<PAGE>
TRUST FOR CREDIT UNIONS
Prospectus
Trust for
Credit Unions
November 30, 1999
.Money Market
Portfolio
.Government
Securities
Portfolio
.Mortgage
Securities
Portfolio
[LOGO OF TRUST FOR CREDIT UNION]
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 PORTFOLIO IS NOT A
CREDIT UNION DEPOSIT AND IS NOT INSURED BY
THE NATIONAL CREDIT UNION SHARE INSURANCE
FUND, THE NATIONAL CREDIT UNION
ADMINISTRATION OR ANY OTHER GOVERNMENT
AGENCY. AN INVESTMENT IN A PORTFOLIO
INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL. ALTHOUGH THE
MONEY MARKET PORTFOLIO SEEKS TO PRESERVE
THE VALUE OF YOUR INVESTMENT AT $1.00 PER
UNIT, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE PORTFOLIO.
[ART]
<PAGE>
General Investment Management Approach
The Money Market Portfolio, Government Securities Portfolio and Mortgage Secu-
rities Portfolio are portfolios ("Portfolios") of the Trust for Credit Unions
(the "Trust" or "Fund"), an open-end, management investment company (commonly
known as a mutual fund).
.The Fund is offered solely to state and federally chartered credit unions.
Units of each of the Fund's Portfolios are designed to qualify as eligible
investments for federally chartered credit unions pursuant to Sections 107(7),
107(8) and 107(15) of the Federal Credit Union Act, Part 703 of the National
Credit Union Administration ("NCUA") Rules and Regulations and NCUA Letter
Number 155. Units of the Fund, however, may or may not qualify as eligible
investments for particular state chartered credit unions. The Fund encourages
each state chartered credit union to consult qualified legal counsel concern-
ing whether the Portfolios are permissible investments under the laws applica-
ble to it.
.The Fund intends to review changes in the applicable laws, rules and regula-
tions governing eligible investments for federally chartered credit unions,
and to take such action as may be necessary so that the investments of the
Fund qualify as eligible investments under the Federal Credit Union Act and
the regulations thereunder.
Goldman Sachs Asset Management ("GSAM"), a unit of the Investment Management
Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Fund's
investment adviser and also provides certain administrative services. GSAM is
referred to in this Prospectus as the "Investment Adviser."
Callahan Credit Union Financial Services Limited Partnership ("CUFSLP") is a
partnership in which 40 major credit unions are limited partners. CUFSLP acts
as administrator of the Fund (the "Administrator"). Callahan Financial Servic-
es, Inc. ("CFS"), the general partner of CUFSLP, and Goldman Sachs serve as the
distributors of the Fund (the "Distributors").
The Fund's Money Market Investment Philosophy:
The Money Market Portfolio is managed to seek preservation of capital, daily
liquidity and maximum current income. The Investment Adviser follows a conser-
vative, risk-managed investment process that seeks to:
.Manage credit risk
.Manage interest rate risk
.Manage liquidity
1
<PAGE>
Since 1988, the Investment Adviser has actively managed the Money Market
Portfolio to provide credit union investors with the greatest possible pres-
ervation 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 Money Market Portfolio. Sources
for their 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 approval list to construct
portfolios which offer the best available risk-return tradeoff within the
"approved" credit universe.
2.Managing Interest Rate Risk
Three main steps are followed in seeking to manage interest rate risk:
.Establish duration target--Duration (a measure of portfolio price
sensitivity to changes in interest rates) is constantly revisited and
adjusted as market conditions change. An overall strategy is developed by
the portfolio management team based on insights gained from weekly meetings
with both Goldman Sachs economists and economists from outside the firm.
.Implement optimum portfolio structure--Proprietary models that seek the
optimum balance of risk and return, in conjunction with the Investment
Adviser's analysis of factors such as market events, short-term interest
rates and the Money Market Portfolio's asset volatility, are used to
identify the most effective portfolio structure.
.Conduct rigorous analysis of new securities--The Investment Adviser's five-
step process includes legal, credit, historical index and liquidity
analysis, as well as price stress testing to determine suitability for
money market mutual funds.
2
<PAGE>
GENERAL INVESTMENT MANAGEMENT APPROACH
3. Managing Liquidity
Factors that the Investment Adviser's portfolio managers continuously moni-
tor and that affect the liquidity of the Money Market Portfolio include:
.The Money Market Portfolio's clients and factors that influence their asset
volatility;
.Technical events that influence the trading range of federal funds and
other short-term fixed-income markets; and
.Bid-ask spreads associated with securities in the Portfolio.
The Fund's Fixed Income Investment Philosophy:
Active Management Within a Risk-Managed Framework
The Government Securities Portfolio and the Mortgage Securities Portfolio
(the "Bond Portfolios") are managed to seek a high level of current income,
consistent with low volatility of principal. The Investment Adviser follows
a disciplined, multi-step process to evaluate potential mortgage-related
investments by assessing:
.Sector Allocation
.Security Selection
.Yield Curve Strategies
Investment Process
1. Sector Allocation--The Investment Adviser assesses the relative value of
different mortgage-related securities to create investment strategies that
meet each Bond Portfolio's objectives.
2. Security Selection--In selecting securities for each Bond Portfolio, the
Investment Adviser draws on the extensive resources of Goldman Sachs,
including fixed-income research professionals.
3. Yield Curve Strategies--The Investment Adviser adjusts the term structure
of the Bond Portfolios based on its expectations of changes in the shape of
the yield curve while closely controlling the overall duration of the Bond
Portfolios.
Among the quantitative techniques used in the Bond Portfolios' investment
process are:
.Option-adjusted analytics to make initial strategic asset allocations
within the mortgage markets and to reevaluate investments as market condi-
tions change; and
.Analytics to estimate mortgage prepayments and cash flows under different
interest rate scenarios and to maintain an optimal portfolio structure.
3
<PAGE>
The Investment Adviser de-emphasizes interest rate predictions as a means of
generating incremental return. Instead, the Investment Adviser seeks to add
value through the selection of particular securities and investment sector
allocation as described above.
With the Bond Portfolios, the Investment Adviser applies a team approach
that emphasizes risk management and capitalizes on Goldman Sachs' extensive
research capabilities.
- --------------------------------------------------------------------------------
Each of the Bond Portfolios described in this Prospectus has a target dura-
tion. A Bond Portfolio's duration approximates its price sensitivity to
changes in interest rates including expected cash flow and mortgage prepay-
ments. Maturity measures the time until final payment is due; it takes no
account of the pattern of a security's cash flows over time. In computing
portfolio duration, a Bond Portfolio will estimate the duration of obliga-
tions that are subject to prepayment or redemption by the issuer, taking
into account the influence of interest rates on prepayments and coupon
flows. This method of computing duration is known as "option-adjusted" dura-
tion. The Bond Portfolios have no restrictions as to the minimum or maximum
maturity of any particular security held by them but intend to maintain the
maximum durations noted under "Portfolio Investment Objectives and Strate-
gies." There can be no assurance that the Investment Adviser's estimation of
duration will be accurate or that the duration of a Portfolio will always
remain within the Portfolio's maximum target duration.
4
<PAGE>
Portfolio Investment Objectives and Strategies
Money Market Portfolio
INVESTMENT OBJECTIVE
The Money Market Portfolio seeks to maximize current income to the extent
consistent with the preservation of capital and the maintenance of liquidity
by investing in high quality money market instruments authorized under the
Federal Credit Union Act.
PRINCIPAL INVESTMENT STRATEGIES
The Money Market Portfolio invests exclusively in:
.Securities issued or guaranteed as to principal and interest by the U.S.
government or by its agencies, instrumentalities or sponsored enterprises
("U.S. Government Securities") and related custodial receipts
.U.S. dollar-denominated obligations issued or guaranteed by U.S. banks with
total assets exceeding $1 billion (including obligations issued by foreign
branches of such banks), but only to the extent permitted under the Federal
Credit Union Act and the rules and regulations thereunder
.Repurchase agreements pertaining thereto
.Federal funds
Pursuant to an order of the Securities and Exchange Commission ("SEC"), the
Money Market Portfolio may enter into principal transactions in certain tax-
able money market instruments, including repurchase agreements, with Goldman
Sachs.
GENERAL INVESTMENT POLICIES
The Portfolio: The Money Market Portfolio's securities are valued by the
amortized cost method as permitted by Rule 2a-7 under the Investment Company
Act of 1940, as amended (the "Act"). Under Rule 2a-7, the Portfolio may
invest only in U.S. dollar-denominated securities that are determined to
present minimal credit risk and meet certain other criteria, including con-
ditions relating to maturity, diversification and credit quality. These
operating policies may be more restrictive than the fundamental policies set
forth in the Statement of Additional Information (the "Additional State-
ment").
5
<PAGE>
Net Asset Value ("NAV"): The Portfolio seeks to maintain a stable NAV of
$1.00 per unit.
Maximum Remaining Maturity of Portfolio Investments: 13 months (as deter-
mined pursuant to Rule 2a-7) at the time of purchase.
Dollar-Weighted Average Portfolio Maturity ("WAM"): Not more than 90 days
(as required by Rule 2a-7).
Diversification: Diversification can help the Portfolio reduce the risks of
investing. In accordance with current regulations of the SEC, the Portfolio
may not invest more than 5% of the value of its total assets at the time of
purchase in the securities of any single issuer. However, the Portfolio may
invest up to 25% of the value of its total assets in the securities of a
single issuer for up to three business days. These limitations do not apply
to cash, certain repurchase agreements or U.S. Government Securities. In
addition, securities subject to certain unconditional guarantees are subject
to different diversification requirements as described in the Additional
Statement.
Credit Quality: Investments by the Money Market Portfolio must present mini-
mal credit risk and be "First Tier Securities." First Tier Securities are
securities that are rated in the highest short-term ratings category by at
least two Nationally Recognized Statistical Rating Organizations ("NRSROs"),
or if only one NRSRO has assigned a rating, by that NRSRO; or have been
issued or guaranteed by, or otherwise allow the Portfolio under certain con-
ditions to demand payment from, an entity with such ratings. U.S. Government
Securities are considered First Tier Securities. Securities without short-
term ratings may be purchased only if they are deemed by the Investment
Adviser to be of comparable quality to First Tier Securities. NRSROs include
Standard & Poor's Ratings Group, Moody's Investors Service, Inc., Fitch
IBCA, Inc., Duff and Phelps, Inc. and Thomson BankWatch, Inc. For a descrip-
tion of each NRSRO's rating categories, see the Additional Statement.
6
<PAGE>
PORTFOLIO INVESTMENT OBJECTIVES AND STRATEGIES
Government Securities Portfolio
INVESTMENT OBJECTIVE
The Government Securities Portfolio seeks to achieve a high level of current
income, consistent with low volatility of principal, by investing in obliga-
tions authorized under the Federal Credit Union Act.
PRINCIPAL INVESTMENT STRATEGIES
The Government Securities Portfolio invests exclusively in:
.U.S. Government Securities and related custodial receipts
.Repurchase agreements pertaining thereto
.Short-term obligations that are permitted investments for the Money Market
Portfolio
Under normal market and interest rate conditions, at least 65% of the total
assets of the Government Securities Portfolio will consist of adjustable
rate mortgage-related securities issued or guaranteed by the U.S. govern-
ment, its agencies, instrumentalities or sponsored enterprises. While there
will be fluctuations in the NAV of the Government Securities Portfolio, the
Portfolio is expected to have less interest rate risk and asset value fluc-
tuation than funds investing primarily in longer-term mortgage-backed secu-
rities paying a fixed rate of interest.
Duration (under normal interest rate conditions):
Target = No shorter than a Six-Month U.S. Treasury Security; no longer than
a One-Year U.S. Treasury Security
Maximum = Two-Year U.S. Treasury Security
Expected Approximate Interest Rate Sensitivity: Nine-Month Treasury Bill
Credit Quality: U.S. Government Securities
Benchmark: An equally weighted blend of the Six-Month and One-Year U.S.
Treasury Security as reported by Merrill Lynch
7
<PAGE>
Mortgage Securities Portfolio
INVESTMENT OBJECTIVE
The Mortgage Securities Portfolio seeks to achieve a high level of current
income, consistent with relatively low volatility of principal, by investing
in obligations authorized under the Federal Credit Union Act.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Mortgage Securities Portfolio will invest
primarily (and at least 65% of its total assets) in privately-issued mort-
gage-related securities rated, at the time of purchase, in one of the two
highest rating categories by an NRSRO and in mortgage-related securities
issued or guaranteed by the U.S. government, its agencies, instrumentalities
or sponsored enterprises. These securities will include both adjustable rate
and fixed rate mortgage pass-through securities, collateralized mortgage
obligations and other multiclass mortgage-related securities, as well as
other securities that are collateralized by or represent direct or indirect
interests in mortgage-related securities or mortgage loans.
The Mortgage Securities Portfolio may also invest in:
.Other U.S. Government Securities and related custodial receipts
.Repurchase agreements pertaining thereto
.Short-term obligations that are permitted investments for the Money Market
Portfolio
The Mortgage Securities Portfolio will attempt, through the purchase of
securities with short or negative durations, to limit the effect of interest
rate fluctuations on the Portfolio's NAV.
Duration (under normal interest rate conditions):
Target = Two-Year U.S. Treasury Security
Maximum = Three-Year U.S. Treasury Security
Expected Approximate Interest Rate Sensitivity: Two-Year U.S. Treasury note
Credit Quality: Privately issued mortgage securities rated AAA or Aaa or AA
or Aa by a NRSRO at the time of purchase; U.S. Government Securities
Benchmark: The Two-Year U.S. Treasury Security as reported by Merrill Lynch
8
<PAGE>
Other Investment Practices
and Securities
The table below identifies some of the investment techniques that may (but are
not required to) be used by the Portfolios in seeking to achieve their invest-
ment objectives. The table also highlights the differences among the Portfolios
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 Fund's annual/semi-annual reports. For more information see Appen-
dix A.
<TABLE>
<CAPTION>
. No specific percentage limitation on usage;
limited only by the objectives Money Government Mortgage
and strategies of the Portfolio Market Securities Securities
- --Not permitted Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Practices
Investment Company Securities -- -- ./1/
Mortgage Dollar Rolls -- . .
Repurchase Agreements . . .
Securities Lending -- ./2/ ./2/
When-Issued Securities and Forward
Commitments . . .
Investment Securities
Bank Obligations/3/ . . .
Custodial Receipts . . .
U.S. Government Securities . . .
Inverse Floating Rate Securities/4/ -- . .
Federal Funds/5/ . . .
Mortgage-Related Securities
Adjustable Rate Mortgage Loans -- . .
Fixed Rate Mortgage Loans -- . .
Collateralized Mortgage Obligations -- . .
Government Mortgage-Related Securities . . .
Multiple Class Mortgage-Related Securities -- . .
Privately Issued Mortgage Pass-Through
Securities -- -- .
- ---------------------------------------------------------------------------
</TABLE>
1 The Mortgage Securities Portfolio may invest up to 10% of its total assets
in the securities of other investment companies.
2 With respect to no more than 5% of net assets.
3 The Portfolios may invest in U.S. dollar-denominated obligations issued or
guaranteed by U.S. banks with total assets exceeding $1 billion (including
obligations issued by foreign branches of such banks) only to the extent
permitted under the Federal Credit Union Act and the rules and regulations
thereunder.
4 To the extent permitted by NCUA Rules and Regulations.
5 The Portfolios may make unsecured loans of federal funds to U.S. banks with
total assets exceeding $1 billion (including obligations issued by foreign
branches of such banks) to the extent permitted by the Federal Credit Union
Act and the rules and regulations thereunder.
9
<PAGE>
Principal Risks of the Portfolios
Loss of money is a risk of investing in each Portfolio. An investment in a
Portfolio is not a deposit of any credit union and is not insured or guaranteed
by the National Credit Union Share Insurance Fund, the National Credit Union
Administration or any other governmental agency. The following summarizes
important risks that apply to the Portfolios and may result in a loss of your
investment. None of the Portfolios should be relied upon as a complete invest-
ment program. There can be no assurance that a Portfolio will achieve its
investment objective.
<TABLE>
<CAPTION>
.Applicable
N/ANot Applicable
Money Government Mortgage
Market Securities Securities
Portfolio Portfolio Portfolio
- -----------------------------------------------------------
<S> <C> <C> <C>
Stable NAV . N/A N/A
Interest Rate . . .
Credit/Default . . .
Call . . .
Extension . . .
Derivatives N/A . .
U.S. Government Securities . . .
Market . . .
Management . . .
Liquidity . . .
Other . . .
- -----------------------------------------------------------
</TABLE>
10
<PAGE>
PRINCIPAL RISKS OF THE PORTFOLIOS
Risks
.Stable NAV Risk--The risk that the Money Market Portfolio will not be able to
maintain a NAV per unit of $1.00 at all times. The Bond Portfolios are not
exposed to this risk as they do not maintain a stable NAV; rather, the value
of their units fluctuates.
.Interest Rate Risk--The risk that during periods of rising interest rates, a
Portfolio's yield (and the market value of its fixed-income securities) will
tend to be lower than prevailing market rates; in periods of falling interest
rates, a Portfolio's yield will tend to be higher.
.Credit/Default Risk--The risk that an issuer or guarantor of a security, or a
bank (or a foreign branch of a U.S. bank) or other financial institution that
has entered into a repurchase agreement, may default on its payment
obligations.
.Call Risk--The risk that an issuer will exercise its right to pay principal on
an obligation held by a Portfolio (such as a mortgage-backed security) earlier
than expected. This may happen when there is a decline in interest rates.
Under these circumstances, a Portfolio may be unable to recoup all of its
initial investment and will also suffer from having to reinvest in lower
yielding securities.
.Extension Risk--The risk that an issuer will exercise its right to pay
principal on an obligation held by a Portfolio (such as a mortgage-backed
security) later than expected. This may happen when there is a rise in
interest rates. Under these circumstances, the value of the obligation will
decrease, and a Portfolio will also suffer from the inability to invest in
higher yielding securities.
.Derivatives Risk--The risk that loss may result from a Portfolio's investments
in mortgage derivatives, forward commitments, mortgage dollar rolls and other
derivative instruments. These instruments may be leveraged so that small
changes may produce disproportionate losses to a Portfolio.
.U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
.Market Risk--The risk that the value of the securities in which a Portfolio
invests may go up or down in response to the prospects of individual companies
and/or general economic conditions. Price changes may be temporary or last for
extended periods.
.Management Risk--The risk that a strategy used by the Investment Adviser may
fail to produce the intended results.
.Liquidity Risk--The risk that a Portfolio will not be able 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.
11
<PAGE>
.Other Risks--Each Portfolio is subject to other risks, such as the risk that
its operations, or the value of its portfolio securities, will be disrupted by
the "Year 2000 Problem."
More information about the portfolio securities and investment techniques of
the Portfolios, and their associated risks, is provided in Appendix A. You
should consider the investment risks discussed in this section and in Appendix
A. Both are important to your investment choice.
12
<PAGE>
Portfolio Performance
HOW THE PORTFOLIOS HAVE PERFORMED
The bar chart and table below provide an indication of the risks of invest-
ing in a Portfolio by showing: (a) changes in the performance of a Portfolio
from year to year; and (b) the average annual returns of the Portfolios and
how the returns of the Bond Portfolios compare to those of broad-based secu-
rities market indices. The bar chart and table assume reinvestment of divi-
dends and distributions. A Portfolio's past performance is not necessarily
an indication of how the Portfolio will perform in the future. Performance
reflects expense limitations in effect. If expense limitations were not in
place, a Portfolio's performance would have been reduced.
You may obtain the Money Market Portfolio's current yield by calling 1-800-
342-5828 or 1-800-237-5678.
13
<PAGE>
Money Market Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
The total
return for the
9-month period
ended September
30, 1999 was
3.73%.
Best Quarter
Q2 '89 2.42%
Worst Quarter
Q2 '93 0.75%
[CHART]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
9.41% 8.32% 5.98% 3.73% 3.09% 4.09% 5.88% 5.35% 5.55% 5.54%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Since
For the period ended December 31, 1998 1 Year 5 Years 10 Years Inception
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Portfolio (Inception 5/17/88) 5.54% 5.28% 5.68% 5.82%
------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
PORTFOLIO PERFORMANCE
Government Securities Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
The total
return for the
9-month period
ended September
30, 1999 was
3.59%.
Best Quarter
Q1 '95 2.44%
Worst Quarter
Q2 '94 0.23%
[CHART]
AVERAGE ANNUAL TOTAL RETURN
1992 1993 1994 1995 1996 1997 1998
5.32% 3.64% 2.03% 7.91% 6.18% 6.79% 4.62%
<TABLE>
<CAPTION>
Since
For the period ended December 31, 1998 1 Year 5 Years Inception
------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Securities Portfolio (Inception 7/10/91) 4.62% 5.49% 5.35%
Six-Month U.S. Treasury Security* 5.58% 5.37% 5.06%
One-Year U.S. Treasury Security* 5.89% 5.53% 5.44%
Lehman Brothers Mutual Fund Adjustable Rate
Mortgage ("ARM") Index** 5.27% 6.11% 6.03%
Lehman Brothers Mutual Fund Short (1-2) Government
Index*** 6.60% 5.85% 6.16%
------------------------------------------------------------------------------
</TABLE>
* The Six-Month and One-Year U.S. Treasury Securities, as reported by Mer-
rill Lynch, does not reflect any fees or expenses.
** The Lehman Brothers Mutual Fund Adjustable Rate Mortgage Index is unman-
aged and the Index figures do not reflect any fees or expenses.
*** The Lehman Brothers Mutual Fund Short (1-2) Government Index is unman-
aged and the Index figures do not reflect any fees or expenses.
15
<PAGE>
Mortgage Securities Portfolio
TOTAL RETURN CALENDAR YEAR
- --------------------------------------------------------------------------------
The total
return for the
9-month period
ended September
30, 1999 was
2.01%.
Best Quarter
Q1 '95 3.47%
Worst Quarter
Q1 '94 (0.46)%
[CHART]
1993 1994 1995 1996 1997 1998
6.45% 0.80% 11.53% 5.36% 7.53% 6.41%
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Since
For the period ended December 31, 1998 1 Year 5 Years Inception
------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Securities Portfolio (Inception 10/9/92) 6.41% 6.27% 6.12%
Two-Year U.S. Treasury Security* 6.57% 5.76% 5.49%
Lehman Brothers ARM Index** 5.27% 6.11% 6.10%
Lehman Brothers Mutual Fund Short (1-3) Government
Index*** 6.97% 5.95% 5.83%
------------------------------------------------------------------------------
</TABLE>
* The Two-Year U.S. Treasury Security, as reported by Merrill Lynch, does
not reflect any fees or expenses.
** The Lehman Brothers ARM Index is unmanaged and the Index figures do not
reflect any fees or expenses.
*** The Lehman Brothers Mutual Fund Short (1-3) Government Index is unman-
aged and the Index figures do not reflect any fees or expenses.
16
<PAGE>
Portfolio Fees and Expenses
This table describes the fees and expenses that you would pay if you buy and
hold units of the Portfolios.
<TABLE>
<CAPTION>
Money Government Mortgage
Market Securities Securities
Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Unitholder 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 Portfolio Operating Expenses*
(expenses that are deducted from Portfolio
assets):/1/
Management Fees 0.16%/2/ 0.20% 0.20%
Administration Fees 0.10%/3/ 0.10% 0.05%
Other Expenses 0.04% 0.03%/5/ 0.04%
- -----------------------------------------------------------------------------
Total Portfolio Operating Expenses 0.30%/4/ 0.33% 0.29%
- -----------------------------------------------------------------------------
</TABLE>
* As a result of the current fee waivers and expense
limitations, "Other Expenses" and "Total Portfolio
Operating Expenses" of the Portfolios which are actu-
ally incurred are as set forth below. The expense
limitations may be terminated at any time at the
option of the Investment Adviser and Administrator.
If this occurs, the Portfolio's operating expenses
may increase without unitholder approval.
<TABLE>
<CAPTION>
Money Government Mortgage
Market Securities Securities
Portfolio Portfolio Portfolio
----------------------------------------------------------------------------
<S> <C> <C> <C>
Annual Portfolio Operating Expenses
(expenses that are deducted from
Portfolio assets):/1/
Management Fees 0.07%/2/ 0.20% 0.20%
Administration Fees 0.02%/3/ 0.10% 0.05%
Other Expenses 0.04% 0.03%/5/ 0.04%
----------------------------------------------------------------------------
Total Portfolio Operating Expenses (after
current waivers and expense limitations) 0.13%/4/ 0.33% 0.29%
----------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Portfolio Fees and Expenses continued
/1/The Portfolios' annual operating expenses are based on actual expenses for
the last fiscal year.
/2/The management fee for the Money Market Portfolio is payable monthly at
annual rates equal to 0.20% of the first $300 million and 0.15% over $300
million of the average daily net assets of the Portfolio. The Investment
Adviser has voluntarily agreed to limit its advisory fee to 0.07% of the
Portfolio's average daily net assets. The limitation may be terminated at
any time at the option of the Investment Adviser.
/3/The Administrator has voluntarily agreed to limit its administration fee on
the Money Market Portfolio to 0.02% of the Portfolio's average daily net
assets. The limitation may be terminated at any time at the option of the
Administrator.
/4/The Administrator has voluntarily agreed to reduce or limit "Total Portfo-
lio Operating Expenses" of the Money Market Portfolio (excluding interest,
taxes, brokerage and extraordinary expenses) to 0.20% of the Portfolio's
average daily net assets.
/5/The Administrator and the Investment Adviser have voluntarily agreed to
reduce or limit "Other Expenses" (excluding advisory fees, administration
fees, interest, taxes, brokerage and extraordinary expenses) of the Govern-
ment Securities Portfolio such that the Administrator will reimburse
expenses that exceed 0.05% up to 0.10% of the Portfolio's average daily net
assets and the Investment Adviser will reimburse expenses that exceed 0.10%
up to 0.15% of the Portfolio's average daily net assets.
18
<PAGE>
PORTFOLIO FEES AND EXPENSES
Example
The following Example is intended to help you compare the cost of investing in
a Portfolio (without the fee waivers and expense limitations) with the cost of
investing in other mutual funds. The Example assumes that you invest $10,000 in
a Portfolio for the time periods indicated and then redeem all of your units at
the end of those periods. The Example also assumes that your investment has a
5% return each year and that a Portfolio's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market $31 $ 97 $169 $381
- ------------------------------------------------------
Government Securities $34 $106 $185 $418
- ------------------------------------------------------
Mortgage Securities $30 $ 93 $163 $368
- ------------------------------------------------------
</TABLE>
19
<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 Goldman Sachs Asset Management ("GSAM"). GSAM, 32 Old Slip,
New York, New York 10005, acts as Investment Adviser to the Portfolios.
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
September 30, 1999, GSAM, along with other units of IMD, had assets under
management of $203 billion.
The Investment Adviser provides day-to-day advice regarding the Portfolios'
transactions. The Investment Adviser also performs the following services
for the Portfolios:
.Continually manages each Portfolio, including the purchase, retention and
disposition of securities and other assets
.Performs various administrative and recordholder servicing functions (to
the extent not provided by CUFSLP, as Administrator)
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
Portfolio's average daily net assets):
<TABLE>
<CAPTION>
Actual Rate For the
Fiscal Year Ended
Portfolio Contractual Rate August 31, 1999
--------------------------------------------------------------
<S> <C> <C>
Money Market 0.20% on first 0.07%
$300 million,
0.15% on remainder
--------------------------------------------------------------
Government Securities 0.20% 0.20%
--------------------------------------------------------------
Mortgage Securities 0.20% 0.20%
--------------------------------------------------------------
</TABLE>
The difference, if any, between the stated fees and the actual fees paid by
the Portfolios reflects that the Investment Adviser did not charge the full
amount of the fees to which it would have been entitled. The Investment
Adviser may discontinue or modify any such voluntary limitations in the
future at its discretion.
20
<PAGE>
SERVICE PROVIDERS
ADMINISTRATOR
Callahan Credit Union Financial Services Limited Partnership ("CUFSLP"), a
Delaware limited partnership in which 40 major credit unions are limited
partners, acts as the Administrator of the Fund. In this capacity, CUFSLP
periodically reviews the performance of the Investment Adviser, the Transfer
Agent, the Distributors and the custodian of the Fund; provides facilities,
equipment and personnel to serve the needs of investors; develops and moni-
tors investor programs for credit unions; provides assistance in connection
with the processing of unit purchase and redemption orders as reasonably
requested by the Transfer Agent or the Fund; handles unitholder problems and
calls relating to administrative matters; provides advice and assistance
concerning the regulatory requirements applicable to credit unions that
invest in the Fund; and provides other administrative services to the Fund.
The administration fee payable to CUFSLP is described under "Portfolio Fees
and Expenses."
DISTRIBUTORS AND TRANSFER AGENT
Callahan Financial Services, Inc. ("CFS"), 1001 Connecticut Avenue, N.W.,
Suite 1001, Washington, D.C. 20036-5504, a Delaware corporation, and Goldman
Sachs, 85 Broad Street, New York, New York 10004, serve as the distributors
(the "Distributors") of units of the Fund. CFS, a registered broker-dealer
under the Securities Exchange Act of 1934, is an affiliate of Callahan &
Associates, Inc., a corporation organized under the laws of the District of
Columbia, founded in 1985. Goldman Sachs, 4900 Sears Tower, Chicago, Illi-
nois 60606-6372, also serves as the Fund's transfer agent (the "Transfer
Agent") and, as such, performs various unitholder servicing functions.
21
<PAGE>
PORTFOLIO MANAGERS
The portfolio managers for the Bond Portfolios are:
<TABLE>
<CAPTION>
Years Primarily
Name and Title Responsible Five Year Employment History
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S>
Jonathan A. Since 1991 Mr. Beinner joined the Investment Adviser in 1990.
Beinner
Managing
Director and
Co-Head U.S.
Fixed Income
-------------------------------------------------------------------------------------------------------------------------------
James B. Clark Since 1994 Mr. Clark joined the Investment Adviser in 1994 after working as an investment manager in
Vice President the mortgage-backed securities group at Travelers Insurance Company.
-------------------------------------------------------------------------------------------------------------------------------
Peter A. Dion Since 1995 Mr. Dion joined the Investment Adviser in 1992. From 1994 to 1995, he was an associate
Vice President portfolio manager.
-------------------------------------------------------------------------------------------------------------------------------
James P. Since 1995 Mr. McCarthy joined the Investment Adviser in 1995 after working four years at Nomura
McCarthy Securities, where he was an assistant vice president and an adjustable rate mortgage trader.
Vice President
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS
The involvement of the Investment Adviser, Goldman Sachs and their affili-
ates in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect
to the Portfolios or limit their investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Portfolios and/or
which engage in and compete for transactions in the same types of securities
and instruments as the Portfolios. Goldman Sachs and its affiliates will not
have any obligation to make available any information regarding their pro-
prietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the
Portfolios. The results of the Portfolios' investment activities, therefore,
may differ from those of Goldman Sachs and its affiliates, and it is possi-
ble that the Portfolios could sustain losses during periods in which Goldman
Sachs and its affiliates and other accounts achieve significant profits on
their trading for proprietary or other accounts. In addition, the Portfolios
may, from time to time, enter into transactions in which other clients of
Goldman Sachs have an adverse interest. The Portfolios' activities may be
limited because of regulatory restrictions applicable to Goldman Sachs and
its affiliates, and/or their internal policies designed to comply with such
restrictions.
22
<PAGE>
SERVICE PROVIDERS
YEAR 2000
Many computer systems were designed using only two digits to signify the
year (for example, "98" for "1998"). On January 1, 2000, if these computer
systems are not corrected, they may incorrectly interpret "00" as the year
"1900" rather than the year "2000," leading to computer shutdowns or errors
(commonly known as the "Year 2000 Problem"). To the extent these systems
conduct forward-looking calculations, these computer problems may occur
prior to January 1, 2000. Like other investment companies and financial and
business organizations, the Fund could be adversely affected in its ability
to process securities trades, price securities, provide unitholder account
services and otherwise conduct normal business operations if the Investment
Adviser or other Fund service providers do not adequately address this prob-
lem in a timely manner.
In order to address the Year 2000 Problem, the Investment Adviser has taken
the following measures:
.The Investment Adviser established a dedicated group which analyzed these
issues and implemented system modifications to prepare for the Year 2000
Problem.
.The Investment Adviser has either tested with or received assurances from
the Fund's other service providers to confirm that they are taking
reasonable steps to avoid Year 2000 Problems, and the Investment Adviser
will continue to monitor the situation.
.The Investment Adviser has developed broad and comprehensive plans, as well
as event management plans that will help manage the Fund through the date
change by allowing the Investment Adviser to closely monitor and respond to
Year 2000-related events as they unfold around the world.
Currently, the Investment Adviser does not anticipate that the transition to
the 21st century will have any material impact on its ability to continue to
service the Fund at current levels.
In addition, the Investment Adviser has undertaken measures to appropriately
take into account available information concerning the Year 2000 prepared-
ness of the issuers of securities held by the Fund. The Investment Adviser
may obtain such Year 2000 information from various sources which the Invest-
ment Adviser believes to be reliable, including the issuers' public regula-
tory filings. However, the Investment Adviser is not in a position to verify
the accuracy or completeness of such information.
At this time, however, no assurance can be given that the actions taken by
the Investment Adviser and the Fund's other service providers will be suffi-
cient to avoid any adverse effect on the Fund due to the Year 2000 Problem.
23
<PAGE>
Dividends
All or substantially all of the Money Market Portfolio's net investment income
will be declared as a dividend daily. Net short-term capital gains, if any,
will be paid in accordance with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), and may be reflected in daily dividend decla-
rations. The Money Market Portfolio does not expect to realize long-term capi-
tal gains.
Over the course of the fiscal year, dividends accrued and paid will constitute
all or substantially all of the Bond Portfolios' net investment income. The
Bond Portfolios intend that all net realized long-term and short-term capital
gains (after taking into account any available capital loss carryovers) will be
declared and paid as a dividend at least annually.
You may choose to have dividends paid in:
.Cash
.Additional units of the same Portfolio
.Units of the Money Market Portfolio (for reinvesting dividends accrued and
paid with respect to the Bond Portfolios)
You may indicate your election on your Account Information Form. Any changes
may be submitted in writing to Goldman Sachs or CFS at any time before the rec-
ord date for a particular dividend or distribution. (If you do not indicate any
choice, your dividends and distributions will be reinvested automatically in
the applicable Portfolio). The election with respect to short-term capital
gains must be the same as the election with respect to the Portfolio's net
investment income dividends, that is, both must be received either in addi-
tional units or in cash. The election with respect to the long-term component,
if any, of a Portfolio's annual capital gains dividend may differ from such
election with respect to such Portfolio's monthly net investment income divi-
dends.
The election to reinvest dividends and distributions in additional units will
not affect the tax treatment of such dividends and distributions, which will be
treated as received by you and then used to purchase the units. At the time of
your purchase of units of either of the Bond Portfolios, a portion of the per
unit NAV may be represented by undistributed income of the Portfolio or
unrealized appreciation of the securities held by the Portfolio.
Dividends from net investment income and distributions from capital gains are
declared and paid as follows:
<TABLE>
<CAPTION>
Investment Income Capital Gains
Dividends Distributions
------------------------------------
Portfolio Declared Paid Declared and Paid
- -----------------------------------------------------------
<S> <C> <C> <C>
Money Market Daily Monthly Annually
- -----------------------------------------------------------
Government Securities Daily Monthly Annually
- -----------------------------------------------------------
Mortgage Securities Daily Monthly Annually
- -----------------------------------------------------------
</TABLE>
From time to time a portion of the Bond Portfolios' dividends may constitute a
return of capital.
24
<PAGE>
Unitholder Guide
The following section will provide you with answers to some of the most
often asked questions regarding buying and selling units of the Portfolios.
A unitholder may also utilize the SMARTPlus personal computer software sys-
tem to buy and sell units and also obtain Portfolio and account information.
For more information about such on-line purchasing options, please call
Goldman Sachs at 1-800-621-2553.
Purchases of units of the Portfolios may be made only by Federal Reserve
wire. There is no minimum for initial or subsequent investments nor are min-
imum balances required.
HOW TO BUY UNITS
Money Market Portfolio
You may purchase units of the Money Market Portfolio on any business day at
their NAV next determined after receipt of an order by wiring federal funds
to The Northern Trust Company ("Northern"), as subcustodian for State Street
Bank and Trust Company ("State Street"). You may place a purchase order in
writing or by telephone.
<TABLE>
--------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
Trust for Credit Unions
4900 Sears Tower-60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------
By Telephone: 1-800-342-5828
(8:00 a.m. to 4:30 p.m. New York time)
--------------------------------------------------------
</TABLE>
Units of the Money Market Portfolio are deemed to have been purchased when
an order becomes effective and are entitled to dividends on units purchased
as follows:
<TABLE>
<CAPTION>
If an effective order is received: Dividends begin:
--------------------------------------------------------
<S> <C>
.By 3:00 p.m. New York time Same business day
.After 3:00 p.m. New York time Next business day
--------------------------------------------------------
</TABLE>
Federal Reserve wires should be sent as early as possible, but must be
received before the end of the business day, for a purchase order to be
effective.
25
<PAGE>
Government Securities Portfolio and Mortgage Securities Portfolio
You may purchase units of each of the Bond Portfolios on any business day at
their NAV next determined after receipt of an order by wiring federal funds
to Northern. You may place a purchase order in writing or by telephone.
<TABLE>
--------------------------------------------------------
<S> <C>
By Writing: Goldman Sachs Funds
Trust for Credit Unions
4900 Sears Tower-60th Floor
Chicago, IL 60606-6372
--------------------------------------------------------
By Telephone: 1-800-342-5828
(8:00 a.m. to 4:30 p.m. New York time)
--------------------------------------------------------
</TABLE>
Dividends will begin to accrue as follows:
.If a purchase order is received by Goldman Sachs by 4:00 p.m. New York time
on a business day, units will be issued and dividends will begin to accrue
on the purchased units on the next business day, provided that Northern
receives the federal funds in respect to such order by such next business
day.
.If a purchase order is received by Goldman Sachs after 4:00 p.m. New York
time, units will be issued and dividends will begin to accrue on the pur-
chased units on the second business day thereafter, provided that Northern
receives the federal funds with respect to such order by such second busi-
ness day.
What Else Should I Know About Unit Purchases?
The following generally applies to purchases of units:
.If payment in federal funds is not received within the periods stated
above, your purchase order will be cancelled, and you will be responsible
for any loss resulting to the Fund.
.For your initial purchase of units of the Portfolios, you should promptly
complete an Account Information Form, and mail it to Goldman Sachs Funds,
Trust for Credit Unions, 4900 Sears Tower, 60th Floor, Chicago, Illinois
60606-6372 or Callahan Financial Services, Inc., 1001 Connecticut Avenue,
N.W., Suite 1001, Washington, D.C. 20036. You may not redeem units prior to
receipt of such Account Information Form.
.Goldman Sachs and/or CFS may from time to time, at their own expense, pro-
vide compensation to certain dealers whose customers purchase significant
amounts of units of the Fund. The amount of such compensation may be made
on a one-time and/or periodic basis and, in the case of Goldman Sachs, may
be up to 20% of the annual fees that are earned by Goldman Sachs as Invest-
ment Adviser to the Fund (after adjustments) and are attributable to units
held by such customers. Such compensation does not represent an additional
expense to the Fund or its unitholders, since it will be paid from the
assets of Goldman Sachs, its affiliates or CFS.
26
<PAGE>
UNITHOLDER GUIDE
The Fund and its Distributors reserve the right to:
.Reject or restrict any purchase or exchange orders by a particular pur-
chaser (or group of related purchasers).
How Are Units Priced?
The price you pay or receive when you buy, sell or exchange units of the
Fund is determined by a Portfolio's NAV. The Fund calculates NAV as follows:
(Value of Assets of the Portfolio)
- (Liabilities of the Portfolio)
NAV = ------------------------------------------------
Number of Outstanding Units of the Portfolio
Money Market Portfolio
.The NAV of the Money Market Portfolio is calculated by State Street as of
the close of regular trading on the New York Stock Exchange (normally 4:00
p.m. New York time) on each business day. Units will be priced on any day
the New York Stock Exchange is open, except for days on which Chicago, Bos-
ton or New York banks are closed for local holidays.
.To help the Portfolio maintain its $1.00 constant unit price, portfolio
securities are valued at amortized cost in accordance with SEC regulations.
Amortized cost will normally approximate market value. There can be no
assurance that the Portfolio will be able at all times to maintain a NAV of
$1.00 per unit.
Government Securities Portfolio and Mortgage Securities Portfolio
The investments of the Bond Portfolios are valued based on market quota-
tions, which may be furnished by a pricing service or provided by securities
dealers. If accurate quotations are not readily available, the fair value of
the Bond Portfolios' investments may be determined based on yield equiva-
lents, a pricing matrix or other sources, under valuation procedures estab-
lished by the Trustees. Debt obligations with a remaining maturity of 60
days or less are valued at amortized cost.
.NAV per unit is calculated by State Street on each business day as of the
close of regular trading on the New York Stock Exchange (normally 4:00 p.m.
New York time). This occurs after the determination, if any, of the income
to be declared as a dividend. Units will not be priced on any day the New
York Stock Exchange is closed.
.When you buy units, you pay the NAV next calculated after the Bond Portfo-
lios receive your order in proper form.
.When you sell units, you receive the NAV next calculated after the Bond
Portfolios receive your order in proper form.
.NAV per unit will fluctuate as the values of portfolio securities change in
response to changing market rates of interest, principal prepayments, yield
spreads and other factors.
27
<PAGE>
General Valuation Policies
.On any business day when the Bond Market Association ("BMA") recommends
that the securities markets close early, each Portfolio reserves the right
to close at or prior to the BMA recommended closing time. If a Portfolio
does so, it will cease granting same business day credit for purchase and
redemption orders received after the Portfolios' closing time and credit
will be given to the next business day.
.Each Portfolio reserves the right to advance the time by which purchase and
redemption orders must be received for same business day credit as other-
wise permitted by the SEC.
Note: The time at which transactions and units are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
HOW TO SELL UNITS
How Can I Sell Units Of The Fund?
You may arrange to take money out of your account by selling (redeeming)
some or all of your units. The Fund will redeem your units without charge
upon request on any business day at their NAV next determined after receipt
of such request in proper form. Redemptions may be requested in writing or
by telephone.
<TABLE>
<CAPTION>
Instructions For Redemptions:
---------------------------------------------------------------------------
<S> <C>
By Writing: .Write a letter of instruction that includes:
.Your name(s) and signature(s)
.Your account number
.The Portfolio name
.The dollar amount or number of units you
want to sell
.How and where to send the proceeds
.Mail the request to:
Goldman Sachs Funds
Trust for Credit Unions
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
---------------------------------------------------------------------------
By Telephone: If you have elected the telephone redemption and
exchange privileges on your Account Information Form:
.1-800-342-5828
(8:00 a.m. to 4:30 p.m. New York time)
---------------------------------------------------------------------------
</TABLE>
28
<PAGE>
UNITHOLDER GUIDE
What Do I Need To Know About Telephone Redemption Requests?
The Fund, the Distributors, the Administrator, the Investment Adviser and
the Transfer Agent will not be liable for any loss you may incur in the
event that the Fund accepts unauthorized telephone redemption requests that
the Fund reasonably believes to be genuine. In an effort to prevent unautho-
rized or fraudulent redemption and exchange requests by telephone, Goldman
Sachs and State Street each employ reasonable procedures specified by the
Fund to confirm that such instructions are genuine. If reasonable procedures
are not employed, the Fund may be liable for any loss due to unauthorized or
fraudulent transactions. The following general policies are currently in
effect:
.All telephone requests are recorded.
.Proceeds of telephone redemptions will be wired directly to the credit
union, central credit union, or other depository account designated on the
Account Information Form unless you provide written instructions signed by
an authorized person designated on the Account Information Form indicating
another credit union, or other depository accounts.
.The telephone redemption option may be modified or terminated at any time.
Note: It may be difficult to make telephone redemptions in times of drastic
economic or market conditions.
How Are Redemption Proceeds Paid?
You may arrange for your redemption proceeds to be wired as federal funds to
the credit union, central credit union or other depository institution des-
ignated on your Account Information Form.
Money Market Portfolio
If a redemption request is received by Goldman Sachs before 3:00 p.m. New
York time, the units to be redeemed do not earn income on the day the
request is received, but proceeds are ordinarily wired on the same day. If
such request is received by Goldman Sachs after such time and prior to 4:00
p.m., New York time, the units to be redeemed earn income on the day the
request is received, and proceeds are ordinarily wired on the morning of the
following business day.
Government Securities Portfolio and Mortgage Securities Portfolio
If a redemption request is received by Goldman Sachs by 4:00 p.m. New York
time, the proceeds are ordinarily wired on the next business day. Units to
be redeemed earn income with respect to the day the request is received.
Also, units redeemed on a day immediately preceding a weekend or holiday
continue to earn income until the next business day.
29
<PAGE>
What Else Do I Need To Know About Redemptions?
.If its authorized signature is guaranteed by a credit union, commercial
bank, trust company, member firm of a national securities exchange or other
eligible guarantor institution, a unitholder may change the designated
credit union, central credit union or other depository account at any time
upon written notice to Goldman Sachs. Additional documentation regarding
any such change or regarding a redemption by any means, may be required
when deemed appropriate by Goldman Sachs and the request for such redemp-
tion will not be considered to have been received in proper form until such
additional documentation has been received.
.Once wire instructions have been given to Northern, neither the Fund nor
Goldman Sachs assumes responsibility for the performance of Northern or of
any intermediaries in the transfer process. If a problem with such perfor-
mance arises, you should deal directly with Northern or such intermediar-
ies.
.The right of a unitholder to redeem units and the date of payment by the
Fund may be suspended for more than seven days for any period during which
the New York Stock Exchange is closed, or trading on the Exchange is
restricted as determined by the SEC; or during any emergency, as determined
by the SEC; or for such other period as the SEC may by order permit for the
protection of unitholders of the Fund.
.Units are not redeemable at the option of the Fund unless the Trustees
determine in their sole discretion that failure to so redeem may have mate-
rially adverse consequences to the unitholders of the Portfolio.
Can My Dividends And Distributions From A Bond Portfolio Be Reinvested In
The Money Market Portfolio?
You may elect to cross-reinvest dividends and capital gain distributions
paid by the Bond Portfolios in units of the same Bond Portfolio or in units
of the Money Market Portfolio.
.Units will be purchased at NAV.
.Cross-reinvestment of dividends will be made to an identically registered
account unless you provide written instructions signed by an authorized
person designated on the Account Information Form indicating an account
registered in a different name or with a different address or taxpayer
identification number.
Can I Exchange My Investment From One Portfolio To Another?
You may exchange units of each Portfolio at NAV for units of any other Port-
folio of the Fund. The exchange privilege may be materially modified or
withdrawn at any time upon 60 days' written notice to you.
30
<PAGE>
UNITHOLDER GUIDE
<TABLE>
<CAPTION>
Instructions For Exchanging Shares:
---------------------------------------------------------------------------
<S> <C>
By Writing: .Write a letter of instruction that includes:
.Your name(s) and signature(s)
.Your account number
.The Portfolio name
.The dollar amount or number of units to be
exchanged
.Mail the request to:
Goldman Sachs Funds
Trust for Credit Unions
4900 Sears Tower--60th Floor
Chicago, IL 60606-6372
---------------------------------------------------------------------------
By Telephone: If you have elected the telephone redemption and
exchange privileges on your Account Information Form:
.1-800-342-5828
(8:00 a.m. to 4:30 p.m. New York time)
---------------------------------------------------------------------------
</TABLE>
You should keep in mind the following factors when making or considering an
exchange:
.You should read the Prospectus before making an exchange.
.Exchanges are available only in states where exchanges may be legally made.
.It may be difficult to make telephone exchanges in times of drastic eco-
nomic or market conditions.
.Goldman Sachs may use reasonable procedures described under "What Do I Need
To Know About Telephone Redemption Requests?" in an effort to prevent unau-
thorized or fraudulent telephone exchange requests.
.Telephone exchanges normally will be made only to an identically registered
account.
.The Fund reserves the right to reject any exchange request.
What Types Of Reports Will I Be Sent Regarding Investments In The
Portfolios?
You will receive an annual report containing audited financial statements
and a semi-annual report. All unitholders will be provided with an individ-
ual monthly statement for each Portfolio showing each transaction for the
reported month. Unitholders of the Bond Portfolios will also be provided
with a printed confirmation for each transaction in their accounts. A year-
to-date statement for your account will be provided upon request made to
Goldman Sachs.
31
<PAGE>
Taxation
TAXATION OF UNITHOLDERS
If state and federally chartered credit unions meet all requirements of Sec-
tion 501(c)(14)(A) of the Code, and all rules and regulations thereunder,
they will be exempt from federal income taxation on any income, dividends or
capital gains realized as the result of purchasing, holding, exchanging or
redeeming units of the Fund.
FEDERAL TAXATION OF THE FUND
The Fund intends that each of its Portfolios will qualify for the special
tax treatment afforded regulated investment companies under Subchapter M of
the Code. Each Portfolio of the Fund is treated as a separate corporation
for federal tax purposes and generally must comply with the qualification
and other requirements applicable to regulated investment companies, without
regard to the Fund's other Portfolios. If a Portfolio otherwise complies
with such provisions, then in any taxable year for which it distributes at
least 90% of its investment company taxable income determined for federal
income tax purposes (before any deduction for dividends paid), the Portfolio
will be relieved of federal income tax on the amounts distributed. The Fund
intends to distribute to its unitholders substantially all of each Portfo-
lio's net investment company taxable income and net capital gain.
The Code will impose a 4% excise tax if a Portfolio fails to meet certain
requirements with respect to distributions of net ordinary income and capi-
tal gain net income. It is not anticipated that this provision will have any
material impact on the Portfolios or their unitholders.
If for any taxable year a Portfolio does not qualify as a regulated invest-
ment company, all of its taxable income will be taxed to such Portfolio at
the appropriate corporate rate without any reduction for distributions made
to unitholders.
The foregoing discussion of tax consequences is based on federal tax laws
and regulations in effect on the date of this Prospectus, which are subject
to change by legislative or administrative action. More tax information is
provided in the Additional Statement. You should also consult your own tax
adviser for information regarding all tax consequences applicable to your
investments in the Portfolios.
32
<PAGE>
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
A. General Portfolio Risks
Risks of Fixed Income Securities. The Portfolios will be subject to the
risks associated with fixed-income securities. These risks include interest
rate risk, credit risk and call/extension risk. In general, interest rate
risk involves the risk that when interest rates decline, the market value of
fixed-income securities tends to increase (although many mortgage-related
securities will have less potential than other debt securities for capital
appreciation during periods of declining rates). Conversely, when interest
rates increase, the market value of fixed-income securities tends to
decline. Credit risk involves the risk that the issuer could default on its
obligations, and a Portfolio will not recover its investment. Call risk and
extension risk are normally present in adjustable rate mortgage loans
("ARMs") and mortgage-backed securities. For example, homeowners have the
option to prepay their mortgages. Therefore, the duration of a security
backed by home mortgages can either shorten (call risk) or lengthen (exten-
sion risk). In general, if interest rates on new mortgage loans fall suffi-
ciently below the interest rates on existing outstanding mortgage loans, the
rate of prepayment would be expected to increase. Conversely, if mortgage
loan interest rates rise above the interest rates on existing outstanding
mortgage loans, the rate of prepayment would be expected to decrease. In
either case, a change in the prepayment rate can result in losses to invest-
ors.
Risks of Derivative Investments. Derivative mortgage-related securities are
particularly exposed to call and extension risks. Small changes in mortgage
prepayments can significantly impact the cash flow and the market value of
these securities. In general, the risk of faster than anticipated prepay-
ments adversely affects super floaters and premium priced mortgage-related
securities. The risk of slower than anticipated prepayments generally
adversely affects floating-rate securities subject to interest rate caps,
support tranches and discount priced mortgage-related securities. In addi-
tion, particular derivative securities may be leveraged such that their
exposure (i.e., price sensitivity) to interest rate and/or prepayment risk
is magnified.
Some floating-rate derivative debt securities can present more complex types
of derivative and interest rate risks. For example, range floaters are sub-
ject to the risk that the coupon will be reduced below market rates if a
designated interest rate floats outside of a specified interest rate band or
collar. Dual index or yield
33
<PAGE>
curve floaters are subject to lower prices in the event of an unfavorable
change in the spread between two designated interest rates.
Risks of Illiquid Securities. The Bond Portfolios may invest up to 15% of
their net assets and the Money Market Portfolio may invest up to 10% of its
net assets in illiquid securities, which cannot be disposed of in seven days
in the ordinary course of business at fair value. Illiquid securities
include:
.Securities that are not readily marketable
.Repurchase agreements, federal funds loans and fixed time deposits with a
notice or demand period of more than seven days
.Loan participations of foreign governments or their agencies that are guar-
anteed as to principal and interest by the U.S. government or its agencies,
instrumentalities or sponsored enterprises where a substantial secondary
market is absent
.Certain restricted securities, unless it is determined, based upon a review
of the trading markets for a specific restricted security, that such
restricted security is eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 ("144A Securities") and, therefore, is liquid
Investing in 144A Securities may decrease a Portfolio's liquidity to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities. The purchase price and subsequent
valuation of restricted and illiquid securities normally reflect a discount,
which may be significant, from the market price of comparable securities for
which a liquid market exists.
Portfolio Turnover Rate. The Investment Adviser will not consider the port-
folio turnover rate a limiting factor in making investment decisions for a
Portfolio. A high rate of portfolio turnover (100% or more) involves corre-
spondingly greater expenses which must be borne by a Portfolio and its
unitholders. The portfolio turnover rate is calculated by dividing the
lesser of the dollar amount of sales or purchases of portfolio securities by
the average monthly value of a Portfolio's portfolio securities, excluding
securities having a maturity at the date of purchase of one year or less.
See "Financial Highlights" in Appendix B for a statement of the Portfolios'
historical portfolio turnover rates.
Investment Criteria. If, after purchase by a Portfolio, an investment ceases
to meet the investment criteria stated in this Prospectus, the Investment
Adviser will consider whether the Portfolio should continue to hold the
investment. Investments purchased prior to January 1, 1998 will be governed
by the NCUA Rules and Regulations in effect when purchased, and the Portfo-
lios may continue to hold such investments after that date subject to com-
pliance with the NCUA Rules and Regulations.
34
<PAGE>
APPENDIX A
B. Portfolio Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Portfolios, including their
associated risks. Additional information is provided in the Additional
Statement, which is available upon request. Among other things, the Addi-
tional Statement describes certain fundamental investment restrictions that
cannot be changed without unitholder approval. You should note, however,
that all policies not specifically designated as fundamental are non-funda-
mental and may be changed without unitholder approval.
U.S. Government Securities and Related Custodial Receipts. U.S. Government
Securities include U.S. Treasury obligations and obligations issued or guar-
anteed by U.S. government agencies, instrumentalities or sponsored enter-
prises. U.S. Government Securities may be supported by (a) the full faith
and credit of the U.S. Treasury (such as the Government National Mortgage
Association ("Ginnie Mae")); (b) the right of the issuer to borrow from the
U.S. Treasury (such as securities of the Student Loan Marketing Associa-
tion); (c) the discretionary authority of the U.S. government to purchase
certain obligations of the issuer (such as the Federal National Mortgage
Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation
("Freddie Mac")); or (d) only the credit of the issuer. U.S. Treasury obli-
gations include, among other things, the separately traded principal and
interest components of securities guaranteed or issued by the U.S. Treasury
if such components are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ("STRIPS").
U.S. Government Securities are 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, instrumentalities or
sponsored enterprises; and (b) participations in loans made to foreign gov-
ernments or their agencies that are so guaranteed as to principal and inter-
est. Certain of these participations may be regarded as illiquid. U.S. Gov-
ernment Securities also include zero coupon bonds.
U.S. Government Securities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the
U.S. govern-ment will provide financial support to U.S. government agencies,
authorities, instrumentalities or sponsored enterprises if it is not obli-
gated to do so by law.
Interests in U.S. Government Securities may be purchased in the form of cus-
todial receipts that evidence ownership of future interest payments, princi-
pal payments or both on certain notes or bonds issued or guaranteed as to
principal and interest by the U.S. government, its agencies, instrumentali-
ties or authorities. For certain
35
<PAGE>
securities law purposes, custodial receipts are not considered obligations
of the U.S. government.
Mortgage-Related Securities. Mortgage-related securities represent direct or
indirect participations in, or are collateralized by and payable from, mort-
gage loans secured by real property. Mortgage-related securities can be
backed by either fixed rate mortgage loans or adjustable rate mortgage
loans, and may be issued by either a governmental or non-governmental enti-
ty. The Mortgage Securities Portfolio may invest in privately-issued mort-
gage pass-through securities that are rated high quality and represent
interests in pools of mortgage loans that are issued by trusts formed by
originators of and institutional investors in mortgage loans (or represent
interests in custodial arrangements administered by such institutions).
These originators and institutions include commercial banks, savings and
loans associations, credit unions, savings banks, mortgage bankers, insur-
ance companies, investment banks or special purpose subsidiaries of the
foregoing. The pools underlying privately-issued mortgage pass-through secu-
rities consist of mortgage loans secured by mortgages or deeds of trust cre-
ating a first lien on residential, residential multi-family and mixed
residential/commercial properties. (In conformance with the NCUA Rules and
Regulations, the Mortgage Securities Portfolio will not invest in commercial
mortgage-related securities.)
Privately-issued mortgage pass-through securities generally offer a higher
yield than similar securities issued by a government entity because of the
absence of any direct or indirect government or agency payment guarantees.
However, timely payment of interest and principal on mortgage loans in these
pools may be supported by various forms of insurance or guarantees, includ-
ing individual loan, pool and hazard insurance, subordination and letters of
credit. The insurance and guarantees are issued by government entities, pri-
vate insurers, banks and mortgage poolers. Mortgage-related securities with-
out insurance or guarantees may also be purchased by the Mortgage Securities
Portfolio if they have the required rating from an NRSRO. Although the mar-
ket for such securities is becoming increasingly liquid, some mortgage-
related securities issued by private organizations may not be readily mar-
ketable.
Mortgage-related securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs") and Real Estate Mortgage
Investment Conduit ("REMIC") pass-through or participation certificates. A
REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages principally secured by interests in real prop-
erty and other permitted investments. CMOs provide an investor with a speci-
fied interest in the cash flow from a pool of underlying mortgages or of
other mortgage-related securities. CMOs are issued in multiple classes, each
with a specified fixed or floating inter-
36
<PAGE>
APPENDIX A
est rate and a final scheduled distribution date. The relative payment
rights of the various CMO classes may be structured in many ways. In many
cases, payments of principal are applied to the CMO classes in the order of
their respective stated maturities, so that no principal payments will be
made on a CMO class until all other classes having an earlier stated matu-
rity date are paid in full. Sometimes, however, CMO classes are "parallel
pay," i.e., payments of principal are made to two or more classes concur-
rently. In some cases, CMOs may have the characteristics of a stripped mort-
gage-backed security whose prices can be highly volatile. CMOs may exhibit
more or less price volatility and interest rate risk than other types of
mortgage-related obligations, and under certain interest rate and payment
scenarios, a Portfolio may fail to recoup fully its investment in certain of
these securities regardless of their credit quality.
To the extent a Portfolio concentrates its investments in pools of mortgage-
related securities sponsored by the same sponsor or serviced by the same
servicer, it may be subject to additional risks. Servicers of mortgage-
related pools collect payments on the underlying mortgage assets for pass-
through to the pool on a periodic basis. Upon insolvency of the servicer,
the pool may be at risk with respect to collections received by the servicer
but not yet delivered to the pool.
Inverse Floating Rate Securities. The Bond Portfolios may, to the extent
permitted by the NCUA, invest in leveraged inverse floating rate debt secu-
rities ("inverse floaters"). The interest rate on inverse floaters resets in
the opposite direction from the market rate of interest to which the inverse
floater is indexed. An inverse floater may be considered to be leveraged to
the extent that its interest rate varies by a magnitude that exceeds the
magnitude of the change in the index rate of interest. The higher the degree
of leverage of an inverse floater, the greater the volatility of its market
value.
Zero Coupon Bonds. Each Portfolio will only purchase zero coupon bonds which
are U.S. Government Securities and do not have maturity dates of more than
ten years from settlement. Zero coupon bonds are issued at a discount from
their face value because interest payments are typically postponed until
maturity. The market prices of these securities generally are more volatile
than the market prices of interest-bearing securities and are likely to
respond to a greater degree to changes in interest rates than interest-bear-
ing securities having similar maturities and credit quality.
Mortgage Dollar Rolls. The Bond Portfolios may enter into mortgage dollar
rolls. A mortgage dollar roll involves the sale by a Portfolio of securities
for delivery in the current month. The Portfolio simultaneously contracts
with the same counterparty to repurchase substantially similar (same type,
coupon and maturity) but not identical securities on a specified future
date. During the roll period, the
37
<PAGE>
Portfolio loses the right to receive principal and interest paid on the
securities sold. However, the Portfolio benefits to the extent of any dif-
ference between (a) the price received for the securities sold and (b) the
lower forward price for the future purchase and/or fee income plus the
interest earned on the cash proceeds of the securities sold. Unless the ben-
efits of a mortgage dollar roll exceed the income, capital appreciation and
gain or loss due to mortgage prepayments that would have been realized on
the securities sold as part of the roll, the use of this technique will
diminish the Portfolio's performance.
Successful use of mortgage dollar rolls depends upon the Investment Advis-
er's ability to predict correctly interest rates and mortgage prepayments.
If the Investment Adviser is incorrect in its prediction, a Portfolio may
experience a loss. For financial reporting and tax purposes, the Portfolios
treat mortgage dollar rolls as two separate transactions: one involving the
purchase of a security and a separate transaction involving a sale. The
Portfolios do not currently intend to enter into mortgage dollar rolls that
are accounted for as a financing and do not treat them as borrowings.
When-Issued Securities and Forward Commitments. The Portfolios may purchase
or sell portfolio securities in when-issued or delayed delivery transactions
provided settlement is regular-way. (Regular-way settlement means delivery
of a security from a seller to a buyer within the time frame that the secu-
rities industry has established for that type of security.) In these trans-
actions, instruments are bought or sold with payment and delivery taking
place in the future in order to secure what is considered to be an advanta-
geous yield or price.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased
declines before the settlement date. Conversely, the sale of securities on a
forward commitment basis involves the risk that the value of the securities
sold may increase before the settlement date. Although the Portfolios will
generally purchase securities on a when-issued or forward commitment basis
with the intention of acquiring the securities, a Portfolio may dispose of
when-issued securities or forward commitments prior to settlement if the
Investment Adviser deems it appropriate.
Lending of Portfolio Securities. The Bond Portfolios may seek to increase
their income by lending portfolio securities to institutions, such as banks
and broker-dealers. The borrowers are required to secure their loans contin-
uously with cash, cash equivalents or U.S. Government Securities in an
amount at least equal to the market value of the securities loaned. Cash
collateral may be invested in cash equivalents. To the extent that cash col-
lateral is invested in other investment securities, such collateral will be
subject to market depreciation or appreciation and a Portfolio will be
responsible for any loss that might result from its investment of
38
<PAGE>
APPENDIX A
the borrowers' collateral. Any investments purchased with the cash (as well
as other cash received in connection with the loan) must be permissible for
federally chartered credit unions and must mature no later than the maturity
of the transaction. If the Investment Adviser determines to make securities
loans, the value of the securities loaned may not exceed 5% of the value of
the net assets of a Bond Portfolio (including the loan collateral). A Bond
Portfolio may experience delay in the recovery of its securities if the
institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Bond Portfolio.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements
with dealers in U.S. Government Securities and member banks of the Federal
Reserve System. 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 Portfolio might suffer a loss to
the extent that the proceeds from the sale of the underlying securities and
other collateral held by the Portfolio are less than the repurchase price
and the Portfolio's cost associated with delay and enforcement of the repur-
chase agreement. In addition, in the event of bankruptcy of the seller, a
Portfolio could suffer additional losses if a court determines that the
Portfolio's interest in the collateral is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. The
Portfolios, together with other registered investment companies having advi-
sory agreements with the Investment Adviser or any of its affiliates, may
transfer uninvested cash balances into a single joint account, the daily
aggregate balance of which will be invested in one or more repurchase agree-
ments.
Other Investment Companies. The Mortgage Securities Portfolio may invest in
securities of other investment companies subject to the limitations pre-
scribed by the Act. These limitations include a prohibition on the Portfolio
acquiring more than 3% of the voting securities of any other investment com-
pany, and a prohibition on investing more than 5% of the Portfolio's total
assets in securities of any one investment company or more than 10% of its
total assets in securities of all investment companies. The Portfolio will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies. Such other investment com-
panies will have investment objectives, policies and restrictions substan-
tially similar to those of the Mortgage Securities Portfolio and will be
subject to substantially the same risks. Pursuant to an exemptive order
obtained from the SEC, other investment companies in which the Portfolio may
invest include money market funds which the Investment Adviser, Goldman
Sachs or any of their affiliates serves as investment adviser, administrator
or distributor.
39
<PAGE>
Bank Obligations. The Portfolios may invest in U.S. dollar-denominated obli-
gations issued or guaranteed by U.S. banks with total assets exceeding $1
billion (including obligations issued by foreign branches of such banks) but
only to the extent permitted under the Federal Credit Union Act and the
rules and regulations thereunder. Bank obligations may include certificates
of deposit, bankers' acceptances, bank notes, deposit notes, and other obli-
gations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obliga-
tions or by government regulation. Obligations of foreign branches of U.S.
banks include fixed time deposits. Generally, fixed time deposits are not
payable until maturity, but may permit early withdrawal subject to penalties
which vary depending upon market conditions and the remaining maturity of
the obligations.
The activities of U.S. and most foreign banks are subject to comprehensive
regulations which, in the case of U.S. regulations, have undergone substan-
tial changes in the past decade. The enactment of new legislation or regula-
tions, as well as changes in interpretation and enforcement of current laws,
may affect the manner of operations and profitability of domestic and for-
eign 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 par-
ticularly susceptible to certain economic factors, such as interest rate
changes and adverse developments in the real estate markets. Fiscal and mon-
etary 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.
Obligations of foreign branches of U.S. banks involve investment risks in
addition to those of domestic obligations of domestic issuers, including the
possibility that liquidity could be impaired because of future political and
economic developments, that the obligations may be less marketable than com-
parable domestic obligations of domestic issuers, that a foreign jurisdic-
tion might impose withholding taxes on interest income payable on those
obligations or that deposits may be seized or nationalized.
Federal Funds. The Portfolios may make unsecured loans of federal funds to
U.S. banks with total assets exceeding $1 billion (including obligations
issued by foreign branches of such banks) to the extent permitted by the
Federal Credit Union Act and the rules and regulations thereunder.
Federal funds are funds held by a regional Federal Reserve Bank for the
account of a bank that is a member of such Federal Reserve Bank (a "Fed Mem-
ber Bank"). A loan of federal funds is an unsecured loan to a Fed Member
Bank at a negotiated interest rate for a negotiated time period, generally
overnight, of
40
<PAGE>
APPENDIX A
federal funds. Loans of federal funds are not insured by the Federal Deposit
Insurance Corporation. In the event the borrower of federal funds enters a
bankruptcy or other insolvency proceeding, the Portfolios could experience
delays and incur expenses in recovering cash. Further, the possibility
exists that in such an instance, the borrowing institution may not be able
to repay the loaned funds. Creditworthiness is, therefore, of particular
importance given the unsecured nature of federal funds borrowings. The Port-
folios will limit federal funds lending to those member Fed Member Banks
whose creditworthiness has been reviewed and found by the Investment Adviser
to be comparable in quality to securities rated high quality by an NRSRO.
Borrowing. The Portfolios may not borrow money, except as a temporary meas-
ure, and then only in amounts not exceeding one-third of the value of a
Portfolio's net assets.
41
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Port-
folio's financial performance for the past five years. The total returns in
the table represent the rate that an investor would have earned or lost on
an investment in a Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Arthur Andersen LLP,
whose report, along with a Portfolio's financial statements, is included in
the Portfolio's annual report (available upon request without charge).
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment Distributions
operations(a) to unitholders
------------- --------------
Net asset Net asset
value at Net From net value
beginning investment investment at end Total
of period income income of period return(b)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended:
8/31/99 $1.00 $0.05 $(0.05) $1.00 5.09%
- -----------------------------------------------------------------------
8/31/98 1.00 0.06 (0.06) 1.00 5.67
- -----------------------------------------------------------------------
8/31/97 1.00 0.05 (0.05) 1.00 5.43
- -----------------------------------------------------------------------
8/31/96 1.00 0.05 (0.05) 1.00 5.51
- -----------------------------------------------------------------------
8/31/95 1.00 0.06 (0.06) 1.00 5.56
- -----------------------------------------------------------------------
</TABLE>
(a) Calculated based on 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 invest-
ment at the net asset value at the end of the period.
42
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratio information
assuming no waiver of
fees or expense
reimbursements
-----------------------------
Ratio of Ratio of
Ratio of net Net net
net investment assets at Ratio of investment
expenses income to end of expenses income
to average average period to average to average
net assets net assets (000's) net assets net assets
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.13% 4.94% $1,068,369 0.30% 4.77%
- --------------------------------------------------------------------------------------
0.11 5.52 972,857 0.30 5.33
- --------------------------------------------------------------------------------------
0.18 5.31 441,205 0.33 5.16
- --------------------------------------------------------------------------------------
0.19 5.37 426,710 0.31 5.25
- --------------------------------------------------------------------------------------
0.20 5.55 382,096 0.33 5.42
- --------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Income from Distributions to
investment operations unitholders
------------------------- ---------------------
Net asset Net realized In excess Net asset
value at Net and unrealized From net of net value
beginning investment gain (loss) on investment investment at end
of period income investments(a) income income of period
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended:
8/31/99 $9.79 $0.54 $(0.14) $(0.54) $ -- $9.65
- --------------------------------------------------------------------------------------------
8/31/98 9.84 0.58 (0.04) (0.58) (0.01) 9.79
- --------------------------------------------------------------------------------------------
8/31/97 9.76 0.59 0.08 (0.59) -- 9.84
- --------------------------------------------------------------------------------------------
8/31/96 9.76 0.60 -- (0.60) -- 9.76
- --------------------------------------------------------------------------------------------
8/31/95 9.78 0.55 -- (0.56) (0.01) 9.76
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Includes balancing effect of calculating per unit amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the invest-
ment at the net asset value at the end of the period.
(c) Includes the effect of mortgage dollar roll transactions.
44
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratio information
assuming no waiver of
fees or expense
reimbursements
---------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income to Portfolio of expenses income to
Total to average average turnover period to average average
return(b) net assets net assets rate(c) (000's) net assets net assets
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4.25% 0.33% 5.60% 152.70% $693,157 0.33% 5.60%
- -------------------------------------------------------------------------
5.60 0.34 5.83 93.77 654,653 0.34 5.83
- -------------------------------------------------------------------------
7.09 0.34 6.02 88.02 564,642 0.34 6.02
- -------------------------------------------------------------------------
6.26 0.35 6.16 149.66 535,702 0.35 6.16
- -------------------------------------------------------------------------
5.82 0.34 5.65 70.58 529,659 0.34 5.65
- -------------------------------------------------------------------------
</TABLE>
45
<PAGE>
MORTGAGE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Income from
investment operations Distributions to unitholders
--------------------------- -----------------------------
Net In
Net asset realized and From excess
value at Net unrealized gain net of net From
beginning investment (loss) on investment investment paid-in
of period income investments(a) income income capital
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended:
8/31/99 $9.90 $0.57 $(0.33) $(0.57) $ -- $ --
- --------------------------------------------------------------------------------
8/31/98 9.75 0.64 0.13 (0.62) -- --
- --------------------------------------------------------------------------------
8/31/97 9.65 0.64 0.10 (0.64) -- --
- --------------------------------------------------------------------------------
8/31/96 9.74 0.66 (0.12) (0.63) -- --
- --------------------------------------------------------------------------------
8/31/95 9.62 0.61 0.16 (0.61) (0.02) (0.02)
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes balancing effect of calculating per unit amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the invest-
ment at the net asset value at the end of the period.
(c) Includes the effect of mortgage dollar roll transactions.
46
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratio information
assuming no waiver
of fees or expense
reimbursements
----------------------
Ratio of Net Ratio of
Net Ratio of net assets net
asset net investment at end Ratio of investment
value at expenses to income Portfolio of expenses to income
end of Total average to average turnover period average to average
period return(b) net assets net assets rate(c) (000's) net assets net assets
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$9.57 2.51% 0.29% 5.87% 168.44% $492,605 0.29% 5.87%
- ---------------------------------------------------------------------------------------
9.90 8.10 0.30 6.44 108.76 442,550 0.30 6.44
- ---------------------------------------------------------------------------------------
9.75 7.89 0.30 6.57 106.10 350,315 0.30 6.57
- ---------------------------------------------------------------------------------------
9.65 5.67 0.28 6.64 163.42 332,546 0.30 6.62
- ---------------------------------------------------------------------------------------
9.74 8.20 0.26 6.36 130.98 264,409 0.32 6.30
- ---------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
[This page intentionally left blank]
<PAGE>
Index
<TABLE>
<C> <S>
1 General Investment Management
Approach
5 Portfolio Investment Objectives and
Strategies
5 Money Market Portfolio
7 Government Securities Portfolio
8 Mortgage Securities Portfolio
9 Other Investment Practices and
Securities
10 Principal Risks of the Portfolios
13 Portfolio Performance
17 Portfolio Fees and Expenses
20 Service Providers
24 Dividends
25 Unitholder Guide
25 How to Buy Units
28 How to Sell Units
32 Taxation
33 Appendix A
Additional Information
on Portfolio Risks,
Securities and
Techniques
42 Appendix B
Financial Highlights
</TABLE>
<PAGE>
Trust For Credit Unions
Prospectus
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Portfolios' investments is available in the
Fund's annual and semi-annual reports to unitholders. In the Fund's annual
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Money Market, Government
Securities and Mortgage Securities Portfolios' performance during the last
fiscal year.
Statement of Additional Information
Additional information about the Portfolios and their policies is also
available in the Fund's Statement of Additional Information ("Additional
Statement"). The Additional Statement is incorporated by reference into this
Prospectus (is legally considered part of this Prospectus).
The Fund's annual and semi-annual reports, and the Additional Statement, are
available free upon request by calling Goldman Sachs at 1-800-342-5828 or
CFS at 1-800-237-5678.
To obtain other information and for unitholder inquiries:
By telephone - Call 1-800-342-5828 or 1-800-CFS-5678
By mail - Goldman, Sachs & Co., Trust for Credit Unions, 4900 Sears Tower,
Chicago, Illinois 60606-6372 or
Callahan Financial Services, Inc., 1001 Connecticut Avenue, N.W., Suite
1001, Washington, D.C. 20036
By e-mail - [email protected] or [email protected]
On the Internet - Text-only versions of the Portfolios' documents are
located online and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
Goldman Sachs - http://www.gs.com (Prospectus Only)
CFS - http://www.trustcu.com
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 by sending your request and a duplicating fee to the SEC's Public
Reference Section, Washington, D.C. 20549-0102, or by electronic request to
the SEC's e-mail address at [email protected]. Information on the operation
of the public reference room may be obtained by calling the SEC at (202)
942-8090.
[LOGO OF TRUST FOR CREDIT UNIONS]
The Fund's investment company registration number is 811-5407.
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
TRUST FOR CREDIT UNIONS
4900 Sears Tower
Chicago, Illinois 60606-6303
Money Market Portfolio
Government Securities Portfolio
Mortgage Securities Portfolio
This Statement of Additional Information (the "Additional Statement") is not a
Prospectus. This Additional Statement should be read in conjunction with the
Prospectus dated November 30, 1999 (the "Prospectus"), relating to the offering
of units of the Money Market Portfolio, Government Securities Portfolio and
Mortgage Securities Portfolio of the Trust for Credit Unions. A copy of the
Prospectus may be obtained without charge from Goldman, Sachs & Co. at
(800) 342-5828 or Callahan Financial Services, Inc. at (800) 237-5678.
The audited financial statements and related report of Arthur Andersen
L.L.P., independent public accountants, for each Portfolio contained in the
Portfolios' 1999 annual report are incorporated herein by reference in the
section "Financial Statements." No other portions of the Portfolios' annual
report are incorporated herein by reference.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Introduction............................................................ B-3
Management.............................................................. B-5
Advisory and Other Services............................................. B-11
Portfolio Transactions.................................................. B-19
Amortized Cost Valuation................................................ B-22
Other Information Regarding Net Asset Value............................. B-24
Description of Units.................................................... B-24
Income.................................................................. B-27
Adjustable and Fixed Rate Mortgage Loans and Mortgage-Related Securities B-28
Other Investment Practices and Securities............................... B-38
Investment Restrictions................................................. B-44
Calculation of Performance Quotations................................... B-47
Other Information....................................................... B-53
Financial Statements.................................................... B-54
Description of Securities Ratings....................................... B-55
Appendix A.............................................................. B-59
</TABLE>
The date of this Additional Statement is November 30, 1999.
<PAGE>
UNITS OF THE PORTFOLIOS ARE NOT ENDORSED BY, INSURED BY, GUARANTEED BY,
OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U. S. GOVERNMENT, ANY CREDIT UNION
OR BY THE NATIONAL CREDIT UNION SHARE INSURANCE FUND, THE NATIONAL CREDIT UNION
ADMINISTRATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE PORTFOLIOS
INVOLVES RISK INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE MONEY MARKET PORTFOLIO
SEEKS TO MAINTAIN ITS NET ASSET VALUE PER UNIT AT $1.00 ALTHOUGH THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO ON A CONTINUOUS BASIS.
B-2
<PAGE>
INTRODUCTION
Trust for Credit Unions (the "Fund" or the "Trust") is an open-end, diversified,
management investment company (commonly known as a "mutual fund") offered only
to state and federally chartered credit unions. The Fund seeks to achieve a high
level of income to the extent consistent with the investment objectives of its
investment portfolios. This Additional Statement relates to the offering of the
units of the Fund's Money Market Portfolio, Government Securities Portfolio and
Mortgage Securities Portfolio (individually, a "Portfolio" and collectively, the
"Portfolios").
The Fund was established under Massachusetts law by an Agreement and Declaration
of Trust dated September 24, 1987 (the "Declaration of Trust"). The
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional units of beneficial interest of one or more separate series
representing interests in separate investment portfolios. The Trustees have the
right to establish investment portfolios in addition to those heretofore
established. Investment in the Portfolios relieves investors from the
administrative and accounting burdens involved in direct investments, and also
provides related benefits as described below.
High Current Income. The Money Market Portfolio seeks to maximize current
- -------------------
income to the extent consistent with the preservation of capital and the
maintenance of liquidity by investing in high-quality money market investments
authorized under the Federal Credit Union Act. The Government Securities and
Mortgage Securities Portfolios (the "Bond Portfolios") seek to achieve a high
level of current income, consistent with low volatility of principal, by
investing in obligations authorized under the Federal Credit Union Act. The Bond
Portfolios invest in longer-term, higher-yielding securities than a money market
fund, and may utilize certain investment techniques not available to a money
market fund. Similarly, the yields of the Bond Portfolios are expected to exceed
those offered by bank certificates of deposit and money market accounts.
However, the Bond Portfolios do not maintain a constant net asset value per unit
and are subject to greater fluctuation in the value of their units than a money
market fund. Unlike bank certificates of deposit and money market accounts,
investments in units of the Portfolios are not insured or guaranteed by any
government agency.
Relative Stability of Principal. Unlike the Money Market Portfolio which seeks
- -------------------------------
to maintain its net asset value per unit at $1.00 (although there is no
assurance that the Money Market Portfolio will be able to do so on a continuous
basis), the Bond Portfolios' net asset values per unit fluctuate. It is expected
that over the long-term the volatility of the Bond Portfolios will be low in
relation to longer-term bond funds; however, there may be a loss of principal.
The Government Securities Portfolio attempts to reduce net asset value
fluctuation by maintaining a maximum duration equal to that of a Two-Year U.S.
Treasury security and a target duration no shorter than that of a Six-Month U.S.
Treasury security and no longer than that of a One-Year U.S. Treasury security.
Similarly, the Mortgage Securities Portfolio attempts to reduce net asset value
fluctuation by maintaining a maximum duration that will not exceed that of a
Three-Year U.S. Treasury security and a target duration equal to that of a Two-
Year U.S. Treasury security and by utilizing certain active management
techniques to hedge interest rate risk. Duration is a measure of the price
sensitivity of the Portfolio, including expected cash flows and mortgage
prepayments under a wide range of interest rate scenarios, and is reviewed and
recalculated
B-3
<PAGE>
daily. However, there is no assurance that these strategies will be successful.
There can be no assurance that Goldman Sachs Asset Management's ("GSAM" or the
"Investment Adviser") estimation of a Portfolio's duration will be accurate or
that the duration of a Portfolio will always remain within the maximum target
duration described above.
Liquidity. Because the Portfolios' units may be redeemed upon request of a
- ---------
unitholder on any business day at net asset value, the Portfolios offer greater
liquidity than many competing investments such as certificates of deposit and
direct investments in certain mortgage-related securities.
Experienced Professional Management. Successfully creating and managing a
- -----------------------------------
diversified portfolio of mortgage-related securities requires professionals with
extensive experience. Members of GSAM's portfolio management team bring together
many years of experience in the analysis, valuation and trading of U.S. fixed-
income securities. At September 30, 1999 they were responsible for approximately
$44.5 billion in fixed-income assets.
A Sophisticated Investment Process. The Portfolios' investment process starts
- ----------------------------------
with a review of trends for the overall economy as well as for different sectors
of the U.S. mortgage and other markets. GSAM's portfolio managers then analyze
yield spreads, implied volatility and the shape of the yield curve.
In planning each Portfolio's strategy, the managers are able to draw upon the
economic and fixed income research resources of Goldman, Sachs & Co. ("Goldman
Sachs"). They also have access to Goldman Sachs' proprietary models. Among the
quantitative techniques used in the Bond Portfolios' investment processes are
. option-adjusted analytics to make initial strategic asset allocations
within the mortgage markets and to reevaluate investments as market
conditions change; and
. analytics to estimate mortgage prepayments and cash flows under
different interest rate scenarios and to maintain an optimal portfolio
structure.
The portfolio managers may use these and other trading and hedging techniques in
response to market and interest rate conditions. In particular, these and other
evaluative tools help the portfolio managers select securities with investment
characteristics they believe are desirable.
Convenience of a Fund Structure. The Bond Portfolios eliminate many of the
- -------------------------------
complications that direct ownership of mortgage securities entails. For example,
most mortgage-related securities generate monthly payments of both principal and
interest, just as the underlying mortgages do. To conserve their principal,
investors must make a special effort to segregate and reinvest the principal
portion of each payment on their own. The Bond Portfolios relieve investors of
this burden by automatically reinvesting all principal payments within the
Portfolio and distributing only current income each month.
B-4
<PAGE>
MANAGEMENT
The Declaration of Trust provides that, subject to its provisions, the business
of the Fund shall be managed by the Fund's Trustees. The Declaration of Trust
provides that (a) the Trustees may enter into agreements with other persons to
provide for the performance and assumption of various services and duties,
including, subject to the Trustees' general supervision, advisory and
administration services and duties and also including distribution, custodian,
transfer and dividend disbursing agency, unitholder servicing and accounting
services and duties; (b) a Trustee shall be liable for his or her own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, and for nothing else, and shall
not be liable for errors of judgment or mistakes of fact or law; and (c) subject
to the preceding clause, the Trustees are not responsible or liable for any
neglect or wrongdoing of any officer or any person referred to in clause
(a).
Information pertaining to the Trustees and officers of the Fund is set forth
below. Trustees deemed to be "interested persons" of the Fund for purposes of
the Investment Company Act of 1940, as amended (the "1940 Act") are indicated by
an asterisk.
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
----------- ---------- -------------------
<S> <C> <C>
TRUSTEES
Gene R. Artemenko, 71 Trustee Retired (June 1991).
Route 7, Box 1593
Reeds Spring, MO 65737
James C. Barr, 64 Trustee Managing Member, J.C.B. Enterprises,
1600 North Oak Street, #420 L.L.C. (March 1997-Present); and Chief
Arlington, VA 22209 Executive Officer, National Milk
Producers Federation (March 1985-March 1997).
Edgar F. Callahan, 71 Trustee Chief Executive Officer, PATELCO Credit
156 Second Street Union (October 1987-Present).
San Francisco, CA 94105-3993
Robert M. Coen, 60 Chairman and Professor of Economics, Northwestern
2003 Sheridan Road Trustee University.
Evanston, IL 60208
John T. Collins, 53 Vice Chairman and Partner, Steptoe & Johnson (law firm)
1330 Connecticut Avenue, N.W. Trustee (January 1985-Present).
Washington, DC 20036
</TABLE>
B-5
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
----------- ---------- -------------------
<S> <C> <C>
Thomas S. Condit, 53 Trustee Retired; Partner, New Media Publishing,
2000 Lincoln Park West Inc. (January 1996-August 1998); and
Apt. 301 Chief Executive Officer, Craver,
Chicago, IL 60614 Matthews, Smith & Co., Inc. (a direct
mail fund raising company) (June 1993-January 1996).
*Douglas C. Grip, 37 Trustee Managing Director, GSAM (November
32 Old Slip 1997-Present); Trustee and President,
New York, NY 10005 Goldman Sachs Trust and Goldman Sachs
Variable Insurance Trust (registered
investment companies) (April 1996-Present and
October 1997-Present, respectively); President,
Goldman Sachs Funds Group (April 1996-Present); and
President, MFS Retirement Services Inc., of Massachusetts
Financial Services (prior thereto).
Betty Hobbs, 61 Trustee President and Chief Executive Officer,
1400 8th Avenue, South Tennessee Teachers Credit Union (over 25 years).
Nashville, TN 37202
Gary Oakland, 47 Trustee President and Chief Executive Officer,
P.O. Box 97050 Boeing Employees' Credit Union (July 1986-Present).
Seattle, WA 98142-9750
Wendell A. Sebastian, 55 Trustee President and Chief Executive Officer,
711 South Dale Mabry Avenue GTE Federal Credit Union (February
Tampa, FL 33609 1998-Present); President, Callahan
Financial Services, Inc. ("CFS") (July
1996-January 1998); and President, GTE
Federal Credit Union (September 1991-July 1996).
</TABLE>
B-6
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
----------- ---------- -------------------
<S> <C> <C>
OFFICERS
Judith E. Sandberg, 43 President President, Callahan Financial Services,
1001 Connecticut Ave., N.W. Inc. (October 1998-Present); Managing
Suite 1001 Director, National Cooperative Bank
Washington, DC 20036 ("NCB") (August 1995-October 1998);
President, NCB Retail Finance
Corporation (October 1995-October 1998);
and Vice President, NCB Bank and NCB
Investment Advisers, Inc. (August 1994-October 1995).
Jesse Cole, 36 Vice President Vice President, GSAM (June
4900 Sears Tower 1998-Present); Vice President, Goldman
Chicago, IL 60606-6303 Sachs Trust and Goldman Sachs Variable
Insurance Trust (registered investment
companies) (1998-Present); Vice
President, AIM Management Group, Inc.
(investment adviser) (April 1996-June
1998); and Assistant Vice President, The
Northern Trust Company (June 1987-April 1996).
Charles W. Filson, 55 Vice President Director and Vice President, CFS (March
1001 Connecticut Ave., N.W. 1989-Present); and Treasurer, CFS
Suite 1001 (October 1987-Present).
Washington, DC 20016
Gordon F. Linke, 41 Vice President Vice President, Goldman Sachs
555 California Street (March 1990-Present).
45th Floor
San Francisco, CA 94104
Nancy L. Mucker, 50 Vice President Vice President, Goldman Sachs (April
4900 Sears Tower 1985-Present); Vice President, Goldman
60th Floor Sachs Trust and Goldman Sachs Variable
Chicago, IL 60606-6303 Insurance Trust (registered investment
companies) (1997-Present); and Manager
of Shareholder Servicing of GSAM
(November 1989-Present).
</TABLE>
B-7
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
----------- ---------- -------------------
<S> <C> <C>
James A. Fitzpatrick, 39 Vice President Managing Director, GSAM (1999); Vice
4900 Sears Tower President, Goldman Sachs (1998-Present);
Chicago, IL 60606-6303 Vice President, GSAM (April
1997-Present); Vice President, Goldman
Sachs Trust and Goldman Sachs Variable
Insurance Trust (registered investment
companies) (October 1997-Present); and
Vice President and General Manager,
First Data Corporation - Investor
Services Group (mutual funds
administrator) (1994 to 1997).
John M. Perlowski, 35 Treasurer Vice President, Goldman Sachs (July
32 Old Slip 1995-Present); Treasurer, Goldman Sachs
New York, NY 10005 Trust and Goldman Sachs Variable
Insurance Trust (registered investment
companies) (1997-Present); and Banking
Director, Investors Bank and Trust
(November 1993-July 1995).
Philip V. Giuca, Jr., 37 Assistant Treasurer Assistant Treasurer, Goldman Sachs Trust
10 Hanover Square and Goldman Sachs Variable Insurance
22nd Floor Trust (registered investment companies)
New York, NY 10004 (1997-Present); and Vice President,
Goldman Sachs (May 1992-Present).
Michael J. Richman, 39 Secretary General Counsel to the Funds Group,
85 Broad Street GSAM, and Vice President, Goldman Sachs
12th Floor (June 1992-Present); Secretary, Goldman
New York, NY 10004 Sachs Trust and Goldman Sachs Variable
Insurance Trust (registered investment
companies) (1997-Present); Associate
General Counsel, GSAM (February
1994-December 1997); Associate General
Counsel, Goldman Sachs (December
1998-Present); and Assistant General
Counsel, Goldman Sachs (June
1992-December 1998).
</TABLE>
B-8
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
----------- ---------- -------------------
<S> <C> <C>
Elizabeth D. Anderson, 30 Assistant Secretary Assistant Secretary, Goldman Sachs Trust
32 Old Slip and Goldman Sachs Variable Insurance
New York, NY 10005 Trust (registered investment companies)
(1997-Present); Portfolio Manager, GSAM
(April 1996-Present); Junior Portfolio
Manager, GSAM (1995-April 1996); Funds
Trading Assistant, GSAM (1993-1995); and
Compliance Analyst, Prudential Insurance
(1991-1993).
Steven E. Hartstein, 35 Assistant Secretary Associate, Goldman Sachs (December
85 Broad Street 1998-Present); Legal Product Analyst,
12th Floor Goldman Sachs (June 1993- December
New York, NY 10004 1998); and Funds Compliance Officer,
Citibank Global Asset Management (August
1991-June 1993).
Deborah A. Farrell, 28 Assistant Secretary Legal Products Analyst, Goldman Sachs
85 Broad Street (December 1998-Present); Assistant
12th Floor Secretary, Goldman Sachs Trust and
New York, NY 10004 Goldman Sachs Variable Insurance Trust
(registered investment companies)
(1997-Present); Legal Assistant, Goldman
Sachs (January 1996-December 1998);
Assistant Secretary to the Funds Group
(1996-Present); Executive Secretary,
Goldman Sachs (January 1994-January
1996); and Legal Secretary, Cleary,
Gottlieb, Steen and Hamilton (law firm)
(September 1990-January 1994).
</TABLE>
B-9
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
----------- ---------- ------------------------
<S> <C> <C>
Howard B. Surloff, 34 Assistant Secretary General Counsel, U.S. Funds Group
85 Broad Street (February 1999-Present); Assistant
12th Floor General Counsel, GSAM and Associate
New York, NY 10004 General Counsel to the Funds Group
(December 1997- January 1999);
Assistant Secretary, Goldman Sachs Trust
and Goldman Sachs Variable Insurance
Trust (registered investment companies)
(1997-Present); Assistant General
Counsel and Vice President, Goldman
Sachs (November 1993- January 1999 and
May 1994-Present, respectively); Counsel
to the Funds Group, GSAM (November
1993- January 1999); and Associate of
Shereff, Friedman, Hoffman & Goodman
(law firm) (October 1990-November 1993).
Kaysie P. Uniacke, 38 Assistant Secretary Managing Director and Senior Portfolio
32 Old Slip Manager, GSAM (1997-Present); Assistant
New York, NY 10005 Secretary, Goldman Sachs Trust and
Goldman Sachs Variable Insurance Trust
(registered investment companies)
(1997-Present); and Vice President and
Senior Portfolio Manager, GSAM (1988-1997).
</TABLE>
As of October 31, 1999, the Trustees and officers of the Fund, as a group, owned
in the aggregate less than 1% of the outstanding units of the Fund. (For
information about units of the Fund owned by credit unions of which certain
Trustees are officers, see "Description of Units" below.) Certain officers hold
comparable positions with certain other investment companies of which Goldman
Sachs, GSAM or an affiliate thereof is the investment adviser and/or
distributor.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended August
31, 1999:
B-10
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or Retirement from Goldman Sachs
Compensation Benefits Accrued as Mutual Funds*
Name of Trustee from the Trust Part of Trust's Expense (Including the Trust)
- --------------- -------------- ----------------------- ---------------------
<S> <C> <C> <C>
Gene R. Artemenko $8,000 -0- $8,000
James C. Barr $8,000 -0- $8,000
Edgar F. Callahan $8,000 -0- $8,000
Robert M. Coen $8,000 -0- $8,000
John T. Collins $8,000 -0- $8,000
Thomas S. Condit $8,000 -0- $8,000
Douglas C. Grip -0- -0- -0-
Rudolph T. Hanley** $4,000 -0- $4,000
Betty G. Hobbs $8,000 -0- $8,000
Gary Oakland*** -0- -0- -0-
Wendell A. Sebastian -0- -0- -0-
- -----------------
</TABLE>
* The Goldman Sachs Fund complex consists of the Goldman Sachs Trust and
Goldman Sachs Variable Insurance Trust. Goldman Sachs Trust consisted of 49
mutual funds, including 19 equity funds, on August 31, 1999. Goldman Sachs
Variable Insurance Trust consisted of 16 mutual funds on August 31,
1999.
** Mr. Hanley retired as a Trustee on March 22, 1999.
*** Mr. Oakland was appointed as Trustee of the Trust as of April 19, 1999.
ADVISORY AND OTHER SERVICES
Investment Adviser
As stated in the Prospectus, GSAM, 32 Old Slip, New York, New York 10005, a unit
of the Investment Management Division of Goldman Sachs, acts as the Fund's
investment adviser. As investment adviser, GSAM continually manages each
Portfolio, including the purchase, retention and disposition of securities and
other assets. Goldman Sachs' administrative obligations include, subject to the
general supervision of the Trustees, (a) providing supervision of all aspects of
the Fund's non-investment operations not performed by others pursuant to the
Fund's administration agreement or custodian agreement; (b) providing the Fund,
to the extent not provided pursuant to such agreements or the Fund's transfer
agency agreement, with personnel to perform such executive, administrative and
clerical services as are reasonably necessary to provide effective
administration of the Fund; (c) arranging, to the extent not provided pursuant
to such agreements, for the preparation, at the Fund's expense, of its tax
returns, reports to unitholders, periodic updating of the Prospectus and reports
filed with the SEC and other regulatory authorities; (d) providing the Fund, to
the extent not provided pursuant to such agreements, with adequate office space
and necessary office equipment and services; (e) maintaining all of the Fund's
records other than those maintained pursuant to such agreements; (f) to the
extent requested by the Trustees of the Fund, negotiating changes to the terms
and provisions of the Fund's administration agreement, the custodian agreement
and the distribution agreement with Callahan Financial Services, Inc.; and (g)
reviewing and paying (or causing to be paid) all bills or statements for
services rendered to the Fund.
The advisory agreement provides that GSAM may render similar services to others
so long as its services under such agreement are not impaired thereby. The
advisory agreement also provides
B-11
<PAGE>
that, subject to applicable provisions of the 1940 Act, GSAM will not be liable
for any error in judgment or mistake of law or for any loss suffered by the Fund
except a loss resulting from willful misfeasance, bad faith or gross negligence
in the performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties, under the advisory agreement or the
transfer agency agreement. The advisory agreement provides further that the Fund
will indemnify GSAM against certain liabilities, including liabilities under
federal and state securities laws, or, in lieu thereof, contribute to payment
for resulting losses.
The advisory agreement will remain in effect with respect to a particular
Portfolio until March 31, 2000, and will continue from year to year thereafter
provided such continuance is specifically approved at least annually (a) by the
vote of a majority of the outstanding units of such Portfolio (as defined under
"Investment Restrictions") or by a majority of the Trustees of the Fund; and (b)
by the vote of a majority of the Trustees of the Fund who are not parties to the
advisory agreement or "interested persons" (as such term is defined in the 1940
Act) of any party thereto, cast in person at a meeting called for the purpose of
voting on such approval. The advisory agreement will terminate automatically if
assigned (as defined in the 1940 Act) and is terminable at any time with respect
to any Portfolio without penalty by the Trustees of the Fund or by vote of a
majority of the outstanding units of the Portfolio (as defined under "Investment
Restrictions") on 60 days' written notice to GSAM or by GSAM on 60 days' written
notice to the Fund.
Expenses borne by the Money Market and the Bond Portfolios include, subject to
the limitations described in the Prospectus, the fees payable to GSAM and
Callahan Credit Union Financial Services Limited Partnership, the fees and
expenses of the Fund's custodian, filing fees for the registration or
qualification of Portfolio units under federal and state securities laws,
expenses of the organization of the Portfolios, the fees of any trade
association of which the Fund is a member, taxes, interest, costs of liability
insurance, fidelity bonds, indemnification or contribution, any costs, expenses
or laws arising out of any liability of or claim for damages or other relief
asserted against the Fund for violation of any law, legal, auditing and tax
services fees and expenses, expenses of preparing and setting in type
prospectuses, statements of additional information, proxy material, reports and
notices and the printing and distributing of the same to the Portfolios'
unitholders and regulatory authorities and compensation and expenses of the
Trustees.
For the fiscal years ended August 31, 1999, August 31, 1998 and August 31, 1997,
the advisory fees paid by each Portfolio were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Money Market Portfolio $ 1,058,821+ $ 477,585+ $ 439,853+
Government Securities Portfolio $ 1,399,604 $ 1,181,065 $ 1,082,182
Mortgage Securities Portfolio $ 940,072 $ 779,686 $ 668,959
</TABLE>
B-12
<PAGE>
------------------
+ Waived additional advisory fees in the amount of $1,377,811, $866,377
and $356,960, respectively, for such periods. Without waivers, the
Money Market Portfolio would have paid advisory fees of $2,436,632,
$1,343,962 and $796,813, respectively, for such periods. In addition,
the expenses of the Money Market Portfolio were reduced or otherwise
limited in the amounts of $0, $0 and $33,469, respectively, by the
Investment Adviser for such periods.
Distributors
Callahan Financial Services, Inc. ("CFS"), 1001 Connecticut Avenue, N.W., Suite
10001, Washington, DC 20036-5504, a Delaware corporation, and Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, serve as the distributors of the
Fund. CFS, a registered broker-dealer under the Securities Exchange Act of 1934,
is an affiliate of Callahan & Associates, Inc., a corporation organized under
the laws of the District of Columbia, founded in 1985.
CFS and Goldman Sachs have entered into distribution agreements with the Fund to
sell units of the Portfolios upon the terms and at the current offering price
described in the Prospectus. Units of the Fund are offered and sold on a
continuous basis by the distributors, acting as agent. CFS and Goldman Sachs are
not obligated to sell any certain number of units of the Portfolios. From time
to time the distributors may purchase or sell units of the Fund for their own
account.
Transfer Agent
Under its transfer agency agreement, Goldman Sachs serves as transfer agent and
dividend disbursing agent for the Fund. Goldman Sachs has undertaken to the Fund
to (a) process and provide confirmations for purchase and redemption
transactions; (b) answer customer inquiries regarding the current yield of, and
certain other matters (e.g., account status information) pertaining to, the
Fund; (c) establish and maintain separate accounts with respect to each
unitholder; (d) provide periodic statements showing account balances; and (e)
provide for dividends or distributions to unitholders.
As compensation for the services rendered to the Fund as transfer agent, Goldman
Sachs is entitled to a fee of $18 per year for each unitholder account plus
reimbursement for certain expenses.
For the last three fiscal years, the transfer agency fees accrued by each
Portfolio were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Money Market Portfolio $ * * *
Government Securities Portfolio $ 4,667 $ 4,971 $ 4,032
Mortgage Securities Portfolio $ 1,612 $ 1,641 $ 1,263
</TABLE>
B-13
<PAGE>
* The transfer agent received no fees for the periods indicated above.
Administrator
As stated in the Prospectus, Callahan Credit Union Financial Services Limited
Partnership ("CUFSLP") acts as administrator for the Fund. In carrying out its
duties, CUFSLP has undertaken to (a) review the preparation of reports and proxy
statements to unitholders, the periodic updating of the Prospectus, this
Additional Statement and the Registration Statement and the preparation of all
other reports filed with the SEC; (b) periodically review the services performed
by the Investment Adviser, the custodian, the distributors and the transfer
agent, and make such reports and recommendations to the Trustees of the Fund
concerning the performance of such services as the Trustees reasonably request
or as CUFSLP deems appropriate; (c) negotiate changes to the terms and
provisions of the Fund's advisory agreement, the custodian agreement, the
transfer agency agreement and the distribution agreement with Goldman Sachs, to
the extent requested by the Trustees of the Fund; and (d) provide the Fund with
personnel to perform such executive, administrative and clerical services as may
be reasonably requested by the Trustees of the Fund.
In addition, CUFSLP has undertaken to (a) provide facilities, equipment and
personnel to serve the needs of investors, including communications systems and
personnel to handle unitholder inquiries; (b) develop and monitor investor
programs for credit unions; (c) provide assistance in connection with the
processing of unit purchase and redemption orders as reasonably requested by the
transfer agent or the Fund; (d) inform GSAM in connection with the portfolio
management of the Fund as to anticipated purchases and redemptions by
unitholders and new investors; (e) provide information and assistance in
connection with the registration of the Fund's units in accordance with state
securities requirements; (f) make available and distribute information
concerning the Fund to unitholders as requested by the Fund; (g) handle
unitholder problems and calls relating to administrative matters; (h) provide
advice and assistance concerning the regulatory requirements applicable to
credit unions that invest in the Fund; (i) provide assistance in connection with
the preparation of the Fund's periodic financial statements and annual audit as
reasonably requested by the Fund or the Fund's independent accountants; (j)
furnish stationery and office supplies; and (k) generally assist in the Fund's
operations.
For the last three fiscal years, the administration fees earned by CUFSLP were
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Money Market Portfolio $304,885* $159,195* $190,866*
Government Securities Portfolio $699,802 $590,533 $541,091
Mortgage Securities Portfolio $235,018 $194,922 $167,240
</TABLE>
- --------------
* Waived additional administration fees in the amount of $1,219,536,
$636,779, and $240,343, respectively.
B-14
<PAGE>
The administration agreement will remain in effect until March 31, 2000, and
will continue from year to year thereafter provided such continuance is
specifically approved at least annually (a) by the vote of a majority of the
Trustees; and (b) by the vote of a majority of the Trustees of the Fund who are
not parties to the administration agreement or "interested persons" (as such
term is defined in the 1940 Act) of any party thereto (the "Disinterested
Trustees"), cast in person at a meeting called for the purpose of voting on such
approval. The administration agreement may be terminated with respect to a
Portfolio at any time, without the payment of any penalty, by a vote of a
majority of the Disinterested Trustees or by vote of the majority of the
outstanding units of the Portfolio (as defined under "Investment Restrictions")
on 60 days' written notice to CUFSLP or by CUFSLP on 60 days' written notice to
the Fund. The administration agreement provides that it may be amended by the
mutual consent of the Fund and CUFSLP, but the consent of the Fund must be
approved by vote of a majority of the Disinterested Trustees cast in person at a
meeting called for the purpose of voting on such amendment. The administration
agreement will terminate automatically if assigned (as defined in the 1940 Act).
The administration agreement provides that CUFSLP will not be liable for any
error in judgment or mistake of law or for any loss suffered by the Fund except
a loss resulting from willful misfeasance, bad faith or gross negligence in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties, under the agreement. The agreement
provides further that the Fund will indemnify CUFSLP against certain
liabilities, including liabilities under the federal and state securities laws
or, in lieu thereof, contribute to payment for resulting losses.
The forty credit unions listed below are the limited partners of CUFSLP, which
created Trust for Credit Unions in conjunction with Goldman Sachs. As of June
30, 1999, these credit unions had total assets of $32.1 billion from 23
different states.
J. David Osborn, President
Larry Hoffman, Chief Financial Officer
Anheuser-Busch Employees Credit Union
Larry Morgan, President
APCO Employees Credit Union
Douglas Ferraro, President
Steven Davis, Chief Financial Officer
Bellco First Federal Credit Union
Gary Oakland, President
T. Brad Canfield, Senior Vice President
Boeing Employees Credit Union
Eldon Arnold, Chief Executive Officer
Sandy Andrews, Sr. Vice President
Citizens Equity Federal Credit Union
B-15
<PAGE>
Dean Nelson, President
Bryan Bennett, Executive Vice President
City-County Federal Credit Union
Larry T. Wilson, Chief Executive Officer
Ralph Reardon, Chief Financial Officer
Coastal Federal Credit Union
Ron Unger, President
Tom Budd, Vice President, Chief Financial Officer
Dearborn Federal Credit Union
Donald Hersman, President
Kendrick Smith, Vice President
Eastern Financial Credit Union
Thomas E. Sargent, President
Michael Osborne, Chief Financial Officer
First Technology Credit Union
Wendell Sebastian, President
Brian Crawford, Executive Vice President
GTE Federal Credit Union
Stan Hollen, Chief Executive Officer
The Golden 1 Credit Union
Charles Cockburn, Chief Executive Officer
Betty Moran, Senior Vice President
Hudson Valley Federal Credit Union
Paul Horgen, President
Bobbi Olson, Chief Financial Officer
IBM Mid America Employees Federal Credit Union
John Wohaldo, Vice President of Operations
Inland Employees Federal Credit Union
Jean Yokum, President
Greg Manweiler, Vice President Finance
Langley Federal Credit Union
Frank Berrish, President
LICU Corporate Federal Credit Union
B-16
<PAGE>
Dennis Pierce, President
Dennis Mann, Senior Vice President
Community America Credit Union
Joseph Bressi, President
Judy Robinson, Chief Financial Officer
Montgomery County Teachers Federal Credit Union
Douglas M. Allman, President
Rhonda Bazey, Vice President-Finance
NASA Federal Credit Union
Lindsay Alexander, President
Tim Duvall, Vice President
NIH Federal Credit Union
Brad Beal, President
Paul Parrish, Sr. Vice President
Nevada Federal Credit Union
Joseph S. Coey, President
Sandra Chavez, Chief Financial Officer
New Mexico Educators Federal Credit Union
Michael J. Maslak, President
Kim Reedy, Chief Financial Officer
North Island Federal Credit Union
Rudy Hanley, President
Paul Sundermann, Senior Vice President
Orange County Teachers Federal Credit Union
Edgar F. Callahan, Chief Executive Officer
Andrew Hunter, President
Patelco Credit Union
John LaRosa, Chief Operating Officer
Police & Fire Federal Credit Union
Ludelle Morrow, President
Jim Miller, Chief Financial Officer
Provident Central Credit Union
B-17
<PAGE>
Jeffrey Farver, President
Jim Girardeau, Executive Vice President
San Antonio Federal Credit Union
Doug Samuels, President
Tom Baldwin, Chief Financial Officer
Space Coast Credit Union
Stephan Winninger, President
Brian McVeigh, Chief Financial Officer
State Employees Credit Union of Michigan
Richard Krauland, President
Scott Winwood, Chief Financial Officer
Steel Works Community Federal Credit Union
Richard Rice, Chief Executive Officer
Amy Sink, Chief Financial Officer
Teachers Credit Union
Betty Hobbs, President
Tennessee Teachers Credit Union
Robert Siravo, Chief Executive Officer
Peggy Anderson, Vice President-Finance
Travis Federal Credit Union
Gregory Blount, President
Ralph Cheplak, Chief Financial Officer
Tropical Federal Credit Union
Philip L. Hart, President
Jack Carlow, Vice President-Finance
Tulsa Federal Employees Credit Union
Leonard Greene, President
Perry Eastman, Chief Financial Officer
Unified Federal Credit Union
E. Burton Eubanks, President
Tony Budet, Senior Vice President
University Federal Credit Union
Frank Berrish, President
Visions Federal Credit Union
B-18
<PAGE>
Custodian
State Street Bank and Trust Company ("State Street"), P.O. Box 1713, Boston,
Massachusetts 02105, is the custodian of the Fund's portfolio securities and
cash. State Street also maintains the Fund's accounting records. The Northern
Trust Company ("Northern") has been retained by State Street to serve as its
agent in connection with certain wire receipts and transfers of funds.
Auditors
PricewaterhouseCoopers LLP, independent public accountants, 160 Federal Street,
Boston, MA 02110, have been selected as auditors of the Fund. In addition to
audit services, PricewaterhouseCoopers LLP prepares the Fund's federal and state
tax returns, and provides consultation and assistance on accounting, internal
control and related matters. The financial statements of the Money Market
Portfolio and the Bond Portfolios, which are incorporated by reference into this
Additional Statement (under "Financial Statements") from the Fund's annual
report to unitholders for the fiscal year ended August 31, 1999 (the "Annual
Report"), and the data set forth under "Financial Highlights" in the Prospectus
have been audited by Arthur Andersen LLP, the Fund's former auditors, as
indicated in their report with respect thereto, which is incorporated by
reference in reliance upon the authority of said firm as experts in giving said
report.
PORTFOLIO TRANSACTIONS
----------------------
In connection with portfolio transactions for the Fund, which are generally done
at a net price without a broker's commission (i.e., a dealer is dealing with the
Fund as principal and receives compensation equal to the spread between the
dealer's cost for a given security and the resale price of such security), the
Fund's advisory agreement provides that GSAM shall attempt to obtain the best
net price and the most favorable execution. On occasions when GSAM deems the
purchase or sale of a security to be in the best interests of a Portfolio as
well as its other customers (including any other Portfolio or other investment
company or advisory account for which GSAM acts as investment adviser), the
advisory agreement provides that GSAM, to the extent permitted by applicable
laws and regulations, may aggregate the securities to be sold or purchased for
the Portfolio with those to be sold or purchased for such other customers in
order to obtain the best net price and most favorable execution. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by GSAM in the manner it considers to
be most equitable and consistent with its fiduciary obligations to such
Portfolio and such other customers. In some instances, this procedure may
adversely affect the size of the position obtainable for such Portfolio. To the
extent that the execution and price offered by more than one dealer are believed
to be comparable, the advisory agreement permits GSAM, in its discretion, to
purchase and sell portfolio securities to and from dealers who provide the Fund
with brokerage or research services.
During the fiscal year ended August 31, 1999, the Portfolios acquired and sold
securities issued by: Nationsbanc Montgomery Securities, ABN AMRO Securities,
Salomon Smith Barney Holdings, Inc., Donaldson Lufkin Jenrette, Inc., Bear
Stearns Companies, Inc., Morgan Stanley Dean Witter & Co., Deutsche Bank
Securities, Lehman Brothers, Inc., Credit Suisse First Boston
B-19
<PAGE>
Corporation, and Swiss Bank. At August 31, 1999, the Money Market Portfolio held
the following amount of securities of its regular brokers/dealers as defined in
Rule 10b-1 under the 1940 Act, or their parents ($ in thousands): Morgan Stanley
Dean Witter & Co. - $34,989. The Mortgage Securities Portfolio held the
following: Salomon Smith Barney Holdings, Inc. - $4,597 and Bear Stearns
Companies, Inc. - $1,005.
Activities of Goldman Sachs and Its Affiliates and Other Accounts Managed by
Goldman Sachs
The involvement of Goldman Sachs and its advisory affiliates in the management
of, or interest in, other accounts and other activities of Goldman Sachs may
present conflicts of interest with respect to the Portfolios or impede their
investment activities.
Goldman Sachs and its advisory affiliates have proprietary interests in, and
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 Portfolios and/or engage in transactions in the same types of
securities and instruments as the Portfolios. Goldman Sachs and its affiliates
are major participants in the fixed-income markets, in each case on a
proprietary basis and for the accounts of customers. As such, Goldman Sachs and
its affiliates are actively engaged in transactions in the same securities and
instruments in which the Portfolios invest. Such activities could affect the
prices and availability of the securities and instruments in which the
Portfolios will invest, which could have an adverse impact on each Portfolio's
performance. Such transactions, particularly in respect of proprietary accounts
or customer accounts other than those included in GSAM and its advisory
affiliates' asset management activities, will be executed independently of the
Portfolios' transactions and thus at prices or rates that may be more or less
favorable. When GSAM and its advisory affiliates seek to purchase or sell the
same assets for their managed accounts, including a Portfolio, 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 Portfolios.
From time to time, a Portfolio's 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 GSAM will not initiate or recommend
certain types of transactions in certain securities or instruments with respect
to which GSAM and/or its affiliates are performing services or when position
limits have been reached.
In connection with its management of the Portfolios, GSAM may have access to
certain fundamental analysis and proprietary technical models developed by
Goldman Sachs and other affiliates. GSAM will not be under any obligation,
however, to effect transactions on behalf of the Portfolios in accordance with
such analysis and models. In addition, neither Goldman Sachs nor any of its
affiliates will have any obligation to make available any information regarding
their proprietary activities or strategies, or the activities or strategies used
for other accounts managed by them, for the benefit of the management of the
Portfolios and it is not anticipated that GSAM will have access to such
information for the purpose of managing the Portfolios.
B-20
<PAGE>
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 GSAM in managing the Portfolios.
The results of each Portfolio's investment activities may differ significantly
from the results achieved by Goldman Sachs and its affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
that are substantially more or less favorable than the results achieved by the
Portfolios. Moreover, it is possible that the Portfolios 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 managing directors of Goldman
Sachs and its affiliates may develop general policies regarding Portfolio
activities, but will not be involved in the day-to-day management of the
Portfolios. In such instances, those individuals may, as a result, obtain
information regarding the Portfolios' proposed investment activities which is
not generally available to the public. In addition, by virtue of their
affiliation with Goldman Sachs, any such member of an investment policy
committee will have direct or indirect interests in the activities of Goldman
Sachs and its affiliates in securities and investments similar to those in which
the Portfolios invest.
In addition, certain principals and certain of the employees of GSAM are also
principals or employees of Goldman Sachs or their affiliated entities. As a
result, the performance by these principals and employees of their obligations
to such other entities may be a consideration of which investors in the
Portfolios should be aware.
GSAM may enter into transactions and invest in instruments on behalf of a
Portfolio 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 Portfolios, and such party may have no
incentive to assure that the Portfolios obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which the Portfolios invest or which may be based on the performance of a
Portfolio. The Portfolios 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 Portfolios. At times, these activities may cause departments of
the firm to give advice to clients that may cause these clients to take actions
adverse to the interests of the Portfolios. To the extent affiliated
transactions are permitted, the Portfolios will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Portfolio will be required to establish business relationships with its
counterparties based on the Portfolio's own credit standing. Neither Goldman
Sachs nor its affiliates will have any obligation to allow their credit to be
used in connection with a Portfolio's establishment of its
B-21
<PAGE>
business relationships, nor is it expected that a Portfolio's counterparties
will rely on the credit of Goldman Sachs or any of its affiliates in evaluating
the Fund's creditworthiness.
It is possible that a Portfolio's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to time,
Goldman Sachs' activities may limit the Portfolios' flexibility in purchases and
sales of securities. When Goldman Sachs is engaged in an underwriting or other
distribution of securities of an entity, GSAM may be prohibited from purchasing
or recommending the purchase of certain securities of that entity for the
Portfolios.
AMORTIZED COST VALUATION
As stated in the Prospectus, the Money Market Portfolio seeks to maintain a net
asset value of $1.00 per unit and, in this regard, values its instruments on the
basis of amortized cost pursuant to Rule 2a-7 under the 1940 Act. The amortized
cost method values a security at its cost on the date of acquisition and
thereafter assumes a constant amortization to maturity of any discount or
premium, 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 the Portfolio would receive if it sold the
instrument. During such periods the yield to investors in the Portfolio may
differ somewhat from that obtained in a similar entity which uses available
indications of market value to value its portfolio instruments. For example, if
the use of amortized cost resulted in a lower (higher) aggregate Portfolio value
on a particular day, a prospective investor in the Portfolio would be able to
obtain a somewhat higher (lower) yield and ownership interest than would result
from investment in such similar entity, and existing investors would receive
less (more) investment income and ownership interest. In this manner, the
amortized cost method may result in dilution of unitholder interests. Similar
effects arise out of the rounding of the Portfolio's net asset value per unit to
the nearest one-cent. However, the Fund expects that the procedures and
limitations referred to in the following paragraphs of this section will tend to
minimize the differences referred to above.
Under Rule 2a-7, the Trustees, in supervising the Fund's operations and
delegating special responsibilities involving portfolio management to GSAM, are
obligated, as a particular responsibility within the overall duty of care owed
to the unitholders, to establish procedures reasonably designed, taking into
account current market conditions and the Money Market Portfolio's investment
objective, to stabilize the net asset value of such Portfolio, as computed for
the purposes of purchases and redemptions, at $1.00 per unit. The Trustees'
procedures include periodically monitoring the difference (the "Market Value
Difference") between the amortized cost value per unit and the net asset value
per unit based upon available indications of market value, considering whether
steps should be taken in the event such Market Value Difference exceeds 1/2 of
1%, and the taking of such steps as they consider appropriate (e.g., selling
portfolio instruments to shorten average portfolio maturity or to realize
capital gains or losses, reducing or suspending unitholder income accruals,
redeeming units in kind, canceling units without monetary consideration, or
utilizing a net asset value per unit based upon available indications of market
value which under such circumstances would vary from $1.00) to eliminate or
reduce to the extent reasonably practicable any material dilution or other
unfair results to
B-22
<PAGE>
investors or existing unitholders which might arise from Market Value
Differences. Available indications of market value used by the Fund consist of
actual market quotations or appropriate substitutes which reflect current market
conditions and include (a) quotations or estimates of market value for
individual portfolio instruments; and/or (b) values for individual portfolio
instruments derived from market quotations relating to varying maturities of a
class of money market instruments.
Rule 2a-7 requires that the Money Market Portfolio limit its investments to
those which GSAM, under guidelines established by the Fund's Board of Trustees,
determines to present minimal credit risks and which are "Eligible Securities"
as defined by the SEC and described in the Prospectus. The Rule also calls for
the Money Market Portfolio to maintain a dollar weighted average portfolio
maturity (not more than 90 days) appropriate to its objective of maintaining a
stable net asset value per unit and precludes the purchase of any instrument
deemed under such Rule to have a remaining maturity of more than 397 days.
Generally, the maturity of an instrument held by the Money Market Portfolio
shall be deemed to be the period remaining until the date noted on the face of
the instrument as the date on which the principal amount must be paid or, in the
case of an instrument called for redemption, the date on which the redemption
payment must be made. However, instruments having variable or floating interest
rates or demand features that satisfy certain regulatory requirements may be
deemed to have remaining maturities as follows: (a) a government security with
a variable rate of interest readjusted no less frequently than every thirteen
months may be deemed to have a maturity equal to the period remaining until the
next readjustment of the interest rate; (b) a government security with a
floating rate of interest readjusted no less frequently than every thirteen
months may be deemed to have a maturity equal to one day; (c) an instrument with
a variable rate of interest, the principal amount of which is scheduled on the
face of the instrument to be paid in thirteen months or less, may be deemed to
have a maturity equal to the earlier of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand; (d) an instrument with a variable rate
of interest, the principal amount of which is scheduled to be paid in more than
thirteen months, that is subject to a demand feature, may be deemed to have a
maturity equal to the longer of the period remaining until the next readjustment
of the interest rate or the period remaining until the principal amount can be
recovered through demand; (e) an instrument with a floating rate of interest,
the principal of which is scheduled on the face of the instrument to be paid in
thirteen months or less, may be deemed to have a maturity of one day; (f) an
instrument with a floating rate of interest the principal amount of which is
scheduled to be paid in more than thirteen months, that is subject to a demand
feature, may be deemed to have a maturity equal to the period remaining until
the principal amount can be recovered through demand; (g) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur or,
where the agreement is subject to demand, the notice period applicable to a
demand for the repurchase of the securities; and (h) investment in another money
market fund may be treated as having a maturity equal to the period of time
within which the acquired money market fund is required to make payment upon
redemption, unless the acquired money market fund has agreed in writing to
provide redemption proceeds within a shorter time period, in which case the
maturity of such investment may be deemed to be the shorter period.
B-23
<PAGE>
OTHER INFORMATION REGARDING NET ASSET VALUE
As used in the Prospectus and this Additional Statement, for purposes of
processing purchase, redemption and exchange orders, the term "business day"
refers to those days the New York Stock Exchange is open which are Monday
through Friday except for holidays (in the case of the Money Market Portfolio,
holidays include days on which Chicago, Boston or New York Banks are closed for
local holidays). For the year 2000, such holidays are: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Columbus Day (Money Market Portfolio
only), Veterans' Day (Money Market Portfolio only), Thanksgiving and Christmas
Day. On those days when one of such organizations closes early, Goldman Sachs
reserves the right to advance the time on that day by which purchase and
redemption requests must be received to become effective, provided that the
current net asset value of each unit shall be computed at least once on such
days.
The proceeds received by each Portfolio from the issue or sale of its units, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of creditors, will be specifically allocated to such
Portfolio and constitute the underlying assets of that Portfolio. The
underlying assets of each Portfolio will be segregated on the books of account,
and will be charged with the liabilities in respect of such Portfolio and with a
share of the general liabilities of the Fund. Expenses of the Fund with respect
to the Portfolios are generally allocated in proportion to the net asset values
of the respective Portfolios except where allocations of direct expenses can
otherwise be fairly made.
DESCRIPTION OF UNITS
The Declaration of Trust provides that each unitholder, by virtue of becoming
such, will be held to have expressly assented and agreed to the terms of the
Declaration of Trust and to have become a party thereto. As mentioned in the
Introduction, the Fund's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional units of beneficial interest of one or
more separate series representing interests in different investment portfolios.
The Trustees have the right to establish investment portfolios in addition to
those heretofore established. Under the terms of the Declaration of Trust, each
unit of each series has a par value of $.001, represents an equal proportionate
interest in a particular investment portfolio with each other unit and is
entitled to such dividends out of the income belonging to such investment
portfolio as are declared by the Trustees. Upon liquidation of an investment
portfolio, unitholders thereof are entitled to share pro rata in the net assets
belonging to that investment portfolio available for distribution. Units are
freely transferable and do not have preemptive or conversion rights. Units, when
issued as described in the Prospectus, are fully paid and non-assessable, except
as expressly set forth below. In the interest of economy, certificates
representing Fund units are not issued.
As a general matter, the Fund does not hold annual or other meetings of
unitholders. This is because the Declaration of Trust provides for unitholder
voting only for the election or removal of one or more Trustees, if a meeting is
called for that purpose, and for certain other designated matters. Each Trustee
serves until the next meeting of unitholders, if any, called for the purpose
B-24
<PAGE>
of considering the election or reelection of such Trustee or a successor to such
Trustee, and until the election and qualification of his or her successor, if
any, elected at such meeting, or until such Trustee sooner dies, resigns,
retires or is removed by the unitholders or two-thirds of the Trustees.
Any Trustee may be removed by the unitholders with or without cause at any time
by vote of those unitholders holding not less than two-thirds of the units then
outstanding, cast in person or by proxy at any meeting called for that purpose.
The Trustees shall promptly call a meeting of unitholders for the purpose of
voting upon the question of removal of any Trustee when requested in writing to
do so by the holders of record of not less than 10% of the outstanding units.
Whenever ten or more unitholders of record who have been such for at least six
months preceding the date of application, and who hold in the aggregate either
units having a net asset value of at least $25,000 or at least 1% of the
outstanding units, whichever is less, shall apply to the Trustees in writing,
stating that they wish to communicate with other unitholders with a view to
obtaining signatures to a request for a unitholder meeting and include with such
application a form of communication and request which they wish to transmit, the
Trustees shall within five business days after receipt of such application
either (1) afford to such applicants access to a list of the names and addresses
of all unitholders as recorded on the books of the Fund or investment portfolio
involved; or (2) inform such applicants as to the approximate number of
unitholders of record, and the approximate cost of mailing to them the proposed
form of communication and request and, upon receipt of the material and the
expenses of mailing, shall promptly mail such materials to all unitholders
unless a majority of the Trustees believe that, in their opinion, such material
either contains untrue statements of fact or omits to state facts necessary to
make the statements contained therein not misleading, or would be in violation
of applicable law. The Trustees shall thereafter comply with any order entered
by the SEC and the requirements of the 1940 Act and the Securities Exchange Act
of 1934.
In addition to Trustee election or removal as described in the Prospectus and as
further described herein, the Declaration of Trust provides for unitholder
voting only (a) with respect to any contract as to which unitholder approval is
required by the 1940 Act; (b) with respect to any termination or reorganization
of the Fund or any Portfolio to the extent and as provided in the Declaration of
Trust; (c) with respect to any amendment of the Declaration of Trust (other
than amendments establishing and designating new investment portfolios,
abolishing investment portfolios, changing the name of the Fund or the name of
any investment portfolio, supplying any omission, curing any ambiguity or
curing, correcting or supplementing any provision thereof which is internally
inconsistent with any other provision thereof or which is defective or
inconsistent with the 1940 Act or with the requirements of the Internal Revenue
Code and applicable regulations for the Fund's obtaining the most favorable
treatment thereunder available to regulated investment companies), which
amendments require approval by a majority of the units entitled to vote; (d) to
the same extent as the stockholders of a Massachusetts business corporation as
to whether or not a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Fund or
the unitholders; and (e) with respect to such additional matters relating to the
Fund as may be required by the
B-25
<PAGE>
1940 Act, the Declaration of Trust, the By-Laws of the Fund, any registration
of the Fund with the SEC or any state, or as the Trustees may consider necessary
or desirable.
Under Massachusetts law, there is a possibility that unitholders of a business
trust could, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an
express disclaimer of unitholder liability for acts or obligations of the Fund
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trustees or any
officer. The Declaration of Trust provides for indemnification out of Fund
property of any unitholder charged or held personally liable for the obligations
or liabilities of the Fund solely by reason of being or having been a unitholder
of the Fund and not because of such unitholder's acts or omissions or for some
other reason. The Declaration of Trust also provides that the Fund shall,
upon proper and timely request, assume the defense of any charge made against
any unitholder as such for any obligation or liability of the Fund and satisfy
any judgment thereon. Thus, the risk of a unitholder incurring financial loss
on account of unitholder liability is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
Each unit of a Portfolio is entitled to one vote on all matters voted upon by
the unitholders of such Portfolio, with fractional units being entitled to
proportionate fractional votes. Units do not have cumulative voting rights.
The Declaration of Trust provides that on any matter submitted to a vote of
the unitholders, all units entitled to vote, irrespective of investment
portfolio, shall be voted in the aggregate and not by investment portfolio
except that (a) as to any matter with respect to which a separate vote of any
investment portfolio is required by the 1940 Act or would be required under the
Massachusetts Business Corporation Law if the Fund were a Massachusetts business
corporation, such requirements as to a separate vote by the investment portfolio
shall apply in lieu of the aggregate voting as described above; (b) in the event
that the separate vote requirements referred to in (a) above apply with respect
to one or more investment portfolios, then subject to (c) below, the units of
all other investment portfolios shall vote as a single investment portfolio; and
(c) as to any matter which does not affect the interest of a particular
investment portfolio, only unitholders of the affected investment portfolio
shall be entitled to vote thereon.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding units of each
investment portfolio affected by such matter. Rule 18f-2 further provides that
an investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are identical or the matter
does not affect any interest of the investment portfolio. Under the Rule, the
approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
portfolio only if approved by a majority of the outstanding units of such
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by unitholders of the Fund voting together in the aggregate without regard
to a particular investment portfolio.
B-26
<PAGE>
As of October 31, 1999 the outstanding units of the Money Market Portfolio, the
Government Securities Portfolio and the Mortgage Securities Portfolio were
939,009,142.02, 66,233,467.727 and 52,567,441.169, respectively. To the Fund's
knowledge, as of such date, the only entities which may have owned 5% or more of
the outstanding units of the Money Market Portfolio were: Citizens Equity
Federal Credit Union, P.O. Box 1715, Peoria, IL 61656-1715 (7%), Orange County
Teachers Federal Credit Union, P.O. Box 11547, Santa Ana, CA 92711-1547 (5%),
and APCO Employees Credit Union, 1608 7th Avenue, Birmingham, AL 35203-1987
(5%). To the Fund's knowledge, as of the same date, the only entities which may
have owned 5% or more of the outstanding units of the Government Securities
Portfolio were: First Technology Federal Credit Union, P.O. Box 2100,
Beaverton, OR 97075-2100 (9%), GTE Federal Credit Union, PO Box 10550, Tampa,
FL 33679-0550 (6%), Patelco Credit Union, 156 2nd Street, San Francisco, CA
94105-3724 (11%), and Boeing Employee Credit Union, 12770 Gateway Drive,
Tukwila, WA 98168-3309 (6%). To the Fund's knowledge, as of the same date, the
only entities which may have owned 5% or more of the outstanding units of the
Mortgage Securities Portfolio were: First Technology Federal Credit Union,
P.O. Box 2100, Beaverton, OR 97075-2100 (11%), Patelco Credit Union, 156 2nd
Street, San Francisco, CA 94105-3724 (15%), APCO Employees Credit Union, 1608
7th Avenue, Birmingham, AL 35203-1987 (9%), and Provident Central Credit Union,
303 Twin Dolphin Drive, Redwood City, CA 94065-1497 (5%).
INCOME
Substantially all of the net investment income of the Money Market Portfolio
will be declared as a dividend on each day. The Bond Portfolios each intend to
declare a daily dividend (payable monthly) determined with the objective of
distributing the majority of their net investment income while enhancing the
stability of principal. Over the course of the fiscal year, dividends accrued
and paid will constitute substantially all of the Portfolios' net investment
income. The amount of the dividend will reflect changes in interest rates
(i.e., as interest rates increase, dividends will generally increase and as
interest rates decline, dividends will generally be reduced). Because the Bond
Portfolios invest in mortgage-related securities that are subject to
prepayments, the Trust cannot predict precisely the amount of principal and
interest that a Portfolio will receive. Therefore, at times, a Portfolio may
distribute amounts above current income levels, which will constitute a return
of capital.
Net investment income of the Money Market Portfolio (from the time of the
immediately preceding determination thereof) consists of (i) interest accrued or
discount accreted (including both original issue and market discount) on the
assets of such Portfolio and any general income of the Fund allocated to such
Portfolio less (ii) the amortization of market premium and the estimated
expenses of such Portfolio.
Net investment income of the Bond Portfolios consists of (i) interest accrued,
discount accreted on certain Portfolio securities and any general income of the
Fund allocated to such Portfolio less (ii) the sum of (a) premiums amortized on
certain Portfolio securities and (b) the estimated expenses of such Portfolio.
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The net investment income of the Portfolios is determined by State Street on a
daily basis. On days on which net asset value is calculated, this determination
is made immediately prior to the calculation of the Portfolios' net asset value.
Payment of dividends with respect to net investment income will be paid on the
last calendar day of each month in additional units of the applicable Portfolio
at the net asset value on such day, unless cash distributions are elected, in
which case payment will be made by Federal Reserve wire on the first business
day of the succeeding month.
ADJUSTABLE AND FIXED RATE MORTGAGE LOANS AND
MORTGAGE-RELATED SECURITIES
The Nature of Adjustable and Fixed Rate Mortgage Loans
The following is a general description of the adjustable and fixed rate mortgage
loans which may be expected to underlie the mortgage-related securities in which
the Bond Portfolios may invest. The actual mortgage loans underlying any
particular issue of mortgage-related securities may differ materially from those
described below.
Adjustable Rate Mortgage Loans ("ARMs"). The Bond Portfolios may invest in
ARMs. ARMs included in a mortgage pool will generally provide for a fixed
initial mortgage interest rate for a specified period of time. Thereafter, the
interest rates (the "Mortgage Interest Rates") may be subject to periodic
adjustment based on changes in the applicable index rate (the "Index Rate").
The adjusted rate would be equal to the Index Rate plus a gross margin, which is
a fixed percentage spread over the Index Rate established for each ARM at the
time of its origination.
Adjustable interest rates can cause payment increases that some mortgagors may
find difficult to make. However, certain ARMs provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs
may also be subject to limitations on the maximum amount by which the Mortgage
Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments that are more
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In
the event that a monthly payment is insufficient to pay the interest accruing on
a Negatively Amortizing ARM, any such excess interest is added to the principal
balance of the loan, causing negative amortization, and will be repaid through
future monthly payments. It may take borrowers under Negatively Amortizing ARMs
longer periods of time to accumulate equity and may increase the likelihood of
default by such borrowers. In the event that a monthly payment exceeds the sum
of the interest accrued at the applicable Mortgage Interest Rate and the
principal payment which would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess (or
"accelerated amortization") further reduces the principal balance of the ARM.
Negatively Amortizing ARMs
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do not provide for the extension of their original maturity to accommodate
changes in their Mortgage Interest Rate. As a result, unless there is a periodic
recalculation of the payment amount (which there generally is), the final
payment may be substantially larger than the other payments. These limitations
on periodic increases in interest rates and on changes in monthly payments
protect borrowers from unlimited interest rate and payment increase, but may
result in increased credit exposure and prepayment risks for lenders.
ARMs also have the risk of prepayments. The rate of principal prepayments with
respect to ARMs has fluctuated in recent years. The value of mortgage-related
securities that are structured as pass through mortgage securities that are
collateralized by ARMs are less likely to rise during periods of declining
interest rates to the same extent as fixed-rate securities. Accordingly, ARMs
may be subject to a greater rate of principal repayments in a declining interest
rate environment resulting in lower yields to a Portfolio. For example, if
prevailing interest rates fall significantly, ARMs could be subject to higher
prepayment rates (than if prevailing interest rates remain constant or increase)
because the availability of low fixed-rate mortgages may encourage mortgagors to
refinance their ARMs to "lock-in" a fixed-rate mortgage. On the other hand,
during periods of rising interest rates, the value of ARMs will lag behind
changes in the market rate. ARMs are also typically subject to maximum
increases and decreases in the interest rate adjustment which can be made on any
one adjustment date, in any one year, or during the life of the security. In
the event of dramatic increases or decreases in prevailing market interest
rates, the value of a Portfolio's investment in ARMs may fluctuate more
substantially since these limits may prevent the security from fully adjusting
its interest rate to the prevailing market rates. As with fixed-rate mortgages,
ARM prepayment rates vary in both stable and changing interest rate
environments.
There are a number of indices that provide the basis for rate adjustments on
ARMs. Commonly utilized indices include the one-year, three-year and five-year
constant maturity Treasury rates, the Three-Month Treasury Bill rate, the 180-
Day Treasury Bill rate, rates of longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the One-Month, Three-Month, Six-Month or One-Year London Interbank
Offered Rate ("LIBOR"), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury rate,
closely mirror changes in market interest rate levels. Others, such as the 11th
District Federal Home Loan Bank Cost of Funds Index, tend to lag behind changes
in market rate levels and tend to be somewhat less volatile. The degree of
volatility in the market value of the Portfolios will be influenced by the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
Fixed Rate Mortgage Loans. The Bond Portfolios may invest in fixed rate
mortgage loans. Generally, fixed rate mortgage loans eligible for inclusion in
a mortgage pool (the "Fixed Rate Mortgage Loans") will bear simple interest at
fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the contractual
term of the mortgage note in sufficient amounts to amortize fully principal by
maturity, although certain Fixed Rate Mortgage Loans provide for a large final
"balloon" payment upon maturity.
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Legal Considerations of Mortgage Loans. The following is a discussion of
certain legal and regulatory aspects of the ARMs and Fixed Rate Mortgage Loans
expected to underlie the mortgage-related securities in which the Bond
Portfolios may invest. These regulations may impair the ability of a mortgage
lender to enforce its rights under the mortgage documents. These regulations
may adversely affect the Portfolios' investments in both privately-issued
mortgage-related securities (in the case of the Mortgage Securities Portfolio)
and obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or sponsored enterprises ("U.S. Government Securities") by
delaying the receipt of payments derived from principal or interest on mortgage
loans affected by such regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be
delayed due to compliance with statutory notice or service of process
provisions, difficulties in locating necessary parties or legal
challenges to the mortgagee's right to foreclose. Depending upon
market conditions, the ultimate proceeds of the sale of foreclosed
property may not equal the amounts owed on the mortgage loan.
Further, courts in some cases have imposed general equitable
principles upon foreclosure generally designed to relieve the borrower
from the legal effect of default and have required lenders to
undertake affirmative and expensive actions to determine the causes
for the default and the likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief
to debtors, may interfere with or affect the ability of a secured
mortgage lender to enforce its security interest. For example, a
bankruptcy court may grant the debtor a reasonable time to cure any
default on a mortgage loan, including payment default. The court in
certain instances may also reduce the monthly payments due under such
mortgage loan, change the rate of interest, reduce the principal
balance of the loan to the then-current appraised value of the related
mortgage property and alter the mortgage loan repayment schedule and
grant priority to certain liens over the lien of the mortgage loan.
If a court relieves a borrower's obligation to repay amounts otherwise
due on a mortgage loan, the mortgage loan servicer will not be
required to advance such amounts, and any loss in respect thereof will
be borne by the holders of securities backed by such loans. In
addition, numerous federal and state consumer protection laws impose
penalties for failure to comply with specific requirements in
connection with origination and servicing of mortgage loans.
4. "Due-on-Sale" Provisions. Fixed rate mortgage loans may contain a so-
called "due-on-sale" clause permitting acceleration of the maturity of
the mortgage loan if the borrower transfers the property.
Applicable law may, however, limit the
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exercise of a "due-on-sale" clause upon a transfer of property. The
inability to enforce a "due- on-sale" clause or the lack of such a
clause in mortgage loan documents may result in a mortgage loan being
assumed by a purchaser of the property that bears an interest rate
below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans
in excess of statutory limits. If such limits are exceeded,
substantial penalties may be incurred and, in some cases,
enforceability of the obligation to pay principal and interest may be
affected.
Mortgage-Related Securities
Mortgage-related securities represent direct or indirect participations in, or
are collateralized by and payable from, mortgage loans secured by real property.
The investment characteristics of adjustable and fixed rate mortgage-related
securities differ from those of traditional fixed-income securities. The major
differences include the payment of interest and principal of mortgage-related
securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans. These differences can result in significantly greater price and
yield volatility than is the case with traditional fixed-income securities. In
general, if a Portfolio purchases mortgage-related securities at a premium, a
faster than expected prepayment rate will reduce both the market value and the
yield to maturity from those which were anticipated. A prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity and market value. Conversely, if a Portfolio purchases mortgage-
related securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturity
and market value.
Prepayments on a pool of mortgage loans are influenced by changes in current
interest rates and a variety of economic, geographic, social and other factors
(such as changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' equity in the mortgage properties and servicing decisions). The
timing and level of prepayments cannot be predicted. A predominant factor
affecting the prepayment rate on a pool of mortgage loans is, however, the
difference between the interest rates on outstanding mortgage loans and
prevailing mortgage loan interest rates (giving consideration to the cost of any
refinancing). Generally, prepayments on mortgage loans will increase during a
period of falling mortgage interest rates and decrease during a period of rising
mortgage interest rates. Accordingly, the amounts of prepayments available for
reinvestment by a Portfolio are likely to be greater during a period of
declining mortgage interest rates. If general interest rates decline, such
prepayments are likely to be reinvested at lower interest rates than the
Portfolio was earning on the mortgage-related securities that were prepaid. Due
to these factors, mortgage-related securities may be less effective than U.S.
Treasury and other types of debt securities of similar maturity at maintaining
yields during periods of declining interest rates. Because the Portfolios'
investments are interest-rate sensitive, each Portfolio's performance will
depend in part upon the ability of the Portfolio to anticipate and respond to
fluctuations in market interest rates and to utilize appropriate strategies to
maximize returns to the Portfolio, while attempting to minimize the associated
risks to its investment capital.
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<PAGE>
Prepayments may have a disproportionate effect on certain mortgage-related
securities and other multiple class pass-through securities, which are discussed
below.
The rate of interest on mortgage-related securities is normally lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as the
Government National Mortgage Association ("GNMA"), and due to any yield retained
by the issuer. Actual yield to the holder may vary from the coupon rate, even
if adjustable, if the mortgage-related securities are purchased or traded in the
secondary market at a premium or discount. In addition, there is normally some
delay between the time the issuer receives mortgage payments from the servicer
and the time the issuer makes the payments on the mortgage-related securities
and this delay reduces the effective yield to the holder of such securities.
The issuers of certain mortgage-backed obligations may elect to have the pool of
mortgage loans (or indirect interests in mortgage loans) underlying the
securities treated as a real estate mortgage investment conduit ("REMIC"), which
is subject to special federal income tax rules. A description of the types of
mortgage-related securities in which the Portfolios may invest is provided
below. The descriptions are general and summary in nature, and do not detail
every possible variation of the types of securities that are permissible for the
Portfolios.
1. Private Mortgage Pass-Through Securities
General Characteristics. The Mortgage Securities Portfolio may invest in
privately issued mortgage pass-through securities ("Mortgage Pass-Throughs")
which represent participation interests in pools of private mortgage loans
conveyed to the issuing trust and generally serviced for the trust by the
originator. For federal income tax purposes, such trusts are generally treated
as grantor trusts or REMICs and, in either case, are generally not subject to
any significant amount of federal income tax at the entity level. Mortgage
Pass-Throughs (whether fixed or adjustable rate) provide for monthly payments
that are a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
Each mortgage pool underlying Mortgage Pass-Throughs will consist of mortgage
loans evidenced by promissory notes secured by first mortgages or first deeds of
trust or other similar security instruments creating a first lien on the
mortgaged properties (the "Mortgaged Properties"). The Mortgaged Properties
will consist of residential properties upon which are located detached
individual dwelling units, individual condominiums, townhouses, duplexes,
triplexes, fourplexes, rowhouses, manufactured homes, individual units in
planned unit developments and other attached dwelling units, vacation homes,
second homes, residential investment properties, multi-family units or
properties with mixed residential and commercial uses. A trust fund with
respect to which a REMIC election has been made may include regular interests in
other REMICs that in turn will ultimately evidence interests in mortgage
loans.
The seller or servicer of the underlying mortgage obligations will generally
make representations and warranties to certificate holders as to certain
characteristics of the mortgage loans and as to
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the accuracy of certain information furnished to the trustee in respect of each
such mortgage loan. Upon a breach of any representation or warranty that
materially and adversely affects the interests of the related certificate
holders in a mortgage loan, the seller or servicer generally will be obligated
either to cure the breach in all material respects, to repurchase the mortgage
loan or, if the related agreement so provides, to substitute in its place a
mortgage loan pursuant to the conditions set forth therein. Such a repurchase or
substitution obligation generally constitutes the sole remedy available to the
related certificate holders or the trustee for the material breach of any such
representation or warranty by the seller or servicer.
Description of Certificates. Mortgage Pass-Throughs may be issued in one or
more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index. Subclasses of certificates
as to which a REMIC election has been made may have the features and structures
described below under the caption "Multiple Class Pass-Through Securities and
Collateralized Mortgage Obligations."
Generally, each registered holder of a certificate will be entitled to receive
its pro rata share of monthly distributions of all or a portion of principal of
the underlying mortgage loans or of interest on the principal balances thereof,
which accrues at the applicable mortgage pass-through rate, or both. The
difference between the Mortgage Interest Rate and the related mortgage pass-
through rate (less the amount, if any, of retained yield) with respect to each
mortgage loan will generally be paid to the servicer as a servicing fee. Since
certain adjustable rate mortgage loans included in a mortgage pool may provide
for deferred interest (i.e., negative amortization), the amount of interest
actually paid by a mortgagor in any month may be less than the amount of
interest accrued on the outstanding principal balance of the related mortgage
loan during the relevant period at the applicable Mortgage Interest Rate. In
such event, the amount of interest that is treated as deferred interest will be
added to the principal balance of the related mortgage loan and will be
distributed pro rata to certificate holders as principal of such mortgage loan
when paid by the mortgagor in subsequent monthly payments or at maturity.
Ratings. The ratings assigned by an NRSRO to Mortgage Pass-Throughs address the
likelihood of the receipt of all distributions on the underlying mortgage loans
by the related certificate holders under the agreements pursuant to which such
certificates are issued. A rating agency's ratings take into consideration the
credit quality of the related mortgage pool, including any credit support
providers, structural and legal aspects associated with such certificates, and
the extent to which the payment stream on such mortgage pool is adequate to make
payments required by such certificates. A rating agency's ratings on such
certificates do not, however,
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constitute a statement regarding frequency of prepayments on the related
mortgage loans. In addition, the rating assigned by a rating agency to a
certificate does not address the remote possibility that, in the event of the
insolvency of the issuer of certificates where a subordinated interest was
retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and that, as a result of such recharacterization,
payments on such certificates may be affected.
Types of Credit Support. Mortgage pools created by non-governmental issuers
generally offer a higher yield than government and government-related pools
because of the absence of direct or indirect government or agency payment
guarantees. To lessen the effect of failures by obligors on underlying assets
to make payments, Mortgage Pass-Throughs may contain elements of credit support.
Such credit support falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying mortgages. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pools of mortgages, the provision of a reserve fund, or a
combination thereof, to ensure, subject to certain limitations, that scheduled
payments on the underlying pool are made in a timely fashion. Protection
against ultimate default ensures ultimate payment of the obligations on at least
a portion of the mortgages in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained from third parties,
through various means of structuring the transaction or through a combination of
such approaches.
In addition, one or more classes of certificates of Mortgage Pass-Throughs may
be subordinate certificates which provide that the rights of the subordinate
certificate holders to receive any or a specified portion of distributions with
respect to the underlying mortgage loans may be subordinated to the rights of
the senior certificate holders. If so structured, the subordination feature may
be enhanced by distributing to the senior certificate holders on certain
distribution dates, as payment of principal, a specified percentage (which
generally declines over time) of all principal prepayments received during the
preceding prepayment period ("shifting interest credit enhancement"). This will
have the effect of accelerating the amortization of the senior certificates
while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative
to that of the senior certificate is intended to preserve the availability of
the subordination provided by the subordinate certificates. In addition,
because the senior certificate holders in a shifting interest credit enhancement
structure are entitled to receive a percentage of principal prepayments which is
greater than their proportionate interest in the trust fund, the rate of
principal prepayments on the mortgage loans will have an even greater effect on
the rate of principal payments and the amount of interest payments on, and the
yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificate
holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such certificates (the "Reserve Fund"). The
Reserve Fund may be created with an initial cash deposit by the originator or
servicer and augmented by the retention of distributions otherwise available to
the subordinate certificate holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
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The subordination feature, and any Reserve Fund, is intended to enhance the
likelihood of timely receipt by senior certificate holders of the full amount of
scheduled monthly payments of principal and interest due them and will protect
the senior certificate holders against certain losses; however, in certain
circumstances the Reserve Fund could be depleted and temporary shortfalls could
result. In the event the Reserve Fund is depleted before the subordinated
amount is reduced to zero, senior certificate holders will nevertheless have a
preferential right to receive current distributions from the mortgage pool to
the extent of the then outstanding subordinated amount. Unless otherwise
specified, until the subordinated amount is reduced to zero, on any distribution
date any amount otherwise distributable to the subordinate certificates or, to
the extent specified, in the Reserve Fund will generally be used to offset the
amount of any losses realized with respect to the mortgage loans ("Realized
Losses"). Realized Losses remaining after application of such amounts will
generally be applied to reduce the ownership interest of the subordinate
certificates in the mortgage pool. If the subordinated amount has been reduced
to zero, Realized Losses generally will be allocated pro rata among all
certificate holders in proportion to their respective outstanding interests in
the mortgage pool.
As an alternative, or in addition to the credit enhancement afforded by
subordination, credit enhancement for Mortgage Pass-Throughs may be provided by
mortgage insurance, hazard insurance, by the deposit of cash, certificates of
deposit, letters of credit, a limited guaranty or by such other methods as are
acceptable to a rating agency. In certain circumstances, such as where credit
enhancement is provided by guarantees or a letter of credit, the security is
subject to credit risk because of its exposure to an external credit enhancement
provider.
Voluntary Advances. Generally, in the event of delinquencies in payments on the
mortgage loans underlying the Mortgage Pass-Throughs, the servicer may agree to
make advances of cash for the benefit of certificate holders, but normally only
to the extent that it determines such voluntary advances will be recoverable
from future payments and collections on the mortgage loans or otherwise.
Optional Termination. Generally, the servicer may, at its option with respect
to any certificates, repurchase all of the underlying mortgage loans remaining
outstanding at such time as the aggregate outstanding principal balance of such
mortgage loans is less than a specified percentage (generally 5-10%) of the
aggregate outstanding principal balance of the mortgage loans as of the cut-off
date specified with respect to such series.
2. Government Mortgage-Related Securities
As stated in the Prospectus, certain mortgage-related securities acquired by the
Portfolios will be issued or guaranteed by the U.S. Government or one of its
agencies, instrumentalities or sponsored enterprises including but not limited
to GNMA, the Federal National Mortgage Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC") ("Government Mortgage-Related Securities").
Each Portfolio may invest in Government Mortgage-Related Securities. GNMA
securities are backed by the full faith and credit of the U.S. Government, which
means that the U.S. Government guarantees that the interest and principal will
be paid when due. FNMA securities and FHLMC securities are not backed by the
full faith and credit of the U.S. Government; however, because of their ability
to borrow from the U.S. Treasury, they are generally viewed by the market as
high quality securities with minimal
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credit risks. There are several types of guaranteed mortgage-related securities
currently available, including guaranteed mortgage pass-through certificates and
multiple-class securities, which include guaranteed REMIC pass-through
certificates. The Portfolios will be permitted to invest in other types of
Government Mortgage-Related Securities that may be available in the future to
the extent such investment is consistent with their respective investment
policies and objectives. Under certain interest rate and prepayment scenarios a
Portfolio may fail to recoup fully its investment in Government Mortgage-Related
Securities.
GNMA Certificates. GNMA is a wholly owned corporate instrumentality of the
United States. GNMA issues mortgage-backed certificates, which are mortgage-
backed securities of the modified pass-through type where both interest and
principal payments (including prepayments) are passed through monthly to the
holder of the certificate whether or not they are paid by the underlying
mortgagor. GNMA is authorized to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of
mortgage loans insured by the Federal Housing Administration ("FHA Loans"), or
guaranteed by the Veterans Administration ("VA Loans"), or by pools of other
eligible mortgage loans. In order to meet its obligations under any guaranty,
GNMA is authorized to borrow from the United States Treasury in an unlimited
amount. The National Housing Act provides that the full faith and credit of the
United States is pledged to the timely payment of principal and interest by GNMA
of amounts due on GNMA certificates.
FNMA Certificates. FNMA is a stockholder-owned corporation chartered under an
act of the United States Congress. Each FNMA certificate is issued and
guaranteed by and represents an undivided interest in a pool of mortgage loans
(a "Pool") formed by FNMA. Each Pool consists of residential mortgage loans
("Mortgage Loans") either previously owned by FNMA or purchased by it in
connection with the formation of the Pool. The Mortgage Loans may be either
conventional Mortgage Loans (i.e., not insured or guaranteed by any U.S.
Government agency) or Mortgage Loans that are either insured by the Federal
Housing Administration ("FHA") or guaranteed by the Veterans Administration
("VA"). The lenders originating and servicing the Mortgage Loans are subject to
certain eligibility requirements established by FNMA.
FNMA has certain contractual responsibilities. With respect to each Pool, FNMA
is obligated to distribute scheduled monthly installments of principal and
interest after FNMA's servicing and guaranty fee, whether or not received, to
certificate holders. FNMA is also obligated to distribute to holders of
certificates an amount equal to the full principal balance of any foreclosed
Mortgage Loan, whether or not such principal balance is actually recovered. The
obligations of FNMA under its guaranty of the FNMA certificates are obligations
solely of FNMA.
FHLMC Certificates. FHLMC is a corporate instrumentality of the United States.
The principal activity of FHLMC currently is the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and their resale in the form of mortgage securities, primarily
FHLMC certificates. A FHLMC certificate represents a pro rata interest in a
group of mortgage loans or participation in mortgage loans (a "FHLMC Certificate
Group") purchased by FHLMC.
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FHLMC guarantees to each registered holder of a FHLMC certificate the timely
payment of interest at the rate provided for by such certificate (whether or not
received on the underlying loans). FHLMC also guarantees to each registered
certificate holder ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. The obligations of FHLMC under its
guaranty of FHLMC certificates are obligations solely of FHLMC.
The mortgage loans underlying the FHLMC certificates will consist of adjustable
rate or fixed rate mortgage loans with original terms of maturity of between ten
and thirty years. Substantially all of these mortgage loans are secured by
first liens on one to four-family residential properties or multi-family
projects. Each mortgage loan must meet the applicable standards set forth in
the law creating FHLMC. A FHLMC Certificate Group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and participations comprising another FHLMC Certificate Group.
3. Multiple Class Pass-Through Securities and Collateralized Mortgage
Obligations
The Bond Portfolios may also invest in multiple class mortgage-related
securities, including collateralized mortgage obligations and REMIC pass-through
or participation certificates (collectively, "CMOs"). These multiple class
securities may be issued by the U.S. Government, its agencies, instrumentalities
or sponsored enterprises, including FNMA and FHLMC or, in the case of the
Mortgage Securities Portfolio, by trusts formed by private originators of, or
investors in, mortgage loans. In general, CMOs represent direct ownership
interests in a pool of residential mortgage loans or mortgage pass-through
securities (the "Mortgage Assets"), the payments on which are used to make
payments on the CMOs. Investors may purchase beneficial interests in CMOs,
which are known as "regular" interests or "residual" interests. The Portfolios
may not purchase residual interests.
Each class of a CMO, often referred to as a "tranche," is issued at a specific
adjustable or fixed interest rate and must be fully retired no later than its
final distribution date. Principal prepayments on the Mortgage Assets
underlying a CMO may cause some or all of the classes of the CMO to be retired
substantially earlier than its final distribution date.
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO in various ways. In certain structures (known as
"sequential pay" CMOs), payments of principal, including any principal
prepayments, on the Mortgage Assets generally are applied to the classes of the
CMO in the order of their respective final distribution dates. Thus, no payment
of principal will be made on any class of sequential pay CMOs until all other
classes having an earlier final scheduled distribution date have been paid in
full.
Additional structures of CMOs include, among others, "parallel pay" CMOs.
Parallel pay CMOs are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
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A wide variety of CMOs may be issued in the parallel pay or sequential pay
structures. These securities include accrual certificates (also known as "Z-
Bonds"), which do not accrue interest at a specified rate until all other
certificates having an earlier final scheduled distribution date have been
retired and such Z-Bonds are converted thereafter to an interest-paying
security, and planned amortization class ("PAC") certificates, which are
parallel pay CMOs which generally require that specified amounts of principal be
applied on each payment date to one or more classes of a CMO (the "PAC
Certificates"), even though all other principal payments and prepayments of the
Mortgage Assets are then required to be applied to one or more other classes of
the CMOs. The scheduled principal payments for the PAC Certificates generally
have the highest priority on each payment date after interest due has been paid
to all classes entitled to receive interest currently. Shortfalls, if any, are
added to the amount payable on the next payment date. The PAC Certificate
payment schedule is taken into account in calculating the final distribution
date of each class of PAC. In order to create PAC tranches, one or more
tranches generally must be created that absorb most of the volatility in the
underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes.
FNMA CMOs are issued and guaranteed as to timely distribution of principal and
interest by FNMA. That is to say, FNMA will be obligated to distribute on a
timely basis to holders of FNMA CMO certificates required installments of
principal and interest and to distribute the principal balance of each class of
CMO in full, whether or not sufficient funds are otherwise available.
For FHLMC CMOs, FHLMC guarantees the timely payment of interest, and also
guarantees the payment of principal as payments are required to be made on the
underlying mortgage participation certificates ("PCs"). PCs represent
undivided interests in specified level payment, residential mortgages or
participations therein purchased by FHLMC and placed in a PC pool. With
respect to principal payments on PCs, FHLMC generally guarantees ultimate
collection of all principal of the related mortgage loans without offset or
deduction but the receipt of the required payments may be delayed. FHLMC also
guarantees timely payment of principal on certain PCs, referred to as "Gold
PCs."
OTHER INVESTMENT PRACTICES AND SECURITIES
U. S. Government Securities
The Portfolios may invest in U.S. Government Securities. Some U.S. Government
Securities (such as Treasury bills, notes and bonds, which differ only in their
interest rates, maturities and times of issuance) are supported by the full
faith and credit of the United States. Others, such as obligations issued or
guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises, are supported either by (a) the right of the issuer to borrow from
the U.S. Treasury (such as securities of the Student Loan Marketing
Association), (b) the discretionary authority of the U.S. government to purchase
certain obligations of the issuer (such as securities of FNMA and FHLMC) or (c)
only the credit of the issuer (such as securities of the Financing Corporation).
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U.S. Treasury obligations include, among other things, the separately traded
principal and interest components of securities guaranteed or issued by the U.S.
Treasury that are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
U.S. Government Securities include securities for which the payment of principal
and interest is backed by an irrevocable letter of credit issued by the U.S.
government, or its agencies, instrumentalities or sponsored enterprises. U.S.
Government Securities also include (to the extent consistent with the Act)
participations in loans made to foreign governments or their agencies that are
guaranteed as to principal and interest by the U.S. government or its agencies,
instrumentalities or sponsored enterprises. The secondary market for certain of
these participations is extremely limited. In the absence of a suitable
secondary market, such participations are regarded as illiquid.
The U.S. government is under no legal obligation, in general, to purchase the
obligations of its agencies, instrumentalities or sponsored enterprises. No
assurance can be given that the U.S. government will provide financial support
to the U.S. government agencies, instrumentalities or sponsored enterprises in
the future.
Custodial Receipts
The Portfolios may invest in custodial receipts in respect of securities issued
or guaranteed as to principal and interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. Such custodial
receipts evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued or guaranteed as to principal and interest
by the U.S. government, its agencies, instrumentalities, political subdivisions
or authorities. These custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGRs") and
"Certificates of Accrual on Treasury Securities" ("CATs"). For certain
securities law purposes, custodial receipts are not considered U.S. Government
Securities.
Lending of Portfolio Securities
The Bond Portfolios may seek to increase their income by lending portfolio
securities to institutions, such as banks and broker-dealers. These loans will
be continuously and fully collateralized (with a perfected first priority) by
cash, cash equivalents or U.S. Government Securities in an amount at least equal
to the market value of the securities loaned. Each Bond Portfolio will have the
right to call a loan and obtain the securities loaned at any time on five days'
notice. A Bond Portfolio may lend its securities only pursuant to a written
loan and security agreement with the borrower and must receive written
confirmation of any loan. Any investments purchased with the cash (as well as
other cash received in connection with the loan) must be permissible for
federally-chartered credit unions and must mature no later than the maturity of
the transaction. For the duration of a loan, each Bond Portfolio will continue
to receive the equivalent of the interest paid by the issuer on the securities
loaned and will also receive compensation from investment of the collateral.
Each Bond Portfolio will not have the right to vote any securities having voting
rights during the existence of the loan, but each Bond
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Portfolio will call the loan in anticipation of an important vote to be taken
among holders of the securities or the giving or withholding of their consent on
a material matter affecting the investment. As with other extensions of credit,
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms deemed by GSAM to be of good standing, and
when, in its judgment, the consideration that can be earned currently from
securities loans of this type justifies the attendant risk. If GSAM determines
to make securities loans, it is expected that during the current fiscal year
such loans will not exceed 5% of a Bond Portfolio's net assets.
Bank Obligations
The Portfolios may invest in U.S. dollar-denominated obligations issued or
guaranteed by U.S. banks with total assets exceeding $1 billion (including
obligations issued by foreign branches of such banks) but only to the extent
permitted under the Federal Credit Union Act and the rules and regulations
thereunder. Bank obligations may include certificates of deposit, bankers'
acceptances, bank notes, deposit notes, and other obligations. Bank obligations
may be general obligations of the parent bank or may be limited to the issuing
branch by the terms of the specific obligations or by government regulation.
Obligations of foreign branches of U.S. banks include fixed time deposits.
Generally, fixed time deposits are not payable until maturity but may permit
early withdrawal subject to penalties, which vary depending upon market
conditions and the remaining maturity of the obligations.
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 operations and profitability of domestic and foreign banks.
Significant developments in the U.S. baking 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 markets. 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.
Obligations of foreign branches of U.S. banks involve investment risks in
addition to those of domestic obligations of domestic issuers, including the
possibility that liquidity could be impaired because of future political and
economic developments, that the obligations may be less marketable than
comparable domestic obligations of domestic issuers, that a foreign jurisdiction
might impose withholding taxes on interest income payable on those obligations
or that deposits may be seized or nationalized.
Inverse Floating Rate Securities
The Bond Portfolios may, to the extent permitted by the National Credit Union
Administration ("NCUA"), invest in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an inverse floater
resets in the opposite direction from the market rate of interest to which the
inverse floater is indexed. An inverse floater may be considered to be
leveraged to
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the extent that its interest rate varies by a magnitude that exceeds the
magnitude of the change in the index rate of interest. The higher degree of
leverage inherent in inverse floaters is associated with greater volatility in
their market values. Accordingly, the duration of an inverse floater may exceed
its stated final maturity. Certain inverse floaters may be deemed to be illiquid
securities for purposes of a Portfolio's 15% limitation on investments in such
securities.
Repurchase Agreements
Each Portfolio may enter into repurchase agreements with dealers in U.S.
Government Securities and member banks of the Federal Reserve System ("Fed
Member Banks"). Repurchase agreements involve the purchase of securities
subject to the seller's agreement to repurchase them at a mutually agreed upon
date and price. Although the securities subject to the repurchase agreement
might bear maturities exceeding one year, settlement for the repurchase would
never be more than one year after the Portfolio's acquisition of the securities
and normally would be within a shorter period of time. The Portfolios generally
intend to enter into repurchase agreements that terminate within seven days'
notice by a Portfolio. The resale price will be in excess of the purchase
price, reflecting an agreed upon market rate effective for the period of time
the Portfolio's money will be invested in the securities, and will not be
related to the coupon rate of the purchased securities. During the term of the
repurchase agreement, GSAM will require the seller to maintain the value of the
securities subject to the agreement in an amount that equals or exceeds the
repurchase price. In the event the seller of the repurchase agreement enters a
bankruptcy or other insolvency proceeding, or in the event of the failure of the
seller to repurchase the underlying securities as agreed upon, the Portfolio
could, however, experience losses that include (a) possible decline in the value
of the underlying securities during the period while the Portfolio seeks to
enforce its rights thereto and possible delay in enforcement of those rights;
(b) possible loss of all or a part of the income or proceeds of the repurchase;
(c) additional expenses to the Portfolio for enforcing those rights; and (d)
possible delay in the disposition of the underlying securities pending court
action or possible loss of rights in such securities. The percentage of each
Portfolio's assets invested in repurchase agreements may vary from time to time
depending upon GSAM's evaluation of market trends and other conditions.
Other Investment Companies
The Mortgage Securities Portfolio may invest in securities of other investment
companies subject to the limitations prescribed by the Act. These limitations
include a prohibition on the Portfolio acquiring more than 3% of the voting
securities of any other investment company, and a prohibition on investing more
than 5% of the Portfolio's total assets in securities of any one investment
company or more than 10% of its total assets in securities of all investment
companies. The Portfolio will indirectly bear its proportionate share of any
management fees and other expenses paid by such other investment companies.
Such other investment companies will have investment objectives, policies and
restrictions substantially similar to those of the Mortgage Securities Portfolio
and will be subject to substantially the same risks. Pursuant to an exemptive
order obtained from the SEC, other investment companies in which the Portfolio
may invest include money market funds which the Investment Adviser, Goldman
Sachs or any of their affiliates serves as investment adviser, administrator or
distributor.
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Zero Coupon Bonds
The Portfolios may purchase zero coupon bonds as described in the Prospectus
that are issued at a discount to their face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. Zero coupon
bonds do not require the periodic payment of interest. Such investments benefit
the issuer by mitigating its need for cash to meet debt service, but some also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations that provide for regular payments of
interest. Each Portfolio will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to unitholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations.
When-Issued and Forward Commitment Transactions
Each Portfolio may purchase or sell portfolio securities in when-issued or
forward commitment transactions provided settlement is regular-way. (Regular-
way settlement means delivery of a security from a seller to a buyer within the
time frame that the securities industry has established for that type of
security.) In such transactions, instruments are bought or sold with payment
and delivery taking place in the future in order to secure what is considered to
be an advantageous yield or price to a Portfolio at the time of entering into
the transactions. However, the yield on a comparable security available when
delivery takes place may vary from the yield on the security at the time that
the when-issued or forward commitment transaction was entered into. When the
Fund engages in when-issued and forward commitment transactions, the Fund relies
on the seller or buyer, as the case may be, to consummate the transaction.
Failure to consummate the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. In
such transactions, the payment obligation and the interest rate are fixed on the
trade date, although no interest accrues to the purchaser prior to the
settlement date. Consistent with the requirements of the 1940 Act, securities
purchased on a when-issued or forward commitment basis are recorded as an asset
(with the purchase price being recorded as a liability) and are subject to
changes in value based upon changes in the general level of interest rates. At
the time of delivery of the security, the value may be more or less than the
transaction price. To the extent that a Portfolio remains substantially fully
invested at the same time that it has entered into such transactions, which it
would normally expect to do, there will be greater fluctuations in the market
value of its net assets than if such Portfolio set aside cash to satisfy its
purchase commitment. However, the Portfolio will segregate liquid assets at
least equal in value to commitments for when-issued or forward commitment
securities.
Mortgage Dollar Rolls
The Bond Portfolios may enter into mortgage dollar rolls in which a Portfolio
sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar but not identical securities on
a specified future date. Delivery for all purchases and sales of securities
will be by regular-way settlement. During the roll period, a
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Bond Portfolio loses the right to receive principal and interest paid on the
securities sold. However, the Bond Portfolio would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Bond Portfolio compared with what such performance would have been without
the use of mortgage dollar rolls. All cash proceeds will be invested in
instruments that are permissible investments for a Bond Portfolio. Such Bond
Portfolio will segregate until the settlement date cash, U.S. Government
Securities or other liquid assets in an amount equal to the forward purchase
price.
Mortgage dollars rolls involve the following risks: if the broker-dealer to whom
a Portfolio sells the security becomes insolvent, the Bond Portfolio's right to
purchase or repurchase the mortgage-related securities may be restricted and the
instrument which the Bond Portfolio is required to repurchase may be worth less
than an instrument which the Bond Portfolio originally held. Successful use of
mortgage dollar rolls may depend upon the Investment Adviser's ability to
predict correctly interest rates and mortgage prepayments. For these reasons,
there is no assurance that mortgage dollar rolls can be successfully employed.
Portfolio Turnover
A Portfolio may sell an instrument soon after its acquisition if GSAM believes
that such disposition is consistent with attaining the investment objectives of
the Portfolio. Instruments held by a Portfolio may be sold for a variety of
reasons, such as a more favorable investment opportunity or other circumstances
bearing on the desirability of continuing to hold such instruments.
Portfolio turnover rate is computed by dividing the lesser of the amount of
securities purchased or securities sold (excluding all securities whose
maturities at acquisition are one year or less) by the average monthly value of
such securities owned during the year, and includes purchase and sale
transactions entered into in connection with mortgage dollar rolls. A 100%
turnover rate would occur, for example, if all of the securities held in such
Portfolio were sold and replaced within one year. The rate at which Portfolio
transactions occur will depend upon GSAM's perception of how market conditions
will affect such Portfolio. GSAM will not consider portfolio turnover a
limiting factor in making investment decisions for a Portfolio consistent with
such Portfolio's investment objective and such Portfolio's investment management
policies. A higher degree of portfolio turnover results in increased
transaction costs to such Portfolio in the form of dealer spreads. Because of
the exclusion of short-term securities from the calculation of portfolio
turnover rates, the portfolio turnover rate for the Money Market Portfolio is
expected to be zero for regulatory reporting purposes.
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Federal Funds
The Portfolios may make unsecured loans of federal funds to U.S. banks with
total assets exceeding $1 billion (including obligations issued by foreign
branches of such banks) to the extent permitted by the Federal Credit Union Act
and the rules and regulations thereunder. The Portfolios' federal funds loans
must also meet the following requirements: (a) the accounts of the borrowing
bank must be insured by the Federal Deposit Insurance Corporation; (b) the
interest received from the loan must be at the market rate for federal funds
transactions; and (c) the transaction must either have a maturity of one or more
business days or the Portfolio must be able to require repayment at any time.
Loans of federal funds rank junior to domestic deposit liabilities of the bank
and pari passu with other senior, unsecured obligations of the bank. Federal
funds are funds held by a regional Federal Reserve Bank for the account of a Fed
Member Bank. A loan of federal funds is an unsecured loan at a negotiated
interest rate for a negotiated time period, generally overnight, of federal
funds by one Fed Member Bank to another. Since, pursuant to an exemption, the
borrowing Fed Member Bank is not required to maintain reserves on the borrowed
federal funds, the interest rate it pays on such loans is generally higher than
the rate it pays on other deposits of comparable size and maturity that are
subject to reserve requirements. In addition, a "depository institution" or
other exempt institution such as the Fund may under Regulation D of the Board of
Governors of the Federal Reserve System in effect make loans of federal funds by
instructing a correspondent or other willing Fed Member Bank at which it
maintains an account to loan federal funds on its behalf.
INVESTMENT RESTRICTIONS
The investment objective of each Portfolio as stated in the Prospectus is
fundamental and may be changed only with the approval of the holders of a
majority of the outstanding units of the affected Portfolio as described below.
In addition, the Fund has adopted the following enumerated fundamental
investment restrictions, none of which may be changed with respect to a
Portfolio without the approval of the holders of a majority of the outstanding
units of the Portfolio as described below. The Fund may not:
(1) Invest any one Portfolio in the instruments of issuers conducting their
principal business activity in the same industry if immediately after such
investment the value of such Portfolio's investments in such industry would
exceed 25% of the value of its total assets; provided that there is no
limitation with respect to or arising out of (a) in the case of the
Mortgage Securities Portfolio, investments in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities or
repurchase agreements by such Portfolio of securities collateralized by
such obligations; or (b) in the case of the Government Securities
Portfolio, investments in obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, repurchase agreements by
such Portfolio of securities collateralized by such obligations or by cash,
certificates of deposit, bankers' acceptances and bank repurchase
agreements; or (c) in the case of the Money Market Portfolio, investments
in obligations issued or guaranteed by the U.S. Government or its agencies
or instrumentalities, repurchase agreements by such Portfolio
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of securities collateralized by such obligations or by cash, certificates
of deposit, bankers' acceptances, bank repurchase agreements and other
obligations issued or guaranteed by banks (except commercial paper); and
provided further that during normal market conditions the Mortgage
Securities Portfolio intends to invest at least 25% of the value of its
total assets in mortgage-related securities. Note: The current position of
the staff of the SEC is that only the Money Market Portfolio may reserve
freedom of action to concentrate in bank obligations and that the exclusion
with respect to bank instruments referred to above may only be applied to
instruments of domestic banks. For this purpose, the staff also takes the
position that foreign branches of domestic banks may, if certain conditions
are met, be treated as domestic banks. The Fund intends to consider only
obligations of domestic banks (as construed to include foreign branches of
domestic banks to the extent they satisfy the above-referenced conditions)
to be within this exclusion until such time, if ever, that the SEC staff
modifies its position.
(2) Invest any one Portfolio in the instruments of any one issuer, other
than the U.S. Government, its agencies or instrumentalities, if immediately
after such investment, more than 5% of the value of such Portfolio's total
assets would be invested in the instruments of such issuer, except that (a)
up to 25% of the value of the total assets of the Money Market Portfolio
and Government Securities Portfolio may be invested in repurchase
agreements, certificates of deposit, bankers' acceptances, time deposits
and federal funds without regard to such 5% limitation; (b) up to 25% of
the value of the total assets of the Mortgage Securities Portfolio may be
invested without regard to such 5% limit; and (c) such 5% limitation shall
not apply to repurchase agreements collateralized by obligations of the
U.S. Government, its agencies or instrumentalities.
(3) Make loans, except through (a) the purchase of debt obligations in
accordance with each Portfolio's investment objective and policies; (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions in accordance with the investment objectives of each
Portfolio; (c) the lending of federal funds to qualified financial
institutions in accordance with the investment objectives of each
Portfolio; and (d) the lending of securities in accordance with the
investment objectives of the Bond Portfolios.
(4) Borrow money, except as a temporary measure, and then only in amounts
not exceeding one-third of the value of the Portfolio's net assets.
(5) Mortgage, pledge or hypothecate any assets except to secure permitted
borrowings.
(6) Purchase or sell real estate, but this restriction shall not prevent
the Fund from investing directly or indirectly in portfolio instruments
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
(7) Purchase or sell commodities or commodity contracts.
(8) Purchase any voting securities except of investment companies (closed-
end investment companies in the case of the Money Market Portfolio and
Government Securities Portfolio) solely to the extent permitted by the 1940
Act, or invest in
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companies for the purpose of exercising control or management. Subject to
certain exceptions, the 1940 Act contains a prohibition against the Fund's
investing more than 5% of its total assets in the securities of another
investment company, investing more than 10% of its assets in securities of
such investment company and all other investment companies or purchasing
more than 3% of the total outstanding voting stock of another investment
company.
(9) Act as an underwriter of securities.
(10) Issue senior securities as defined in the 1940 Act except insofar as
the Fund may be deemed to have issued a senior security by reason of (a)
borrowing of money to the extent permitted herein; or (b) purchasing
securities on a when-issued or forward commitment basis.
(11) Purchase any security for the Money Market Portfolio that is
restricted as to disposition under federal securities laws (foreign
securities traded only in foreign markets are not regarded as restricted).
(12) Purchase any security on margin (except for forward commitment or
when-issued transactions or such short-term credits as are necessary for
the clearance of transactions).
(13) Make short sales of securities or maintain a short position.
(14) Write, purchase or sell puts, calls or combinations thereof.
Investment Restriction No. (2) above is intended to incorporate the
diversification requirements of the 1940 Act and the rules thereunder. Pursuant
to Rule 2a-7 under the 1940 Act, which establishes separate diversification
requirements for money market funds, the Money Market Portfolio currently may
not invest more than 5% of its total assets in the securities of any one issuer
other than obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, repurchase agreements collateralized by such
obligations and securities subject to a guarantee or unconditional demand
feature (as defined by Rule 2a-7). The Money Market Portfolio may, however,
invest up to 25% of its total assets in the First Tier Securities (as defined by
Rule 2a-7) of a single issuer for a period of up to three business days after
the purchase thereof, although the Portfolio may not make more than one such
investment at any time. Investment by the Money Market Portfolio in guarantees
and demand features is subject to further diversification requirements. Subject
to certain exceptions, immediately after the acquisition of a guarantee or
demand feature or a security subject to a guarantee or demand feature, the Money
Market Portfolio, with respect to 75% of its total assets, may not have invested
more than 10% of its total assets in securities issued by or subject to
guarantees and demand features from the same person. Adherence by the Money
Market Portfolio to the requirements of Rule 2a-7, which is not fundamental
and may be changed in the future without shareholder vote, is considered to be
adherence to the requirements of Investment Restriction No. (2) above.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Portfolio's net asset value.
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For purposes of the foregoing limitations, any limitation that involves a
maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by, a Portfolio of the
Fund.
Borrowings by the Fund (if any) are not for investment leverage purposes but are
solely for extraordinary or emergency purposes or to facilitate management of
the Portfolios by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments is deemed to be disadvantageous or not
possible. If, due to market fluctuations or other reasons, the total assets of
a Portfolio fall below 300% of its borrowings, the Fund will promptly reduce the
borrowings of such Portfolio in accordance with the 1940 Act. No purchases of
securities will be made if borrowings exceed 5% of the value of the applicable
Portfolio's assets.
The prohibition against short sales and short positions does not include
transactions sometimes referred to as "short sales against the box" where the
Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short.
As used in the Prospectus and this Additional Statement with respect to a change
in investment objective or fundamental investment restrictions, the approval of
an investment advisory agreement or the approval of a distribution agreement,
the term "majority of the outstanding units" of either the Fund or a particular
Portfolio of the Fund means the vote of the lesser of (a) 67% or more of the
units of the Fund or such Portfolio present at a meeting, if the holders of more
than 50% of the outstanding units of the Fund or such Portfolio are present or
represented by proxy; or (b) more than 50% of the outstanding units of the Fund
or such Portfolio.
As stated in the Prospectus, investments purchased by the Portfolios before
January 1, 1998 (the effective date of recent amendments to the Rules and
Regulations of the NCUA) will be governed by the Rules and Regulations in effect
when purchased, and the Portfolios may continue to hold such investments after
such date subject to compliance with such former Rules and Regulations. Among
other things, prior to January 1, 1998 a Portfolio could also purchase a
stripped mortgage-backed security to reduce the interest rate risk of its
holdings.
CALCULATION OF PERFORMANCE QUOTATIONS
From time to time, quotations of the Money Market Portfolio's "yield" and
"effective yield," and the yields and the total returns of the Bond Portfolios
may be quoted in advertisements or communications to unitholders. These
advertisements and communications may be part of marketing activities conducted
by either or both of the Fund's distributors on behalf of the Portfolios. The
performance figures are based on historical earnings and are not intended to
indicate future performance. These performance figures are calculated in the
following manner.
Money Market Portfolio
Yield - the net annualized yield based on a specified seven-calendar day period
- -----
calculated at simple interest rates. Yield is calculated by determining the net
change, exclusive of capital
B-47
<PAGE>
changes, in the value of a hypothetical preexisting account having a balance of
one unit at the beginning of the period and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return. The yield is annualized by multiplying the base period return by 365/7.
The yield figure is stated to the nearest hundredth of one percent.
Effective Yield - the net annualized yield for a specified seven-calendar day
period assuming a reinvestment of dividends (compounding). Effective yield is
calculated by the same method as yield except the yield figure is compounded by
adding 1, raising the sum to a power equal to 365 divided by 7, 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 this assumed
reinvestment.
Yield and effective yield for the Portfolio will vary based on changes in market
conditions, the level of interest rates and the level of the Portfolio's
expenses.
For the seven-day period ended August 31, 1999, the yield and the effective
yield for the Money Market Portfolio were:
<TABLE>
<CAPTION>
7-Day Period
Ended August 31, 1999
---------------------------------------------------------------------------
With Fee Waivers and Expense Without Fee Waivers and Expense
Reimbursements Reimbursements
---------------------------------------------------------------------------
<S> <C> <C>
Yield 5.20% 5.03%
---- ----
Effective Yield 5.33% 5.16%
---- ----
</TABLE>
Bond Portfolios
Yield - The yields of the Bond Portfolios are calculated by dividing the net
- -----
investment income per unit (as described below) earned by a Bond Portfolio
during a 30-day period by the maximum offering price per unit on the last day of
the period and annualizing the result on a semi-annual basis by adding one to
the quotient, raising the sum to the power of six, subtracting one from the
result and then doubling the difference. A Bond Portfolio's net investment
income per unit earned during the period is based on the average daily number of
units outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
a-b
Yield = 2[(--- + 1)6- 1
cd
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<PAGE>
Where:
a= dividends and interest earned during the period.
b= expenses accrued for the period (net of fee waivers).
c= the average daily number of units outstanding during the period that
were entitled to receive dividends.
d= the maximum offering price per unit on the last day of the period.
Except as noted below, interest earned on debt obligations held by a Bond
Portfolio is calculated by computing the yield to maturity of each obligation
held by the Bond Portfolio based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Bond Portfolio. The maturity of an obligation with a call provision is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date. With respect to debt obligations
purchased at a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be adjusted monthly
to reflect changes in the market values of such debt obligations.
With respect to mortgage-related obligations which are expected to be subject to
monthly payments of principal and interest ("pay downs"), (a) gain or loss
attributable to actual monthly pay downs are accounted for as an increase or
decrease to interest income during the period; and (b) the Bond Portfolio may
elect either (i) to amortize the discount and premium on the remaining security,
based on the cost of the security, to the weighted average maturity date, if
such information is available, or to the remaining term of the security, if any,
if the weighted average maturity date is not available, or (ii) not to amortize
discount or premium on the remaining security.
The net investment income used for purposes of determining yield may differ from
net income used for accounting purposes.
Total Return - The total return of a Bond Portfolio will be calculated on an
- ------------
average annual total return basis, and may also be calculated on an aggregate
total return basis, for various periods. Average annual total return reflects
the average annual percentage change in value of an investment in a Bond
Portfolio over the measuring period. Aggregate total return reflects the total
percentage change in value over the measuring period. The Fund may also
advertise from time to time the total return of a Bond Portfolio on a year-by-
year or other basis for various specified periods by means of quotations,
charts, graphs or schedules.
Each Bond Portfolio computes average annual total return by determining the
average annual compounded rates of return during specified periods that equate
the initial amount invested to the ending redeemable value of such investment.
This is done by dividing the ending redeemable value of a hypothetical $1,000
initial payment by $1,000 and raising the quotient to a power equal to one
divided by the number of years (or fractional portion thereof) covered by the
computation and subtracting one from the result. This calculation can be
expressed as follows:
B-49
<PAGE>
ERV/1/n/
T = [(-----)- 1]
p
Where:
T = average annual total return.
ERV = ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the beginning of
the period.
p = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of years.
Each Bond Portfolio computes aggregate total return by determining the
cumulative rate of return during a specified period that likewise equates the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
T = [(- - - - 1)]
p
Under the methods prescribed by the SEC, standardized calculations of average
annual total return assume the reinvestment of all dividends and capital gains
distributions on the reinvestment dates during the period (although a Bond
Portfolio may also publish non-standardized calculations without this
assumption). Calculations of aggregate total return also normally assume the
reinvestment of all dividends and capital gains distributions on the
reinvestment date during the period. The ending redeemable value (variable "ERV"
in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations. Year-to-year total return is
calculated in a similar manner.
B-50
<PAGE>
PERFORMANCE FIGURES
<TABLE>
<CAPTION>
Value of $1,000 Investment
--------------------------
Commencement of Operations
Year Ending 8/31/99 Five Year ending 8/31/99 --------------------------
------------------- ------------------------ through 8/31/99*
----------------
30-Day With Fee Without Fee With Fee Without Fee With Fee Without Fee
Period Waiver and/or Waiver and/or Waiver and/or Waiver and/or Waiver and/or Waiver and/or
Ending expense expense expense expense expense expense
8/31/99 reimbursement reimbursement reimbursement reimbursement reimbursement reimbursement
------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Government
Securities
Portfolio
Yield 5.63% N/A N/A N/A N/A N/A N/A
------
Ending Redeemable N/A $1,043 $1,043 $1,326 $1,326 $1,522 $1,516
Value at ------ ------ ------ ------ ------ ------
8/31/99
Average N/A 4.25% 4.25% 5.80% 5.80% 5.29% 5.24%
Annual ------ ------ ------ ------ ------ ------
Total
Return
Cumulative N/A 4.25% 4.25% 32.59% 32.59% 52.19% 51.58%
Total ------ ------ ------ ------ ------ ------
Return
Mortgage
Securities
Portfolio
Yield 6.22% N/A N/A N/A N/A N/A N/A
------
Ending N/A $1,025 $1,025 $1,367 $1,366 $1,467 $1,466
Redeemable ------ ------ ------ ------ ------ ------
Value at
8/31/99
Average N/A 2.51% 2.51% 6.45% 6.43% 5.71% 5.70%
Annual ------ ------ ------ ------ ------ ------
Total
Return
Cumulative N/A 2.51% 2.51% 36.71% 36.60% 46.72% 46.55%
Total ------ ------ ------ ------ ------ ------
Return
</TABLE>
* For the periods from July 10, 1991 and October 9, 1992, (commencement of
operations for the Government Securities Portfolio and the Mortgage
Securities Portfolio, respectively) to August 31, 1999.
B-51
<PAGE>
In addition, the Money Market Portfolio may quote from time to time its total
return in accordance with SEC regulations.
All Portfolios
Each of the Portfolios may also quote from time to time distribution rates in
reports to unitholders and in sales literature. The distribution rate for a
specified period is calculated by dividing the total distribution per share by
the maximum offering price on the last day of the period and then annualizing
such amount.
For the thirty-day period ended August 31, 1999, the distribution rate of each
of the following Portfolios was:
<TABLE>
<CAPTION>
30-Day Period Ended 30-Day Period Ended
August 31, 1999, With August 31, 1999 Without
Portfolio Expense Reimbursement Expense Reimbursement
--------- --------------------- ---------------------
<S> <C> <C>
Government Securities 5.51% 5.51%
---- ----
Mortgage Securities 5.89% 5.89%
---- ----
</TABLE>
From time to time the Portfolios' comparative performance may be advertised as
measured by various independent sources, including, but not limited to, Lipper
Analytical Services, Inc., Barron's, The Wall Street Journal, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Business Week,
Financial World and Forbes. In addition, the Fund may from time to time
advertise the Portfolios' performance relative to certain indices and benchmark
investments, including (a) the Lehman Brothers Government/Corporate Bond Index;
(b) Lehman Brothers Government Index; (c) Lehman Brothers ARM Index; (d) Lehman
Brothers 1-2 Year Government Index; (e) Lehman Brothers 1-3 Year Government
Index; (f) Merrill Lynch 1-2 Year Treasury Index; (g) Merrill Lynch 2-Year
Treasury Curve Index; (h) the Salomon Brothers Treasury Yield Curve Rate of
Return Index; (i) the Payden & Rygel 2-Year Treasury Note Index; (j) 1-3 Year
U.S. Treasury Notes; (k) constant maturity U.S. Treasury yield indices; (1) the
Consumer Price Index; (m) the London Interbank Offered Rate; (n) other taxable
investments such as certificates of deposit, money market mutual funds,
repurchase agreements and commercial paper; and (o) historical data concerning
the relative performance of adjustable and fixed-rate mortgage loans.
The composition of the securities in such indices and the characteristics of
such benchmark investments are not identical to, and in some cases are very
different from, those of the Fund's Portfolios. These indices and averages are
generally unmanaged and the items included in the calculations of such indices
and averages may not be identical to the formulas used by the Fund to calculate
its performance figures.
From time to time advertisements or communications to unitholders may summarize
the substance of information contained in unitholder reports (including the
investment composition
B-52
<PAGE>
of the Portfolios), as well as the views of Goldman Sachs as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Portfolios (such as the supply and demand of mortgage-related
securities and the relative performance of different types of mortgage loans and
mortgage-related securities as affected by prepayment rates and other factors).
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic market views to suggest
periodic tactical modifications to current asset allocation strategies. Such
advertisements and information may include other material that highlights or
summarizes the services provided in support of an asset allocation program.
In addition, advertisements or unitholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in
such Portfolio. Such advertisements or communications may include symbols,
headlines or other material that highlights or summarizes the information
discussed in more detail therein.
Performance data is based on historical results and is not intended to indicate
future performance. Yield, total return and distribution rates will vary based
on changes in market conditions, the level of interest rates, and Portfolio
expenses. The value of units of the Bond Portfolios will fluctuate, and an
investor's units may be worth more or less than their original cost upon
redemption.
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the information
included in the Registration Statement filed with the SEC under the Securities
Act of 1933 Act with respect to the securities offered by the Prospectus.
Certain portions of the Registration Statement have been omitted from the
Prospectus and this Additional Statement pursuant to the rules and regulations
of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C. Statements contained in
the Prospectus or in this Additional Statement as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which the Prospectus and
this Additional Statement form a part, each such statement being qualified in
all respects by such reference. Capitalized terms, to the extent not otherwise
defined herein, shall have the meanings as assigned to them in the Prospectus.
B-53
<PAGE>
FINANCIAL STATEMENTS
The financial statements and related report of Arthur Andersen L.L.P.,
independent public accountants, contained in the Portfolios' 1999 Annual Report
are hereby incorporated by reference. No other parts of the 1999 Annual Report
are incorporated by reference herein. A copy of the Annual Report accompanies or
has preceded this Additional Statement and may be obtained without charge by
writing to Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606, or
Callahan Credit Union Financial Services Limited Partnership, 1001 Connecticut
Ave., N.W., Suite 1001, Washington, DC 20036-5504, or by calling Goldman Sachs
at (800) 342-5828 (800-DIAL-TCU) or Callahan Financial Services, Inc. at (800)
237-5678.
B-54
<PAGE>
DESCRIPTION OF SECURITIES RATINGS/1/
A. LONG-TERM RATINGS
Moody's Investors Service, Inc.
Aaa: Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than with "Aaa"
securities.
Moody's applies numerical modifiers 1, 2, and 3 in the "Aa" category. The
modifier 1 indicates that the obligation ranks in the higher end of the "Aa"
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of the "Aa" category.
Standard & Poor's Ratings Group
AAA: An obligation rated "AAA" has the highest rating assigned by S&P. This
rating indicates 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.
Plus (+) or Minus (-): The "AA" rating may be modified by the addition of a plus
or minus sign to show relative standing within the "AA" category.
Duff & Phelps, Inc.
AAA: Debt rated "AAA" 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.
- ---------------------------
/1/ The ratings systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group at the date of this Additional Statement
for the securities listed. Ratings are generally given to securities at
the time of issuance. While the rating agencies may from time to time
revise such ratings, they undertake no obligation to do so, and the
ratings indicated do not necessarily represent ratings which will be given
to these securities throughout the period they are held by a Portfolio.
B-55
<PAGE>
AA: Debt rated "AA" 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.
Duff & Phelps applies modifiers plus (+) and minus (-) in the "AA" category for
long-term debt securities. The modifier "+" indicates that the security ranks in
the higher end of the "AA" category and the modifier "-" indicates that the
security ranks in the lower end of the "AA" category.
Fitch IBCA, Inc.
AAA: Bonds rated "AAA" are considered to be investment grade and of the highest
credit quality. "AAA" ratings denote the lowest expectation of credit risk. They
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
AA: Bonds rated "AA" are considered to be investment grade and of very high
credit quality. "AA" ratings denote a very low expectation of credit risk. They
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
Fitch IBCA applies plus (+) and minus (-) modifiers in the "AA" category to
indicate the relative position of a credit within the rating category. The
modifier "+" indicates that the security ranks in the higher end of the "AA"
category and the modifier "-" indicates that the security ranks in the lower end
of the "AA" category.
Thomson Bankwatch, Inc.
AAA: The highest category, "AAA" indicates the ability to repay principal and
interest on a timely basis is extremely high.
AA: The second highest category, "AA" 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.
Ratings in the Long-Term Debt categories may include a plus (+) or minus (-)
designation which indicates where within the respective category the issue is
placed.
B-56
<PAGE>
B. SHORT-TERM RATINGS
Moody's Investors Service, Inc.
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.
Prime-1: Issuers (or supporting institutions) with a "Prime-1" rating 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
. well-established access to a range of financial markets and assured sources
of alternate liquidity
Prime-2: Issuers (or supporting institutions) with a "Prime-2" rating 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.
Standard & Poor's Ratings Group
Standard & Poor's short-term debt rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
A-1: A short-term obligation rated "A-1" is the highest category. 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: A short-term obligation rated "A-2" is 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.
Duff & Phelps Credit Rating Co.
The top two rating categories of Duff & Phelps for investment grade commercial
paper and short-term debt are "D-1" and "D-2." Duff & Phelps employs three
designations, "D-1+," "D-1" and "D-1-," within the highest rating category.
B-57
<PAGE>
D-1+: Debt rated "D-1+" possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
D-1: Debt rated "D-1" 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 rated "D-1-" 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 rated "D-2" 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, Inc.
Fitch IBCA short-term ratings apply to debt obligations that have time horizons
of less than 12 months for most obligations.
F1: Securities rated "F1" possess the highest credit quality. This designation
indicates the best capacity for timely payment of financial commitments and may
have an added "+" to denote any exceptionally strong credit feature.
F2: Securities rated "F2" possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
Thomson Bankwatch, Inc.
The TBW 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.
TBW-1: The highest category, "TBW-1" indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2: The second highest category, "TBW-2" 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.
B-58
<PAGE>
APPENDIX A
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
The performance of various types of securities (taxable money market
funds, U.S. Treasury securities, adjustable rate mortgage securities,
government securities) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/All
Taxable Index) over varying periods of time.
Credit Ratings of domestic government bonds in various countries.
Price volatility comparisons of types of securities over different
periods of time.
Price and yield comparisons of a particular security over different
periods of time.
In addition, the Trust may from time to time include rankings of Goldman Sachs'
research department by publications such as the Institutional Investor and the
Wall Street Journal in advertisements.
B-59
