Shares, ILA Service Shares and Cash Management
Shares, respectively, when taking California State taxes into account. Tax-
equivalent effective yields would be 6.98%, 6.68%, 6.20% and 5.88% for the
ILA Shares, ILA Administration Shares, ILA Service Shares and Cash
Management Shares, when taking California State taxes into account.
** Assuming such Shares had been outstanding and were subject to maximum
service fees.
*** Tax-equivalent yields would be 7.25%, 6.99%, 6.54% and 6.24% for the ILA
Shares, ILA Administration Shares, ILA Service Shares and Cash Management
Shares, respectively, when taking New York State taxes into account, and
7.56%, 7.28%, 6.82% and 6.51%, respectively, when taking New York City
taxes into account. Tax-equivalent effective yields would be 7.39%, 7.11%,
6.65% and 6.35% for the ILA Shares, ILA Administration Shares, ILA Service
Shares and Cash Management Shares, respectively, when taking New York State
taxes into account, and 7.71%, 7.41%, 6.93% and 6.62%, respectively, when
taking New York City taxes into account.
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FST Select Shares of the Financial Square Funds commenced operations after
December 31, 1999. The yield performance below is for other classes of shares
that would have similar yields because each class of shares will be invested in
the same portfolio of securities. Yields will differ only to the extent that
classes do not have the same expenses. In reviewing this performance
information, you should be aware that FST Shares have no service fee, FST
Administration Shares have a .25% administration fee, FST Service Shares have a
.50% service fee and FST Preferred Shares have a .10% preferred administration
fee while FST Select Shares have a service fee of .03%. The yield, effective
yield, tax-equivalent yield and tax-equivalent effective yield of each Financial
Square Fund for the seven-day period ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
FS Prime Obligations Fund:
FST Shares 5.63% 5.79% N/A N/A
FST Administration Shares 5.38% 5.53% N/A N/A
FST Service Shares 5.13% 5.26% N/A N/A
FST Preferred Shares 5.53% 5.69% N/A N/A
FS Money Market Fund:
FST Shares 5.66% 5.82% N/A N/A
FST Administration Shares 5.41% 5.55% N/A N/A
FST Service Shares 5.16% 5.29% N/A N/A
FST Preferred Shares 5.56% 5.71% N/A N/A
FS Treasury Obligations Fund:
FST Shares 4.72% 4.83% N/A N/A
FST Administration Shares 4.47% 4.57% N/A N/A
FST Service Shares 4.22% 4.31% N/A N/A
FST Preferred Shares 4.62% 4.72% N/A N/A
FS Treasury Instruments Fund:
FST Shares 5.09% 5.22% N/A N/A
FST Administration Shares 4.84% 4.96% N/A N/A
FST Service Shares 4.59% 4.70% N/A N/A
FST Preferred Shares 4.99% 5.12% N/A N/A
FS Government Fund:
FST Shares 5.30% 5.44% N/A N/A
FST Administration Shares 5.05% 5.17% N/A N/A
FST Service Shares 4.80% 4.91% N/A N/A
FST Preferred Shares 5.20% 5.33% N/A N/A
FS Federal Shares:
FST Shares 5.56% 5.71% N/A N/A
FST Administration Shares 5.31% 5.45% N/A N/A
FST Service Shares 5.06% 5.19% N/A N/A
FST Preferred Shares 5.46% 5.61% N/A N/A
FST Tax-Free Fund:
FST Shares 4.40% 4.49% 7.28% 7.43%
FST Administration Shares 4.15% 4.23% 6.87% 7.00%
FST Service Shares 3.90% 3.97% 6.46% 6.57%
FST Preferred Shares 4.30% 4.39% 7.12% 7.27%
</TABLE>
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<PAGE>
Information set forth in the foregoing table reflects certain fee reductions and
expense limitations voluntarily agreed to by the Investment Adviser. See "The
Investment Adviser, Distributor and Transfer Agent." In the absence of such fee
reductions, the yield, effective yield, the tax-equivalent yield and tax-
equivalent effective yield of each Financial Square Fund (no FST Select Shares
were outstanding as of December 31, 1999) for the same period would have been as
follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
FS Prime Obligations Fund:
FST Shares 5.60% 5.76% N/A N/A
FST Administration Shares 5.35% 5.49% N/A N/A
FST Service Shares 5.10% 5.23% N/A N/A
FST Preferred Shares 5.50% 5.65% N/A N/A
FS Money Market Fund:
FST Shares 5.60% 5.76% N/A N/A
FST Administration Shares 5.35% 5.50% N/A N/A
FST Service Shares 5.10% 5.23% N/A N/A
FST Preferred Shares 5.50% 5.66% N/A N/A
FS Treasury Obligations Fund:
FST Shares 4.65% 4.76% N/A N/A
FST Administration Shares 4.42% 4.52% N/A N/A
FST Service Shares 4.17% 4.26% N/A N/A
FST Preferred Shares 4.57% 4.68% N/A N/A
FS Treasury Instruments Fund:
FST Shares 5.11% 5.24% N/A N/A
FST Administration Shares 4.86% 4.98% N/A N/A
FST Service Shares 4.61% 4.71% N/A N/A
FST Preferred Shares 5.01% 5.13% N/A N/A
FS Government Fund:
FS Shares 5.26% 5.40% N/A N/A
FST Administration Shares 5.01% 5.13% N/A N/A
FST Service Shares 4.76% 4.87% N/A N/A
FST Preferred Shares 5.16% 5.29% N/A N/A
FS Federal Fund:
FST Shares 5.52% 5.67% N/A N/A
FST Administration Shares 5.27% 5.41% N/A N/A
FST Service Shares 5.02% 5.14% N/A N/A
FST Preferred Shares 5.42% 5.56% N/A N/A
FS Tax-Free Fund:
FST Shares 4.40% 4.49% 7.28% 7.43%
FST Administration Shares 4.15% 4.23% 6.87% 7.00%
FST Service Shares 3.90% 3.97% 6.46% 6.57%
FST Preferred Shares 4.30% 4.39% 7.12% 7.27%
</TABLE>
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The quotations of tax-equivalent yield set forth above for the seven-day
period ended December 31, 1999 are based on a federal marginal tax rate of
39.6%.
With respect to the ILA Tax-Exempt California Portfolio, the California top
marginal State personal income tax rate of 9.3% is being assumed in addition to
the 39.6% federal tax rate, for an effective combined tax rate of 45.2%. With
respect to the ILA Tax-Exempt New York Portfolio, the tax-equivalent and tax-
equivalent effective yields are being shown under three scenarios. The first
scenario assumes, as noted above, a federal marginal tax rate of 39.6%, the
second scenario assumes a New York top marginal State personal income tax rate
of 6.85% for a combined effective tax rate of 43.74% (adjusted for the federal
income tax benefit of deductible state and local taxes). The third scenario
assumes a New York City top marginal personal income tax rate of 3.8276% in
addition to the above federal and New York State tax rates, for a combined
effective tax rate of 46.05% (adjusted for the federal income tax benefit of
deductible state and local taxes). The combined tax rates assume full
deductibility of state and, if applicable, city taxes in computing federal tax
liability and does not incorporate the 3% phase-out for itemized deductions.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed or recommended 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 form a part of
such an asset allocation strategy. Such advertisements and information may also
include a discussion of GSAM's current economic outlook and domestic and
international market views and recommend 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.
From time to time any Series may publish an indication of its past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Incorporated, Weisenberger Investment Companies
Service, Donoghue's Money Fund Report, Barron's, Business Week, Changing Times,
Financial World, Forbes, Money, Morningstar Mutual Funds, Micropal, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
The Trust may also advertise information which has been provided to the
NASD for publication in regional and local newspapers. In addition, the Trust
may from time to time advertise a Series' performance relative to certain
indices and benchmark investments, including (without limitation): inflation and
interest rates, certificates of deposit (CDs), money market deposit accounts
(MMDAs), checking accounts, savings accounts, repurchase agreements and
information prepared by recognized mutual fund statistical services. The Trust
may also compare a Series' performance with that of other mutual funds with
similar investment objectives.
The composition of the investments in such mutual funds, comparative
indices and the characteristics of such benchmark investments are not identical
to, and in some cases are very different from, those of a Series. 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 a Series
to calculate its performance data.
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A Series' performance data will be based on historical results and is not
intended to indicate future performance. A Series' performance will vary based
on market conditions, portfolio expenses, portfolio investments and other
factors. Return for a Series will fluctuate unlike certain bank deposits or
other investments which pay a fixed yield or return.
The Trust may also, at its discretion, from time to time make a list of a
Series' holdings available to investors upon request. The Trust may from time
to time summarize the substance of discussions contained in shareholder reports
in advertisements and publish the Investment Adviser's views as to markets, the
rationale for a Series' investments and discussions of a Fund's current
holdings.
In addition, from time to time, quotations from articles from financial and
other publications, such as those listed above, may be used in advertisements,
sales literature and in reports to shareholders.
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;
. 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.
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TAX INFORMATION
Each Series 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. If for any
taxable year a Series does not qualify as a regulated investment company, it
will be taxed on all of its investment company taxable income and net capital
gains at corporate rates without any deduction for dividends paid, its net tax-
exempt interest (if any) may be subject to the alternative minimum tax, and its
distributions to shareholders will be taxable as ordinary dividends to the
extent of its current and accumulated earnings and profits.
There are certain tax requirements that all Series must follow in order to
avoid federal taxation. In its efforts to adhere to these requirements, the
Series may have to limit their investment activities in some types of
instruments. In order to qualify as a regulated investment company, each Series
must, among other things, (a) derive at least 90% of its gross income for the
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of stock or Securities or certain
other investments (the "90% Test"); and (b) diversify its holdings so that, at
the close of each quarter of its taxable year, (i) at least 50% of the market
value of the Series' total gross assets is represented by cash and cash items
(including receivables), 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
Series' total assets, and (ii) not more than 25% of the value of the Series'
total (gross) assets is invested in the securities (other than U.S. Government
securities and securities of other regulated investment companies) of any one
issuer. For purposes of these requirements, participation interests will be
treated as securities, and the issuer will be identified on the basis of market
risk and credit risk associated with any particular interest. Certain payments
received with respect to such interests, such as commitment fees and certain
facility fees, may not be treated as income qualifying under the 90% test.
Each Series, as a regulated investment company, will not be subject to
federal income tax on any of its net investment income and net realized capital
gains that are distributed to shareholders with respect to any taxable year in
accordance with the Code's timing and other requirements, provided that the
Series distributes at least 90% of its investment company taxable income
(generally, all of its net taxable income other than "net capital gain," which
is the excess of net long-term capital gain over net short-term capital loss)
for such year and, in the case of any Series that earns tax-exempt interest, at
least 90% of the excess of the tax-exempt interest it earns over certain
disallowed deductions. A Series will be subject to federal income tax at
regular corporate rates on any investment company taxable income or net capital
gain that it does not distribute for a taxable year. In order to avoid a
nondeductible 4% federal excise tax, each Series 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 all taxable ordinary income and
the excess of capital gains over capital losses for the previous year that were
not distributed in such year and on which the Series paid no federal income tax.
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Dividends paid by a Series from taxable net investment income (including
income attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of net
short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of shareholders. Such distributions will not
qualify for the corporate dividends-received deduction. Dividends paid by a
Series from the excess of net long-term capital gain (if any) over net short-
term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of a Series have been held by such
shareholders, and also will not qualify for the corporate dividends-received
deduction. A Series' net realized capital gains for a taxable year are computed
by taking into account realized capital losses, including any capital loss
carryforward of that Series. At December 31, 1999, the following Series had
approximately the following amounts of capital loss carryforwards:
<TABLE>
<CAPTION>
Amount Year of Expiration
------ ------------------
<S> <C> <C>
ILA Tax-Exempt Diversified Portfolio $146,000 2001 to 2005
ILA Tax-Exempt California Portfolio 31,000 2007
FS Tax-Free Fund 13,619 2005 to 2007
</TABLE>
Distributions paid by the ILA Tax-Exempt Diversified, ILA Tax-Exempt
California, ILA Tax-Exempt New York Portfolios or FS Tax-Free Fund from tax-
exempt interest received by them and properly designated as "exempt-interest
dividends" will generally be exempt from regular federal income tax, provided
that at least 50% of the value of the applicable Series' total assets at the
close of each quarter of its taxable year consists of tax-exempt obligations,
i.e., obligations described in Section 103(a) of the Code (not including shares
- ----
of other regulated investment companies that may pay exempt-interest dividends,
because such shares are not treated as tax-exempt obligations for this purpose).
Dividends paid by the other Series from any tax-exempt interest they may receive
will not be tax-exempt, because they will not satisfy the 50% requirement
described in the preceding sentence. A portion of any tax-exempt distributions
attributable to interest on certain "private activity bonds," if any, received
by a Series may constitute a tax preference items and may give rise to, or
increase liability under, the alternative minimum tax for particular
shareholders. In addition, all tax-exempt distributions of the Series may be
considered in computing the "adjusted current earnings" preference item of their
corporate shareholders in determining the 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. To the
extent that the ILA Tax-Exempt Diversified, ILA Tax-Exempt California, ILA Tax-
Exempt New York Portfolios and FS Tax-Free Fund invest in certain short-term
instruments, including repurchase agreements, the interest on which is not
exempt from federal income tax, or earn other taxable income any distributions
of income from such investments or other taxable income will be taxable to
shareholders as ordinary income. All or substantially all of any interest on
indebtedness incurred directly or indirectly to purchase or carry shares of the
Series will generally not be deductible. The availability of tax-exempt
obligations and the value of the Series may be affected by restrictive tax
legislation enacted in recent years.
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In purchasing municipal obligations, the ILA Tax-Exempt Diversified, ILA
Tax-Exempt California, ILA Tax-Exempt New York Portfolios and FS Tax-Free Fund
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 and, where applicable, the tax-exempt nature of such
interest under the personal income tax laws of a particular state. These Series
do not undertake independent investigations concerning the tax-exempt status of
such obligations, nor do they 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 Series' distributions
attributable to interest the Series received on such bond for the current year
and for prior years could be characterized or recharacterized as taxable income.
Distributions of net investment income and net realized capital gains will
be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis in each share so received equal to the amount of cash
they would have received had they elected to receive cash.
Certain Series may be subject to foreign taxes on their income (possibly
including, in some cases, capital gains) from securities. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes in some cases. However, neither the Series nor its shareholders will be
able to claim foreign tax credits with respect to any such taxes.
Redemptions (including exchanges) and other dispositions of shares in
transactions that are treated as sales for tax purposes will generally not
result in taxable gain or loss, provided that the Series successfully maintain a
constant net asset value per share, but a loss may be recognized to the extent a
contingent deferred sales charge ("CDSC") is imposed on the redemption or
exchange of ILA Class B or Class C Shares. All or a portion of such a loss may
be disallowed under applicable Code provisions in certain circumstances.
Shareholders should consult their own tax advisers with reference to their
circumstances to determine whether a redemption, exchange, or other disposition
of Series' shares is properly treated as a sale for tax purposes.
All distributions (including exempt-interest dividends), whether received
in shares or cash, must be reported by each shareholder who is required to file
a federal income tax return. The Series will inform shareholders of the federal
income tax status of their distributions after the end of each calendar year,
including, in the case of the ILA Tax-Exempt Diversified Portfolio, ILA Tax-
Exempt California Portfolio, ILA Tax-Exempt New York Portfolio and FS Tax-Free
Fund, the amounts that qualify as exempt-interest dividends and any portions of
such amounts that constitute tax preference items under the federal alternative
minimum tax.
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Shareholders who receive exempt-interest dividends and have not held their
shares of the applicable Series for its entire taxable year may have designated
as tax-exempt or as a tax preference item a percentage of their distributions
which is not exactly equal to a proportionate share of the amount of tax-exempt
interest or tax preference income earned during the period of their investment
in such Series. Each shareholder should consult his or her own tax advisor to
determine the tax consequences of an investment in a Series in the shareholder's
own state and locality.
Shares of a Series that pays primarily exempt-interest dividends 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 because such plans and accounts are generally tax-exempt
and, therefore, not only would the shareholder not gain any additional benefit
from the Series' dividends being tax-exempt, but such dividends would be
ultimately taxable to the beneficiaries when distributed. In addition, a Series
that pays primarily exempt-interest dividends may not be an appropriate
investment for entities which 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 who (i)
regularly uses a part of such facilities in his or her 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, (ii) occupies more than 5% of the usable area of such
facilities, or (iii) are persons for whom such facilities or a part thereof were
specifically constructed, reconstructed or acquired. "Related persons" include
certain related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its 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.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. 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 a Series, including the possibility that such a shareholder may be
subject to a U.S. nonresident alien withholding tax at a rate of 30% (or at a
lower rate under an applicable U.S. income tax treaty) on certain distributions
from a Series and, if a current IRS Form W-8 or acceptable substitute is not on
file with the Series, may be subject to backup withholding on certain payments.
State and Local
The Trust may be subject to state or local taxes in jurisdictions in which
the Trust may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of a Series and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and an investment in the Series may have tax consequences for
shareholders that are different from those of a direct investment in the Series'
securities. Shareholders should consult their own tax advisers concerning these
matters. For example, in such states or localities it may be appropriate for
shareholders to review with their tax advisers the state income and, if
applicable, intangible property tax consequences of
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investments by the Series in securities issued by the particular state or the
U.S. government or its various agencies or instrumentalities, because many
states (i) exempt from personal income tax distributions made by regulated
investment companies from interest on obligations of the particular state or on
direct U.S. government obligations and/or (ii) exempt from intangible property
tax the value of the shares of such companies attributable to such obligations,
subject to certain state-specific requirements and/or limitations. See also the
discussion below of these applicable provisions in California and New York.
Provided that the Series qualify as regulated investment companies and
incur no federal income tax liability, the Series may still be subject to New
York State and City minimum taxes, which are small in amount.
California State Taxation. The following discussion of California tax law
assumes that the ILA Tax-Exempt California Portfolio will be qualified as a
regulated investment company under Subchapter M of the Code and will be
qualified thereunder to pay exempt-interest dividends. The ILA Tax-Exempt
California Portfolio intends to qualify for each taxable year under California
law to pay "exempt-interest dividends" which will be exempt from the California
personal income tax.
Individual shareholders of the ILA Tax-Exempt California Portfolio who
reside in California will not be subject to California personal income tax on
distributions received from the Portfolio to the extent such distributions are
exempt-interest dividends attributable to interest on obligations the interest
on which is exempt from California personal income tax provided that the
Portfolio satisfies the requirement of California law that at least 50% of its
assets at the close of each quarter of its taxable year be invested in such
obligations and properly designates such exempt-interest dividends under
California law. Distributions from the ILA Tax-Exempt California Portfolio which
are attributable to sources other than those described in the second preceding
sentence will generally be taxable to such shareholders as ordinary income.
Moreover, California legislation which incorporates Subchapter M of the Code
provides that capital gain dividends may be treated as long-term capital gains.
Such gains are currently subject to personal income tax at ordinary income tax
rates. Capital gains that are retained by the Portfolio will be taxed to that
Portfolio, and California residents will receive no California personal income
tax credit for such tax. Distributions other than exempt-interest dividends are
includable in income subject to the California alternative minimum tax.
Distributions from investment income and long-term and short-term capital
gains will generally not be excluded from taxable income in determining
California corporate franchise taxes for corporate shareholders and will be
treated as ordinary dividend income for such purposes. In addition, such
distributions may be includable in income subject to the alternative minimum
tax.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the ILA Tax-Exempt California Portfolio will not be
deductible for California personal income tax purposes.
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In addition, any loss realized by a shareholder of the ILA Tax-Exempt
California Portfolio upon the sale of shares held for six months or less may be
disallowed to the extent of any exempt-interest dividends received with respect
to such shares. Moreover, any loss realized upon the redemption of shares
within six months from the date of purchase of such shares and following receipt
of a long-term capital gains distribution will be treated as long-term capital
loss to the extent of such long-term capital gains distribution. Finally, any
loss realized upon the redemption of shares within thirty days before or after
the acquisition of other shares of the same Portfolio may be disallowed under
the "wash sale" rules.
New York City and State Taxation. Individual shareholders who are
residents of New York State will be able to exclude for New York State income
tax purposes that portion of the exempt-interest dividends properly designated
as such from the ILA Tax-Exempt New York Portfolio which is derived from
interest on obligations of New York State and its political subdivisions and
obligations of Puerto Rico, the U.S. Virgin Islands and Guam. Exempt-interest
dividends may be properly designated as such only if, as anticipated, at least
50% of the value of the assets of the Portfolio are invested at the close of
each quarter of its taxable year in obligations of issuers the interest on which
is excluded from gross income for federal income tax purposes. Individual
shareholders who are residents of New York City will also be able to exclude
such income for New York City income tax purposes. Interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of the ILA
Tax-Exempt New York Portfolio is not deductible for New York State or New York
City personal income tax purposes. Distributions from the ILA Tax-Exempt New
York Portfolio which are attributable to sources other than those described in
this paragraph will generally be taxable to such shareholders as ordinary
income.
Long-term capital gains, if any, that are distributed by the ILA Tax-Exempt
New York Portfolio and are properly designated as capital gain dividends will be
treated as capital gains for New York State and City income tax purposes in the
hands of New York State and New York City residents.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this Additional Statement in light of their
particular tax situations.
This discussion of the tax treatment of the Portfolio and its shareholders
is based on the tax laws in effect as of the date of this Additional Statement.
ORGANIZATION AND CAPITALIZATION
Each Series is a series of Goldman Sachs Trust, a Delaware business trust,
established by a Declaration of Trust dated January 28, 1997. The Series were
previously a series of Goldman Sachs Money Market Trust, a Massachusetts
business trust, and were reorganized into the Trust as of April 30, 1997.
The Trustees have authority under the Trust's Declaration of Trust to
create and classify shares of beneficial interest in separate series, without
further action by shareholders. The Act
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requires that where more than one class or series of shares exists, each class
or series must be preferred over all other classes or series in respect of
assets specifically allocated to such class or series. The Trustees also have
authority to classify and reclassify any series of shares into one or more
classes of shares. As of the date of this Additional Statement, the Trustees
have authorized the issuance of up to three classes of shares of each of the ILA
Portfolios: ILA Shares, ILA Administration Shares and ILA Service Shares. In
addition, the Trustees have authorized a fourth and fifth class of shares, ILA
Class B Shares and ILA Class C Shares, with respect to the Prime Obligations
Portfolio. The Trustees have also authorized Cash Management Shares of the ILA
Prime Obligations Portfolio, ILA Money Market Portfolio, ILA Government
Portfolio, ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt California
Portfolio and ILA Tax-Exempt New York Portfolio. As of the date of this
Additional Statement, the Trustees have authorized the issuance of up to five
classes of shares of each of the Financial Square Funds: FST Shares, FST Service
Shares, FST Administration Shares, FST Preferred Shares and FST Select Shares.
Each ILA Share, ILA Administration Share, ILA Service Share, ILA Class B
Share, ILA Class C Share, Cash Management Share, FST Share, FST Service Share,
FST Administration Share, FST Preferred Share and FST Select Share of a Series
represents an equal proportionate interest in the assets belonging to that
Series. It is contemplated that most shares (other than ILA Class B or Class C
Shares) will be held in accounts of which the record owner is a bank or other
institution acting, directly or through an agent, as nominee for its customers
who are the beneficial owners of the shares or another organization designated
by such bank or institution. ILA Class B and Class C Shares generally are only
issued upon exchange from Class B or Class C Shares, respectively, of other
Series of the Goldman Sachs mutual funds. ILA Shares and FST Shares may be
purchased for accounts held in the name of an investor or institution that is
not compensated by the Trust for services provided to the institution's
investors. ILA Administration Shares and FST Administration Shares may be
purchased for accounts held in the name of an investor or an institution that
provides certain account administration services to its customers, including
maintenance of account records of its customers and processing orders to
purchase, redeem and exchange ILA Administration Shares or FST Administration
Shares providing services to its customers intended to facilitate or improve the
understanding of the benefits and risks of a Fund and provide facilities to
answer inquiries and respond to customer correspondence. ILA Administration
Shares of each ILA Portfolio bear the cost of administration fees at the annual
rate of up to .15 of 1% of the average daily net assets of such Shares. FST
Administration Shares of a Financial Square Fund bear the cost of administration
fees at the annual rate of up to .25 of 1% of the average daily net assets of
such shares. ILA Service Shares and FST Service Shares may be purchased for
accounts held in the name of an institution that provides certain account
administration and shareholder liaison services to its customers, including
maintenance of account records, processing orders to purchase, redeem and
exchange ILA Service Shares or FST Service Shares, responding to customer
inquiries and assisting customers with investment procedures. ILA Service
shares bear the cost of service fees at the annual rate of up to .40 of 1% of
the average daily net assets of such shares. FST Service Shares of a Financial
Square Fund bear the cost of service fees at the annual rate of up to .50 of 1%
of the average daily net assets of such shares. FST Preferred Shares may be
purchased for accounts held in the name of an institution that provides certain
account administration services to its customers, including acting directly or
through an agent, as the sole shareholder of record,
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maintaining account records of its customers and processing orders to purchase,
redeem and exchange FST Preferred Shares and provide services to its customers
intended to facilitate or improve their understanding of the benefits and risks
of a Fund. FST Preferred Shares of a Financial Square Fund bear the cost of
preferred administration fees at an annual rate of up to .10 of 1% of the
average daily net assets of such shares. FST Select Shares may be purchased for
accounts held in the name of an institution that provides certain account
administration services to its customers, including acting directly or through
an agent, as the sole shareholder of record, maintaining account records of its
customers and processing orders to purchase, redeem and exchange FST Select
Shares. FST Select Shares of a Financial Square Fund bear the cost of service
fees at an annual rate of up to .03 of 1% of the average daily net assets of
such shares. ILA Class B Shares of the Prime Obligations Portfolio are sold
subject to a CDSC up to 5.0%, and ILA Class C Shares are sold subject to a CDSC
of 1.0% if redeemed within 12 months of purchase. ILA Class B and Class C Shares
are sold primarily through brokers and dealers who are members of the National
Association of Securities Dealers Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. ILA Class B and Class C
Shares bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of
up to .75 of 1% of the average daily net assets attributable to ILA Class B and
Class C Shares, respectively. ILA Class B and Class C Shares also bear the cost
of service fees at an annual rate of up to .25 of 1% of the average daily net
assets of the Prime Obligations Portfolio attributable to ILA Class B and Class
C Shares. Cash Management Shares may be purchased for accounts held in the name
of an institution that provides certain account administration and shareholder
liaison services to its customers, including maintenance of account records,
processing orders to purchase, redeem and exchange Cash Management Shares,
responding to customer inquiries and assisting customers with investment
procedures. Cash Management Shares bear the cost of service fees at the annual
rate of up to .50 of 1% of the average daily net assets of such shares. Cash
Management Shares also bear the cost of distribution (Rule 12b-1) fees at an
annual rate of .50 of 1% of the average daily net assets attributable to Cash
Management Shares. In addition, each class of ILA Shares bears its own transfer
agency expenses.
It is possible that an institution or its affiliates may offer different
classes of shares to its customers and thus receive different compensation with
respect to different classes of shares of the same Series. In the event a
Series is distributed by salespersons or any other persons, they may receive
different compensation with respect to different classes of shares of the
Series. ILA Administration Shares, ILA Service Shares, ILA Class B Shares, ILA
Class C Shares, Cash Management Shares, FST Service Shares, FST Administration
Shares, FST Preferred Shares and FST Select Shares each have certain exclusive
voting rights on matters relating to their respective plans. Shares of each
class may be exchanged only for shares of the same class in another ILA
Portfolio or, in the case of the Prime Obligations Portfolio, shares of the
corresponding class of certain other mutual funds sponsored by Goldman Sachs.
Except as described above, the eleven classes of shares are identical. 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.
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
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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 directors from the separate voting requirements of Rule 18f-2.
When issued shares are fully paid and non-assessable. In the event of
liquidation, shareholders of each class are entitled to share pro rata in the
net assets of the applicable Series available for distribution to the
shareholders of such class. 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 interests in the Series' or 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. Shares representing interests in a particular Series and any
dividends and distributions paid by a Series are reflected in account statements
from the transfer agent.
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
without the vote or consent of shareholders, 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
Declaration of Trust and such other matters as the Trustees may determine or may
be required by law.
The Declaration of Trust provides for indemnification of Trustees, officers
and agents of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of any series is held personally liable
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason, the shareholder or
former shareholder (or heirs, executors, administrators, legal representatives
or general successors) shall be held harmless from and indemnified against all
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loss and expense arising from such liability. The Trust acting on behalf of any
affected series, must, upon request by such shareholder, assume the defense of
any claim made against such shareholder for any act or obligation of the series
and satisfy any judgment thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors
and events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any respective series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, or any series or class thereof, or affecting assets of the
type in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
"master-feeder" structure by investing all or a portion of the assets of a
series of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). To the extent
provided by the Trustees in the appointment of Series Trustees, Series Trustees
(a) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (b) may have, to the exclusion of any other
Trustee of the Trust, all the powers and authorities of Trustees under the
Declaration of Trust with respect to any other series or class; and/or (c) may
have no power or authority with respect to any other series or class. The
Trustees are not currently considering the appointment of Series Trustees for
the Trust.
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding units of the ILA Prime Obligations
Portfolio: Goldman Sachs Funds Group, 85 Broad Street, New York, NY 10004
(64%); and Security Trust Company, Attn: Operations Department, P.O. Box 1589,
San Diego, CA 92112 (11%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding units of the ILA Money Market
Portfolio: Goldman Sachs Funds
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Group, 85 Broad Street, New York, NY 10004 (78%); and Bank of New York, 48 Wall
Street, New York, NY 10286 (14%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding units of the ILA Treasury Obligations
Portfolio: Goldman Sachs Funds Group, 85 Broad Street, New York, NY 10004
(17%); First National Bank of Omaha, Trust Officer, P.O. Box 3128, Omaha, NE
68103 (8%); Bank of New York, STIF/FI Note, 1 Wall Street, Fl. 5, New York, NY
10286 (39%); and Centennial Holdings, 1428 15/th/ St., Denver, CO 80202 (10%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding units of the ILA Treasury Instruments
Portfolio: Goldman Sachs Funds Group, 85 Broad Street, New York NY, 10004
(28%); Bank of New York, 1 Wall Street, Fl. 5, New York, NY 10286 (20%);
Emerald Partners, 237 Park Ave., Suite 801, New York, NY 10017 (20%); and First
National Bank of Santa Fe, Attn: Jerry Pogemiller, AVP&TO, P.O. Box 609, Santa
Fe, NM 87504 (11%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding units of the ILA Government
Portfolio: Goldman Sachs Funds Group, 85 Broad Street, New York, NY 10004
(37%); and Comerica Bank, Calhoun & Co., P.O. Box 55-519, Detroit, MI 48255
(12%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding units of the ILA Federal Portfolio:
Goldman Sachs Funds Group, 85 Broad Street, New York, NY 10004 (85%); and Bank
of New York, 48 Wall Street, New York, NY 10286 (5%).
As of March 17, 2000, the entity noted below owned of record or
beneficially 5% or more of the outstanding units of the ILA Tax-Exempt
Diversified Portfolio: Goldman Sachs Funds Group, 85 Broad Street, New York, NY
10004 (87%).
As of March 17, 2000, the entity noted below owned of record or
beneficially 5% or more of the outstanding units of the ILA Tax-Exempt
California Portfolio: Goldman Sachs Funds Group, 85 Broad Street, New York, NY
10004 (95%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding units of the ILA Tax-Exempt New York
Portfolio: Goldman Sachs Funds Group, 85 Broad Street, New York, NY 10004
(87%); and Bank of New York 48 Wall Street, New York, NY 10286 (10%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding shares of the FS Prime Obligations
Fund: Bank of New York, Hare & Co., Attn: Bimal Saha, Stif/Master Note, One
Wall Street, 5th Floor, New York, NY 10286 (7%); and Commerce Bank of Kansas
City, P.O. Box 248, Kansas City, MO 64141 (6%).
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As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding shares of the FS Money Market Fund:
Goldman Sachs & Co., 85 Broad Street, New York, NY 10004 (25%); Exodus
Communications, Inc., Attn: Mike Healy, 2650 San Tomas Expy, Santa Clara, CA
95051 (6%); and Citicorp Trust N.A., Custodian, Attn: Joan D'Andrea, 400 Royal
Palm Way, Fl. 3, Palm Beach, FL 33480 (5%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding shares of the FS Treasury Obligations
Fund: Mellon Bank, Ms. Beth Brown, Three Mellon Bank Center, 34th Floor,
Pittsburgh, PA 15258 (12%); Commerce Bank of Kansas City, P.O. Box 248, Kansas
City, MO 64141 (9%); Goldman Sachs & Co., 85 Broad Street, New York, NY 10004
(8%); Fulton Bank, P.O. Box 3215, Lancaster, PA 17604 (6%); and Commerce Bank
Lenexa, Capital Markets Group, 4/th/ Fl., 1000 Walnut, Kansas City, MO 64106
(5%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding Fund shares of the FS Treasury
Instruments: Harris Trust & Savings Bank, Attn: Elliott A. Yurman, Mutual
Funds Unit-LLE, P.O. Box 71940, Chicago, IL 60694 (44%); Goldman Sachs & Co.,
85 Broad Street, New York, NY 10004 (10%); Hilliard Lyons Trust Co., Attn:
Carin M. Obye, P.O. Box 32760, Louisville, KY 40232 (8%); Guaranty Bank & Trust
Co., Haws & Co., P.O. Box 5847, Denver, CO 80217 (7%); Northern Capital Trust of
Fargo, Attn: H. Michael Hardy, P.O. Box 829, Fargo, ND 58107 (6%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding shares of the FS Government Fund:
Turtle & Co., Bn-CC. c/o State Street Bank & Trust, Attn: Robert Taylor, P.O.
Box 9427, Boston, MA 02209 (10%); First Citizens Bank & Trust, 100 Tryon Road,
Raleigh, NC 27603 (8%); and KPMG LLP, Harvey-Skolnick - Director of Treasury, 3
Chestnut Ridge Road, Montvale, NJ 07645 (5%).
As of March 17, 2000, the entity noted below owned of record or
beneficially 5% or more of the outstanding shares of the FS Federal Fund:
Goldman Sachs & Co., 85 Broad Street, New York, NY 10004 (50%).
As of March 17, 2000, the entities noted below owned of record or
beneficially 5% or more of the outstanding shares of the FS Tax-Free Money
Market Fund: Goldman Sachs & Co., 85 Broad Street, New York, NY 10004 (45%);
and Commerce Bank of Kansas City, NA, Mr. Mark Andreoli, Senior Vice President,
P.O. Box 248, Kansas City, MO 64141 (8%).
Shareholder and Trustee Liability
Under Delaware law, the shareholders of the Series 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 many other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may
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thereby subject the Delaware business trust shareholders to liability. To guard
against this risk, the Declaration of Trust contains express disclaimer of
shareholder liability for acts or obligations of a Series. Notice of such
disclaimer will normally be given in each agreement, obligation or instrument
entered into or executed by a Portfolio or the Trustees. The Declaration of
Trust provides for indemnification by the relevant Series for all loss suffered
by a shareholder as a result of an obligation of the Series. The Declaration of
Trust also provides that a Series shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Series and
satisfy any judgment thereon. In view of the above, the risk of personal
liability of shareholders is remote.
In addition to the requirements set forth under Delaware law, the
Declaration of Trust provides that shareholders may bring a derivative action on
behalf of the Trust 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 Trust, or 10% of the outstanding shares of
the Series or class to which such action relates, must 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 such claim. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the
Trust for the expense of any such investment advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to
act as custodian of the Series' assets. In that capacity, State Street
maintains the accounting records and calculates the daily net asset value per
share of the Series. Its mailing address is P.O. Box 1713, Boston, MA 02105.
State Street has appointed The Northern Trust Company, 50 South LaSalle Street,
Chicago, Illinois 60675 as subcustodian to hold cash and certain securities
purchased by the Trust.
INDEPENDENT ACCOUNTANTS
For the fiscal year ended December 31, 1999, Arthur Andersen LLP, former
independent public accountants, 225 Franklin Place, Boston, Massachusetts 02110,
served as auditors of the Series. PricewaterhouseCoopers LLP, independent
public accountants, 160 Federal Street, Boston, Massachusetts 02110 have been
selected as auditors of the Series of the Trust for the fiscal year ending
December 31, 2000. In addition to audit services, PricewaterhouseCoopers LLP
will
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prepare the Trust's federal and state tax returns, and will provide consultation
and assistance on accounting, internal control and related matters.
FINANCIAL STATEMENTS
The audited financial statements and related reports of Arthur Andersen
LLP, the Trust's former independent public accountants, contained in each
Series' 1999 Annual Report are hereby incorporated by reference. A copy of the
Annual Report 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 Series' Prospectus. No other
portions of the Series' Annual Report are incorporated herein by reference.
PricewaterhouseCoopers LLP have been selected as auditors of the Series of
the Trust for the fiscal year ending December 31, 2000.
OTHER INFORMATION
The Investment Adviser, Distributor and/or their affiliates may pay, out of
their own assets, compensation to Authorized Dealers, service organizations and
financial intermediaries ("Intermediaries") in connection with the sale,
distribution and/or servicing of shares of the Series. These payments
("Additional Payments") would be in addition to the payments by the Series
described in the Series' Prospectuses and this Additional Statement for
distribution and shareholder servicing and processing. These Additional
Payments may take the form of "due diligence" payments for an institution's
examination of the Series and payments for providing extra employee training and
information relating to the Series; "listing" fees for the placement of the
Series on a dealer's list of mutual funds available for purchase by its
customers; "finders" or "referral" fees for directing investors to the Series;
"marketing support" fees for providing assistance in promoting the sale of the
Series' 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 Series. 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.
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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. In some, but not all, cases these payments will be pursuant to
an Administration, Distribution Service or Select Plan described in the
Prospectuses and the following sections. Certain Service Organizations or
institutions may enter into sub-transfer agency agreements with the Trust or
Goldman Sachs with respect to their services.
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.
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ADMINISTRATION PLANS
(ILA Administration, FST Administration and FST Preferred Shares Only)
The Trust, on behalf of each ILA Portfolio and Financial Square Fund, has
adopted an administration plan with respect to the ILA Administration Shares
(the "ILA Administration Plan"), with respect to the FST Administration Shares
(the "FST Administration Plan") and with respect to FST Preferred Shares (the
"FST Preferred Plan," together with the ILA Administration Plan and the FST
Administration Plan, the "Administration Plans") which authorize the ILA
Portfolios and Financial Square Funds to compensate service organizations for
providing certain account administration services to their customers who are
beneficial owners of such shares. Pursuant to the Administration Plans, the
Trust, on behalf of each Series, enters into agreements with service
organizations which purchase ILA Administration Shares, FST Administration
Shares or FST Preferred Shares on behalf of their customers ("Service
Agreements"). Under such Service Agreements, the service organizations may:
(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 ILA Administration Shares, FST Administration Shares or FST
Preferred Shares, (c) answer questions and handle correspondence from customers
regarding their accounts, (d) process customer orders to purchase, redeem and
exchange ILA Administration Shares, FST Administration Shares or FST Preferred
Shares, 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, the
Trust on behalf of each ILA Portfolio and Financial Square Fund pays each
service organization an administration fee in an amount up to .15% (on an
annualized basis) of the average daily net assets of the ILA Administration
Shares of each ILA Portfolio, .25% (on an annualized basis) of the average daily
net assets of the FST Administration Shares and .10% (on an annualized basis) of
the average daily net assets of the FST Preferred Shares of each Financial
Square Fund, attributable to or held in the name of such service organization
for its customers. The Trust, on behalf of the Series, accrues payments made to
a service organization pursuant to a Service Agreement daily. All inquiries of
beneficial owners of ILA Administration Units, FST Administration Shares and FST
Preferred Shares should be directed to the owners' service organization.
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For the fiscal years ended December 31, 1999, December 31, 1998 and
December 31, 1997 the amount of the administration fees paid by each ILA
Portfolio under its ILA Administration Plan to Service Organizations was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ----------
<S> <C> <C> <C>
ILA Prime Obligations
Portfolio $ 57,419 $ 56,195 $ 117,600
ILA Money Market Portfolio 53,223 482,750 510,535
ILA Treasury Obligations
Portfolio 90,628 134,705 311,981
ILA Treasury Instruments
Portfolio 127,026 146,145 296,919
ILA Government Portfolio 9,844 14,657 66,034
ILA Federal Portfolio 293,344 779,240 1,119,368
ILA Tax-Exempt Diversified
Portfolio 48,148 34,749 119,510
ILA Tax-Exempt California
Portfolio 19,940 1,702 508
ILA Tax-Exempt New York
Portfolio 30,750 34,741 46,589
</TABLE>
For the fiscal years ended December 31, 1999, December 31, 1998 and
December 31, 1997 the amount of administration fees paid by each Financial
Square Fund under its FST Administration Plan to Service Organizations was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
FS Prime Obligations Fund $1,608,204 $ 832,405 $ 662,090
FS Money Market Fund 1,171,166 947,740 780,489
FS Treasury Obligations Fund 2,716,747 2,373,198 1,741,440
FS Government Fund 1,241,755 845,644 649,313
FS Tax Free Fund 352,368 360,347 241,784
FS Treasury Instruments Fund(1) 138,125 49,689 3,240
FS Federal Fund(1) 1,541,602 951,754 353,083
</TABLE>
- ---------------------------
/(1)/ The FST Administration Shares of the FS Treasury Instruments Fund and FS
Federal Fund commenced share activity on April 1, 1997.
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For the fiscal years ended December 31, 1999, December 31, 1998 and
December 31, 1997 the amount of administration fees paid by each Financial
Square Fund under its FST Preferred Plan was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
FS Prime Obligations Fund $271,735 $156,506 $181,303
FS Money Market Fund 182,474 76,867 55,349
FS Treasury Obligations Fund 282,021 307,604 107,309
FS Government Fund 193,925 96,834 27,961
FS Tax Free Fund 45,428 93,209 15,965
FS Treasury Instruments Fund(1) 92 0 1
FS Federal Fund(1) 74,134 122,073 66,047
</TABLE>
- ----------------------------
/(1)/ The FST Preferred Shares of the FS Treasury Instruments Fund and FS
Federal Fund commenced share activity on May 30, 1997.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974) may apply to a service organization's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in ILA Administration Shares, FST Administration Shares and FST Preferred
Shares. Service organizations, including banks regulated by the Comptroller of
the Currency, the Federal Reserve Board or the Federal Deposit Insurance
Corporation, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or State Securities
Commissions, are urged to consult legal advisers before investing fiduciary
assets in ILA Administration Shares, FST Administration Shares or FST Preferred
Shares. In addition, under some state securities laws, banks and other
financial institutions purchasing ILA Administration Shares, FST Administration
Shares or FST Preferred Shares on behalf of their customers may be required to
register as dealers.
The Trustees of the Trust, 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 Administration Plans or the related Service
Agreements, most recently voted to approve the Administration Plans and Service
Agreements at a meeting called for the purpose of voting on such Administration
Plans and Service Agreements on April 25, 2000. The Administration Plans and
Service Agreements will remain in effect until May 1, 2001 and continue in
effect thereafter only if such continuance is specifically approved annually by
a vote of the Trustees in the manner described above.
An Administration Plan may not be amended to increase materially the amount
to be spent for the services described therein without approval of the ILA
Administration, FST Administration or FST Preferred shareholders of the affected
Series, and all material amendments of the Administration Plan must also be
approved by the Trustees in the manner described above. An Administration Plan
may be terminated at any time by a majority of the Trustees as described above
or by vote of a majority of the outstanding ILA Administration Shares, FST
Administration Shares or FST Preferred Shares of the affected Series. The
Service
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Agreements may be terminated at any time, without payment of any penalty, by
vote of a majority of the Trustees as described above or by a vote of a majority
of the outstanding ILA Administration Shares, FST Administration Shares or FST
Preferred Shares of the affected Series on not more than sixty (60) days'
written notice to any other party to the Service Agreements. The Service
Agreements shall terminate automatically if assigned. So long as the
Administration Plans are in effect, the selection and nomination of those
Trustees who are not interested persons shall 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 Trustees have determined that, in their
judgment, there is a reasonable likelihood that the Administration Plans will
benefit the Series and holders of ILA Administration Shares, FST Administration
Shares and FST Preferred Shares of such Series.
SERVICE PLANS
(ILA Service Shares, Cash Management Shares and FST Service Shares Only)
The Trust has adopted a service plan on behalf of each ILA Portfolio with
respect to the ILA Service Shares (the "ILA Service Plan"), on behalf of the ILA
Prime Obligations Portfolio, ILA Money Market Portfolio, ILA Government
Portfolio, ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt California
Portfolio and ILA Tax-Exempt New York Portfolio with respect to the Cash
Management Shares (the "Cash Management Shares Service Plan") and on behalf of
each Financial Square Fund with respect to the FST Service Shares (the "FST
Service Plan" and together with the ILA Service Plan and the Cash Management
Shares Service Plan, the "Service Plans") which authorize the Series to
compensate service organizations for providing certain account administration
and personal account maintenance services to their customers who are or may
become beneficial owners of such shares. Pursuant to the Service Plans, the
Trust, on behalf of each ILA Portfolio or Financial Square Fund, enters into
agreements with service organizations which purchase ILA Service Shares, Cash
Management Shares or FST Service Shares on behalf of their customers ("Service
Agreements"). Under such Service Agreements the service organizations may: (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 ILA Service Shares, Cash Management Shares or FST Service
Shares; (c) answer questions and handle correspondence from customers regarding
their accounts; (d) process customer orders to purchase, redeem and exchange ILA
Service Shares, Cash Management Shares or FST Service Shares, 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 ILA Service Shares, Cash Management Shares or FST Service Shares; (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; (j) act as liaison
between customers and the Trust, including obtaining information from the Trust,
working with the Trust to correct errors and resolve problems and providing
statistical and other information to the Trust; and (k) with respect to the Cash
Management Shares Service Plan: (i)
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provide services to customers intended to facilitate or improve their
understanding of the benefits and risks of an ILA Portfolio, (ii) facilitate the
inclusion of an ILA Portfolio in investment, retirement, asset allocation, cash
management or sweep accounts or similar products or services offered to
customers by or through service organizations, (iii) facilitate electronic or
computer trading and/or processing in an ILA Portfolio or providing electronic,
computer or other database information regarding an ILA Portfolio to customers,
and (iv) develop, maintain and support systems necessary to support Cash
Management Shares. As compensation for such services, (a) the Trust on behalf of
each ILA Portfolio pays each service organization a service fee in an amount up
to .40% (on an annualized basis) of the average daily net assets of the ILA
Service Shares of each ILA Portfolio attributable to or held in the name of such
service organization for its customers; provided, however, that the fee paid for
personal and account maintenance services shall not exceed .25% of such average
daily net assets; (b) the Trust on behalf of each ILA Portfolio pays each
service organization a service fee in an amount up to .50% (on an annual basis)
of the average daily net assets of the Cash Management Shares of each ILA
Portfolio attributable to or held in the name of such service organization for
its customers; provided, however, that the fee paid for personal and account
maintenance services shall not exceed .25% of such average daily net assets; and
(c) the Trust, on behalf of each Financial Square Fund, pays each service
organization a service fee in an amount up to .50% (on an annualized basis) of
the average daily net assets of the FST Service Shares of each Financial Square
Fund attributable to or held in the name of such service organization for its
customers; provided, however, that the fee paid for personal and account
maintenance services shall not exceed .25% of such average daily net assets. The
Trust, on behalf of the Series, accrues payments made to a service organization
pursuant to a Service Agreement daily. All inquiries of beneficial owners of ILA
Service Units, Cash Management Shares and FST Service Shares should be directed
to the owners' service organization.
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<PAGE>
For the fiscal years ended December 31, 1999, December 31, 1998 and
December 31, 1997 the amount of the service fees paid by each ILA Portfolio then
in existence to service organizations pursuant to the ILA Service Plan was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
ILA Prime Obligations
Portfolio $ 417,319 $ 435,823 $ 300,300
ILA Money Market Portfolio 1,290,742 144,733 40,053
ILA Treasury Obligations
Portfolio 234,094 324,013 361,567
ILA Treasury Instruments
Portfolio 1,292,984 1,126,342 1,020,955
ILA Government Portfolio 366,922 395,588 342,976
ILA Federal Portfolio 1,110,241 145,279 209,156
ILA Tax-Exempt Diversified
Portfolio 111,352 124,850 102,409
ILA Tax-Exempt California
Portfolio/(1)/ 33,838 0 2
ILA Tax-Exempt New York
Portfolio/(1)/ 0 0 2
</TABLE>
(1) ILA Service Share activity commenced operations in 1997.
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<PAGE>
For the fiscal years ended December 31, 1999 and December 31, 1998, the
amount of the service fees paid by each ILA Portfolio then in existence to
service organizations pursuant to the Cash Management Shares Service Plan was as
follows:
<TABLE>
<CAPTION>
1999 1998/(1)/
---- ---------
<S> <C> <C>
ILA Prime Obligations
Portfolio $ 8 $ 5
ILA Money Market Portfolio 8 5
ILA Government Portfolio
Portfolio 67 5
ILA Tax-Exempt Diversified
Portfolio 8 5
ILA Tax-Exempt California 8 5
Portfolio
ILA Tax-Exempt New York 8 5
Portfolio
</TABLE>
/(1)/ Cash Management Shares commenced operations on May 1, 1998.
For the fiscal years ended December 31, 1999, December 31, 1998 and
December 31, 1997 the amount of service fees paid by each Financial Square Fund
to service organizations pursuant to the FST Service Plan was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
FS Prime Obligations
Fund $2,388,719 $1,167,952 $ 707,816
FS Money Market Fund 1,792,922 2,478,988 1,514,944
FS Treasury Obligations Fund 2,620,099 2,019,235 1,201,356
FS Government Fund 3,617,320 3,225,643 2,533,854
FS Tax-Free Fund 275,997 254,984 166,974
FS Treasury Instruments Fund/(1)/ 91,522 97,057 112,501
FS Federal Fund/(2)/ 1,981,259 1,312,961 482,096
</TABLE>
(1) FST Service Share activity commenced March 5, 1997.
(2) FST Service Share activity commenced March 25, 1997.
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<PAGE>
The Trust has adopted each Service 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 such as the Trust may bear expenses associated with the
distribution of its securities. In particular, such an investment company cannot
engage directly or indirectly in financing any activity which is primarily
intended to result in the sale of securities 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 Service
Plans and described above are not expenses incurred primarily for effecting the
distribution of ILA Service Shares, Cash Management Shares or FST 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 Service
Plans.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974) may apply to a service organization's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in ILA Service Shares, Cash Management Shares or FST Service Shares.
Service organizations, including banks regulated by the Comptroller of the
Currency, the Federal Reserve Board or the Federal Deposit Insurance
Corporation, and Investment Advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or State Securities
Commissions, are urged to consult legal advisers before investing fiduciary
assets in ILA Service Shares, Cash Management Shares or FST Service Shares.
The Trustees of the Trust, 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 Service Plans or the related Service
Agreements, most recently voted to approve the Service Plans and Service
Agreements at a meeting called for the purpose of voting on such Service Plans
and Service Agreements on April 25, 2000. The ILA Service Plan and FST Service
Plan and Service Agreements will remain in effect until May 1, 2001, and the
Cash Management Service Plan and Service Agreement will remain in effect until
April 30, 2001. The Service Plans and Service Agreements will continue in effect
thereafter only if such continuance is specifically approved annually by a vote
of the Trustees in the manner described above.
A Service Plan may not be amended to increase materially the amount to be
spent for the services described therein without approval of the ILA Service
Shareholders, Cash Management Shareholders or FST Service Shareholders of the
affected Series, and all material amendments of a Plan must also be approved by
the Trustees in the manner described above. A Service 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 ILA Service Shares, Cash Management Shareholders
or FST Service Shares of the affected Series. The Service Agreements may be
terminated at any time, without payment of any penalty, by vote of a majority of
the Board of Trustees as described above or by a vote of a majority of the
outstanding ILA Service Shares, Cash Management Shareholders or FST Service
Shares of the affected Series on not more than sixty (60) days' written notice
to any other party to the Service Agreements. The Service Agreements shall
terminate automatically if assigned. As long as the Service Plans are in effect,
the selection and
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<PAGE>
nomination of those Trustees who are not interested persons shall be determined
by the discretion of the Trust's Nominating Committee, which consists of all of
the non-interested members of the Board of Trustees. The Trustees have
determined that, in their judgment, there is a reasonable likelihood that the
Service Plans will benefit the Series and holders of ILA Service Shares, Cash
Management Shares and FST Service Shares of such Series.
SELECT PLAN
(FST Select Shares Only)
The Trust, on behalf of the FS Prime Obligations, FS Money Market, FS
Treasury Obligations, FS Treasury Instruments, FS Government, FS Federal and FS
Tax-Free Funds has adopted a select plan with respect to the FST Select Shares
(the "FST Select Plan ") which authorize the Financial Square Funds to
compensate service organizations for providing certain account administration
services to their customers who are beneficial owners of such shares. Pursuant
to the Select Plan, the Trust, on behalf of such Series, enters into agreements
with service organizations, which purchase FST Select Shares on behalf of their
customers ("Service Agreements"). Under such Service Agreements, the service
organizations may: (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 FST Select Shares, (c) process
and issue confirmations concerning customer orders to purchase, redeem and
exchange FST Select Shares, and (d) handle the transmission of funds
representing the customers' purchase price or redemption proceeds. As
compensation for such services, the Trust on behalf of each Financial Square
Fund pays each service organization an administration fee in an amount up to .03
of 1% (on an annualized basis) of the average daily net assets of the FST Select
Shares of each Financial Square Fund, attributable to or held in the name of
such service organization for its customers. The Trust, on behalf of the Series,
accrues payments made pursuant to a Service Agreement daily. All inquiries of
beneficial owners of Select Shares should be directed to the owners' service
organizations.
FST Select Shares commenced operations on January 31, 2000.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a service organization's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in FST Select Shares. 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 Securities and Exchange Commission, the
Department of Labor or State Securities Commissions, are urged to consult legal
advisers before investing fiduciary assets in FST Select Shares.
The Trustees of the Trust, 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 Select Plan or the related Service Agreements,
(the "Non-Interested Trustees") most recently voted to approve the Select Plan
and Service Agreements at a meeting called for the purpose of voting on such
Select Plan and Service Agreements on April 25, 2000. The FST Select Plan and
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<PAGE>
Service Agreements will remain in effect until May 1, 2001. The Select Plan and
Service Agreements will continue in effect thereafter only if such continuance
is specifically approved annually by a vote of the Trustees in the manner
described above.
The Select Plan may not be amended to increase materially the amount to be
spent for the services described therein and may not be made unless other and
other material amendments of the Plan must also be approved by the Trustees in
the manner described above. The Select Plan may be terminated at any time by a
majority of the Non-Interested Trustees as described above or by vote of a
majority of the outstanding FST Select Shares of the affected Series. The
Service Agreements may be terminated at any time, without payment of any
penalty, by vote of a majority of the Non-Interested Trustees as described above
or by a vote of a majority of the outstanding FST Select Shares of the affected
Series on not more than sixty (60) days' written notice to any other party to
the Service Agreements. The Service Agreements shall terminate automatically if
assigned. As long as the Select Plan are in effect, the selection and nomination
of those Trustees who are not interested persons shall be determined by the
discretion of the Trust's Nominating Committee, which consists of all of the
non-interested members of the Board of Trustees. The Trustees have determined
that, in their judgment, there is a reasonable likelihood that the Select Plan
will benefit the Series and holders of FST Select Shares of such Series.
DISTRIBUTION AND SERVICE PLANS
Distribution and Service Plans. As described in the Prospectuses, the
Trust has adopted distribution and service plans pursuant to Rule 12b-1 under
the Act with respect to ILA Class B and Class C Shares on behalf of the ILA
Prime Obligations Portfolio (the "Distribution and Service Plans").
The Distribution and Service Plans were most recently approved on April 25,
2000 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 Distribution and Service Plans, cast in person at a
meeting called for the purpose of approving the Distribution and Service Plans.
The compensation payable under the Distribution and Service Plans may not
exceed 0.75% per annum of the average daily net assets attributable to ILA Class
B and Class C Shares, respectively, of the ILA Prime Obligations Portfolio.
Under the Distribution and Service Plans for ILA Class B and Class C
Shares, Goldman Sachs is also entitled to receive 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 ILA Class B or Class C Shares.
The Distribution and Service Plans are compensation plans which provide for
the payment of a specified fee without regard to the expenses actually incurred
by Goldman Sachs. The distribution fees received by Goldman Sachs under the
Distribution and Service Plans and
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<PAGE>
CDSC on ILA Class B Shares may be sold by Goldman Sachs as distributor to
entities which provide financing for payments to Authorized Dealers in respect
of sales of ILA Class B Shares. Goldman Sachs may also pay up to the entire
amount of its fee under the Class C Distribution and Service Plan to service
organizations or other institutions for providing services in connection with
the sale of 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 ILA Class B Shares and Class C Shares. If such fees
exceed Goldman Sachs' expenses, Goldman Sachs may realize a profit from these
arrangements.
For the fiscal year ended December 31, 1999, the amount of distribution and
service fees paid by the ILA Prime Obligation Portfolio's Class B Shares to
Goldman Sachs was $163,044. For the fiscal year ended December 31, 1999, the
amount of distribution and service fees paid by the ILA Prime Obligations
Portfolio's Class C Shares to Goldman Sachs was $66,091.
For the fiscal year ended December 31, 1998, the amount of distribution and
service fees paid by the ILA Prime Obligation Portfolio's Class B Shares to
Goldman Sachs was $59,917. For the fiscal year ended December 31, 1998, the
amount of distribution and service fees paid by the ILA Prime Obligations
Portfolio's Class C Shares to Goldman Sachs was $43,200.
For the fiscal year ended December 31, 1997, the amount of distribution
fees paid by the ILA Prime Obligations Portfolio's Class B Shares to Goldman
Sachs was $4,635. For the fiscal year ended December 31, 1997, the amount of
services fees paid by the ILA Prime Obligations Portfolio's Class B Shares to
Goldman Sachs was $1,545.
For the fiscal year ended December 31, 1997, the amount of distribution
fees paid by the ILA Prime Obligations Portfolio's Class C Shares to Goldman
Sachs was $784. For the fiscal year ended December 31, 1997, the amount of
service fees paid by the ILA Prime Obligations Portfolio's Class C Shares to
Goldman Sachs was $261.
During the fiscal year ended December 31, 1999, Goldman Sachs incurred the
following expenses in connection with distribution activities under the
Distribution and Service Plan of the ILA Prime Obligations Portfolio with
respect to ILA Class B Shares and ILA Class C Shares, respectively: compensation
to dealers, $145,109 and $80,608; compensation and expenses of the Distributor
and its sales personnel, $4,695 and $1,756; allocable overhead, telephone and
travel expenses, $5,082 and $1,900; printing and mailing of prospectuses to
other than current shareholders, $169 and $63; and preparation and distribution
of sales literature and advertising, $827 and $309. These amounts reflect
expenses incurred by Goldman Sachs, which amounts are in excess of the
compensation received by Goldman Sachs under the Distribution and Service Plan.
The payments under the Distribution and Service Plan were used by Goldman Sachs
to compensate it for the expenses shown above on a pro-rata basis. Compensation
to dealers includes advance commissions paid to dealers of 4% on ILA Class B
Shares and 1% on ILA Class C Shares which are considered deferred assets and
amortized over a period of 6 years with respect to ILA Class B Units and one
year with respect to ILA Class C Shares. The amounts presented above reflect
amortization expense recorded during the period presented.
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<PAGE>
The Distribution and Service Plans will remain in effect from year to year,
provided such continuance is approved annually by a majority vote of the
Trustees of the Trust, including a majority of the non-interested Trustees who
have no direct or indirect financial interest in the Distribution and Service
Plans. The Distribution and Service Plans may not be amended to increase
materially the amount of distribution compensation described therein as to a
particular Portfolio without approval of a majority of the outstanding Class B
or Class C Shareholders, of the affected Portfolio and Share class. All material
amendments to the Distribution and Service Plans must also be approved by the
Trustees of the Trust in the manner described above. The Distribution and
Service Plans may be terminated at any time without payment of any penalty by a
vote of the majority of the non-interested Trustees or by vote of a majority of
the Class B or Class C Shares, of the applicable Portfolio. If the Distribution
and Service Plans were terminated by the Trust's Board of Trustees and no
successor plan were adopted, the Series would cease to make distribution
payments to Goldman Sachs and Goldman Sachs would be unable to recover the
amount of any of its unreimbursed distribution expenditures. So long as the
Distribution and Service Plans are in effect, the selection and nomination of
non-interested Trustees will be committed to the discretion of the non-
interested Trustees. The Trustees have determined that in their judgment there
is a reasonable likelihood that the Distribution and Service Plans will benefit
the applicable Series and their respective Shareholders.
Distribution Plan. As described in the Prospectus, the Trust has adopted a
distribution plan pursuant to Rule 12b-1 under the Act with respect to Cash
Management Shares on behalf of the ILA Prime Obligations Portfolio, ILA Money
Market Portfolio, ILA Government Portfolio, ILA Tax-Exempt Diversified
Portfolio, ILA Tax-Exempt California Portfolio and ILA Tax-Exempt New York
Portfolio (the "Cash Management Shares Distribution Plan").
The Cash Management Shares Distribution Plan was most recently approved on
April 25, 2000 on behalf of the Trust by a majority vote of the Trust's Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Trust and have no direct or indirect financial interest in the Cash
Management Shares Distribution Plan, cast in person at a meeting called for the
purpose of approving the Cash Management Shares Distribution Plan.
The compensation payable under the Cash Management Shares Distribution Plan
with respect to the ILA Prime Obligations Portfolio, ILA Money Market Portfolio,
ILA Government Portfolio, ILA Tax-Exempt Diversified Portfolio, ILA Tax-Exempt
California Portfolio and ILA Tax-Exempt New York Portfolio may not exceed 0.50%
per annum of the average daily net assets attributable to Cash Management Shares
of such ILA Portfolio. Goldman Sachs may modify or discontinue such waivers and
limitation in the future at its discretion.
For the fiscal years ended December 31, 1999 and December 31, 1998, the
amount of distribution fees paid by the ILA Prime Obligations Portfolio, ILA
Money Market Portfolio, ILA Government Portfolio, ILA Tax-Exempt Diversified
Portfolio, ILA Tax-Exempt California Portfolio and ILA Tax-Exempt New York
Portfolio to Goldman Sachs pursuant to the Cash Management Shares Distribution
Plan was $1 and $0, $1 and $0, $9 and $0, $1 and $0, $1 and $0 and $1 and $0,
respectively.
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<PAGE>
Goldman Sachs may pay up to the entire amount of its fee under the Cash
Management Shares Distribution Plan to service organizations or other
institutions for providing services in connection with the sale of Cash
Management 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 Cash Management Shares. If such fee exceeds its expenses,
Goldman Sachs may realize a profit from these arrangements.
The Cash Management Shares Distribution Plan is a compensation plan which
provides for the payment of a specified distribution fees without regard to the
distribution expenses actually incurred by Goldman Sachs. If the Cash Management
Shares Distribution Plan was terminated by the Trust's Board of Trustees and no
successor plan were adopted, the ILA Prime Obligations Portfolio, ILA Money
Market Portfolio, ILA Government Portfolio, ILA Tax-Exempt Diversified
Portfolio, ILA Tax-Exempt California Portfolio and ILA Tax-Exempt New York
Portfolio would cease to make distribution payments to Goldman Sachs and Goldman
Sachs would be unable to recover the amount of any of its unreimbursed
distribution expenditures. However, Goldman Sachs does not intend to make
expenditures for which it may be compensated under the Cash Management Shares
Distribution Plan at a rate that materially exceeds the rate of compensation
received under the Plan.
The Cash Management Shares Distribution Plan will remain in effect from
year to year, provided such continuance is approved annually by a majority vote
of the Board of Trustees of the Trust, including a majority of the non-
interested Trustees who have no direct or indirect financial interest in the
Distribution Plan. The Cash Management Shares Distribution Plan may not be
amended to increase materially the amount to be spent for the services described
therein as to a particular Series without approval of a majority of the
outstanding Cash Management Shareholders, as applicable, of that Portfolio. All
material amendments to the Distribution Plan must also be approved by the Board
of Trustees of the Trust in the manner described above. The Cash Management
Shares Distribution Plan may be terminated at any time without payment of any
penalty by a vote of the majority of the non-interested Trustees or by vote of a
majority of the Cash Management Shares, as applicable, of the applicable
Portfolio. So long as the Cash Management Shares Distribution Plan is in effect,
the selection and nomination of non-interested Trustees shall be committed to
the discretion of the non-interested Trustees. The Trustees have determined that
in their judgment there is a reasonable likelihood that the Cash Management
Shares Distribution Plan will benefit the applicable Portfolios and their
respective Shareholders.
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<PAGE>
APPENDIX A
Short-Term Debt Credit Ratings
- ------------------------------
A Standard & Poor's short-term issue credit rating is generally a
-----------------
current opinion of the creditworthiness of an obligor with respect to financial
obligations having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard and Poor's for short-term
debt:
"A-1" - 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.
Moody's short-term debt 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 short-term debt:
"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 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.
The three rating categories of Duff & Phelps for 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 short-term debt:
A-1
<PAGE>
"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.
Fitch IBCA short-term ratings apply to debt obligations that have a
----------
time horizon 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" - The highest credit quality. This designation indicates the best
capacity for timely payment of financial commitments and may have an added "+"
to denote any exceptionally strong credit feature.
"F2" - 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.
Thomson Financial 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 Financial BankWatch:
"TBW-1" - The highest category and indicates a very high likelihood
that principal and interest will be paid on a timely basis.
"TBW-2" - The 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."
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
-----------------
corporate and municipal long-term debt (ratings from "AA" through "BBB" may be
modified by the
A-2
<PAGE>
addition of a plus (+) or minus (-) sign to show relative standing within the
major rating categories):
"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.
The following summarizes the ratings used by Moody's for corporate and
-------
municipal long-term debt (Numerical modifiers 1, 2 and 3 are applied in each
generic rating classification from "Aa" through "Baa". The modifier 1 indicates
that the obligations 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):
"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 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
A-3
<PAGE>
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
The following summarizes the long-term debt ratings used by Duff &
------
Phelps for corporate and municipal long-term debt (The "AA," "A," and "BBB"
- ------
ratings may be modified by the addition of a plus (+) or minus (-) sign to show
relative standing within these major categories):
"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.
"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. This is the
lowest investment grade category.
The following summarizes the ratings used by Fitch IBCA for corporate
----------
and municipal bonds (Ratings from and including "AA" to "BBB" may be modified by
the addition of a plus (+) or minus (-) sign to show relative standing within
these major categories):
"AAA" - 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" - 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" - 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" - 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. This is the lowest investment grade category.
A-4
<PAGE>
Thomson Financial 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 Financial BankWatch for long-
---------------------------
term debt ratings (The ratings may include a plus (+) or minus (-) sign
designation which indicates where within the respective category the issue is
placed):
"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.
Additional 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 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 a
very strong capacity to pay debt service 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.
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:
A-5
<PAGE>
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"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.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Short-Term Debt Credit Ratings for municipal notes.
A-6
<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 the 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.
B-1
<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 helped 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.
B-2
<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.
B-3
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1869 Marcus Goldman opens Goldman Sachs
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
1981 Enters money market mutual fund business for institutional clients
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
B-4
<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
B-5
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
SERVICE SHARES
INSTITUTIONAL SHARES
GOLDMAN SACHS INTERNET TOLLKEEPER FUND(SM)
GOLDMAN SACHS REAL ESTATE SECURITIES FUND
(Each a Specialty Equity Fund of Goldman Sachs Trust)
4900 Sears Tower
Chicago, Illinois 60606-6303
This Statement of Additional Information (the "Additional Statement") is
not a Prospectus. This Additional Statement should be read in conjunction with
the Prospectuses for the Class A Shares, Class B Shares, Class C Shares, Service
Shares and Institutional Shares of: Goldman Sachs Internet Tollkeeper Fund and
Goldman Sachs Real Estate Securities Fund dated May 1, 2000 (the
"Prospectuses"), which may be obtained without charge from Goldman, Sachs & Co.
by calling the telephone number, or writing to one of the addresses, listed
below.
The audited financial statements and related report of Arthur Andersen LLP,
the former independent public accountants for each Fund, contained in each
Fund's 1999 Annual Report are incorporated herein by reference in the section
"Financial Statements." No other portions of the Funds' Annual Report are
incorporated by reference. Ernst & Young LLP, independent public accountants,
have been selected as the independent public accountants of the Funds for the
fiscal year ending December 31, 2000.
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
Investment Adviser Distributor
32 Old Slip 85 Broad Street
New York, New York 10005 New York, New York 10004
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, Illinois 60606
Toll free (in U.S.) . . . 800-621-2550
The date of this Additional Statement is May 1, 2000.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
----
<S> <C>
INTRODUCTION............................................................... B-3
INVESTMENT POLICIES........................................................ B-4
INVESTMENT RESTRICTIONS.................................................... B-40
MANAGEMENT................................................................. B-42
REIMBURSEMENT.............................................................. B-59
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................... B-60
NET ASSET VALUE............................................................ B-64
PERFORMANCE INFORMATION.................................................... B-65
SHARES OF THE TRUST........................................................ B-71
TAXATION................................................................... B-76
FINANCIAL STATEMENTS....................................................... B-82
OTHER INFORMATION.......................................................... B-82
DISTRIBUTION AND SERVICE PLANS............................................. B-84
OTHER INFORMATION REGARDING MAXIMUM SALES CHARGE,
PURCHASES, REDEMPTIONS, EXCHANGES AND DIVIDENDS....................... B-91
SERVICE PLAN............................................................... B-95
Appendix A................................................................. 1-A
Appendix B................................................................. 1-B
Appendix C (Statement of Intention and Escrow Agreement)................... 1-C
</TABLE>
B-2
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end, management investment
company. The Trust is organized as a Delaware business trust, established by a
Declaration of Trust dated January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was combined with the Trust on April 30, 1997.
The following series of the Trust are described in this Additional Statement:
Goldman Sachs Internet Tollkeeper Fund ("Internet Tollkeeper Fund") and Goldman
Sachs Real Estate Securities Fund ("Real Estate Securities Fund") (collectively
referred to herein as the "Funds").
The Trustees have authority under the Trust's charter to create and
classify shares into separate series and to classify and reclassify any series
or portfolio of shares into one or more classes without further action by
shareholders. Pursuant thereto, the Trustees have created the Funds and other
series. Additional series may be added in the future from time to time. Each
Fund currently offers five classes of shares: Class A Shares, Class B Shares,
Class C Shares, Institutional Shares and Service Shares. See "Shares of the
Trust."
Goldman Sachs Asset Management, ("GSAM" or the "Investment Adviser") a unit
of the Investment Management Division of Goldman, Sachs & Co. ("Goldman Sachs"),
serves as the Investment Adviser to the Funds. In addition, Goldman Sachs
serves as each Fund's distributor and transfer agent. Each Fund's custodian is
State Street Bank and Trust Company ("State Street").
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 the Funds' investment objectives and
policies. There is no assurance that a Fund will achieve its objective.
Capitalized terms used but not defined herein have the same meaning as in the
Prospectuses.
B-3
<PAGE>
INVESTMENT POLICIES
Each Fund has distinct investment objectives and policies. There can be no
assurance that a Fund's objectives will be achieved. Each Fund is a
diversified, open-end management company as defined in the Investment Company
Act of 1940, as amended (the "Act").
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in either
Fund may be worth more or less when redeemed than when purchased. Neither Fund
should be relied upon as a complete investment program.
General Information Regarding The Funds.
- ---------------------------------------
The Investment Adviser may purchase for the Funds common stocks, preferred
stocks, interests in real estate investment trusts, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures, limited liability companies and similar
enterprises, warrants and stock purchase rights ("equity securities"). In
choosing a Fund's securities, the Investment Adviser utilizes first-hand
fundamental research, including visiting company facilities to assess operations
and to meet decision-makers. The Investment Adviser may also use macro analysis
of numerous economic and valuation variables to anticipate changes in company
earnings and the overall investment climate. The Investment Adviser is able to
draw on the research and market expertise of the Goldman Sachs Global Investment
Research Department and other affiliates of the Investment Adviser, as well as
information provided by other securities dealers. Equity securities in a Fund's
portfolio will generally be sold when the Investment Adviser believes that the
market price fully reflects or exceeds the securities' fundamental valuation or
when other more attractive investments are identified.
Internet Tollkeeper Fund - Growth Style. The Internet Tollkeeper Fund is
managed using a growth equity oriented approach. Equity securities for this Fund
are selected based on their prospects for above average growth. The Investment
Adviser will select securities of growth companies trading, in the Investment
Adviser's opinion, at a reasonable price relative to other industries,
competitors and historical price/earnings multiples. The Fund will generally
invest in companies whose earnings are believed to be in a relatively strong
growth trend, or, to a lesser extent, in companies in which significant further
growth is not anticipated but whose market value per share is thought to be
undervalued. In order to determine whether a security has favorable growth
prospects, the Investment Adviser ordinarily looks for one or more of the
following characteristics in relation to the security's prevailing price:
prospects for above average sales and earnings growth per share; high return on
invested capital; free cash flow generation; sound balance sheet, financial and
accounting policies, and overall financial strength; strong competitive
advantages; effective research, product development, and marketing; pricing
flexibility; strength of management; and general operating characteristics that
will enable the company to compete successfully in its marketplace.
The Internet Generally. The Internet is a global collection of connected
computers that allows commercial and professional organizations, educational
institutions, government
B-4
<PAGE>
agencies, and consumers to communicate electronically, access and share
information and conduct business. It is dramatically changing the way consumers
and businesses are buying and selling goods and services. The World Wide Web, a
means of graphically interfacing with the Internet, provides companies with the
ability to reach a global audience with greater operating efficiency and
conveniently provides consumers with a broad selection of services and products.
Historical technological breakthroughs like the invention of the telephone,
electricity and the automobile changed the way people lived and conducted
commerce. As with previous advancements in communication there is a tremendous
amount of excitement and activity being generated by people researching
information, consumers shopping for products, companies improving their business
plans and investors seeking to capitalize on opportunities. The advent of the
radio, television and the personal computer was also met with a high degree of
excitement and many of the companies that were associated with the new
technology received high stock valuations. Only a few of these original
companies were able to achieve long-term success. The Investment Adviser
believes that it is difficult to predict which of the new Internet companies
will ultimately succeed but that there will be many established companies that
will benefit from the growth of the Internet.
Origins of the Internet. The evolution of the Internet began as a result
of the Cold War. In 1962, The Rand Corporation was asked by the United States
Military to devise a military communication network that could survive a nuclear
war. The basic premise of the network was to have a decentralized network that
would still be able to deliver messages to their destinations even if some nodes
(cities) were destroyed along the route.
The first network called ARAPNET connected four universities in 1969. The
original use of the network was for long-distance computation that allowed
researchers to collaborate on projects. A secondary use also evolved as people
began to use the network as an electronic post office to trade e-mails. As
networking technology improved and the number of personal computers increased
the Internet evolved into much more than a global communications medium. Today,
electronic commerce has become an integral part of the global economy.
International Data Corporation (IDC) estimates that at the end of 1999, there
were approximately 240 million web users worldwide.
Growth of the Internet. Personal and business use of the Internet is
growing quickly. Personal uses of the Internet have advanced beyond teenage
chat rooms and pictorials featuring the emperor's clothing to sending electronic
mail, researching information, accessing on-line versions of publications,
getting maps and driving directions and listing group or association schedules
and events. Businesses are offering products and services to both consumers and
business clients. Forrestor Research has estimated that business to consumer
electronic commerce was $18.1 billion in 1999. In 1998, Forrestor Research
estimated that business to business electronic commerce would be $109 billion in
1999. Companies are offering products and services that do not require the
customer's physical presence to purchase including books, music, videos, airline
tickets and stock trading. Business to business commerce will likely benefit as
companies are better equipped and connected than most consumers.
B-5
<PAGE>
Risk Considerations Regarding the Internet Industry. The market in which
many Internet companies compete is characterized by rapidly changing technology,
evolving industry standards, frequent new service and product announcements,
introductions and enhancements and changing customer demands. The failure of an
Internet company to adapt to such changes could have a material adverse effect
on the company's business, results of operations and financial condition. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by an Internet company to modify or adapt its services
or infrastructure, which could have a material adverse effect on an Internet
company's business, results of operations and financial condition.
The success of the many Internet companies will also depend in large part
upon the development and maintenance of the infrastructure of the World Wide Web
for providing reliable Web access and services, such as a reliable network
backbone with the necessary speed, data capacity and security, or timely
development of complementary products such as high speed modems. There can be
no assurance that the infrastructure or complementary products or services
necessary to make the Web a viable commercial marketplace for the long term will
be developed or that if they are developed, that the Web will become a viable
commercial marketplace for services such as those offered by Internet companies.
The market for the purchase of products and services over the Internet is a
new and emerging market. If acceptance and growth of Internet use does not
occur, an Internet company's business and financial performance will suffer.
Although there has been substantial interest in the commercial possibilities for
the Internet, many businesses and consumers have been slow to purchase Internet
access services for a number of reasons, including inconsistent quality of
service, lack of availability of cost-effective, high-speed service, a limited
number of local access points for corporate users, inability to integrate
business applications on the Internet, the need to deal with multiple and
frequently incompatible vendors, inadequate protection of the confidentiality of
stored data and information moving across the Internet and a lack of tools to
simplify Internet access and use. It is possible that a sufficiently broad base
of consumers may not adopt, or continue to use, the Internet as a medium of
commerce.
Despite the implementation of security measures, an Internet company's
networks may be vulnerable to unauthorized access, computer viruses and other
disruptive problems. Internet companies have in the past experienced, and may
in the future experience, interruptions in service as a result of the accidental
or intentional actions of Internet users, current and former employees or
others. Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems of a company and its
subscribers. These events may result in liability of the company to its
subscribers and also may deter potential subscribers.
The law relating to the liability of online services companies for
information carried on or disseminated through their services is currently
unsettled. It is possible that claims could be made against online services
companies under both United States and foreign law for defamation, libel,
invasion of privacy, negligence, copyright or trademark infringement, or other
B-6
<PAGE>
theories based on the nature and content of the materials disseminated through
their services. Several private lawsuits seeking to impose such liability upon
other online services companies are currently pending. In addition, legislation
has been proposed that imposes liability for or prohibits the transmission over
the Internet of certain types of information. The increased attention focused
upon liability issues as a result of these lawsuits and legislative proposals
could also impact the growth of Internet use.
It is possible that a number of laws and regulations may be adopted with
respect to the Internet or other online services covering issues such as user
privacy, freedom of expression, pricing, content and quality of products and
services, taxation, advertising, intellectual property rights and information
security. The nature of such governmental action and the manner in which it may
be interpreted and enforced cannot be fully determined. Such action could
subject an Internet company and/or its customers to potential liability, which
in turn could have an adverse effect on the Internet company's business, results
of operations and financial condition. The adoption of any such laws or
regulations might also decrease the rate of growth of Internet use, which in
turn could decrease the demand for the services of Internet companies or
increase the cost of doing business or in some other manner have a material
adverse effect on an Internet company's business, results of operations and
financial condition. In addition, applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy is
uncertain. The vast majority of such laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also recently
settled a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for the services of an Internet company
or increase the cost of doing business as a result of litigation costs or
increased service delivery costs, or could in some other manner have a material
adverse effect an Internet company's business, results of operations and
financial condition.
Internet companies do not collect sales or other similar taxes. However,
one or more states may seek to impose sales tax collection obligations on
Internet companies which engage in or facilitate online commerce, and a number
of proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of electronic
commerce, and could adversely affect an Internet company's opportunity to derive
financial benefit from such activities. Moreover, a successful assertion by one
or more states or any foreign country that an Internet company should collect
sales or other taxes on the exchange of merchandise on its system could have a
material adverse effect on an Internet company's business, results of operations
and financial condition.
B-7
<PAGE>
Legislation limiting the ability of the states to impose taxes on Internet-
based transactions has been proposed in the U.S. Congress. There can be no
assurance that this legislation will ultimately be enacted into law or that the
final version of this legislation will not contain a limited time period in
which such tax moratorium will apply. In the event that the tax moratorium is
imposed for a limited time period, there can be no assurance that the
legislation will be renewed at the end of such period. Failure to enact or
renew this legislation could allow various states to impose taxes on Internet-
based commerce and the imposition of such taxes could have a material adverse
affect on an Internet company's business, results of operations and financial
condition.
Real Estate Securities Fund. The investment strategy of the Real Estate
Securities Fund is based on the premise that property market fundamentals are
the primary determinant of growth which underlies the success of companies in
the real estate industry. The Fund's research and investment process focuses on
companies that can achieve sustainable growth in cash flow and dividend paying
capability. This process is comprised of real estate market research and
securities analysis. The Fund's Investment Adviser will take into account
fundamental trends in underlying property markets as determined by proprietary
models, research of local real estate market, earnings, cash flow growth and
stability, the relationship between asset values and market prices of the
securities and dividend payment history. The Investment Adviser will attempt to
purchase securities so that its underlying portfolio will be diversified
geographically and by property type.
Other Information. Since normal settlement for equity securities is three
trading days (for certain international markets settlement may be longer), the
Funds will need to hold cash balances to satisfy shareholder redemption
requests. Such cash balances will normally range from 2% to 5% of a Fund's net
assets. Additionally, the Funds may purchase futures contracts to manage their
cash position. For example, if cash balances are equal to 5% of the net assets,
the Fund may enter into long futures contracts covering an amount equal to 5% of
the Fund's net assets. As cash balances fluctuate based on new contributions or
withdrawals, a Fund may enter into additional contracts or close out existing
positions.
Corporate Debt Obligations
- --------------------------
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
Corporate debt obligations are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations and may also be subject
to price volatility due to such factors as market interest rates, market
perception of the creditworthiness of the issuer and general market liquidity.
An economic downturn could severely affect the ability of highly leveraged
issuers of junk bond securities to service their debt obligations or to repay
their obligations upon maturity. Factors having an adverse impact on the market
value of junk bonds will have an adverse effect on a Fund's net asset value to
the extent it invests in such securities. In addition, a Fund may incur
additional
B-8
<PAGE>
expenses to the extent it is required to seek recovery upon a default in payment
of principal or interest on its portfolio holdings.
The secondary market for junk bonds, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities. This reduced liquidity may have an adverse effect on the
ability of the Funds to dispose of a particular security when necessary to meet
their redemption requests or other liquidity needs. Under adverse market or
economic conditions, the secondary market for junk bonds could contract further,
independent of any specific adverse changes in the condition of a particular
issuer. As a result, the Investment Adviser could find it difficult to sell
these securities or may be able to sell the securities only at prices lower than
if such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under such circumstances, may be less than
the prices used in calculating a Fund's net asset value.
Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which the Funds may
invest, the yields and prices of such securities may tend to fluctuate more than
those for higher rated securities. In the lower quality segments of the fixed-
income securities market, changes in perceptions of issuers' creditworthiness
tend to occur more frequently and in a more pronounced manner than do changes in
higher quality segments of the fixed-income securities market, resulting in
greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
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 Investment Adviser 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.
The Investment Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Investment Adviser
continually monitors the investments in a Fund's portfolio and evaluates whether
to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
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<PAGE>
U.S. Government Securities
- --------------------------
Each Fund may invest in U.S. Government securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. Government agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include Treasury receipts and other
stripped U.S. Government securities, where the interest and principal components
of stripped U.S. Government Securities are traded independently. A Fund may
also invest in zero coupon U.S. Treasury securities and in zero coupon
securities issued by financial institutions, which represent a proportionate
interest in underlying U.S. Treasury securities. A zero coupon security pays no
interest to its holder during its life and its value consists of the difference
between its face value at maturity and its cost. The market prices of zero
coupon securities generally are more volatile than the market prices of
securities that pay interest periodically.
Bank Obligations
- ----------------
Each Fund may invest in obligations issued or guaranteed by U.S. or foreign
banks. Bank obligations, including without limitation, time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation. Banks are subject to extensive but
different governmental regulations which may limit both the amount and types of
loans which may be made and interest rates which may be charged. 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 operation of this industry.
Zero Coupon Bonds
- -----------------
A Fund's investments in fixed-income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund
will accrue income on such investments for each taxable year which (net of
deductible expenses, if any) is distributable to shareholders and which, because
no cash is generally received at the time of accrual, may require the
liquidation of other portfolio securities to obtain sufficient cash to satisfy
the Fund's distribution obligations.
B-10
<PAGE>
Variable and Floating Rate Securities
- -------------------------------------
The interest rates payable on certain fixed-income securities in which a
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.
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.
Mortgage-Backed Securities
- --------------------------
General Characteristics. Each Fund may invest in mortgage-backed
securities. 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, multifamily (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,
multifamily 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 mortgage-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
B-11
<PAGE>
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.
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"), collateralized mortgage obligations and stripped
mortgage-backed securities. A Fund is permitted to invest in other types of
mortgage-backed securities that may be available in the future to the extent
consistent with its investment policies and objective.
A Fund's investments in mortgage-backed securities may include securities
issued or guaranteed by the U.S. Government or one of its agencies, authorities,
instrumentalities or sponsored enterprises, such as the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
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 guaranty, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
B-12
<PAGE>
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
multifamily 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 and
undivided interests in whole loans and participations comprising another Freddie
Mac Certificate group.
Mortgage Pass-Through Securities. Each Fund may invest in both government
guaranteed and privately issued mortgage pass-through securities ("Mortgage
Pass-Throughs"); that is, fixed or adjustable rate mortgage-backed securities
which provide for monthly payments that are a "pass-through" of the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees or other
amounts paid to any guarantor, administrator and/or servicer of the underlying
mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
Description of Certificates. Mortgage Pass-Throughs may be issued in
one or more classes of senior certificates and one or more classes of
subordinate certificates. Each such class may bear a different pass-through
rate. Generally, each certificate will evidence the specified interest of the
holder thereof in the payments of principal or interest or both in respect of
the mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--------
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
B-13
<PAGE>
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.
Ratings. The ratings assigned by a rating organization to Mortgage
Pass-Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
Credit Enhancement. Credit support falls generally into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pools of mortgages, the provision of a reserve fund, or a
combination thereof, to ensure, subject to certain limitations, that scheduled
payments on the underlying pool are made in a timely fashion. Protection
against losses resulting from default ensures ultimate payment of the
obligations on at least a portion of the assets in the pool. Such credit
support can be provided by, among other things, payment guarantees, letters of
credit, pool insurance, subordination, or any combination thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to
achieve ratings on one or more classes of Mortgage Pass-Throughs, one or more
classes of certificates may be subordinate certificates which provide that the
rights of the subordinate certificate-holders to receive any or a specified
portion of distributions with respect to the underlying mortgage loans may be
subordinated to the rights of the senior certificate-holders. If so structured,
the subordination feature may be enhanced by distributing to the senior
certificate-holders on certain distribution dates, as payment of principal, a
specified percentage (which generally declines over time) of all principal
B-14
<PAGE>
payments received during the preceding prepayment period ("shifting interest
credit enhancement"). This will have the effect of accelerating the amortization
of the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due 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 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
B-15
<PAGE>
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 if 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.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations. A 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 Freddie Mac or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class mortgage-backed
securities represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participation 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
B-16
<PAGE>
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.
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 Real Estate Securities Fund may
invest in stripped mortgage-backed securities ("SMBS"), which are derivative
multiclass mortgage securities. Although the market for such securities is
increasingly liquid, certain SMBS may not be readily marketable and will be
considered illiquid for purposes of the Fund's limitation on investments in
illiquid securities. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other mortgage-backed securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
B-17
<PAGE>
Inverse Floating Rate Securities
- --------------------------------
The Real Estate Securities Fund may invest in inverse floating rate debt
securities ("inverse floaters"). The interest rate on an inverse floater 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 degree of leverage
inherent in inverse floaters is associated with greater volatility in their
market values. 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 15% limitation on investments in such
securities.
Asset-Backed Securities
- -----------------------
Each Fund may invest in 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.
Like mortgage-backed securities, asset-backed 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.
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
B-18
<PAGE>
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.
Futures Contracts and Options on Futures Contracts
- --------------------------------------------------
Each Fund may purchase and sell futures contracts and may also purchase and
write call and put options on futures contracts. The Funds may purchase and
sell futures contracts based on various securities (such as U.S. Government
securities), securities indices, foreign currencies and 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 Commodity Futures Trading Commission ("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 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
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 through the sale of futures contracts to offset a decline in the value of
its current portfolio securities. When rates are falling or 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. Similarly, each Fund can purchase and sell futures
contracts on a specified currency in order to seek to increase total return or
to hedge against changes in currency exchange rates. Each Fund can purchase
futures contracts on foreign currency to establish the price in U.S. dollars of
a security quoted or denominated in such currency that such Fund has acquired or
expects to acquire.
Positions taken in the futures market are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While each Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead
B-19
<PAGE>
make or take delivery of the underlying securities or currency whenever it
appears economically advantageous for the Fund to do so. A clearing corporation
associated with the exchange on which futures 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, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. 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 dollar
value of such Fund's portfolio securities. Similarly, each Fund may 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 quoted or denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the applicable 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, a Fund 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 or rates 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
B-20
<PAGE>
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 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. A Fund will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
Other Considerations. Each Fund will engage in futures transactions and
related options transactions only for bona fide hedging as defined in the
regulations of the CFTC or to seek to increase total return to the extent
permitted by such regulations.
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 such 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. A Fund will engage in transactions in futures contracts and, for a
Fund permitted to do so, related options transactions only to the extent such
transactions are consistent with the requirements of the Code for maintaining
its qualification as a regulated investment company for federal income tax
purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in certain cases, require the Fund to
segregate with its custodian cash or liquid assets 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,
unanticipated changes in interest rates, 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 difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
In addition, it is not possible for a Fund to hedge fully or perfectly against
currency fluctuations affecting the value of securities quoted or 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.
B-21
<PAGE>
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. A Fund may also, to the
extent it invests in foreign securities, write (sell) put and call options on
foreign currencies. 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 as long as the option is outstanding or such
Fund will use the other methods described below. A 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 would obligate such 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.
Call and put options written by a Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund or by an offsetting forward contract which, by virtue of its exercise price
or otherwise, reduces a Fund's net exposure on its written option position.
A Fund may also write (sell) covered call and put options on any securities
index comprised 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 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.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration which has
been segregated by the Fund) upon conversion or exchange of other securities in
its portfolio. A Fund may cover call and put options on a securities index by
segregating cash or liquid assets with a value equal to the exercise price.
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."
B-22
<PAGE>
Purchasing Options. Each Fund may purchase put and call options on any
securities in which it may invest or on any securities index comprised of
securities in which it may invest. A Fund may also, to the extent that it
invests in foreign securities, purchase put and call options on foreign
currencies. 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 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 if, during the option period, the value of such
securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise such a Fund would realize either no gain or a loss
on the purchase of the call option.
A Fund may purchase put options in anticipation of a decline in the market
value of securities in its portfolio ("protective puts") or in securities in
which it may invest. 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
more than cover the premium and transaction costs; otherwise such a 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 portfolio securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
Yield Curve Options. The Real Estate Securities 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.
The Real Estate Securities Fund may purchase or write yield curve options
for the same purposes as other options on securities. For example, the Fund may
purchase a call option on the yield spread between two securities if it owns one
of the securities and anticipates purchasing the other security and wants to
hedge against an adverse change in the yield spread between the two securities.
The Real Estate Securities 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
B-23
<PAGE>
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 risk of loss even if the yield of one of the underlying securities
remains constant, or if the spread moves in a direction or to an extent which
was not anticipated.
Yield curve options written by the Real Estate Securities 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, the Fund's liability for such a covered option is generally
limited to the difference between the amount of such Fund's liability under the
option written by the Fund less the value of the option held by the Fund. Yield
curve options may also be covered in such other manner as may be in accordance
with the requirements of the counterparty with which the option is traded and
applicable laws and regulations. Yield curve options are traded over-the-
counter, and because they have been only recently introduced, established
trading markets for these options have not yet developed.
Risks Associated with Options Transactions. There is no assurance that a
liquid secondary market on an 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
segregated assets until the options expire or are exercised. Similarly, if a
Fund is unable to effect a closing sale transaction with respect to options it
has purchased, it will have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of underlying
securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Each 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.
B-24
<PAGE>
Transactions by each Fund in options on securities and indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities 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. Thus, the number of options which a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the 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.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to seek to
increase total return involves the risk of loss if the Investment Adviser is
incorrect in its expectation of fluctuations in securities prices or interest
rates. The successful use of options for hedging purposes also depends in part
on the ability of the Investment Adviser to manage future price fluctuations and
the degree of correlation between the options and securities (or currency)
markets. If the Investment Adviser is incorrect in its expectation of changes
in market prices or determination of the correlation between the instruments or
indices on which options are written and purchased and the instruments 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.
Real Estate Investment Trusts
- -----------------------------
Each Fund may invest in shares of REITs. The Real Estate Securities Fund
expects that a substantial portion of its total assets will be invested in REITs
and real estate industry companies. REITs are pooled investment vehicles which
invest primarily in real estate or real estate related loans. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly
in real property and derive income primarily from the collection of rents.
Equity REITs can also realize capital gains by selling properties that have
appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest
payments. Like regulated investment companies such as the Funds, REITs are not
taxed on income distributed to shareholders provided they comply with certain
requirements under the Code. A Fund will indirectly bear its proportionate share
of any expenses paid by REITs in which it invests in addition to the expenses
paid by a Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers, self-
liquidation, and the possibilities of failing to qualify for the exemption from
tax for distributed income under the Code and failing to maintain their
exemptions from the Act. REITs (especially mortgage REITs) are also subject to
interest rate risks.
B-25
<PAGE>
Warrants and Stock Purchase Rights
- ----------------------------------
Each Fund may invest in warrants or rights (other than those acquired in
units or attached to other securities) which entitle the holder to buy equity
securities at a specific price for a specific period of time. A Fund will
invest in warrants and rights only if such equity securities are deemed
appropriate by the Investment Adviser for investment by the Fund. Warrants and
rights have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer.
Foreign Securities
- ------------------
The Internet Tollkeeper and Real Estate Securities Funds may invest in the
aggregate up to 25% and 15%, respectively, of their total assets in foreign
securities, including securities of issuers in emerging countries. Investments
in foreign securities may offer potential benefits not available from
investments solely in U.S. dollar-denominated or quoted securities of domestic
issuers. Such benefits may include the opportunity to invest in foreign issuers
that appear, in the opinion of the Investment Adviser, to offer the potential
for long-term growth of capital and income, the opportunity to invest in foreign
countries with economic policies or business cycles different from those of the
United States and the opportunity to reduce fluctuations in portfolio value by
taking advantage of foreign stock markets that do not necessarily move in a
manner parallel to U.S. markets.
Investing in foreign securities involves certain special risks, including
those set forth below, which are not typically associated with investing in U.S.
dollar-denominated or quoted securities of U.S. issuers. Investments in foreign
securities usually involve currencies of foreign countries. Accordingly, any
Fund that invests in foreign securities 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. The Funds may
be subject to currency exposure independent of their securities positions. 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.
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.
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 issuer than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States 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
B-26
<PAGE>
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 foreign securities
exchanges, brokers, dealers and listed and unlisted companies than in the United
States.
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 some of a Fund's assets are uninvested and no return is earned on
such assets. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio securities or, if the Fund has entered into a contract to
sell the securities, could result in possible liability to the purchaser. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect a Fund's investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Each Fund may invest in foreign securities which take the form of sponsored
and unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs") and may also invest in European Depository Receipts ("EDRs")
or other similar instruments representing securities of foreign issuers
(together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do
not have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments. Investment in Depository Receipts does not eliminate all
the risks inherent in investing in securities of non-U.S. issuers. The market
value of Depository Receipts is dependent upon the market value of the
underlying securities and fluctuations in the relative value of the currencies
in which the Depository Receipts and the underlying securities are quoted.
However, by investing in Depository Receipts, such as ADRs, that are quoted in
U.S. dollars, a Fund may avoid currency risks during the settlement period for
purchases and sales.
B-27
<PAGE>
As described more fully below, each Fund may invest in countries with
emerging economies or securities markets. Political and economic structures in
many of such countries may be undergoing significant evolution and rapid
development, and such countries may lack the social, political and economic
stability characteristic of more developed countries. Certain of such countries
may have in the past failed to recognize private property rights and have at
times nationalized or expropriated the assets of private companies. As a
result, the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. See "Investing in Emerging Markets,
including Asia and Eastern Europe," below.
Investing in Emerging Countries, including Asia and Eastern Europe. Each
of the securities markets of the emerging countries is less liquid and subject
to greater price volatility and has a smaller market capitalization than the
U.S. securities markets. Issuers and securities markets in such countries are
not subject to as extensive and frequent accounting, financial and other
reporting requirements or as comprehensive government regulations as are issuers
and securities markets in the U.S. In particular, the assets and profits
appearing on the financial statements of emerging country issuers may not
reflect their financial position or results of operations in the same manner as
financial statements for U.S. issuers. Substantially less information may be
publicly available about emerging country issuers than is available about
issuers in the United States.
Emerging country securities markets are typically marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain emerging countries are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in emerging countries may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. The limited size of many of these securities markets can
cause prices to be erratic for reasons apart from factors that affect the
soundness and competitiveness of the securities issuers. For example, prices
may be unduly influenced by traders who control large positions in these
markets. 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 limited liquidity of emerging country
markets may also affect a Fund's ability to accurately value its portfolio
securities or to acquire or dispose of securities at the price and time it
wishes to do so or in order to meet redemption requests.
Transaction costs, including brokerage commissions or dealer mark-ups, in
emerging countries may be higher than in the United States and other developed
securities markets. In addition, existing laws and regulations are often
inconsistently applied. 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.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees. These restrictions may limit a
Fund's investment in certain emerging countries and may increase the expenses of
the Fund. Certain emerging countries require
B-28
<PAGE>
governmental approval prior to investments by foreign persons or limit
investment 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 company available
for purchase by nationals. In addition, the repatriation of both investment
income and capital from several of the emerging countries is subject to
restrictions which require governmental consents or prohibit repatriation
entirely for a period of time. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of a Fund. A Fund may be required to establish special
custodial or other arrangements before investing in certain emerging countries.
Each of the emerging countries may be subject to a substantially greater
degree of economic, political and social instability and disruption than is the
case in the United States, Japan and most Western European countries. This
instability may result from, among other things, the following: (i)
authoritarian governments or military involvement in political and economic
decision making, including changes or attempted changes in governments through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic or social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; (v) ethnic, religious and
racial disaffection or conflict; and (vi) the absence of developed legal
structures governing foreign private investments and private property. Such
economic, political and social instability could disrupt the principal financial
markets in which the Funds may invest and adversely affect the value of the
Funds' assets. A Fund's investments could in the future be adversely affected
by any increase in taxes or by political, economic or diplomatic developments.
A Fund may seek investment opportunities within former "east bloc" countries in
Eastern Europe. All or a substantial portion of such investments may be
considered "not readily marketable" for purposes of the limitation on illiquid
securities set forth below. For example, most Eastern European countries have
had a centrally planned, socialist economy since shortly after World War II.
The governments of a number of Eastern European countries currently are
implementing reforms directed at political and economic liberalization,
including efforts to decentralize the economic decision-making process and move
towards a market economy. However, business entities in many Eastern European
countries do not have any recent history of operating in a market-oriented
economy, and the ultimate impact of Eastern European countries' attempts to move
toward more market-oriented economies is currently unclear. In addition, any
change in the leadership or policies of Eastern European countries may halt the
expansion of or reverse the liberalization of foreign investment policies now
occurring and adversely affect existing investment opportunities.
The economies of 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 payments. 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 are vulnerable to weakness in
world prices for their commodity exports.
B-29
<PAGE>
A Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates. See
"Taxation."
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 a Fund remain uninvested and no return
is earned on such assets. The inability of a Fund to make intended security
purchases or sales due to settlement problems could result either in losses to
the Fund due to subsequent declines in value of the portfolio securities or, if
the Fund has entered into a contract to sell the securities, could result in
possible liability to the purchaser.
Forward Foreign Currency Exchange Contracts. The Funds may enter into
forward foreign currency exchange contracts for hedging purposes and to seek to
protect against anticipated changes in future foreign currency exchange rates.
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
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 a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are often, but
not always, effected with the currency trader who is a party to the original
forward contract.
A 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 denominated or quoted in a foreign currency, or
when a Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, the Fund
will attempt to protect itself against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Investment 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
B-30
<PAGE>
of some or all of such Fund's portfolio securities quoted or denominated in such
foreign currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date on which the contract is entered into and the date it matures. Using
forward contracts to protect the value of a Fund's portfolio securities against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
which a Fund can achieve at some future point in time. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the U.S. dollar value of only a portion of a Fund's
foreign assets.
Unless otherwise covered in accordance with applicable regulations, cash or
liquid assets of a Fund 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. The segregated assets will be marked-to-market on
a daily basis. If the value of the segregated assets declines, additional cash
or liquid assets will be segregated on a daily basis so that the value of the
assets will equal the amount of a Fund's commitments with respect to such
contracts. Although the contracts are not presently regulated by the 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.
While a Fund may enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause a Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. 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, currency
swaps or other privately negotiated currency instruments unless the credit
quality of the unsecured senior debt or the claims-paying ability of the
counterparty is considered to be investment grade by the Investment Adviser. 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.
Writing and Purchasing Currency Call and Put Options. Each Fund may, to
the extent that it invests in foreign securities, write and purchase put and
call options on foreign currencies for
B-31
<PAGE>
the purpose of protecting against declines in the U.S. dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. As with other kinds of option transactions, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. If and when a Fund seeks to
close out an option, 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. Options on foreign currencies to
be written or purchased by a Fund will be traded on U.S. and foreign exchanges
or over-the-counter.
Options on currency may be used for hedging purposes or to seek to increase
total return when the Investment Adviser anticipates that the currency will
appreciate or depreciate in value, but the securities quoted or denominated in
that currency do not present attractive investment opportunities and are not
included in the Fund's portfolio.
A call option written by a Fund obligates a Fund to sell a specified
currency to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option written by a
Fund would obligate a Fund to purchase a specified currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. The writing of currency options involves a risk that a Fund
will, upon exercise of the option, be required to sell currency subject to a
call at a price that is less than the currency's market value or be required to
purchase currency subject to a put at a price that exceeds the currency's market
value. For a description of how to cover written put and call options, see
"Writing Covered Options" above.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has 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 options
purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of
a call option would entitle the Fund, in return for the premium paid, to
purchase specified currency at a specified price during the option period. 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.
A Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell specified currency at
a specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the 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
B-32
<PAGE>
sufficiently to more than cover the premium and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the put option.
Gains and losses on the purchase of protective put options would tend to be
offset by countervailing changes in the value of underlying currency or
portfolio securities.
In addition to using options for the hedging purposes described above, the
Funds may use options on currency to seek to increase total return. The Funds
may write (sell) covered put and call options on any currency in order to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, the Funds may forego the opportunity to profit from an increase in the
market value of the underlying currency. Also, when writing put options, the
Funds accept, in return for the option premium, the risk that they may be
required to purchase the underlying currency at a price in excess of the
currency's market value at the time of purchase.
Special Risks Associated With Options on Currency. An exchange traded
options position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time.
For some options no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a Fund would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying currency (or security quoted
or denominated in that currency) until the option expires or it delivers the
underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading
in over-the-counter options is subject to the risk that the other party will be
unable or unwilling to close out options purchased or written by a Fund.
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
B-33
<PAGE>
Currency Swaps, Mortgage Swaps, Credit Swaps, Index Swaps and Interest Rate
- ---------------------------------------------------------------------------
Swaps, Caps, Floors and Collars
- -------------------------------
The Real Estate Securities Fund may enter into currency, mortgage, credit,
index and interest rate swaps and other interest rate swap arrangements such as
rate caps, floors and collars, for hedging purposes or to seek to increase total
return. Currency swaps involve the exchange by a Fund with another party of
their respective rights to make or receive payments in specified currencies.
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. Index swaps involve the exchange by a Fund with another
party of the respective amounts payable with respect to a notional principal
amount at interest rates equal to two specified indices. 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 for the other party, upon the
occurrence of specified credit events. 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.
A Fund will enter into interest rate, mortgage and index 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, index 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, index and mortgage swaps is limited to the
net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate, index or mortgage swap defaults,
the Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. In contrast, currency swaps usually
involve the delivery of a gross payment stream in one designated currency in
exchange for the gross payment stream in another designated currency.
Therefore, the entire payment stream under a currency swap is subject to the
risk that the other party to the swap will default on its contractual delivery
obligations. To the extent that the 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 or otherwise, the Funds and the Investment
Adviser believe that swaps do not constitute senior securities under the Act
and, accordingly, will not treat them as being subject to a Fund's borrowing
restrictions.
A Fund will not enter into transactions involving swaps, caps, floors or
collars unless the unsecured commercial paper, senior debt or claims paying
ability of the other party thereto is considered to be investment grade by the
Investment Adviser.
B-34
<PAGE>
The use of interest rate, mortgage, index, 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 an 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. 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.
Convertible Securities
- ----------------------
Each Fund 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
convertible security tends to reflect the market price of the underlying common
stock. As the market price of the underlying common stock declines, the
convertible security, like a fixed-income security, tends to trade increasingly
on a yield basis, and thus may not decline in price 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. In evaluating a convertible security, the Investment
Adviser will give primary emphasis to the attractiveness of the underlying
common stock. Convertible debt securities are equity investments for purposes
of each Fund's investment policies.
Preferred Securities
- --------------------
Each Fund may invest in preferred securities. 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 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.
Equity Swaps
- ------------
Each Fund may enter into equity swap contracts to invest in a market
without owning or taking physical custody of securities in circumstances in
which direct investment is restricted for legal reasons or is otherwise
impracticable. Equity swaps may also be used for hedging purposes or
B-35
<PAGE>
to seek to increase total return. The counterparty to an equity swap contract
will typically be a bank, investment banking firm or broker/dealer. Equity swap
contracts may be structured in different ways. For example, a counterparty may
agree to pay the Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in the
particular stocks (or an index of stocks), plus the dividends that would have
been received on those stocks. In these cases, the Fund may agree to pay to the
counterparty a floating rate of interest on the notional amount of the equity
swap contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to
the Fund on the equity swap contract should be the gain or loss on the notional
amount plus dividends on the stocks less the interest paid by the Fund on the
notional amount. In other cases, the counterparty and the Fund may each agree to
pay the other the difference between the relative investment performances that
would have been achieved if the notional amount of the equity swap contract had
been invested in different stocks (or indices of stocks).
A Fund will enter into equity 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. Payments may be made
at the conclusion of an equity swap contract or periodically during its term.
Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited
to the net amount of payments that a Fund is contractually obligated to make.
If the other party to an equity 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. Inasmuch as these transactions are entered into for hedging purposes or
are offset by segregated cash or liquid assets to cover the Funds' potential
exposure, the Funds and their Investment Adviser believe that transactions do
not constitute senior securities under the Act and, accordingly, will not treat
them as being subject to a Fund's borrowing restrictions.
A Fund will not enter into swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party
thereto is considered to be investment grade by the Investment Adviser.
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
B-36
<PAGE>
borrower of the securities fail financially. However, the loans would be made
only to firms deemed by the Investment Adviser to be of good standing, and when,
in the judgment of the Investment Adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If
the 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 a Fund (including the loan collateral).
Cash received as collateral for securities lending transactions may be
invested in other investment eligible securities. Investing the collateral
subjects it to market depreciation or appreciation, and the Fund is responsible
for any loss that may result from its investment of the borrowed collateral.
When-Issued Securities and Forward Commitments
- ----------------------------------------------
Each Fund may purchase when-issued securities and enter into forward
commitments. 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. A Fund will purchase securities on a when-issued
basis or purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or negotiate a commitment after entering into it. A Fund
may realize a capital gain or loss in connection with these transactions. For
purposes of determining a Fund's duration, the maturity of when-issued or
forward commitment securities will be calculated from the commitment date. A
Fund is required to segregate until three days prior to the settlement date,
cash and liquid assets in an amount sufficient to meet the purchase price.
Alternatively, a 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.
Investment in Unseasoned Companies
- ----------------------------------
Each Fund may invest in companies (including predecessors) which have
operated less than three years, except that this limitation does not apply to
debt securities which have been rated investment grade or better by at least one
nationally recognized statistical ratings organization ("NRSRO"). The
securities of such companies may have limited liquidity, which can result in
their being priced higher or lower than might otherwise be the case. In
addition, investments in unseasoned companies are more speculative and entail
greater risk than do investments in companies with an established operating
record.
B-37
<PAGE>
Other Investment Companies
- --------------------------
A Fund reserves the right to invest up to 10% of its total assets in the
securities of all investment companies (including SPDRs and WEBS and other
exchange-traded funds) but may neither invest more than 5% of its total assets
in any one investment company nor 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 other fees paid by the Fund. However, to the extent that the Fund
invests in a money market fund for which the Investment Adviser or any of its
affiliates acts as investment adviser, the advisory and other fees payable by
the Fund to the Investment Adviser will be reduced by an amount equal to the
Fund's proportionate share of the advisory and administration fees paid by such
money market fund to the investment adviser.
SPDRs are interests in a unit investment trust ("UIT") that may be obtained
from the UIT or purchased in the secondary market (SPDRs are listed on the
American Stock Exchange). There is a 5% limit based on total assets on
investments by any one Fund in SPDRs. The UIT will issue SPDRs in aggregations
known as "Creation Units" in exchange for a "Portfolio Deposit" consisting of
(a) a portfolio of securities substantially similar to the component securities
("Index Securities") of the Standard & Poor's 500 Composite Stock Price Index
(the "S&P Index"), (b) a cash payment equal to a pro rata portion of the
dividends accrued on the UIT's portfolio securities since the last dividend
payment by the UIT, net of expenses and liabilities, and (c) a cash payment or
credit ("Balancing Amount") designed to equalize the net asset value of the S&P
Index and the net asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, the Portfolio must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the
Portfolio will receive Index Securities and cash identical to the Portfolio
Deposit required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
Each Fund 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. Each Fund may, subject to the limitations stated above,
invest in World Equity Benchmark Shares ("WEBS") and similar securities that
invest in securities included in foreign securities indices.
B-38
<PAGE>
The Funds may, subject to the limitations stated above, invest in other
types of unaffiliated investment companies issuing shares which are traded like
traditional equity securities on a national stock exchange or the NASDAQ
National Market System.
Repurchase Agreements
- ---------------------
Each Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount of
their repurchase obligation. 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 a Fund's custodian (or subcustodian). 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 always 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 value
of the security. If the court characterizes the transaction as a loan and a
Fund has not perfected a security interest in the security, a 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 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), a 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, a Fund, together with other registered investment companies
having advisory agreements with the Investment Adviser or its 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-39
<PAGE>
Mortgage Dollar Rolls
- ---------------------
When Real Estate Securities Fund enters into a mortgage dollar roll, it
will segregate cash or liquid assets in an amount equal to the forward purchase
price until the settlement date.
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 equity
securities, or for other reasons. It is anticipated that the portfolio turnover
rate of each Fund will vary from year to year. During the Internet Tollkeeper
Fund's first year of operations its portfolio turnover rate is not expected to
exceed 50%.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority (as defined in the Act) of the outstanding voting
securities of the affected Fund. The investment objective of each Fund and all
other investment policies or practices of each Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder
approval. See "Investment Objectives and Policies" in the Prospectus. For
purposes of the Act, "majority" means the lesser of (a) 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
purposes of the following limitations, 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 Funds'
fundamental investment restriction no. 3, asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed, must be maintained at
all times.
A Fund may not:
(1) Make any investment inconsistent with the Fund's classification
as a diversified company under the Act.
(2) Invest 25% or more of its total assets in the securities of one
or more issuers conducting their principal business activities in
the same industry (other than the Goldman Sachs Real Estate
Securities Fund, which will invest at least 25% or more of its
total assets in the real estate industry and the Goldman Sachs
Internet Tollkeeper Fund which will invest at least 25% of its
total assets in companies in one or more of the media,
telecommunications, technology and/or internet industries)
(excluding the U.S. Government or any of its agencies or
instrumentalities).
B-40
<PAGE>
(3) Borrow money, except (a) the Fund may borrow from banks (as
defined in the Act) or through reverse repurchase agreements in
amounts up to 33-1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by
applicable law, borrow up to an additional 5% of its total assets
for temporary purposes, (c) the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) the Fund may purchase
securities on margin to the extent permitted by applicable law
and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) Make loans, except through (a) the purchase of debt obligations
in accordance with the Fund's investment objective and policies,
(b) repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted
by applicable law.
(5) Underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be
an underwriting.
(6) 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.
(7) Invest in commodities or commodity contracts, except that the
Fund may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
(8) Issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same investment objective,
restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of exercising control or
management.
B-41
<PAGE>
(b) 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.
(c) Purchase additional securities if the Fund's borrowings (excluding
covered mortgage dollar rolls) exceed 5% of its net assets.
(d) Make short sales of securities, except short sales against the box.
MANAGEMENT
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Adviser, 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.
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Ashok N. Bakhru, 58 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
(1984-1999); 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); and Trustee, Citizens
Scholarship Foundation of America (since
1998).
</TABLE>
B-42
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*David B. Ford, 54 Trustee Trustee- Goldman Sachs Variable
32 Old Slip Insurance Trust (registered investment
New York, NY 10005 company) (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 (since
November 1995); Co-Head and Director,
Goldman Sachs Funds Management L.P.
(since November 1995 and December 1994,
respectively); and Chairman and
Director, Goldman Sachs Asset Management
Japan Limited (since November 1994).
</TABLE>
B-43
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*Douglas C. Grip, 37 Trustee Trustee and President - Goldman Sachs
32 Old Slip & President Variable Insurance Trust (registered
New York, NY 10005 investment company) (since October
1997); Trustee, Trust for Credit Unions
(registered investment company) (since
March 1998); Managing Director, Goldman
Sachs Asset Management Group (since
November 1997); President, Goldman Sachs
Funds Group (since April 1996); and
President, MFS Retirement Services Inc.,
of Massachusetts Financial Services
(prior thereto).
*John P. McNulty, 47 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered investment
New York, NY 10005 company) (since October 1997); Managing
Director, Goldman Sachs (since November
1996); Head of Investment Management
Division (since September 1999); General
Partner, J. Aron & Company (commodity
dealer and risk management adviser)
(since November 1995); Director and
Co-Head, Goldman Sachs Funds Management,
L.P. (since November 1995); Director,
Goldman Sachs Asset Management
International (since January 1996);
Co-Head, GSAM (November 1995 - September
1999); Director, Global Capital
Reinsurance (insurance) (since 1989);
Director, Commodities Corp. LLC (since
April 1997); Limited Partner of Goldman
Sachs (1994 - November 1995); and
Trustee, Trust for Credit Unions
(registered investment company) (January
1996-March 1998).
</TABLE>
B-44
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Mary P. McPherson, 64 Trustee Trustee - Goldman Sachs Variable
The Andrew W. Mellon Foundation Insurance Trust (registered investment
140 East 62/nd/ Street company) (since October 1997); Vice
New York, NY 10021 President, 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, Josiah Macy, Jr.
Foundation (health educational programs)
(since 1977); Director, the Philadelphia
Contributionship (insurance) (since
1985); Director Emeritus, Amherst
College (1986-1998); Director, Dayton
Hudson Corporation (general retailing
merchandising) (1988-1997); Director,
The Spencer Foundation (educational
research) (since 1993); member of PNC
Advisory Board (banking) (since 1993);
and Director, American School of
Classical Studies in Athens (since 1997).
*Alan A. Shuch, 50 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered investment
New York, NY 10005 company) (since October 1997); Limited
Partner, Goldman Sachs (since December
1994); Consultant to GSAM (since
December 1994).
</TABLE>
B-45
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Jackson W. Smart, Jr., 69 Trustee Trustee - Goldman Sachs Variable
One Northfield Plaza, Suite 218 Insurance Trust (registered investment
Northfield, IL 60093 company) (since October 1997);
President, Board Member and Senior
Advisor, Smart Properties, Inc. (since
January 2000); Chairman, Executive
Committee and Director, First
Commonwealth, Inc. (a managed dental
care company) (January 1996 - August
1999); 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 Northwestern Healthcare (since
1980).
William H. Springer, 70 Trustee Trustee - Goldman Sachs Variable
701 Morningside Drive Insurance Trust (registered investment
Lake Forest, IL 60045 company) (since October 1997); Director,
The Walgreen Co. (a retail drug store
business) (April 1988 - January 2000);
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).
</TABLE>
B-46
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Richard P. Strubel, 60 Trustee Trustee - Goldman Sachs Variable
500 Lake Cook Road Insurance Trust (registered investment
Suite 150 company) (since October 1997); President
Deerfield, IL 60015 and COO, UNext.com (provider of
educational services via the internet)
(since 1999); Director, Gildan
Activewear Inc. (since February 1999);
Director of Kaynar Technologies Inc.
(since March 1997); Managing Director,
Tandem Partners, Inc. (1990-1999);
President and Chief Executive Officer,
Microdot, Inc. (a diversified
manufacturer of fastening systems and
connectors) (January 1984 - October
1994); Trustee, Northern Institutional
Funds (since December 1982); and
Director of Cantilever Technologies,
Inc. (since 1999).
*Nancy L. Mucker, 50 Vice President Vice President - Goldman Sachs Variable
4900 Sears Tower Insurance Trust (registered investment
Chicago, IL 60606 company) (since 1997); Vice President
and Co-Manager of Funds Group
Shareholder Servicing, Goldman Sachs
(since April 1985).
*John M. Perlowski, 35 Treasurer Treasurer - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered investment
New York, NY 10005 company) (since 1997); Vice President,
Goldman Sachs (since July 1995); and
Banking Director, Investors Bank and
Trust (November 1993 - July 1995).
</TABLE>
B-47
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*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); Managing
Director, Goldman Sachs (since October
1999); Vice President of GSAM (April
1997-December 1999); and Vice President
and General Manager, First Data
Corporation - Investor Services Group
(1994 to 1997).
*Jesse Cole, 36 Vice President Vice President - Goldman Sachs Variable
4900 Sears Tower Insurance Trust (registered investment
Chicago, IL 60606 company) (since 1998); Vice President,
GSAM (since June 1998); 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 Assistant Treasurer - Goldman Sachs
32 Old Slip Treasurer Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997); and
Vice President, Goldman Sachs (May
1992-Present).
*Michael J. Richman, 39 Secretary Secretary - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered investment
New York, NY 10005 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-48
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*Howard B. Surloff, 34 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Assistant General Counsel, GSAM and
General Counsel to the U.S. Funds Group
(since December 1997); Assistant General
Counsel and Vice President, Goldman
Sachs (since November 1993 and May 1994,
respectively), and Counsel to the Funds
Group, GSAM (November 1993 - December
1997).
*Valerie A. Zondorak, 34 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Assistant General Counsel, GSAM and
Assistant General Counsel to the Funds
Group (since December 1997); Vice
President and Assistant General Counsel,
Goldman Sachs (since March 1997);
Counsel to the Funds Group, GSAM (March
1997 - December 1997); and Associate of
Shereff, Friedman, Hoffman & Goodman
(September 1990 to February 1997).
*Deborah A. Farrell, 28 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust (registered
New York, NY 10005 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), and Executive Secretary,
Goldman Sachs (January 1994 - January
1996).
</TABLE>
B-49
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*Kaysie P. Uniacke, 39 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Managing Director, GSAM (since 1997);
and Vice President and Senior Portfolio
Manager, GSAM (1988 to 1997).
*Elizabeth D. Anderson, 30 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Portfolio Manager, GSAM (since April
1996); Junior Portfolio Manager, GSAM
(1995 - April 1996), and Funds Trading
Assistant, GSAM (1993 - 1995).
*Amy E. Belanger, 30 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Variable Insurance Trust (registered
New York, NY 10005 investment company) (since 1999); Vice
President, Goldman Sachs (since June
1999); Counsel, Goldman Sachs (since
1998); and Associate, Dechert Price &
Rhoads (September 1996-1998).
</TABLE>
Each interested Trustee and officer holds comparable positions with certain
other companies of which Goldman Sachs, GSAM or an affiliate thereof is the
investment adviser, administrator and/or distributor. As of March 17, 2000, the
Trustees and officers of the Trust as a group owned less than 1% of the
outstanding shares of beneficial interest of the Funds.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
B-50
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1999:
<TABLE>
<CAPTION>
Total Compensation from Goldman
Aggregate Pension or Retirement Benefits Sachs Trust and the Goldman Sachs
Compensation Accrued as Part of Funds' fund complex (including the
Name of Trustee from the Funds/2/ Expenses Funds)/3/
- --------------- ----------------- -------- ---------
<S> <C> <C> <C>
Ashok N. Bakhru/1/ $1,112 $0 $159,884
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson 813 0 118,716
Alan A. Shuch 0 0 0
Jackson W. Smart 813 0 118,716
William H. Springer 813 0 118,716
Richard P. Strubel 813 0 118,716
</TABLE>
________________________
/1/ Includes compensation as Chairman of the Board of Trustees.
/2/ Reflects amount paid by the Funds described in this Additional Statement
during the fiscal year ended December 31, 1999. The Internet Tollkeeper
Fund commenced operations on October 1, 1999.
/3/ The Goldman Sachs Fund complex consists of the Goldman Sachs Trust and
Goldman Sachs Variable Insurance Trust. Goldman Sachs Trust consisted of 51
mutual funds, including the Funds, on December 31, 1999. Goldman Sachs
Variable Insurance Trust consisted of 16 mutual funds as of December 31,
1999.
B-51
<PAGE>
Class A Shares of the Funds 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 rehired 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.
The Trust, its Investment Adviser and principal underwriter have adopted
codes of ethics under Rule 17j-1 of the Act that permit personnel subject to
their particular code of ethics to invest in securities, including securities
that may be purchased or held by the Funds.
Management Services
===================
As stated in the Funds' Prospectuses, GSAM, 32 Old Slip, New York, New
York, a unit of the Investment Management Division of Goldman Sachs, 85 Broad
Street, New York, New York, serves as Investment Adviser to the Funds. See
"Service Providers" in the Funds' Prospectuses for a description of the
Investment Adviser's duties to the Funds. The Goldman Sachs Group, Inc.,
controls the Funds' Investment Adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan,
Montreal, 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. 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 Investment Adviser is able to draw on the substantial research and
market expertise of Goldman Sachs, whose investment research effort is one of
the largest in the industry. 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
Adviser.
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
B-52
<PAGE>
consistently been highly ranked in respected industry surveys conducted in the
U.S. and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure
and evaluate portfolios.
In managing the Funds, the Investment Adviser has access to 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 movement 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 among foreign countries and currencies for the Funds,
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' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for a Fund given its investment
objectives and criteria.
The Management Agreement provides that GSAM, in its capacity as Investment
Adviser, may render similar services to others as long as the services under the
Management Agreement are not impaired thereby. The Internet Tollkeeper and Real
Estate Securities Funds' Management Agreement was initially approved by the
Trustees, including a majority of the non-interested Trustees (as defined below)
who are not parties to the Management Agreement, on July 27, 1999 and July 22,
1997, respectively. The Management Agreement was most recently approved with
respect to each Fund by the Trustees, including a majority of the Trustees who
are not parties to the Management Agreement or "interested persons" (as such
term is defined in the Act) of any party thereto (the "non-interested
Trustees"), on April 25, 2000. The sole shareholder of the Internet Tollkeeper
and Real Estate Securities Funds approved these arrangements on September 23,
1999 and July 21, 1997, respectively. The Management Agreement will remain in
effect until June 30, 2001 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.
B-53
<PAGE>
The Management Agreement will terminate automatically if assigned (as
defined in the Act). The Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the particular Fund on 60 days' written notice
to the Investment Adviser and by the Investment Adviser on 60 days' written
notice to the Trust.
Pursuant to the Management Agreement the Investment Adviser is entitled to
receive fees, payable monthly, at the annual rate of 1.00% of each Fund's
average daily net assets. The Funds had no fee waiver arrangements at the
fiscal year ended December 31, 1999 or December 31, 1998.
For the fiscal years ended December 31, 1999 and December 31, 1998 the
amounts of the investment advisory fees incurred by each Fund then in existence
were as follows:
Fiscal year ended Fiscal year ended
December 31, December 31,
1999 1998
---- ----
Real Estate Securities Fund/1/ $1,490,779 $82,560
Internet Tollkeeper Fund/1, 2/ 1,347,758 N/A
_____________________________
/1/ The Real Estate Securities and Internet Tollkeeper Funds commenced
operations on July 27, 1998 and October 1, 1999, respectively.
/2/ During the fiscal year ended December 31, 1998, no shares of the Internet
Tollkeeper Fund were offered.
Under the Management Agreement, the Investment Adviser also: (i) supervises
all non-advisory operations of each Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of each Fund; (iii)
arranges for at each Fund's expense: (a) the preparation of all required tax
returns, (b) the preparation and submission of reports to existing shareholders,
(c) the periodic updating of prospectuses and statements of additional
information and (d) the preparation of reports to be filed with the SEC and
other regulatory authorities; (iv) maintains each Fund's records; and (v)
provides office space and all necessary office equipment and services.
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 Adviser and its advisory affiliates, have proprietary interests in,
and may manage or advise with respect to, accounts or funds (including separate
accounts and other funds and collective investment vehicles) which have
investment objectives similar to those of the Funds and/or which engage in
transactions
B-54
<PAGE>
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, 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 Adviser's and its 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
Adviser and its 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 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 Adviser and/or its
affiliates will not initiate or recommend certain types of transactions in
certain securities or instruments with respect to which the Investment Adviser
and/or its affiliates are performing services or when position limits have been
reached.
In connection with their management of the Funds, the Investment Adviser
may have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Investment Adviser 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 Adviser 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 Adviser in managing the
Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Investment Adviser and its affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods in
which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in
B-55
<PAGE>
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 and
investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Investment Adviser 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 Adviser may enter into transactions and invest in currencies
or instruments on behalf of a Fund in which customers of Goldman Sachs serve as
the counterparty, principal or issuer. In such cases, such party's interests in
the transaction will be adverse to the interests of a Fund, 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 or instruments of which may
be those in which a Fund invests 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 transactions with other clients of Goldman Sachs
or its affiliates where such other clients have interests adverse to those of
the Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
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 the
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on the Fund's
investment flexibility, portfolio diversification and
B-56
<PAGE>
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 holdings 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 an underwriting or other
distribution of securities of an entity, the Investment Adviser may be
prohibited from purchasing or recommending the purchase of certain securities of
that entity for the Funds.
Distributor and Transfer Agent
- ------------------------------
Goldman Sachs, 85 Broad Street, New York, New York 10004 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 on behalf of
each Fund. 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 Prospectus and periodic reports have been prepared, set in type and mailed
to shareholders, Goldman Sachs will pay for the printing and distribution of
copies thereof used in connection with the offering to prospective investors.
Goldman Sachs will also pay for other supplementary sales literature and
advertising costs. Goldman Sachs may enter into sales agreements with certain
investment dealers and other financial service firms (the "Authorized Dealers")
to solicit subscriptions for shares of the Funds. Goldman Sachs receives a
portion of the sales charge imposed on the sale, in the case of Class A Shares,
or redemption in the case of Class B and Class C Shares (and in certain cases,
Class A Shares), of such Fund shares.
Goldman Sachs retained approximately the following combined commissions on
sales of Class A, Class B and Class C Shares during the following periods:
Fiscal year ended Fiscal year ended
December 31, December 31,
1999 1998
---- ----
Real Estate Securities Fund/1/ $ 962,000 $125,000
Internet Tollkeeper Fund/1, 2/ 2,076,000 N/A
______________________
/1/ The Real Estate Securities and Internet Tollkeeper Funds commenced
operations on July 27, 1998 and October 1, 1999, respectively.
/2/ During the fiscal year ended December 31, 1998 no shares of the Internet
Tollkeeper Fund were offered.
Goldman Sachs, 4900 Sears Tower, Chicago, IL 60606 serves as the Trust's
transfer agent. Under its transfer agency agreement with the Trust, Goldman
Sachs has undertaken with the Trust to: (i) record the issuance, transfer and
redemption of shares, (ii) provide purchase and redemption confirmations and
quarterly statements, as well as certain other statements, (iii) provide certain
B-57
<PAGE>
information to the Trust's custodian and the relevant sub-custodian 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 ongoing basis, to 0.04% of average daily net assets with
respect to each Fund's Institutional 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 agent and the assumption by Goldman Sachs of the expenses related
thereto, Goldman Sachs received fees for the fiscal years ended December 31,
1999 and December 31, 1998 from each Fund then in existence as follows under the
fee schedules then in effect:
Fiscal year ended Fiscal year ended
December 31, December 31,
1999 1998
---- ----
Real Estate Securities Fund/1/ $203,038 $4,197
Internet Tollkeeper Fund/1, 2/ 246,740 N/A
_______________________
/1/ Real Estate Securities and Internet Tollkeeper Funds commenced operations
on July 27, 1998 and October 1, 1999, respectively.
/2/ During the fiscal year ended December 31, 1998, no shares of the Internet
Tollkeeper Fund were offered.
The Trust's distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services
Goldman Sachs provides thereunder are not impaired thereby. Such agreements
also provide 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 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 and
auditing fees and expenses (including the cost of legal and certain accounting
services rendered by employees of GSAM, Goldman Sachs Asset Management
International ("GSAMI") and Goldman Sachs with respect to the Trust), expenses
of preparing and setting in
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<PAGE>
type prospectuses, statements of additional information, proxy material, reports
and notices and the printing and distributing of the same to the Trust's
shareholders and regulatory authorities, any expenses assumed by a Fund pursuant
to its distribution and service plans, compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any service plan or distribution and service plan
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 Adviser's fees, as well as other operating
expenses, will have the effect of reducing the total return to investors. From
time to time, the Investment Adviser may waive receipt of is 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.
The Investment Adviser voluntarily has agreed to reduce or limit certain
"Other Expenses" (excluding management, distribution and service fees, transfer
agency fees, service share fees, taxes, interest, brokerage, and litigation,
indemnification and other extraordinary expenses) for the Internet Tollkeeper
and Real Estate Securities Funds to the extent such expenses exceed 0.06% and
0.00%, of each Fund's average daily net assets.
Such reductions or limits, if any, are calculated monthly on a cumulative
basis and may be discontinued or modified by the applicable Investment Adviser
in its discretion at any time.
Fees and expenses of legal counsel, registering shares of a 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 Investment Adviser's costs of
performing certain accounting services not being provided by a Fund's Custodian.
REIMBURSEMENT
For the fiscal years ended December 31, 1999 and December 31, 1998, the
amounts of certain "Other Expenses" of each Fund then in existence that were
reduced or otherwise limited were as follows under the expense limitations that
were then in effect:
Fiscal year ended Fiscal year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Real Estate Securities Fund/1/ $404,669 $151,035
Internet Tollkeeper Fund/1, 2/ 390,663 N/A
________________________
/1/ The Real Estate Securities and Internet Tollkeeper Funds commenced
operations on July 27, 1998 and October 1, 1999, respectively.
/2/ During the fiscal year ended December 31, 1998, no shares of the Internet
Tollkeeper Fund were offered.
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<PAGE>
Custodian and Sub-Custodians
- ----------------------------
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the custodian
of the Trust's portfolio securities and cash. State Street also maintains the
Trust's accounting records. State Street may appoint domestic and foreign sub-
custodians from time to time to hold certain securities purchased by the Trust
and to hold cash for the Trust.
Independent Public Accountants
- ------------------------------
For the fiscal year ended December 31, 1999, Arthur Andersen LLP, former
independent public accountants to the Funds, 225 Franklin Street, Boston,
Massachusetts 02110, served as auditors of the Funds. Ernst & Young LLP,
independent public accountants, 787 Seventh Avenue, New York, New York 10019,
have been selected as auditors of the Funds of the Trust for the fiscal year
ending December 31, 2000. In addition to audit services, Ernst & Young LLP will
prepare the Fund's federal and state tax returns, and will provide consultation
and assistance on accounting, internal control and related matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Adviser is responsible for decisions to buy and sell
securities for the Funds, the selection of brokers and dealers to effect the
transactions and the negotiation of brokerage commissions, if any. Purchases and
sales of securities on a securities exchange are effected through brokers who
charge a commission for their services. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law, Goldman
Sachs.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities of a Fund, the Investment
Adviser is generally required to give primary consideration to obtaining the
most favorable execution and net price available. This means that the Investment
Adviser will seek to execute each transaction at a price and commission, if any,
which provides the most favorable total cost or proceeds reasonably attainable
in the circumstances. As permitted by Section 28(e) of the Securities Exchange
Act of 1934, the Fund may pay a broker which provides brokerage and research
services to the Fund an amount of disclosed commission in excess of the
commission which another broker would have charged for effecting that
transaction. Such practice is subject to a good faith determination that such
commission is reasonable in light of the services provided and to such policies
as the Trustees may adopt from time to time. While the Investment Adviser
generally seeks reasonably competitive spreads or commissions, a Fund will not
necessarily be paying the lowest spread or commission available. Within the
framework of this policy, the Investment Adviser will consider research and
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<PAGE>
investment services provided by brokers or dealers who effect or are parties to
portfolio transactions of a Fund, the Investment Adviser and its affiliates, or
their other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
research reports on particular industries and companies, economic surveys and
analyses, recommendations as to specific securities and other products or
services (e.g., quotation equipment and computer related costs and expenses),
advice concerning the value of securities, the advisability of investing in,
purchasing or selling securities, the availability of securities or the
purchasers or sellers of securities, furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and performance of accounts, effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement) and providing
lawful and appropriate assistance to the Investment Adviser in the performance
of their decision-making responsibilities. Such services are used by the
Investment Adviser in connection with all of their investment activities, and
some of such services obtained in connection with the execution of transactions
for 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 the 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.
On occasions when the Investment Adviser deems the purchase or sale of a
security to be in the best interest of a Fund as well as its other customers
(including any other fund or other investment company or advisory account for
which the Investment Adviser acts as investment adviser or sub-investment
adviser), the Investment Adviser, 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 under the circumstances. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Adviser in
the manner it considers to be equitable and consistent with its fiduciary
obligations to such Fund and such other customers. In some instances, this
procedure may adversely affect the price and size of the position obtainable for
a Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees.
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 each Fund, the commissions, fees or other remuneration received
by Goldman Sachs must be reasonable and
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<PAGE>
fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities 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 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.
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<PAGE>
For the fiscal years ended December 31, 1999 and December 31, 1998, each Fund in
existence paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
---- ------- ---- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1999:
Real Estate Securities Fund $452,425 $17,090(4%)/1/ $ 190,627,802(4%)/2/ N/A
Internet Tollkeeper Fund/3/ $512,326 $11,040(2%)/1/ $1,234,176,060(1%)/2/ N/A
</TABLE>
- ---------------
/1/ Percentage of total commissions paid.
/2/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
/3/ The Internet Tollkeeper Fund commenced operations on October 1, 1999.
<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 Research
---- ------- ---- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1998:
Real Estate Securities Fund $133,807 $5,806(4%)/1/ $61,448,321(9%)/2/ $ N/A
Internet Tollkeeper Fund/3/ N/A N/A N/A N/A
</TABLE>
_______________
/1/ Percentage of total commissions paid.
/2/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
/3/ The Internet Tollkeeper Fund commenced operations on October 1, 1999.
During the fiscal year ended December 31, 1999, the Funds acquired and sold
securities of their regular broker-dealers. As of December 31, 1999, the Funds
held the following amounts of securities of their regular broker-dealers, as
defined in Rule 10b-1 under the Act, or their parents:
Fund Broker/Dealer Amount
- ---- ------------- ------
Real Estate Securities Fund N/A N/A
Internet Tollkeeper Fund Morgan Stanley & Co. $18,413,818
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<PAGE>
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good faith
the fair value of securities of each Fund. In accordance with procedures adopted
by the Trustees, the net value per share of each class of each Fund is
calculated by determining the value of the net assets attributed 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 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.
Portfolio securities of the Fund for which accurate market quotations are
available are valued as follows: (a) securities listed on any U.S. or foreign
stock exchange or on the National Association of Securities Dealers Automated
Quotations System ("NASDAQ") will be valued at the last sale price on the
exchange or system in which they are principally traded on the valuation date.
If there is no sale on the valuation day, securities traded will be valued at
the closing bid price, or if a closing bid price is not available, at either the
exchange or system-defined close price on the exchange or system in which such
securities are principally traded. If the relevant exchange or system has not
closed by the above-mentioned time for determining the Funds net asset value,
the securities will be valued at the last sale price, or if not available at the
bid price at the time the net asset value is determined; (b) over-the-counter
securities not quoted on NASDAQ will be valued at the last sale price on the
valuation day or, if no sale occurs, at the last bid price at the time net asset
value is determined; (c) equity securities for which no prices are obtained
under section (a) or (b) 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 their fair value in
accordance with procedures approved by the Board of Trustees; (d) fixed-income
securities with a remaining maturity of 60 days or more for which accurate
market quotations are readily available will normally be valued according to
dealer-supplied bid quotations or bid quotations from a recognized pricing
service (e.g., Merrill Lynch, J.J. Kenny, Muller Data Corp., Bloomberg, EJV,
Reuters or Standard & Poor's); (e) fixed-income securities for which accurate
market quotations are not readily available are valued by the Investment Adviser
based on valuation models that take into account spread and daily yield changes
on government securities in the appropriate market (i.e., matrix pricing); (f)
debt securities with a remaining maturity of 60 days or less are valued by the
Investment Adviser at amortized cost, which the Trustees have determined to
approximate fair value; and (g) all other instruments, 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,
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<PAGE>
will be valued at fair value in accordance with the valuation procedures
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 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 NAV 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 or series except where allocations of direct expenses can otherwise be
fairly made.
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.
Average annual total return and yield are computed pursuant to formulas
specified by the SEC.
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. The results are compounded on a bond equivalent (semi-
annual) basis and then annualized. Net investment income per share is equal to
the dividends and interest earned during the period, reduced by accrued expenses
for the period. The calculation of net investment income for these purposes may
differ from the net investment income determined for accounting purposes.
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<PAGE>
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 or maximum public offering price 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 at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption 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 with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period. The table set forth
below indicates the total return (capital changes plus reinvestment of all
distributions) on a hypothetical investment of $1,000 in a Fund for the periods
indicated.
Total return calculations for Class A Shares reflect the effect of paying
the maximum initial sales charge. Investment at a lower sales charge would
result in higher performance figures. Total return calculations for Class B and
Class C Shares reflect deduction of the applicable CDSC imposed upon redemption
of Class B and Class C Shares held for the applicable period. Each Fund may also
from time to time advertise total return on a cumulative, average, year-by-year
or other basis for various specified periods by means of quotations, charts
graphs or schedules. In addition, each Fund may furnish total return
calculations based on investments at various sales charge levels or at 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 Funds' 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.
Occasionally, statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a Fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
From time to time the Trust may publish an indication of a Fund's past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc.,
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<PAGE>
Morningstar Mutual Funds, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Micropal, Barron's, Business Week, Consumer's Digest,
Consumer's Report, Investors Business Daily, The New York Times, Kiplinger's
Personal Finance Magazine, Changing Times, Financial World, Forbes, Fortune,
Money, Personal Investor, Sylvia Porter's Personal Finance and The Wall Street
Journal. The Trust may also advertise information which has been provided to the
NASD for publication in regional and local newspapers. In addition, the Trust
may from time to time advertise a Fund's performance relative to certain indices
and benchmark investments, including: (a) the Lipper Analytical Services, Inc.
Mutual Fund Performance Analysis, Fixed-Income Analysis and Mutual Fund Indices
(which measure total return and average current yield for the mutual fund
industry and rank mutual fund performance); (b) the CDA Mutual Fund Report
published by CDA Investment Technologies, Inc. (which analyzes price, risk and
various measures of return for the mutual fund industry); (c) the Consumer Price
Index published by the U.S. Bureau of Labor Statistics (which measures changes
in the price of goods and services); (d) Stocks, Bonds, Bills and Inflation
published by Ibbotson Associates (which provides historical performance figures
for stocks, government securities and inflation); (e) the Salomon Brothers'
World Bond Index (which measures the total return in U.S. dollar terms of
government bonds, Eurobonds and foreign bonds of ten countries, with all such
bonds having a minimum maturity of five years); (f) the Lehman Brothers
Aggregate Bond Index or its component indices; (g) the Standard & Poor's Bond
Indices (which measure yield and price of corporate, municipal and U.S.
Government bonds); (h) the J.P. Morgan Global Government Bond Index; (i) other
taxable investments including certificates of deposit (CDs), money market
deposit accounts (MMDAs), checking accounts, savings accounts, money market
mutual funds and repurchase agreements; (j) Donoghues' Money Fund Report (which
provides industry averages for 7-day annualized and compounded yields of
taxable, tax-free and U.S. Government money funds); (k) the Hambrecht & Quist
Growth Stock Index; (l) the NASDAQ OTC Composite Prime Return; (m) the Russell
Midcap Index; (n) the Russell 2000 Index- Total Return; (o) the Russell 1000
Value Index; (p) the Russell 1000 Growth Index-Total Return; (q) the Value-Line
Composite-Price Return; (r) the Wilshire 4500 Index; (s) the FT-Actuaries Europe
and Pacific Index; (t) historical investment data supplied by the research
departments of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan
Stanley (including the EAFE Indices, the Morgan Stanley Capital International
Combined Asia ex Japan Free Index and the Morgan Stanley Capital International
Emerging Markets Free Index), Salomon Brothers, Merrill Lynch, Donaldson Lufkin
and Jenrette or other providers of such data; (u) CDA/Wiesenberger Investment
Companies Services or Wiesenberger Investment Companies Service; (v) The Goldman
Sachs Commodities Index; (w) information produced by Micropal, Inc.; and (x) The
Tokyo Price Index. The composition of the investments in such indices and the
characteristics of such benchmark investments are not identical to, and in some
cases are 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 a Fund to
calculate its performance figures.
Information used in advertisements 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:
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<PAGE>
. 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;
. 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 (common stocks, small
company stocks, long-term government bonds, treasury bills and
certificates of deposit) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
. the dollar and non-dollar based returns of various market indices (i.e.,
Morgan Stanley Capital International EAFE Index, FT-Actuaries Europe &
Pacific Index and the Standard & Poor's Index of 500 Common Stocks) over
varying periods of time;
. total stock market capitalizations of specific countries and regions
on a global basis;
. performance of securities markets of specific countries and regions;
and
. value of a dollar amount invested in a particular market or type of
security over different periods of time.
B-68
<PAGE>
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
B-69
<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes
maximum maximum
Applicable Assumes Applicable Assumes
sales no sales sales no sales
Fund Class Time Period Charge** Charge Charge** Charge
- ---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Securities Fund A 7/27/98-12/31/99 - Since inception (8.94)% (5.28)% (9.78)% (6.16)
Real Estate Securities Fund A 1/1/99-12/31/99 - One year (6.51)% (1.02)% (6.99)% (1.53)%
Real Estate Securities Fund B 7/27/98-12/31/99 - Since inception (8.65)% (6.01)% (9.34)% (6.70)%
Real Estate Securities Fund B 1/1/99-12/31/99 - One year (6.65)% (1.73)% (6.91)% (1.99)%
Real Estate Securities Fund C 7/27/98-12/31/99 - Since inception (6.03)% (6.03)% (6.71)% (6.71)%
Real Estate Securities Fund C 1/1/99-12/31/99 - One year (2.79)% (1.80)% (3.05)% (2.06)%
Real Estate Securities Fund Institutional 7/27/98-12/31/99 - Since inception N/A (4.91)% N/A (5.62)%
Real Estate Securities Fund Institutional 1/1/99-12/31/99 - One year N/A (0.64)% N/A (0.91)%
Real Estate Securities Fund Service 7/27/98-12/31/99 - Since inception N/A (5.38)% N/A (6.13)%
Real Estate Securities Fund Service 1/1/99-12/31/99 - One Year N/A (1.12)% N/A (1.46)%
Internet Tollkeeper Fund A 10/1/99-12/31/99 - Since inception* 81.95% 92.50% 81.84% 92.39%
Internet Tollkeeper Fund B 10/1/99-12/31/99 - Since inception* 87.00% 92.00% 86.89% 91.89%
Internet Tollkeeper Fund C 10/1/99-12/31/99 - Since inception* 90.90% 91.90% 90.79% 91.79%
Internet Tollkeeper Fund Institutional 10/1/99-12/31/99 - Since inception* N/A 92.50% N/A 92.39%
Internet Tollkeeper Fund Service 10/1/99-12/31/99 - Since inception* N/A 92.30% N/A 92.19%
</TABLE>
__________________________
* Represents an aggregate total return (not annualized) since this class has
not completed a full twelve months of operations.
** Total return reflects a maximum initial sales charge of 5.5% for Class A
Shares, the assumed deferred sales charge for Class B Shares (5% maximum
declining to 0% after six years) and the assumed deferred sales charge for
Class C Shares (1% if redeemed within 12 months of purchase).
B-70
<PAGE>
From time to time advertisements or information may include a discussion of
the origin, evolution and growth of the Internet, the benefits of the Internet
to consumers and businesses and the impact of the Internet on society in general
and more specifically on the investment landscape.
From time to time, advertisements or information 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
in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Investment
Adviser's views as to markets, the rationale for a Fund's investments and
discussions of a Fund's current asset allocation.
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 materials
which highlight or summarize the services provided in support of an asset
allocation program.
A Fund's performance data will be based on historical results and will not
be intended to indicate future performance. A Fund's total return and yield
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and an
investor's shares may be worth more or less than their original cost upon
redemption. The Trust may also, at its discretion, from time to time make a
list of a Fund's holdings available to investors upon request.
Total return will be calculated separately for each class of shares in
existence. Because each class of shares is subject to different expenses, total
return with respect to each class of shares of a Fund will differ.
SHARES OF THE TRUST
The Trustees have authority under the Trust's Declaration of Trust to
create and classify shares of beneficial interest in separate series, without
further action by shareholders. The Trustees also have authority to classify
and reclassify any series of shares into one or more classes of shares. As of
the date of this Additional Statement, the Trustees have classified the shares
of each of the Funds into five classes: Institutional Shares, Service Shares,
Class A Shares, Class B Shares and Class C Shares.
Each Institutional 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
B-71
<PAGE>
Service Plans are borne exclusively by 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 different share
classes. The Trustees may determine in the future that it is appropriate to
allocate other expenses differently between classes of shares and may do so to
the extent consistent with the rules of the SEC and positions of the Internal
Revenue Service. Each class of shares may have different minimum investment
requirements and be entitled to different shareholder services. With limited
exceptions, shares of a class may only be exchanged for shares of the same or an
equivalent class of another fund. See "Shareholder Guide" in the Prospectus. In
addition, the fees and expenses set forth below for each class may be subject to
voluntary fee waivers or reimbursements, as discussed more fully 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 under a Plan for services provided to the institution's
customers.
Service Shares may be purchased at net asset value without a sales charge
for accounts held in the name of an institution that, directly or indirectly,
provides certain account administration and shareholder liaison services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Service Shares. Service Shares bear the cost of
account administration fees at the annual rate of up to 0.50% of the average
daily net assets of the Fund attributable to Service Shares.
Class A Shares are sold, with an initial sales charge of up to 5.5%,
through brokers and dealers who are members of the National Association of
Securities Dealers, Inc. and certain other financial service firms that have
sales agreements with Goldman Sachs. Class A Shares bear the cost of
distribution and service fees at the aggregate rate of up to 0.25% of the
average daily net assets of Class A Shares of the Internet Tollkeeper Fund and
0.50% of the average daily net assets of the Real Estate Securities Fund. 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 Shares of the Funds are sold subject to a contingent deferred sales
charge of up to 5.0% through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B Shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B Shares. Class B Shares
also bear the cost of service fees at an annual rate of up to 0.25% of the
average daily net assets attributable to Class B Shares.
Class C Shares of the Funds are sold subject to a contingent deferred sales
charge of up to 1.0% through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class C Shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class C Shares. Class C Shares
also bear the
B-72
<PAGE>
cost of service fees at an annual rate of up to 0.25% of the average daily net
assets attributable to Class C Shares.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Service, Class A Shares, Class B Shares
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 the same amount,
except for differences caused by the differences in expenses discussed above.
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 for the consideration described in the Prospectus, shares are
fully paid and non-assessable. In the event of liquidation, shareholders are
entitled to share pro rata in the net assets of the applicable class of the
relevant Fund available for distribution to such shareholders. All shares are
freely transferable and have no preemptive, subscription or conversion rights.
As of March 17, 2000 the following entities owned of record or beneficially
more than 5% of the outstanding shares of the Real Estate Securities Fund's
Institutional Shares: First National Bank of North Dakota, P.O. Box 6001, Grand
Forks, ND 58206-6001 (11%); State Street Bank and Trust Company, Omnibus A/C -
Growth and Income Fund, P.O. Box 1713, Boston, MA 02105-1713 (6%) and State
Street Bank & Trust Co., FBO Goldman Sachs Growth and Income Strategy Omnibus
A/C, P.O. Box 1713, Boston, MA 02105 (6%).
As of March 17, 2000 the following entity owned of record or beneficially
more than 5% of the outstanding securities of the Internet Tollkeeper Fund's
Class B Shares: Merrill Lynch Pierce Fenner & Smith, For the Sole Benefit of
Its Customers, Attn: Service Team Sec #9EH18, Goldman Sachs Funds, 4800 Deer
Lake Dr. East, 3/rd/ Fl., Jacksonville, FL 32246 (6%).
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. In addition,
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.
B-73
<PAGE>
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
without the vote or consent of the shareholders, 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 elections 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 Declaration of Trust and such other matters as the
Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers, employees and agents of the Trust unless the recipient is adjudicated
(i) to be liable by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of such person's
office or (ii) not to have acted in good faith in the reasonable belief that
such person's actions were in the best interest of the Trust. The Declaration of
Trust provides that, if any shareholder or former shareholder of any series is
held personally liable solely by reason of being or having been a shareholder
and not because of the shareholder's acts or omissions or for some other reason,
the shareholder or former shareholder (or heirs, executors, administrators,
legal representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The Trust,
acting on behalf of any affected series, must, upon request by such shareholder,
assume the defense of any claim made against such shareholder for any act or
obligation of the series and satisfy any judgment thereon from the assets of the
series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust, series or its respective
shareholders. The factors and events that the Trustees may take into account in
making such determination include (i) the inability of the Trust or any
successor series or class to maintain its assets at an appropriate size; (ii)
changes in laws or regulations governing the Trust, series or class or affecting
assets of the type in which it invests; or (iii) economic developments or trends
having a significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or their organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
B-74
<PAGE>
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would adversely affect the voting rights
of shareholder; (ii) that is required by law to be approved by shareholders;
(iii) that would amend the provisions of the Declaration of Trust regarding
amendments and supplements thereto; or (iv) that the Trustees determine to
submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the 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 courts of such other states, the
courts may not apply Delaware law and may thereby subject the Delaware business
trust shareholders to liability. To guard against this risk, the Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of a Fund. Notice of such disclaimer will normally be given in each
agreement, obligation or instrument entered into or executed by a series or the
Trustees. The Declaration of Trust provides for indemnification by the relevant
Fund for all loss suffered by a shareholder as a result of an obligation of the
series. The Declaration of Trust also provides that a series shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the series and satisfy any judgment thereon. In view of
the above, the risk of personal liability of shareholders of a Delaware business
trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of and to employ other advisers in considering the merits
of the request and shall require an undertaking by the shareholders making such
request to reimburse the series for the expense of any such advisers in the
event that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for error of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee
B-75
<PAGE>
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.
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 each Fund of the Trust. This summary does not
address special tax rules applicable to certain classes of investors, such as
tax-exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his own tax adviser with respect to
the specific federal, state, local and foreign tax consequences of investing in
each Fund. The summary is based on the laws in effect on the date of this
Additional Statement, which are subject to change.
General
=======
Each Fund is a separate taxable entity. The Real Estate Securities and
Internet Tollkeeper Funds have elected to be treated and intend to qualify for
each taxable year as a regulated investment company under Subchapter M of the
Code.
There are certain tax requirements that all funds must follow in order to
avoid federal taxation. In its efforts to adhere to these requirements, the
Funds may have to limit their investment activities in some types of
instruments. 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 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) such 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 such
Fund's 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 such Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses. For purposes
of the 90% gross income test, income that a Fund earns from equity interests in
certain entities that are not treated as corporations (e.g., partnerships or
trusts) for U.S. tax purposes will generally have the same character for such
Fund as in the hands of such an entity; consequently, a Fund may be required to
limit its equity investments in such entities that earn fee income, rental
income, or other nonqualifying income. In addition, future Treasury regulations
could provide that qualifying income under the 90% gross income test will not
include gains from foreign currency transactions that are not directly related
to a Fund's principal business of investing in stock or securities or options
and futures with respect to stock or securities. Using foreign currency
positions
B-76
<PAGE>
or entering into foreign currency options, futures and forward or swap contracts
for purposes other than hedging currency risk with respect to securities in a
Fund's portfolio or anticipated to be acquired may not qualify as "directly-
related" under these tests.
If a Fund complies with such provisions, then in any taxable year in which
such Fund 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 accrued original issue discount
and market discount income, income from securities lending, any 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, such Fund (but not its shareholders) will be relieved of
federal income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if a Fund retains any investment company
taxable income or "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), it will be subject to a tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains
in a notice to its shareholders who, if subject to U.S. federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis of shares
owned by a shareholder of the Fund will be increased by an amount equal under
current law to 65% of the amount of undistributed net capital gain included in
the shareholder's gross income. Each Fund intends to distribute for each
taxable year to its shareholders all or substantially all of its investment
company taxable income, net capital gain and any net tax-exempt interest.
Exchange control or other foreign laws, regulations or practices may restrict
repatriation of investment income, capital or the proceeds of securities sales
by foreign investors and may therefore make it more difficult for such a Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, each Fund generally expects
to be able to obtain sufficient cash to satisfy such requirements from new
investors, the sale of securities or other sources. If for any taxable year 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, and its distributions to shareholders will be taxable as ordinary
dividends to the extent of its current and accumulated earnings and profits.
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 all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed for such year and on which the Fund paid no federal
income tax. For federal income tax purposes, dividends declared by a Fund in
October, November or December to shareholders of record on a specified date in
such a month and paid during January of the following year are taxable to such
shareholders as if received on December 31 of the year declared. The Funds
anticipate that
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<PAGE>
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, 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. These amounts are
available to be carried forward to offset future capital gains to the extent
permitted by the Code and applicable tax regulations. At December 31, 1999, the
Funds had no capital loss carry forwards.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains and losses. Certain of the futures
contracts, forward contracts and options held by 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, the
Fund may be required to defer the recognition of losses on futures contracts,
forward contracts, and options or underlying securities or foreign currencies to
the extent of any unrecognized gains on related positions held by such 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. Application of certain requirements for
qualification as a regulated investment company and/or these tax rules to
certain investment practices, such as dollar rolls, or certain derivatives such
as interest rate swaps, floors, caps and collars and currency, mortgage or index
swaps may be unclear in some respects, and a Fund may therefore be required to
limit its participation in such transactions. Certain tax elections may be
available to a Fund to mitigate some of the unfavorable consequences described
in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized 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 foregoing currency transactions or instruments
could exceed net investment income otherwise calculated for accounting purposes
with the result being either no dividends being paid or a portion of a Fund's
dividends being treated as a return of capital for tax purposes, nontaxable to
the extent of a shareholder's tax basis in his shares and, once such basis is
exhausted, generally giving rise to capital gains.
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<PAGE>
A Fund's investment in zero coupon securities, deferred interest
securities, certain structured securities 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, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
Each Fund anticipates that it will be subject to foreign taxes on its
income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases.
If a Fund acquires stock (including, under proposed regulations, an option
to acquire stock such as is inherent in a convertible bond) in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, rents, royalties or capital gain) or hold
at least 50% of their assets in investments producing such passive income
("passive foreign investment companies"), 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 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. In some cases, elections may be
available that would ameliorate these adverse tax consequences, but such
elections would require the Fund to include each year certain amounts as income
or gain (subject to the distribution requirements described above) without a
concurrent receipt of cash. Each Fund may limit and/or manage its holdings in
passive foreign investment companies to minimize its tax liability or maximize
its return from these investments.
Investments 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 payments received on obligations in default should be
allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
Taxable U.S. Shareholders - Distributions
=========================================
For U.S. federal income tax purposes, distributions by a Fund, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. 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
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received.
B-79
<PAGE>
Distributions from investment company taxable income for the year will be
taxable as ordinary income. Distributions designated as derived from a Fund's
dividend income, if any, that would be eligible for the dividends received
deduction if such Fund were not a regulated investment company may be eligible,
for the dividends received deduction for corporate shareholders. 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
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. The entire dividend,
including the deducted amount, is considered in determining the excess, if any,
of a corporate shareholder's adjusted current earnings over its alternative
minimum taxable income, which may increase its liability for the federal
alternative minimum tax, and the dividend may, if it is treated as an
"extraordinary dividend" under the Code, reduce such shareholder's tax basis in
its shares of a Fund. Capital gain dividends (i.e., dividends from net capital
gain) if designated as such in a written notice to shareholders mailed not later
than 60 days after a Fund's taxable year closes, will be taxed to shareholders
as long-term capital gain regardless of how long shares have been held by
shareholders, but are not eligible for the dividends received deduction for
corporations. Such long-term capital gain will be taxed at a maximum rate of
20%. Distributions, if any, that are in excess of a Fund's current and
accumulated earnings and profits will first reduce a shareholder's tax basis in
his shares and, after such basis is reduced to zero, will generally constitute
capital gains to a shareholder who holds his shares as capital assets.
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. (To aid in computing your tax basis, a
shareholder should generally retain its account statements for the period that
it held shares). If the shareholder holds the shares as a capital asset at the
time of sale, the character of the gain or loss should be capital, and treated
as long-term if the shareholder's holding period is more than one year, and
short-term otherwise. In general, the maximum long-term capital gain rate will
be 20% for capital gains on assets held more than one year. 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. If a shareholder receives 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 a sale or redemption of such shares, 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. All or a portion of any sales load
paid upon the purchase of shares of a Fund will not be taken into account in
determining gain or loss on the redemption or exchange of such shares within 90
days after their purchase to the extent the
B-80
<PAGE>
redemption proceeds are reinvested, or the exchange is effected, without payment
of an additional sales load pursuant to the reinvestment or exchange privilege.
The load not taken into account will be added to the tax basis of the newly-
acquired 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 such
Fund. If disallowed, the loss will be reflected in an adjustment to the basis of
the shares acquired.
Each Fund may be required to withhold, as "backup withholding," federal
income tax at a rate of 31% from dividends (including capital gain dividends)
and share redemption and exchange proceeds to individuals and other non-exempt
shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Fund that the payee is subject
to backup withholding as a result of failing to properly report interest or
dividend income to the Internal Revenue Service or that the TIN furnished by the
payee to the Fund is incorrect, or if (when required to do so) the payee fails
to certify under penalties of perjury that it is not subject to backup
withholding. A Fund may refuse to accept an application that does not contain
any required TIN or certification that the TIN provided is correct. If the
backup withholding provisions are applicable, any such dividends and proceeds,
whether paid in cash or reinvested in additional 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 a shareholder does not have
a TIN, it should apply for one immediately by contacting the local office of the
Social Security Administration or the Internal Revenue Service (IRS). Backup
withholding could apply to payments relating a shareholder's account while it is
waiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under a Uniform Gifts or Transfer to Minors
Act, the TIN of the minor should be furnished.
Non-U.S. Shareholders
=====================
The discussion above relates solely to U.S. federal income tax law as it
applies to "U.S. persons" subject to tax under such law. Shareholders who, as to
the United States, are not "U.S. persons," (i.e., are nonresident aliens,
foreign corporations, fiduciaries of foreign trusts or estates, foreign
partnerships or other non-U.S. investors) generally will be subject to U.S.
federal withholding tax at the rate of 30% on distributions treated as ordinary
income unless the tax is reduced or eliminated pursuant to a tax treaty or the
dividends are effectively connected with a U.S. trade or business of the
shareholder. In the latter 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 non-U.S.
shareholder 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.
B-81
<PAGE>
Any capital gain realized by a non-U.S. shareholder 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 U.S., or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the U.S. 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 an
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from the Funds.
State and Local
===============
Each Fund may be subject to state or local taxes in jurisdictions in which
such Fund may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of such Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such 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.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
the former independent public accountants for each Fund, contained in each
Fund's 1999 Annual Report are incorporated by reference into this Additional
Statement. A copy of the Annual Reports may be obtained upon request and
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 Report are incorporated by reference herein.
Ernest & Young LLP have been selected as auditors of the Funds of the Trust
for the fiscal year ending December 31, 2000.
OTHER INFORMATION
Each 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 the Fund at the time of
redemption by a distribution in kind of securities (instead of cash) from such
Fund. The securities distributed in kind would be readily marketable and would
be valued for this purpose using the same method employed in calculating the
Fund's net asset value per share. See "Net Asset
B-82
<PAGE>
Value." If a shareholder receives redemption proceeds in kind, the shareholder
should expect to incur transaction costs upon the disposition of the securities
received in the redemption.
The right of a shareholder to redeem shares and the date of payment by 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.
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 Organization and
other financial intermediaries ("Intermediaries") for the sale and distribution
of Shares of the Funds and/or for the servicing of those shares. These payments
("Additional Payments") would be in addition to the payments by the Funds
described in the Funds' Prospectus and this 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 an Intermediary'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 the 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, to
the extent permitted by applicable regulations, contribute to various non-cash
and cash incentive arrangements to promote the sale of shares, as well as
sponsor various educational programs, sales contests and/or promotions. 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.
B-83
<PAGE>
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.
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.
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. See "Shareholder Services" in the Prospectus.
The Plans for each Fund were most recently approved on April 25, 2000, in
each instance 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.
Under the Plans for Class A, 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 A (Real Estate Securities Fund only), Class B or
Class C Shares. Goldman Sachs has voluntarily agreed to waive a portion of the
distribution and services fees equal, on an annual basis, to .25% of the average
daily net assets attributable to Class A Shares of the Real Estate Securities
Fund. 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.
B-84
<PAGE>
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 contingent deferred sales charge 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 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, 2001 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 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 so terminated, 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 will 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-85
<PAGE>
The following chart shows the distribution and service fees paid to Goldman
Sachs for the fiscal years ended December 31, 1999 and December 31, 1998 by each
applicable Fund then in existence pursuant to the Class A Plan:
Fiscal year ended Fiscal year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Real Estate Securities Fund/1/ $237,988 $1,681
Internet Tollkeeper Fund/1, 2/ $130,302 N/A
__________________
/1/ The Class A Share class of the Real Estate Securities and Internet
Tollkeeper Funds commenced operations on July 27, 1998 and October 1, 1999,
respectively.
/2/ During the fiscal year ended December 31, 1998, no shares of the Internet
Tollkeeper Fund were offered.
The following chart shows the distribution and service fees that would have been
paid to Goldman Sachs for the fiscal years ended December 31, 1999 and December
31, 1998 by each applicable Fund then in existence pursuant to the Class A Plan,
without the voluntary limitations then in effect:
Fiscal year ended Fiscal year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Real Estate Securities Fund/1/ $475,977 $2,963
Internet Tollkeeper Fund/1, 2/ $130,302 N/A
__________________
/1/ The Class A Share class of the Real Estate Securities and Internet
Tollkeeper Funds commenced operations on July 27, 1998 and October 1, 1999,
respectively.
/2/ During the fiscal year ended December 31, 1998, no shares of the Internet
Tollkeeper Fund were offered.
B-86
<PAGE>
The following chart shows the distribution and service fees paid to Goldman
Sachs for the fiscal years ended December 31, 1999 and December 31, 1998 by each
applicable Fund then in existence pursuant to the Class B Plan:
Fiscal year ended Fiscal year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Real Estate Securities Fund/1/ $ 1,779 $31
Internet Tollkeeper Fund/1, 2/ $478,409 N/A
__________________
/1/ The Class B Share class of the Real Estate Securities and Internet
Tollkeeper Funds commenced operations on July 27, 1998 and October 1, 1999,
respectively.
/2/ During the fiscal year ended December 31, 1998, no shares of the Internet
Tollkeeper Fund were offered.
The following chart shows the distribution and service fees paid to Goldman
Sachs for the fiscal years ended December 31, 1999 and December 31, 1998 by each
applicable Fund then in existence pursuant to the Class C Plan:
Fiscal year ended Fiscal year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Real Estate Securities Fund/1/ $ 2,309 $6
Internet Tollkeeper Fund/1, 2/ $285,912 N/A
_______________________
/1/ The Class C Share class of the Real Estate Securities and Internet
Tollkeeper Funds commenced operations on July 27, 1998 and October 1, 1999,
respectively.
/2/ During the fiscal year ended December 31, 1998, no shares of the Internet
Tollkeeper Fund were offered.
B-87
<PAGE>
During the fiscal year ended December 31, 1999, Goldman Sachs incurred
the following expenses in connection with distribution under the Class A Plan of
each applicable Fund:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & Its Sales and Travel Than Current Literature and
to Dealers/1/ Personnel Expenses Shareholders Advertising
------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1999:
Real Estate Securities Fund $685,429 $564,336 $467,370 $30,624 $139,002
Internet Tollkeeper Fund/2/ 82,064 690,260 694,190 56,311 222,871
</TABLE>
___________________________
/1/ Advance commissions paid to dealers of 1% on Class A Shares are considered
deferred assets which are amortized over a period of 1 year; amounts
presented above reflect amortization expense recorded during the period
presented.
/2/ The Internet Tollkeeper Fund commenced operations on October 1, 1999.
B-88
<PAGE>
During the fiscal year ended December 31, 1999, Goldman Sachs incurred the
following expenses in connection with distribution under the Class B Plan of
each applicable Fund with Class B Shares:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & Its Sales and Travel Than Current Literature and
to Dealers/1/ Personnel Expenses Shareholders Advertising
------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1999:
Real Estate Securities Fund $ 1,558 $ 406 $ 475 $ 36 $ 148
Internet Tollkeeper Fund/2/ 251,228 601,022 609,286 50,256 196,261
</TABLE>
___________________________
/1/ Advance commissions paid to dealers of 4% on Class B shares are considered
deferred assets which are amortized over a period of 6 years; amounts
presented above reflect amortization expense recorded during the period
presented.
/2/ The Internet Tollkeeper Fund commenced operations on October 1, 1999.
B-89
<PAGE>
During the fiscal year ended December 31, 1999, Goldman Sachs incurred
the following expenses in connection with distribution under the Class C Plan of
each applicable Fund with Class C Shares:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & Its Sales and Travel Than Current Literature and
to Dealers/1/ Personnel Expenses Shareholders Advertising
------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1999:
Real Estate Securities Fund $ 2,066 $ 550 $ 676 $ 49 $ 206
Internet Tollkeeper Fund/2/ 230,131 363,248 373,560 30,707 119,837
</TABLE>
___________________________
/1/ Advance commissions paid to dealers of 1% on Class C shares are considered
deferred assets which are amortized over a period of 1 year; amounts
presented above reflect amortization expense recorded during the period
presented.
/2/ The Internet Tollkeeper Fund commenced operations on October 1, 1999.
B-90
<PAGE>
The information contained in the preceding tables reflects amounts expended by
Goldman Sachs, which amounts are in excess of the compensation received by
Goldman Sachs under the Plans. The payments under the Plans were used by
Goldman Sachs to compensate it for the expenses shown above on a pro-rata basis.
OTHER INFORMATION REGARDING MAXIMUM SALES CHARGE, PURCHASES, REDEMPTIONS,
EXCHANGES AND DIVIDENDS
(Class A Shares, Class B Shares and Class C Shares Only)
Maximum Sales Charges
- ---------------------
Class A Shares of each Fund are sold at a maximum sales charge of
5.5%. Using the maximum offering price per share as of December 31, 1999, the
maximum offering price of each Fund's Class A shares would be as follows:
Maximum Offering
Net Asset Sales Price to
Value Charge Public
----- ------- --------
Internet Tollkeeper Fund $19.25 5.5% $20.37
Real Estate Securities Fund $ 8.68 5.5% $ 9.19
The following information supplements the information in the Prospectus under
the captions "Shareholder Guide" and "Dividends." Please see the Prospectus for
more complete information.
Other Purchase Information
- --------------------------
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distributions
relating to the beneficial owner's account will be performed by the Authorized
Dealer, and not by the Fund and its Transfer Agent. Since the Funds will have no
record of the beneficial owner's transactions, a beneficial owner should contact
the Authorized Dealer to purchase, redeem or exchange shares, to make changes in
or give instructions concerning the account or to obtain information about the
account. The transfer of shares in a "street name" account to an account with
another dealer or to an account directly with the Fund involves special
procedures and will require the beneficial owner to obtain historical purchase
information about the shares in the account from the Authorized Dealer.
Right of Accumulation (Class A)
- -------------------------------
A Class A shareholder qualifies for cumulative quantity discounts if
the current purchase price of the new investment plus the shareholder's current
holdings of existing Class A Shares (acquired by purchase or exchange) of the
Funds and Class A Shares of any other Goldman Sachs Fund (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example,
if a shareholder owns shares with a current market value of $35,000 and
purchases additional Class A Shares of any Fund with a purchase price of
$25,000, the sales charge for the
B-91
<PAGE>
$25,000 purchase would be 4.75% (the rate applicable to a single purchase of
more than $50,000). Class A Shares purchased without the imposition of a sales
charge 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,
groups of individuals represented by and investing on the recommendation of the
same accounting firm, certain affinity groups or other similar organizations
(collectively, "eligible persons") may be combined for the purpose of
determining whether a purchase will qualify for the right of accumulation and,
if qualifying, the applicable sales charge level. This right of accumulation is
subject to the following conditions: (i) the business organization's, group's or
firm's agreement to cooperate in the offering of the Funds' shares to eligible
persons; and (ii) notification to the Funds at the time of purchase that the
investor is eligible for this right of accumulation. In addition, in connection
with SIMPLE IRA accounts, cumulative quantity discounts are available on a per
plan basis if (1) your employee has been assigned a cumulative discount number
by Goldman Sachs, and (2) your account, alone or in combination with the
accounts of other plan participants also invested in Class A Shares of the
Goldman Sachs Funds, totals the requisite aggregate amount as described in the
Prospectus.
Statement of Intention (Class A)
- --------------------------------
If a shareholder anticipates purchasing at least $50,000 of Class A
Shares of a Fund alone or in combination with Class A Shares of any other
Goldman Sachs Fund within a 13-month period, the shareholder may purchase shares
of the Fund at a reduced sales charge by submitting a Statement of Intention
(the "Statement"). Shares purchased pursuant to a Statement will be eligible
for the same sales charge discount that would have been available if all of the
purchases had been made at the same time. The shareholder or his Authorized
Dealer must inform Goldman Sachs that the Statement is in effect each time
shares are purchased. There is no obligation to purchase the full amount of
shares indicated in the Statement. A shareholder may include the value of all
Class A Shares on which a sales charge has previously been paid as an
"accumulation credit" toward the completion of the Statement, but a price
readjustment will be made only on Class A Shares purchased within ninety (90)
days before submitting the Statement. The Statement authorizes the Transfer
Agent to hold in escrow a sufficient number of shares which can be redeemed to
make up any difference in the sales charge on the amount actually invested. For
purposes of satisfying the amount specified on the Statement, the gross amount
of each investment, exclusive of any appreciation on shares previously
purchased, will be taken into account.
The provisions applicable to the Statement, and the terms of the
related escrow agreement, are set forth in Appendix C to this Additional
Statement.
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<PAGE>
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 Fund shareholder should obtain and read the prospectus relating to
any other Fund, Goldman Sachs Fund or ILA Portfolio and its shares or units and
consider its investment objective, policies and applicable fees before electing
cross-reinvestment into that Fund or Portfolio. The election to cross-reinvest
dividends and capital gain distributions will not affect the tax treatment of
such dividends and distributions, which will be treated as received by the
shareholder and then used to purchase shares of the acquired fund. Such
reinvestment of dividends and distributions in shares of other Goldman Sachs
Funds or in units of ILA Portfolios is available only in states where such
reinvestment may legally be made.
Automatic Exchange Program
- --------------------------
A Fund shareholder may elect 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 different address, social
security or other taxpayer identification number, provided that the account in
the acquired fund has been established, appropriate signatures have been
obtained and the minimum initial investment requirement has been satisfied. A
Fund shareholder should obtain and read the prospectus relating to any other
Goldman Sachs Fund and its shares and consider its investment objective,
policies and applicable fees and expenses before electing an automatic exchange
into that Goldman Sachs Fund.
Systematic Withdrawal Plan
- --------------------------
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is
available to shareholders of a Fund whose shares are worth at least $5,000. The
Systematic Withdrawal Plan provides for monthly payments to the participating
shareholder of any amount not less than $50.
Dividends and capital gain distributions on shares held under the
Systematic Withdrawal Plan are reinvested in additional full and fractional
shares of the applicable Fund at net asset value. The Transfer Agent acts as
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right
to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written
notice to the shareholder. Withdrawal payments should not be considered to be
dividends, yield or income. If periodic withdrawals continuously exceed new
purchases and reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. The maintenance of a withdrawal plan concurrently with purchases of
additional Class A, Class B or Class C Shares
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<PAGE>
would be disadvantageous because of the sales charge imposed on purchases of
Class A Shares or the imposition of a CDSC on redemptions of Class A, Class B or
Class C Shares. The CDSC applicable to Class A, Class B or 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.
B-94
<PAGE>
SERVICE PLAN
(Service Shares Only)
The Funds have 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, each Fund enters into agreements with Service
Organizations which purchase Service Shares of the Fund on behalf of their
customers ("Service Agreements"). Under such Service Agreements the Service
Organizations may perform some or all of the following services: (a) act,
directly or through an agent, as the sole shareholder of record and nominee for
all customers, (b) maintain account records for each customer who beneficially
owns Service Shares of a Fund, (c) answer questions and handle correspondence
from customers regarding their accounts, (d) process customer orders to
purchase, redeem and exchange Service Shares of a Fund, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in shares by customers, (f)
provide facilities to answer questions from prospective and existing investors
about Service Shares of a Fund, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization and (j) act as liaison between customers and a Fund, including
obtaining information from the Fund, working with the Fund to correct errors and
resolve problems and providing statistical and other information to a Fund. As
compensation for such services, each 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.
The amount of the service fees paid by each Fund then in existence to
Service Organizations pursuant to the Plan was as follows for the fiscal years
ended December 31, 1999 and December 31, 1998:
Fiscal year Fiscal year
ended ended
December 31, December 31,
1999 1998
---- ----
Real Estate Fund/1/ $ 7 $ 3
Internet Tollkeeper Fund/1,2/ $ 39 N/A
_________________
/1/ The Real Estate Securities and Internet Tollkeeper Funds commenced
operations on July 27, 1998 and October 1, 1999, respectively.
/2/ During the fiscal year ended December 31, 1998, no shares of te Internet
Tolkeeper Fund were offered.
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<PAGE>
The Funds have adopted the 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.
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 a Fund, such Service Organizations might be required to alter
materially or discontinue the services performed under their Service Agreements.
If one or more of the Service Organizations were restricted from effecting
purchases or sales of Service Shares automatically pursuant to pre-authorized
instructions, for example, effecting such transactions on a manual basis might
affect the size and/or growth of 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 the 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 alteration of a Fund's
operations would have any effect on the net asset value per share or result in
financial losses to any shareholder.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Service Shares of 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 Service Shares of a Fund. 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 Plan or the related Service Agreements most
recently voted to approve the Plan and related Service Agreements with respect
to the Funds on April 25, 2000 in each instance at a meeting called for the
purpose of voting
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<PAGE>
on such Plan and Service Agreements. The Plan and related Service Agreements
will remain in effect until May 1, 2001 and will continue in effect thereafter
only if such continuance is specifically approved annually by a vote of the
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's Service Class and all
material amendments of the Plan must also be approved by the Trustees in the
manner described above. The Plan may be terminated at any time by a majority of
the Trustees as described above or by a 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 Trustees
as described above or by a vote of a majority of the outstanding Service Shares
of the affected Fund on not more than sixty (60) days' written notice to any
other party to the Service Agreements. The Service Agreements will terminate
automatically if assigned. So long as the Plan is in effect, the selection and
nomination of those Trustees who are not interested persons will be committed to
the discretion of the non-interested Trustees. The Trustees have determined
that, in its judgment, there is a reasonable likelihood that the Plans will
benefit the Funds and the holders of Service Shares of the Funds.
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<PAGE>
APPENDIX A
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
opinion of the creditworthiness of an obligor with respect to financial
obligations having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard and 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 S&P 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.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of S&P's analysis for
credit ratings on any issuer or issue. Currency of repayment is a key factor in
this analysis. An obligor's capacity to repay foreign obligations may be lower
than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity to repay external
1-A
<PAGE>
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished from local currency issuer ratings to identify those
instances where sovereign risks make them different for the same issuer.
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 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.
2-A
<PAGE>
"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.
"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 best 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 uncertain 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
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
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<PAGE>
Thomson Financial 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 Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial 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 Financial 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."
"TBW-3" - This designation represents Thomson Financial 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 Financial 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.
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<PAGE>
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 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 S&P 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.
"c" - The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"p" - The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality
5-A
<PAGE>
subsequent to completion of the project, makes no comment on the likelihood of
or the risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
"r" - The "r" highlights derivative, hybrid and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns as a result of noncredit risks. Examples of such obligations
are securities with principal or interest return indexed to equities,
commodities or currencies; certain swaps and options; and interest-only and
principal-only mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility or
variability in total return.
"N.R." Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy. Debt obligations of issuers outside
the United States and its territories are rated on the same basis as domestic
corporate and municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and related
uncertainties.
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 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
6-A
<PAGE>
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.
"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. This is the
lowest investment grade category.
"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.
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<PAGE>
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. This is the lowest
investment grade category.
"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.
"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. The ratings of obligations
in this category are based on their prospects for achieving partial or full
recovery in a reorganization or
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<PAGE>
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. "DDD" obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. "DD" indicates
potential recoveries in the range of 50%-90%, and "D" the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
"NR" indicates that Fitch IBCA does not rate the issuer or issue in
question.
"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
Thomson Financial 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.
9-A
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"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," - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"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
capacity to pay debt service 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.
10-A
<PAGE>
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. Margins of
protection 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.
"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.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
Our client's interests always come first. Our experience shows that if we
serve our clients well, our own success will follow.
Our assets are our people, capital and reputation. If any of these 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.
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.
1-B
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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 around the world 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 Goldman Sachs Asset Management increases assets under management by 100%
over 1996
Dow Jones Industrial Average breaks 7000
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
4-B
<PAGE>
APPENDIX C
Statement of Intention
(applicable only to Class A shares)
If a shareholder anticipates purchasing $50,000 or more of Class A
Shares of a Fund alone or in combination with Class A Shares of another Goldman
Sachs Fund within a 13-month period, 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
