<PAGE>
As filed with the Securities and Exchange Commission on
May 19, 2000
1933 Act Registration No. 33-17619
1940 Act Registration No. 811-5349
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------
Form N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 ( X )
Post-Effective Amendment No. 66 ( X )
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 ( X )
Amendment No. 68 ( X )
(Check appropriate box or boxes)
--------------
GOLDMAN SACHS TRUST
(Exact name of registrant as specified in charter)
4900 Sears Tower
Chicago, Illinois 60606-6303
(Address of principal executive offices)
Registrant's Telephone Number,
including Area Code 312-655-4400
--------------
Michael J. Richman, Esq. Copies to:
Goldman, Sachs & Co. Jeffrey A. Dalke, Esq.
32 Old Slip - 19th Floor Drinker Biddle & Reath LLP
New York, New York 10005 One Logan Square
18th and Cherry Streets
(Name and address of agent for service) Philadelphia, PA 19103
<PAGE>
It is proposed that this filing will become effective (check appropriate box)
( ) Immediately upon filing pursuant to paragraph (b)
( ) On (date) pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(1)
(X) On August 1, 2000 pursuant to paragraph (a)(1)
( ) 75 days after filing pursuant to paragraph (a)(2)
( ) On (date) pursuant to paragraph (a)(2) of rule 485.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Preliminary Prospectus dated May 19, 2000
Subject to Completion
Prospectus
ILA Cash
Management
Shares
August 1,
2000
GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS
..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]
[Artwork to Appear Here]
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, 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
3
<PAGE>
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 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.
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
Cash Management Shares of the Treasury Obligations, Treasury Instruments and
Federal Portfolios have less than one calendar year's performance. For this
reason, the performance information shown below is for another class of
shares (ILA Service 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 ILA Service
Shares have a 0.40% (annualized) service fee while Cash Management Shares
bear distribution and service fees at 0.57% net of voluntary waivers. If the
expenses of the Cash Management Shares were reflected, performance would be
reduced.
The bar chart and table below provide an indication of the risks of
investing in a Fund by showing, with respect to the Prime Obligations, Money
Market, Government, Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios: (a) changes in the performance of each Fund's
ILA Cash Management Shares from year to year; and (b) the average annual
returns of each Fund's ILA Cash Management Shares and, with respect to the
Treasury Obligations, Treasury Instruments and Federal Portfolios, (c)
changes in the performance of each Fund's ILA Service Shares from year to
year; and (d) the average annual returns of each 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 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
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>
15
<PAGE>
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>
16
<PAGE>
FUND PERFORMANCE
Treasury Obligations Portfolio
TOTAL RETURN CALENDAR YEAR (Service Shares)
- --------------------------------------------------------------------------------
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 (Service Shares)
- --------------------------------------------------------------------------------
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
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>
19
<PAGE>
Federal Portfolio
TOTAL RETURN CALENDAR YEAR (Service Shares)
- --------------------------------------------------------------------------------
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>
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>
21
<PAGE>
FUND PERFORMANCE
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>
22
<PAGE>
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>
23
<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 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%
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% 0.07%
- ------------------------------------------------------------------------------
Total Fund Operating Expenses/5/ 1.00% 0.98% 0.99%
- ------------------------------------------------------------------------------
</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%
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% 0.10% 0.06%
- ----------------------------------------------------------------------------
Total Fund Operating Expenses/5/ 1.00% 1.02% 0.98%
- ----------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Fund Fees and Expenses continued
<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%
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% 0.09%
- -----------------------------------------------------------------------------
Total Fund Operating Expenses/5/ 0.99% 0.99% 1.01%
- -----------------------------------------------------------------------------
</TABLE>
/1/The annual operating expenses of the Treasury Obligations, Treasury Instru-
ments and Federal Portfolios are estimated. The annual operating expenses of
all other Portfolios 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.
25
<PAGE>
FUND FEES AND EXPENSES
<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>
26
<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
- -------------------------------------------------------
Treasury Obligations $145 $449 N/A N/A
- -------------------------------------------------------
Treasury Instruments $146 $452 N/A N/A
- -------------------------------------------------------
Government $148 $459 $792 $1,735
- -------------------------------------------------------
Federal $144 $446 N/A N/A
- -------------------------------------------------------
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.
27
<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 March 31, 2000, GSAM, along with other units
of IMD, had assets under management of $267.8 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.
28
<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 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>
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.
29
<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.
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' 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.
31
<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 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 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
32
<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.
33
<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:
(Value of Assets of the Class)
NAV = - (Liabilities of the Class)
-----------------------------------------
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 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.
34
<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.
35
<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 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 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 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.
36
<PAGE>
..When the check is presented to State Street for payment, a sufficient num-
ber 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 termi-
nate 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 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 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 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 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,
37
<PAGE>
SHAREHOLDER GUIDE
that distribution and all future distributions payable to you will be rein-
vested 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 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 eco-
nomic or market conditions.
38
<PAGE>
..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 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;
39
<PAGE>
SHAREHOLDER GUIDE
..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 Cash Management Shares.
40
<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.
41
<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.
42
<PAGE>
Certain of these participations may be regarded as illiquid. U.S. Government
Securities also include zero coupon bonds.
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 guar-
anteed 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 hav-
ing more than $1 billion in total assets at the time of purchase. Bank obliga-
tions 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 regula-
tion.
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.
43
<PAGE>
APPENDIX A
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.
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
44
<PAGE>
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 be affected by reductions in the principal amount of such secu-
rities 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
45
<PAGE>
APPENDIX A
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 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 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.
46
<PAGE>
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 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 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
47
<PAGE>
APPENDIX A
subdivisions or authorities. For certain securities 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 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
48
<PAGE>
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.
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,
49
<PAGE>
APPENDIX A
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 tax-
able 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 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 sub-
ject 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.
50
<PAGE>
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 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.
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). As of the date of this Prospectus,
the Cash Management Shares of Treasury Obligations, Treasury Instruments and
Federal Portfolios had not commenced operations.
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 investment
value at end expenses to income to expenses income to
end Total of period average net average net to average average net
of period returnb (in 000's) assets assets net 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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
<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
28 Service Providers
30 Dividends
</TABLE>
<TABLE>
<C> <C> <S>
31 Shareholder Guide
31 How to Buy Shares
34 How to Sell Shares
41 Taxation
42 Appendix A
Additional Information
on Portfolio Risks,
Securities and
Techniques
52 Appendix B
Financial Highlights
</TABLE>
<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>
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 19, 2000
SUBJECT TO COMPLETION
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
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
ILA 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, ILA
Service Shares and ILA Cash Management 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; and (c) 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, FST Shares, FST Service Shares, FST Administration Shares, FST Preferred
Shares and FST Select Shares each dated May 1, 2000 and the Prospectus relating
to ILA Cash Management Shares dated August 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 August 1, 2000.
<PAGE>
TABLE OF CONTENTS
Page in
Statement of
Additional
Information
-----------
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
<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 of financial
institutions, increased acquisition activity and geographic expansion. Banks
may be particularly susceptible to certain economic factors, such as interest
rate changes
-2-
<PAGE>
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.
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.
-3-
<PAGE>
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.
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'
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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 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.
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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 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
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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. 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.
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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.
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
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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 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.
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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 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.
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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 Obligations Fund, FS Treasury Instruments Fund,
FS Government and FS Federal Funds) may invest in private activity bonds. The
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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
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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 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.
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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.
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.
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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.
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,
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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.
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
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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.
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.
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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 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.
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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).
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
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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 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.
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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.
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
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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.
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
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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 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
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(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.
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
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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 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
-------------
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
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"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 2000-01 Executive Budget submission. The
revised expectations for these years will reflect the
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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 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
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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
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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.
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
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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.
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
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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
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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.
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,
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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
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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 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.
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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.
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
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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.
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
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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.
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
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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 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
-36-
<PAGE>
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 clearance of
purchases and sales of portfolio securities and (d) the Series may purchase
securities on margin to the extent permitted by applicable law.
-37-
<PAGE>
(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.
(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.
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<PAGE>
(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.
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.
-39-
<PAGE>
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 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,
-40-
<PAGE>
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.
-41-
<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 62nd 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>
-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 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).
*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).
</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>
*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).
*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).
</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>
*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).
*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).
</TABLE>
-49-
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -------------------
<S> <C> <C>
*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>
-50-
<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. Bakhru/1/ $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.
-51-
<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, proxy
material, reports and notices, the printing and distribution of the same to
shareholders and
-52-
<PAGE>
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>
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:
-53-
<PAGE>
<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:
<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.
-54-
<PAGE>
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:
<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.
-55-
<PAGE>
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 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>
-56-
<PAGE>
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 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
-57-
<PAGE>
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.
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.
-58-
<PAGE>
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.
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
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<PAGE>
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.
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 ($24,000).
As of December 31, 1999, each Financial Square Fund held the following
amounts of securities of its regular broker/dealers as defined in Rule 10b-1
under the Act, or their parents
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($ 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 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
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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 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.
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<PAGE>
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 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
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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 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
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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 ILA Cash Management Shares have a .50% service fee and a .50%
distribution fee. Prior to the date of this Additional Statement, the ILA
Treasury Obligations Portfolio, ILA Treasury Instruments Portfolio and ILA
Federal Portfolio had not offered ILA Cash Management Shares and, accordingly,
no performance information is available. 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
ILA 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
ILA 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 Cash Management Shares N/A N/A 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 Cash Management Shares N/A N/A 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
ILA Cash Management Shares 4.76% 4.87% 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 Cash Management Shares N/A N/A 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 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%
ILA 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%
ILA 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%
ILA 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 ILA 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
ILA 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 ILA 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 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 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
ILA 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
ILA 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 Cash Management Shares N/A N/A 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 Cash Management Shares N/A N/A 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
ILA 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 Cash Management Shares N/A N/A 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%
ILA 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%
ILA 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%
ILA 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 ILA 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
ILA 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 ILA 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 ILA 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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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>
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%.
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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.
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,
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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.
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
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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. 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
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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 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.
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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.
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.
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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 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 four
classes of shares of each of the ILA Portfolios: ILA Shares, ILA Administration
Shares, ILA Service Shares and ILA Cash Management Shares. In addition, the
Trustees have authorized a fifth and sixth class of shares, ILA Class B Shares
and ILA Class C Shares, with respect to the Prime Obligations 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.
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Each ILA Share, ILA Administration Share, ILA Service Share, ILA Class B
Share, ILA Class C Share, ILA 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, 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
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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. ILA 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 ILA Cash Management Shares, responding to customer
---
inquiries and assisting customers with investment procedures. ILA 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. ILA 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 ILA 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, ILA 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 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
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<PAGE>
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
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
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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 May 9, 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 10004-2456 (69%); and
Chicago Trust Co. of CA, Attn: Operations Department, P.O. Box 1589, San Diego,
CA 92112 (9%).
As of May 9, 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 Group, 85 Broad Street, New York, NY 10004-2456 (77%); and Bank of
New York, 48 Wall Street, New York, NY 10286 (16%).
As of May 9, 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 10004-2456 (19%);
First National Bank of Omaha, Trust Officer, P.O. Box 3128, Omaha, NE 68103
(9%); Bank of New York, STIF/FI Note, 1 Wall Street, Fl. 5, New York, NY 10286-
0001 (47%); and Centennial Holdings, 1428 15th St., Denver, CO 80202 (7%).
As of May 9, 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, 10004-2456 (24%); Bank
of New York, 1 Wall Street, Fl. 5, New York, NY 10286 (15%); Emerald Partners,
237 Park Ave., Suite 801, New York, NY 10017-3140 (35%); and First National
Bank of Santa Fe, Attn: Jerry Pogemiller, AVP&TO, P.O. Box 609, Santa Fe, NM
87504-0609 (10%).
As of May 9 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
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<PAGE>
Broad Street, New York, NY 10004-2456 (39%); and Mercantile Bank of St. Louis,
Mandell & Company, P.O. Box 387 MPO, St. Louis, MO 63101 (16%).
As of May 9, 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 10004-2456 (82%); and Bank of New
York, 48 Wall Street, New York, NY 10286 (6%).
As of May 9, 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 -2456 (88%).
As of May 9, 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 10004-2456 (97%).
As of May 9, 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 2456 (86%); and
Bank of New York, 48 Wall Street, New York, NY 10286 (12%).
As of May 9, 2000, the entities noted below owned of record or beneficially
5% or more of the outstanding shares of the FS Prime Obligations Fund: Commerce
Bank of Kansas City, P.O. Box 248, Kansas City, MO 64141 (6%) and Goldman Sachs
Funds Group, 85 Broad Street, New York, NY 1004-2456 (5%).
As of May 9, 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 10004-2456 (27%); 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 33480-4113 (6%).
As of May 9, 2000, the entities noted below owned of record or beneficially
5% or more of the outstanding shares of the FS Treasury Obligations Fund:
Commerce Bank of Kansas City, P.O. Box 248, Kansas City MO 64141 (10%); Fulton
Bank, P.O. Box 3215, Lancaster PA 17604-3215, (7%); Mellon Bank, Ms. Beth Brown,
Three Mellon Bank Center, 34th Floor, Pittsburgh, PA 15258-001 (8%); Kitchen
Aid Bermuda, 2000 North #M-63, Benton Harbor, MI 49022 (6%); Treasurer of the
State of Illinois, 300 W. Jefferson Level 1, Springfield, IL 62702 (5%).
As of May 9, 2000, the entities noted below owned of record or beneficially
5% or more of the outstanding Fund shares of the FS Treasury Instruments Fund:
Harris Trust & Savings Bank, Attn: Elliott A. Yurman, Mutual Funds Unit-LLE,
P.O. Box 71940, Chicago, IL 60694 (34%); Goldman Sachs & Co., 85 Broad Street,
New York, NY 10004-2456 (11%); Hilliard Lyons Trust Co., Attn: Carin M. Obye,
P.O. Box 32760, Louisville, KY 40232-2760 (11%); Guaranty Bank & Trust Co.,
Haws & Co., P.O. Box 5847, Denver, CO 80217-5847 (8%);
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<PAGE>
Northern Capital Trust of Fargo, Attn: H. Michael Hardy, P.O. Box 829, Fargo, ND
58107-0829 (7%).
As of May 9, 2000, the entities noted below owned of record or beneficially
5% or more of the outstanding units of the FS Government Fund: Turtle & Co.,
BN-CC, c/o State Street Bank & Trust, P.O. Box 9427, Boston, MA 02209 (11%);
Wachovia Bank, 301 N. Church St., NC-31058, Winston Salem, NC 27101-3820 (7%);
First Citizens Bank & Trust, 100 Tryon Rd., Raleigh, NC 27603-3526 (6%) and KPMG
LLP, Harvey Skolnick --Dir. Of Treasury, 3 Chestnut Ridge Rd., Montvale, NJ
07645-1842 (5%).
As of May 9, 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 10004-2456 (55%); and
Commerce Bank of Kansas City, NA, Mr. Mark Andreoli, Senior Vice President, P.O.
Box 248, Kansas City, MO 64141 (6%).
As of May 9, 2000, the entities 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 10004-2456 (43%); Citibank NA, 11 Wall Street
- - 5th Fl, New York, NY 10043-1000 (5%).
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 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
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<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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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<PAGE>
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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<PAGE>
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.
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:
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<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 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
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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, ILA 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"), the ILA 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, ILA
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, ILA 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, ILA 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, ILA 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) 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 ILA 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,
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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 ILA 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, ILA Cash Management Shares and FST
Service Shares should be directed to the owners' service organization.
Prior to the date of this Additional Statement, the ILA Treasury
Obligations Portfolio, ILA Treasury Instruments Portfolio and ILA Federal
Portfolio had not offered ILA Cash Management Shares and, accordingly, no fees
were paid by these Portfolios to service organizations pursuant to the Cash
Management Shares Service Plan.
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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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) ILA 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.
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
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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, ILA 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, ILA 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, ILA 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, except with respect to the Cash
Management Shares Service Plan and related Service Agreement as it relates to
the ILA Treasury Obligations Portfolio, ILA Treasury Instruments Portfolio and
ILA Federal Portfolio. With respect to the ILA Treasury Obligations Portfolio,
ILA Treasury Instruments Portfolio and ILA Federal Portfolio, the Cash
Management Shares Service Plan and related Service Agreement were initially
approved by 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 Cash Management Shares Service Plan
and related Service Agreement, at a meeting called for the purposes of voting on
such Service Plan and related Service Agreement on ________, 2000. The ILA
Service Plan and FST Service Plan and Service Agreements will remain in effect
until May 1, 2001, and the ILA 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, ILA 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, ILA 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,
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<PAGE>
ILA 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 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, ILA 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
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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 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.
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
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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
ILA Cash Management Shares on behalf of each ILA Portfolio (the "Cash Management
Shares Distribution Plan").
The Cash Management Shares Distribution Plan was most recently
approved on April 25, 2000 on behalf of each ILA Portfolio (except the ILA
Treasury Obligations Portfolio, ILA Treasury Instruments Portfolio and ILA
Federal Portfolio) 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 Cash Management
Shares Distribution Plan was initially approved with respect to the ILA Treasury
Obligations Portfolio, ILA Treasury Instruments Portfolio and ILA Federal
Portfolio on ________, 2000 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 may not exceed 0.50% per annum of the average daily net assets attributable
to ILA Cash Management Shares of the ILA Portfolios. 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. Prior to the date of this Additional Statement, the ILA Treasury
Obligations Portfolio, ILA Treasury Instruments Portfolio and ILA Federal
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Portfolio had not offered ILA Cash Management Shares and, accordingly, no fees
were paid by these Portfolios to Goldman Sachs pursuant to the Cash Management
Shares Distribution Plan.
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 ILA 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 ILA 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 Portfolios 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 ILA 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 ILA 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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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:
"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.
A-1
<PAGE>
"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 addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories):
A-2
<PAGE>
"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 unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
A-3
<PAGE>
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.
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.
B-1
<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.
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).
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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
1998 Goldman Sachs Asset Management reaches $195.5 billion in assets under
management
B-4
<PAGE>
Dow Jones Industrial Average breaks 9000
1999 Goldman Sachs becomes a public company
B-5
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
--------
The following exhibits relating to Goldman Sachs Trust are incorporated
herein by reference to Post-Effective Amendment No. 26 to Goldman Sachs Trust's
Registration Statement on Form N-1A (Accession No. 000950130-95-002856); to
Post-Effective Amendment No. 27 to such Registration Statement (Accession No.
0000950130-96-004931); to Post-Effective Amendment No. 29 to such Registration
Statement (Accession No. 0000950130-97-000573); to Post-Effective Amendment No.
31 to such Registration Statement (Accession No. 0000950130-97-000805); to Post-
Effective Amendment No. 32 to such Registration Statement (Accession No.
0000950130-97-0001846); to Post-Effective Amendment No. 40 to such Registration
Statement (Accession No. 0000950130-97-004495); to Post-Effective Amendment No.
41 to such Registration Statement (Accession No 0000950130-98-000676); to Post-
Effective Amendment No. 43 to such Registration Statement (Accession No.
0000950130-98-000965); to Post-Effective Amendment No. 44 to such Registration
Statement (Accession No. 0000950130-98-002160); to Post-Effective Amendment No.
46 to such Registration Statement (Accession No. 0000950130-98-003563); to Post-
Effective Amendment No. 47 to such Registration Statement (Accession No.
0000950130-98-004845); to Post-Effective Amendment No. 48 to such Registration
Statement (Accession No. 0000950109-98-005275); to Post-Effective Amendment No.
50 to such Registration Statement (Accession No. 0000950130-98-006081); to Post-
Effective Amendment No. 51 to such Registration Statement (Accession No.
0000950130-99-000178); to Post-Effective Amendment No. 52 to such Registration
Statement (Accession No. 0000950130-99-000742); to Post-Effective Amendment No.
53 to such Registration Statement (Accession No. 0000950130-99-001069); to Post-
Effective Amendment No. 54 to such Registration Statement (Accession No.
0000950130-99-002212); to Post-Effective Amendment No. 55 to such Registration
Statement (Accession No. 0000950109-99-002544); to Post-Effective Amendment No.
56 to such Registration Statement (Accession No. 0000950130-99-005294); to Post-
Effective Amendment No. 57 to such Registration Statement (Accession No.
0000950109-99-003474); to Post-Effective Amendment No. 58 to such Registration
Statement (Accession No. 0000950109-99-004208); to Post-Effective Amendment No.
59 to such Registration Statement (Accession No. 0000950130-99-006810); to Post-
Effective Amendment No. 60 to such Registration Statement (Accession No.
0000950109-99-004538) (no exhibits filed as part of this Amendment), to Post-
Effective Amendment No. 61 to such Registration Statement (Accession No.
0000950130-00-000099) (no exhibits filed as part of this Amendment); to Post-
Effective Amendment No. 62 to such Registration Statement (Accession No.
0000950109-00-000585), to Post-
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<PAGE>
Effective Amendment No. 63 to such Registration Statement (Accession No.
0000950109-00-001365), to Post-Effective Amendment No. 64 to such Registration
Statement (Accession No. 0000950130-00-002072) and to Post-Effective Amendment
No. 65 to such Registration Statement (Accession No. 0000950130-00-002509).
(a)(1). Agreement and Declaration of Trust dated January 28, 1997.
(Accession No. 0000950130-97-000573.)
(a)(2). Amendment No. 1 dated April 24, 1997 to Agreement and Declaration
of Trust January 28, 1997. (Accession No. 0000950130-97-004495.)
(a)(3). Amendment No. 2 dated July 21, 1997 to Agreement and Declaration
of Trust, as amended, dated January 28, 1997. (Accession No.
0000950130-97-004495.)
(a)(4). Amendment No. 3 dated October 21, 1997 to the Agreement and
Declaration of Trust, as amended, dated January 28, 1997.
(Accession No. 0000950130-98-000676.)
(a)(5). Amendment No. 4 dated January 28, 1998 to the Agreement and
Declaration of Trust, as amended, dated January 28, 1997.
(Accession No. 0000950130-98-000676.)
(a)(6). Amendment No. 5 dated April 23, 1998 to Agreement and Declaration
of Trust as amended, dated January 28, 1997. (Accession No.
0000950130-98-004845.)
(a)(7). Amendment No. 6 dated July 22, 1998 to Agreement and Declaration
of Trust as amended, dated January 28, 1997. (Accession No.
0000950130-98-004845.)
(a)(8). Amendment No. 7 dated November 3, 1998 to Agreement and
Declaration of Trust as amended, dated January 28, 1997.
(Accession No. 0000950130-98-006081.)
(a)(9). Amendment No. 8 dated January 22, 1999 to Agreement and
Declaration of Trust as amended, dated January 28, 1997.
(Accession No. 0000950130-99-000742.)
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<PAGE>
(a)(10). Amendment No. 9 dated April 28, 1999 to Agreement and Declaration
of Trust as amended, dated January 28, 1997. (Accession No.
0000950109-99-002544.)
(a)(11). Amendment No. 10 dated July 27, 1999 to Agreement and Declaration
of Trust as amended, dated January 28, 1997. (Accession No.
0000950130-99-005294.)
(a)(12). Amendment No. 11 dated July 27, 1999 to Agreement and Declaration
of Trust as amended, dated January 28, 1997. (Accession No.
0000950130-99-005294.)
(a)(13). Amendment No. 12 dated October 26, 1999 to Agreement and
Declaration of Trust as amended, dated January 28, 1997.
(Accession No. 0000950130-99-004208.)
(a)(14). Amendment No. 13 dated February 3, 2000 to Agreement and
Declaration of Trust, as amended, dated January 28, 1997.
(Accession No. 0000950109-00-000585.)
(a)(15). Amendment No. 14 dated April 26, 2000 to Agreement and
Declaration of Trust, as amended, dated January 28, 1997.
(Accession No. 0000950130-00-002509.)
(b). Amended and Restated By-laws of the Delaware business trust dated
January 28, 1997. (Accession No. 0000950130-97-000573.)
(b)(2). Amended and Restated By-laws of the Delaware business trust dated
January 28, 1997, as amended and restated July 27, 1999.
(Accession No. 0000950130-99-005294.)
(c). Not applicable.
(d)(1). Management Agreement dated April 30, 1997 between Registrant, on
behalf of Goldman Sachs Short Duration Government Fund, and
Goldman Sachs Funds Management, L.P. (Accession No. 0000950130-
98-000676.)
(d)(2). Management Agreement dated April 30, 1997 between Registrant, on
behalf of Goldman Sachs Adjustable Rate Government Fund, and
Goldman Sachs Funds Management, L.P. (Accession No. 0000950130-
98-000676.)
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<PAGE>
(d)(3). Management Agreement dated April 30, 1997 between Registrant, on
behalf of Goldman Sachs Short Duration Tax-Free Fund, and Goldman
Sachs Asset Management. (Accession No. 0000950130-98-000676.)
(d)(4). Management Agreement dated April 30, 1997 between Registrant, on
behalf of Goldman Sachs Core Fixed Income Fund, and Goldman Sachs
Asset Management. (Accession No. 0000950130-98-000676.)
(d)(5). Management Agreement dated April 30, 1997 between the Registrant,
on behalf of Goldman Sachs - Institutional Liquid Assets, and
Goldman Sachs Asset Management. (Accession No. 0000950130-98-
000676.)
(d)(6). Management Agreement dated April 30, 1997 between Registrant,
Goldman Sachs Asset Management, Goldman Sachs Fund Management
L.P. and Goldman, Sachs Asset Management International.
(Accession No. 0000950109-98-005275.)
(d)(7). Management Agreement dated January 1, 1998 on behalf of the
Goldman Sachs Asset Allocation Portfolios and Goldman Sachs Asset
Management. (Accession No. 0000950130-98-000676.)
(d)(8). Amended Annex A to Management Agreement dated January 1, 1998 on
behalf of the Goldman Sachs Asset Allocation Portfolios and
Goldman Sachs Asset Management (Conservative Strategy Portfolio)
(Accession No. 0000950130-99-000742.)
(d)(9). Amended Annex A dated April 28, 1999 to Management Agreement
dated April 30, 1997. (Accession No. 0000950109-99-002544.)
(d)(10). Amended Annex A dated July 27, 1999 to Management Agreement dated
April 30, 1997. (Accession No. 0000950130-99-005294.)
(d)(11). Amended Annex A dated October 26, 1999 to Management Agreement
dated April 30, 1997. (Accession No. 0000950130-99-004208.)
(d)(12). Amended Annex A dated February 3, 2000 to Management Agreement
dated April 30, 1997 (Accession No. 0000950109-00-001365.)
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<PAGE>
(d)(13). Amended Annex A dated April 26, 2000 to Management Agreement
dated April 30, 1997 (Accession No. 0000950130-00-002509.)
(e). Distribution Agreement dated April 30, 1997 as amended April 26,
2000 between Registrant and Goldman Sachs & Co. (Accession No.
0000950130-00-002509.)
(f). Not applicable.
(g)(1). Custodian Agreement dated July 15, 1991, between Registrant and
State Street Bank and Trust Company. (Accession No. 0000950130-
95-002856.)
(g)(2). Custodian Agreement dated December 27, 1978 between Registrant
and State Street Bank and Trust Company, on behalf of Goldman
Sachs - Institutional Liquid Assets, filed as Exhibit 8(a).
(Accession No. 0000950130-98-000965.)
(g)(3). Letter Agreement dated December 27, 1978 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs -
Institutional Liquid Assets, pertaining to the fees payable by
Registrant pursuant to the Custodian Agreement, filed as Exhibit
8(b). (Accession No. 0000950130-98-000965.)
(g)(4). Amendment dated May 28, 1981 to the Custodian Agreement referred
to above as Exhibit (g)(2) (Accession No. 0000950130-98-000965.)
(g)(5). Fee schedule relating to the Custodian Agreement between
Registrant on behalf of the Goldman Sachs Asset Allocation
Portfolios and State Street Bank and Trust Company. (Accession
No. 0000950130-97-004495.)
(g)(6). Letter Agreement dated June 14, 1984 between Registrant and State
Street Bank and Trust Company, on behalf of Goldman Sachs -
Institutional Liquid Assets, pertaining to a change in wire
charges under the Custodian Agreement, filed as Exhibit 8(d).
(Accession No. 0000950130-98-000965.)
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<PAGE>
(g)(7). Letter Agreement dated March 29, 1983 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs -
Institutional Liquid Assets, pertaining to the latter's
designation of Bank of America, N.T. and S.A. as its subcustodian
and certain other matters, filed as Exhibit 8(f). (Accession No.
0000950130-98-000965.)
(g)(8). Letter Agreement dated March 21, 1985 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs -
Institutional Liquid Assets, pertaining to the creation of a
joint repurchase agreement account, filed as Exhibit 8(g).
(Accession No. 0000950130-98-000965.)
(g)(9). Letter Agreement dated November 7, 1985, with attachments,
between Registrant and State Street Bank and Trust Company, on
behalf of Goldman Sachs - Institutional Liquid Assets,
authorizing State Street Bank and Trust Company to permit
redemption of units by check, filed as Exhibit 8(h). (Accession
No. 0000950130-98-000965.)
(g)(10). Money Transfer Services Agreement dated November 14, 1985,
including attachment, between Registrant and State Street Bank
and Trust Company, on behalf of Goldman Sachs - Institutional
Liquid Assets, pertaining to transfers of funds on deposit with
State Street Bank and Trust Company, filed as Exhibit 8(i).
(Accession No. 0000950130-98-000965.)
(g)(11). Letter Agreement dated November 27, 1985 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs -
Institutional Liquid Assets, amending the Custodian Agreement.
(Accession No. 0000950130-98-000965.)
(g)(12). Letter Agreement dated July 22, 1986 between Registrant and State
Street Bank and Trust Company, on behalf of Goldman Sachs -
Institutional Liquid Assets, pertaining to a change in wire
charges. (Accession No. 0000950130-98-000965.)
(g)(13). Letter Agreement dated June 20, 1987 between Registrant and State
Street Bank and Trust Company, on behalf of Goldman Sachs -
Institutional Liquid Assets, amending the
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<PAGE>
Custodian Agreement. (Accession No. 0000950130-98-000965.)
(g)(14). Letter Agreement between Registrant and State Street Bank and
Trust Company, on behalf of Goldman Sachs - Institutional Liquid
Assets, pertaining to the latter's designation of Security
Pacific National Bank as its subcustodian and certain other
matters. (Accession No. 0000950130-98-000965.)
(g)(15). Amendment dated July 19, 1988 to the Custodian Agreement between
Registrant and State Street Bank and Trust Company, on behalf of
Goldman Sachs - Institutional Liquid Assets. Accession No.
0000950130-98-000965.)
(g)(16). Amendment dated December 19, 1988 to the Custodian Agreement
between Registrant and State Street Bank and Trust Company, on
behalf of Goldman Sachs - Institutional Liquid Assets. Accession
No. 0000950130-98-000965.)
(g)(17). Custodian Agreement dated April 6, 1990 between Registrant and
State Street Bank and Trust Company on behalf of Goldman Sachs
Capital Growth Fund. (Accession No. 0000950130-98-006081.)
(g)(18). Sub-Custodian Agreement dated March 29, 1983 between State Street
Bank and Trust Company and Bank of America, National Trust and
Savings Association on behalf of Goldman Sachs Institutional
Liquid Assets. (Accession No. 0000950130-98-006081.)
(g)(19). Fee schedule dated January 8, 1999 relating to Custodian
Agreement dated April 6, 1990 between Registrant and State Street
Bank and Trust Company (Conservative Strategy Portfolio).
(Accession No. 0000950130-99-000742.)
(g)(20). Fee schedule dated April 12, 1999 relating to Custodian Agreement
dated April 6, 1990 between Registrant and State Street Bank and
Trust Company (Strategic Growth and Growth Opportunities
Portfolios). (Accession No. 0000950109-99-002544.)
(g)(21). Fee schedule dated July 19, 1999 relating to Custodian Agreement
dated April 6, 1990
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<PAGE>
between Registrant and State Street Bank and Trust Company
(Internet Tollkeeper Fund). (Accession No. 0000950130-99-005294.)
(g)(22). Fee schedule dated October 1, 1999 relating to the Custodian
Agreement dated April 6, 1990 between Registrant and State Street
Bank and Trust Company (Large Cap Value Fund). (Accession No.
0000950130-99-006810.)
(g)(23). Fee schedule dated January 12, 2000 relating to Custodian
Agreement dated April 6, 1990 between Registrant and State Street
Bank and Trust Company (CORE Tax-Managed Equity Fund). (Accession
No. 0000950109-00-000585.)
(g)(24). Fee schedule dated January 6, 2000 relating to Custodian
Agreement dated July 15, 1991 between Registrant and State Street
Bank and Trust Company (High Yield Municipal Fund). (Accession
No. 0000950109-00-000585.)
(g)(25). Fee schedule dated April 14, 2000 relating to Custodian Agreement
dated April 6, 1990 to between Registrant and State Street Bank
and Trust Company (Research Select Fund). (Accession No.
0000950130-00-002509.)
(g)(26). Fee schedule dated April 14, 2000 relating to Custodian Agreement
dated July 15, 1991 between Registrant and State Street Bank and
Trust Company (Enhanced Cash Fund). (Accession No. 0000950130-
00-002509.)
(g)(27). Additional Portfolio Agreement dated September 27, 1999 between
Registrant and State Street Bank and Trust Company. (Accession
No. 0000950109-00-000585.)
(g)(28). Letter Agreement dated September 27, 1999 between Registrant and
State Street Bank and Trust Company relating to Custodian
Agreement dated December 27, 1978. (Accession No. 0000950109-00-
000585.)
(g)(29). Letter Agreement dated September 27, 1999 between Registrant and
State Street Bank and Trust Company relating to Custodian
Agreement
-8-
<PAGE>
dated April 6, 1990. (Accession No. 0000950109-00- 000585.)
(g)(30). Letter Agreement dated September 27, 1999 between Registrant and
State Street Bank and Trust Company relating to Custodian
Agreement dated July 15, 1991. (Accession No. 0000950109-00-
000585.)
(h)(1). Wiring Agreement dated June 20, 1987 among Goldman, Sachs & Co.,
State Street Bank and Trust Company and The Northern Trust
Company. (Accession No. 0000950130-98-000965.)
(h)(2). Letter Agreement dated June 20, 1987 regarding use of checking
account between Registrant and The Northern Trust Company.
(Accession No. 0000950130-98-000965.)
(h)(3). Transfer Agency Agreement dated July 15, 1991 between Registrant
and Goldman, Sachs & Co. (Accession No. 0000950130-95-002856.)
(h)(4). Fee schedule relating to Transfer Agency Agreement between
Registrant on behalf of the Goldman Sachs Asset Allocation
Portfolios and Goldman, Sachs & Co. (Accession No. 0000950130-
97-004495.)
(h)(5). Fee schedule dated July 31, 1998 relating to Transfer Agency
Agreement between Registrant and Goldman, Sachs & Co. on behalf
of all Funds of Goldman Sachs Trust other than the Institutional
Liquid Assets and Financial Square Money Market Funds.
(Accession No. 0000950130-98-004845.)
(h)(6). Fee Schedule dated July 31, 1998 relating to Transfer Agency
Agreement between Registrant and Goldman, Sachs & Co. on behalf
of ILA Money Market Funds. (Accession No. 0000950130-98-006081.)
(h)(7). Fee Schedule dated July 31, 1998 relating to Transfer Agency
Agreement dated July 15, 1991 between the Registrant and
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Goldman, Sachs & Co. (Internet Tollkeeper Fund). (Accession No.
0000950130-99-005294.)
(h)(8). Transfer Agency Agreement dated May 1, 1988 between Goldman Sachs
Institutional Liquid Assets and Goldman, Sachs & Co. (Accession
No. 0000950130-98-006081.)
(h)(9). Transfer Agency Agreement dated April 30, 1997 between Registrant
and Goldman, Sachs & Co. on behalf of the Financial Square Funds.
(Accession No. 0000950130-98-006081.)
(h)(10). Transfer Agency Agreement dated April 6, 1990 between GS-Capital
Growth Fund, Inc. and Goldman Sachs & Co. (Accession No.
0000950130-98-006081.)
(h)(11). Goldman Sachs - Institutional Liquid Assets Administration Class
Administration Plan dated April 22, 1998. (Accession No.
0000950130-98-006081.)
(h)(12). Goldman Sachs - Institutional Liquid Assets Service Class Service
Plan dated April 22, 1998. (Accession No. 0000950130-98-006081.)
(h)(13). Goldman Sachs Trust Administration Class Administration Plan
dated April 23, 1998. (Accession No. 0000950130-98-006081.)
(h)(14). Cash Management Shares Service Plan dated May 1, 1998.
(Accession No. 0000950130-98-006081.)
(h)(15). Form of Retail Service Agreement on behalf of Goldman Sachs Trust
relating to Class A Shares of Goldman Sachs Asset Allocation
Portfolios, Goldman Sachs Fixed Income Funds, Goldman Sachs
Domestic Equity Funds and Goldman Sachs International Equity
Funds. (Accession No. 0000950130-98-006081.)
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(h)(16). Form of Supplemental Service Agreement on behalf of Goldman Sachs
Trust relating to the Administrative Class, Service Class and
Cash Management Class of Goldman Sachs - Institutional Liquid
Assets Portfolios. (Accession No. 0000950130-98-006081.)
(h)(17). Form of Supplemental Service Agreement on behalf of Goldman Sachs
Trust relating to the FST Shares, FST Preferred Shares, FST
Administration Shares and FST Service Shares of Goldman Sachs
Financial Square Funds. (Accession No. 0000950130-98-006081.)
(h)(18). Form of Service Agreement on behalf of Goldman Sachs Trust
relating to the Select Class, the Preferred Class, the
Administration Class, the Service Class and the Cash Management
Class, as applicable, of Goldman Sachs Financial Square Funds,
Goldman Sachs - Institutional Liquid Assets Portfolios, Goldman
Sachs Fixed Income Funds, Goldman Sachs Domestic Equity Funds,
Goldman Sachs International Equity Funds and Goldman Sachs Asset
Allocation Portfolios. (Accession No. 0000950130-00-002509.)
(h)(19). FST Select Shares Plan dated October 26, 1999. (Accession No.
0000950130-99-006810.)
(h)(20). FST Administration Class Administration Plan dated April 25,
2000. (Accession No. 0000950130-00-002509.)
(h)(21). FST Service Class Service Plan dated April 25, 2000. (Accession
No. 0000950130-00-002509.)
(h)(22). FST Preferred Class Preferred Administration Plan dated April 25,
2000. (Accession No. 0000950130-00-002509.)
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(h)(23). Goldman Sachs Trust Service Class Service Plan dated April 25,
2000. (Accession No. 0000950130-00-002509.)
(h)(24). Administration Class Administration Plan dated April 26, 2000.
(Accession No. 0000950130-00-002509.)
(i)(1). Opinion of Drinker, Biddle & Reath LLP. (With respect to the
Asset Allocation Portfolios). (Accession No. 0000950130-97-
004495.)
(i)(2). Opinion of Morris, Nichols, Arsht & Tunnell. (Accession No.
0000950130-97-001846.)
(i)(3). Opinion of Drinker Biddle & Reath LLP. (With respect to Japanese
Equity and International Small Cap). (Accession No. 0000950130-
98-003563.)
(i)(4). Opinion of Drinker Biddle & Reath LLP. (With respect to Cash
Management Shares). (Accession No. 0000950130-98-003563.)
(i)(5). Opinion of Drinker Biddle & Reath LLP. (With respect to the
European Equity Fund). (Accession No. 0000950130-98-006081.)
(i)(6). Opinion of Drinker Biddle & Reath LLP. (With respect to the CORE
Large Cap Value Fund). (Accession No. 0000950130-98-006081.)
(i)(7). Opinion of Drinker Biddle & Reath LLP (with respect to the
Conservative Strategy Portfolio). (Accession No. 0000950130-99-
001069.)
(i)(8). Opinion of Drinker Biddle & Reath LLP (with respect to the
Strategic Growth and Growth Opportunities Portfolios).
(Accession No. 0000950109-99-002544.)
(i)(9). Opinion of Drinker Biddle & Reath LLP (with respect to the
Internet Tollkeeper Fund). Accession No. 0000950109-99-004208.)
(i)(10). Opinion of Drinker Biddle & Reath LLP (with respect to the Large
Cap Value Fund). (Accession No. 0000950130-99-006810.)
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(i)(11). Opinion of Drinker Biddle & Reath LLP (with respect to FST Select
Shares). (Accession No. 0000950109-00-000585.)
(i)(12). Opinion of Drinker Biddle & Reath LLP (with respect to the High
Yield Municipal Fund). (Accession No. 0000950109-00-001365.)
(i)(13). Opinion of Drinker Biddle & Reath LLP (with respect to the CORE
Tax-Managed Equity Fund). (Accession No. 0000950109-00-001365.)
(j). None.
(k). Not applicable.
(l). Not applicable.
(m)(1). Class A Distribution and Service Plan amended and restated as of
September 1, 1998. (Accession No. 0000950130-98-004845.)
(m)(2). Class B Distribution and Service Plan amended and restated as of
September 1, 1998. (Accession No. 0000950130-98-004845.)
(m)(3). Class C Distribution and Service Plan amended and restated as of
September 1, 1998. (Accession No. 0000950130-98-004845.)
(m)(4). Cash Management Shares Plan of Distribution pursuant to Rule 12b-
1 dated May 1, 1998. (Accession No. 0000950130-98-006081.)
(n). None.
(o). Plan dated October 26, 1999 entered into by Registrant pursuant
to Rule 18f-3. (Accession No. 0000950130-99-006810.)
(p)(1). Code of Ethics - Goldman Sachs Trust and Goldman Sachs Variable
Insurance Trust, dated April 23, 1997, as amended October 21,
1997 and April 25, 2000. (Accession No. 0000950130-00-002509.)
(p)(2). Code of Ethics - Goldman Sachs Asset Management, Goldman Sachs
Funds Management L.P. and Goldman Sachs Asset Management
International, effective January 23, 1991 (as revised April 1,
2000). (Accession No. 0000950130-00-002509.)
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<PAGE>
(q)(1). Powers of Attorney of Messrs. Bakhru, Ford, Grip, Shuch, Smart,
Springer, Strubel, McNulty, Mosior, Gilman, Perlowski, Richman,
Surloff, Mmes. MacPherson, Mucker and Taylor. (Accession No.
0000950130-97-000805.)
(q)(2). Powers of Attorney dated October 21, 1997 on behalf of James A.
Fitzpatrick and Valerie A. Zondorak. (Accession No. 0000950130-
98-000676.)
The following exhibit relating to Goldman Sachs Trust is filed herewith
electronically pursuant to EDGAR rules:
(j)(1) Consent of Independent Auditors.
Item 24. Persons Controlled by or Under Common Control with Registrant.
-------------------------------------------------------------
Not Applicable.
Item 25. Indemnification
---------------
Article IV of the Declaration of Trust of Goldman Sachs Trust, Delaware business
trust, provides for indemnification of the Trustees, officers and agents of the
Trust, subject to certain limitations. The Declaration of Trust is incorporated
by reference to Exhibit (a)(1).
The Management Agreement with each of the Funds (other than the ILA Portfolios)
provides that the applicable Investment Adviser will not be liable for any error
of judgment or mistake of law or for any loss suffered by a Fund, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Investment Adviser or from reckless disregard by the Investment Adviser of
its obligations or duties under the Management Agreement. Section 7 of the
Management Agreement with respect to the ILA Portfolios provides that the ILA
Portfolios will indemnify the Adviser against certain liabilities; provided,
however, that such indemnification does not apply to any
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<PAGE>
loss by reason of its willful misfeasance, bad faith or gross negligence or the
Adviser's reckless disregard of its obligation under the Management Agreement.
The Management Agreements are incorporated by reference to Exhibits (d)(1)
through (d)(7).
Section 9 of the Distribution Agreement between the Registrant and Goldman Sachs
dated April 30, 1997, as amended April 26, 2000 and Section 7 of the Transfer
Agency Agreements between the Registrant and Goldman, Sachs & Co. dated July 15,
1991, May 1, 1988, April 30, 1997 and April 6, 1990 each provide that the
Registrant will indemnify Goldman, Sachs & Co. against certain liabilities. A
copy of the Distribution Agreement is incorporated by reference as Exhibit (e).
The Transfer Agency Agreements are incorporated by reference as Exhibits (h)(3),
(h)(8), (h)(9) and (h)(10), respectively, to the Registrant's Registration
Statement.
Mutual fund and Trustees and officers liability policies purchased jointly by
the Registrant, Trust for Credit Unions, Goldman Sachs Variable Insurance Trust
and The Commerce Funds insure such persons and their respective trustees,
partners, officers and employees, subject to the policies' coverage limits and
exclusions and varying deductibles, against loss resulting from claims by reason
of any act, error, omission, misstatement, misleading statement, neglect or
breach of duty.
Item 26. Business and Other Connections of Investment Adviser.
----------------------------------------------------
The business and other connections of the officers and Managing Directors of
Goldman, Sachs & Co., Goldman Sachs Funds Management, L.P., and Goldman Sachs
Asset Management International are listed on their respective Forms ADV as
currently filed with the Commission (File Nos. 801-16048, 801-37591 and 801-
38157, respectively) the texts of which are hereby incorporated by reference.
Item 27. Principal Underwriters.
----------------------
(a) Goldman, Sachs & Co. or an affiliate or a division thereof currently serves
as investment adviser and distributor of the units of Trust for Credit Unions,
for shares of Goldman Sachs Trust and for shares of Goldman Sachs Variable
Insurance Trust. Goldman, Sachs & Co., or a division thereof currently serves as
administrator and distributor of the units or shares of The Commerce Funds.
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<PAGE>
(b) Set forth below is certain information pertaining to the Managing Directors
of Goldman, Sachs & Co., the Registrant's principal underwriter, who are members
of Goldman, Sachs & Co.'s Management Committee. None of the members of the
management committee holds a position or office with the Registrant, except John
P. McNulty who is a trustee of the Registrant.
GOLDMAN SACHS MANAGEMENT COMMITTEE
Name and Principal
Business Address Position
- ------------------ --------
Henry M. Paulson, Jr. (1) Chairman and Chief Executive Officer
Robert J. Hurst (1) Vice Chairman
John A. Thain (1)(3) President and Co-Chief Operating Officer
John L. Thornton (3) President and Co-Chief Operating Officer
Lloyd C. Blankfein (1) Managing Director
Richard A. Friedman (1) Managing Director
Steven M. Heller (1) Managing Director
Robert S. Kaplan (1) Managing Director
Robert J. Katz (1) Managing Director
John P. McNulty (2) Managing Director
Michael P. Mortara (1) Managing Director
Daniel M. Neidich (1) Managing Director
Robin Neustein (2) Managing Director
Mark Schwartz (4) Managing Director
Robert K. Steel (2) Managing Director
Leslie C. Tortora (2) Managing Director
Patrick J. Ward (3) Managing Director
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<PAGE>
Name and Principal
Business Address Position
- ------------------ --------
Gregory K. Palm (1) Counsel and Managing Director
_______________________
(1) 85 Broad Street, New York, NY 10004
(2) One New York Plaza, New York, NY 10004
(3) Peterborough Court, 133 Fleet Street, London EC4A 2BB, England
(4) ARK Mori Building, 12-32 Akasaka I-Chome Minato-KY,
Tokyo 107-6019, Japan
(c) Not Applicable.
Item 28. Location of Accounts and Records.
--------------------------------
The Declaration of Trust, By-laws and minute books of the Registrant and certain
investment adviser records are in the physical possession of Goldman Sachs Asset
Management, 32 Old Slip, New York, New York 10005. All other accounts, books
and other documents required to be maintained under Section 31(a) of the
Investment Company Act of 1940 and the Rules promulgated thereunder are in the
physical possession of State Street Bank and Trust Company, P.O. Box 1713,
Boston, Massachusetts 02105 except for certain transfer agency records which are
maintained by Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606.
Item 29. Management Services
-------------------
Not applicable.
Item 30. Undertakings
------------
Not applicable.
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* Pursuant to a power of attorney previously filed.
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<PAGE>
EXHIBIT INDEX
(j)(1) Consent of Independent Auditors.
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<PAGE>
Exhibit (J)(1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent accountants, we hereby consent to the use of our reports for
Goldman Sachs Trust on behalf of the Institutional Liquid Assets Portfolios
dated February 14, 2000 (and all references to our firm) included in or made a
part of Post-Effective Amendment No. 66 and Amendment No. 68 to Registration
Statement File Nos. 33-17619 and 811-5349, respectively.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 17, 2000
