<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1999
REGISTRATION NO. 333-74449
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE GOLDMAN SACHS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6211 13-4019460
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
85 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 902-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT J. KATZ
GREGORY K. PALM
GOLDMAN, SACHS & CO.
85 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 902-1000
(NAMES, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENTS FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
RICARDO A. MESTRES, JR. ALAN L. BELLER
JOHN P. MEAD CHRISTOPHER E. AUSTIN
DAVID B. HARMS CHRISTOPHER J. WALTON
ROBERT W. REEDER III CLEARY, GOTTLIEB, STEEN & HAMILTON
SULLIVAN & CROMWELL ONE LIBERTY PLAZA
125 BROAD STREET NEW YORK, NEW YORK 10006
NEW YORK, NEW YORK 10004 (212) 225-2000
(212) 558-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share... 69,000,000 $55.00 $3,795,000,000 $1,055,010(4)
Rights(3)................................
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A portion of the shares to be registered represents shares that are to be
offered outside of the United States but that may be resold from time to
time in the United States. Such shares are not being registered for the
purpose of sales outside the United States. Includes 9,000,000 shares
issuable upon exercise of the underwriters' options to purchase additional
shares of Common Stock.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(3) Each share of Common Stock includes one Shareholder Protection Right as
described under "Description of Capital Stock".
(4) Previously paid $959,100 on March 16, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated April 12, 1999.
60,000,000 Shares
THE GOLDMAN SACHS GROUP, INC.
[GOLDMAN SACHS LOGO]
Common Stock
------------------------
This is an initial public offering of shares of Common Stock of The Goldman
Sachs Group, Inc. This prospectus relates to an offering of 48,000,000 shares in
the United States and Canada. In addition, 8,000,000 shares are being offered
outside the United States, Canada and the Asia/ Pacific region and 4,000,000
shares are being offered in the Asia/Pacific region.
Goldman Sachs is offering 42,000,000 of the shares to be sold in the
offerings. Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association are each offering an additional 9,000,000 shares.
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price per
share will be between $45 and $55. Goldman Sachs intends to list the Common
Stock on the New York Stock Exchange under the symbol "GS".
See "Risk Factors" beginning on page 11 to read about factors you should
consider before buying shares of the Common Stock.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Goldman Sachs................. $ $
Proceeds, before expenses, to the selling shareholders...... $ $
</TABLE>
The underwriters may, under the terms of the underwriting agreements,
purchase up to an additional 9,000,000 shares from Goldman Sachs at the initial
public offering price less the underwriting discount.
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
------------------------
Global Coordinator
GOLDMAN, SACHS & CO.
------------------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC. CREDIT SUISSE FIRST BOSTON DONALDSON, LUFKIN &
JENRETTE
LEHMAN BROTHERS MERRILL LYNCH & CO. J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY SANFORD C. BERNSTEIN & CO., INC. SCHRODER & CO. INC.
------------------------
Prospectus dated , 1999.
<PAGE> 3
OUR BUSINESS PRINCIPLES
1. Our clients' interests always come first. Our experience shows that if we
serve our clients well, our own success will follow.
2. Our assets are our people, capital and reputation. If any of these is ever
diminished, the last is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
3. Our goal is to provide superior returns to our shareholders. Profitability
is critical to achieving superior returns, building our capital and attracting
and keeping our best people. Significant employee stock ownership aligns the
interests of our employees and our shareholders.
4. We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
5. We stress creativity and imagination in everything we do. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
6. We make an unusual effort to identify and recruit the very best person for
every job. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.
7. We offer our people the opportunity to move ahead more rapidly than is
possible at most other places. We have yet to find the limits to the
responsibility that our best people are able to assume. Advancement depends
solely on ability, performance and contribution to the Firm's success, without
regard to race, color, religion, sex, age, national origin, disability, sexual
orientation, or any impermissible criterion or circumstance.
8. We stress teamwork in everything we do. While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of the
interests of the Firm and its clients.
9. The dedication of our people to the Firm and the intense effort they give
their jobs are greater than one finds in most other organizations. We think that
this is an important part of our success.
10. We consider our size an asset that we try hard to preserve. We want to be
big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to maintain the loyalty, the intimacy and the
esprit de corps that we all treasure and that contribute greatly to our success.
11. We constantly strive to anticipate the rapidly changing needs of our
clients and to develop new services to meet those needs. We know that the world
of finance will not stand still and that complacency can lead to extinction.
12. We regularly receive confidential information as part of our normal client
relationships. To breach a confidence or to use confidential information
improperly or carelessly would be unthinkable.
13. Our business is highly competitive, and we aggressively seek to expand our
client relationships. However, we must always be fair competitors and must never
denigrate other firms.
14. Integrity and honesty are at the heart of our business. We expect our
people to maintain high ethical standards in everything they do, both in their
work for the Firm and in their personal lives.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the Common Stock. You should read the entire prospectus
carefully, especially the risks of investing in the Common Stock discussed under
"Risk Factors" on pages 11-22.
THE GOLDMAN SACHS GROUP, INC.
Goldman Sachs is a leading global investment banking and securities firm
with three principal business lines:
- Investment Banking;
- Trading and Principal Investments; and
- Asset Management and Securities Services.
Our goal is to be the advisor of choice for our clients and a leading
participant in global financial markets. We provide services worldwide to a
substantial and diversified client base, which includes corporations, financial
institutions, governments and high net worth individuals.
For our fiscal year ended November 27, 1998, our net revenues were $8.5
billion and our pre-tax earnings were $2.9 billion and for our fiscal quarter
ended February 26, 1999, our net revenues were $3.0 billion and our pre-tax
earnings were $1.2 billion. As of February 26, 1999, our total assets were
$230.6 billion and our partners' capital was $6.6 billion.
We have over time produced strong earnings growth and attractive returns on
partners' capital through different economic and market conditions. Over the
last 15 years, our pre-tax earnings have grown from $462 million in 1983 to $2.9
billion in 1998, representing a compound annual growth rate of 13%. Economic and
market conditions can, however, significantly affect our performance. For
example, in the second half of fiscal 1998, our performance was adversely
affected by turbulence in global financial markets.
We have achieved this growth, which has been generated without the benefit
of a large acquisition, by maintaining an intense commitment to our clients,
focusing on our core businesses and key opportunities, and operating as an
integrated franchise.
Because we believe that the needs of our clients are global and that
international markets have high growth potential, we have built upon our
strength in the United States to achieve leading positions in other parts of the
world. Today, we have a strong global presence as evidenced by the geographic
breadth of our transactions, leadership in our core products and the size of our
international operations. As of February 26, 1999, we operated offices in 23
countries and 36% of our 13,000 employees were based outside the United States.
We are committed to a distinctive culture and set of core values. These
values are reflected in our Business Principles, which emphasize placing our
clients' interests first, integrity, commitment to excellence and innovation,
and teamwork.
Goldman Sachs is managed by its principal owners. Simultaneously with the
offerings, we will grant restricted stock units, stock options or interests in a
defined contribution plan to substantially all of our employees. Following the
offerings, our employees, including former partners, will own approximately 66%
of Goldman Sachs. None of our employees are selling shares in the offerings.
WHY WE ARE GOING PUBLIC
We have decided to become a public company for three principal reasons:
- to secure permanent capital to grow;
- to share ownership broadly among our employees now and through future
compensation; and
- to permit us to use publicly traded securities to finance strategic
acquisitions that we may elect to make in the future.
3
<PAGE> 5
SUMMARY FINANCIAL DATA
($ in millions)
<TABLE>
<CAPTION>
AS OF OR FOR
AS OF OR FOR THREE MONTHS
YEAR ENDED NOVEMBER ENDED FEBRUARY
------------------------------ ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues:
Investment Banking........................ $ 2,113 $ 2,587 $ 3,368 $ 633 $ 902
Trading and Principal Investments......... 2,693 2,926 2,379 1,182 1,357
Asset Management and Securities
Services............................... 1,323 1,934 2,773 657 736
-------- -------- -------- ------- --------
Total net revenues.......................... $ 6,129 $ 7,447 $ 8,520 $ 2,472 $ 2,995
======== ======== ======== ======= ========
Pre-tax earnings(1)......................... $ 2,606 $ 3,014 $ 2,921 $ 1,022 $ 1,188
Total assets................................ 152,046 178,401 217,380 -- 230,624
Partners' capital........................... 5,309 6,107 6,310 -- 6,612
Pre-tax return on average partners'
capital(1)................................ 51% 53% 47% -- --
</TABLE>
- ---------------
Read the table above in conjunction with the footnotes to "Selected Consolidated
Financial Data" as well as the following footnote:
(1) Since we have historically operated in partnership form, payments to our
profit participating limited partners have been accounted for as
distributions of partners' capital rather than as compensation expense. As a
result, our pre-tax earnings and compensation and benefits expense have not
reflected any payments for services rendered by our profit participating
limited partners. Accordingly, our historical pre-tax earnings understate
the expected operating costs to be incurred by us after the offerings. As a
corporation, we will include payments for services rendered by our former
profit participating limited partners in compensation and benefits expense.
For financial information that reflects pro forma compensation and benefits
expense as if we had been a corporation, see "Pro Forma Consolidated
Financial Information".
------------------------
STRATEGY AND PRINCIPAL BUSINESS LINES
Our strategy is to grow our three core businesses -- Investment Banking,
Trading and Principal Investments, and Asset Management and Securities
Services -- in markets throughout the world. Our leadership position in
investment banking provides us with access to governments, financial
institutions and corporate clients globally. Trading and principal investing has
been an important part of our culture and earnings, and we remain committed to
these businesses irrespective of their volatility. Managing wealth is one of the
fastest growing segments of the financial services industry and we are
positioning our asset management and securities services businesses to take
advantage of that growth.
INVESTMENT BANKING
Investment Banking represented 39% of fiscal 1998 net revenues and 35% of
fiscal 1997 net revenues. We are a market leader in both the financial advisory
and underwriting businesses, serving over 3,000 clients worldwide. For the
period January 1, 1994 to December 31, 1998, we had the industry-leading market
share of 25.3% in worldwide mergers and acquisitions advisory services, having
advised on over $1.7 trillion of transactions. Over the same period, we also
achieved number one market shares of 15.2% in underwriting worldwide initial
public offerings and 14.4% in underwriting worldwide common stock issues. The
source for this market share information is Securities Data Company.
4
<PAGE> 6
TRADING AND PRINCIPAL INVESTMENTS
Trading and Principal Investments represented 28% of fiscal 1998 net
revenues and 39% of fiscal 1997 net revenues. We make markets in equity and
fixed income products, currencies and commodities; enter into swaps and other
derivative transactions; engage in proprietary trading and arbitrage; and make
principal investments. In trading, we focus on building lasting relationships
with our most active clients while maintaining leadership positions in our key
markets. We believe our research, market-making and proprietary activities
enhance our understanding of markets and ability to serve our clients.
ASSET MANAGEMENT AND SECURITIES SERVICES
Asset Management and Securities Services represented 33% of fiscal 1998 net
revenues and 26% of fiscal 1997 net revenues. We provide global investment
management and advisory services; earn commissions on agency transactions;
manage merchant banking funds; and provide prime brokerage, securities lending
and financing services. Our asset management business has grown rapidly, with
assets under supervision increasing from $92.7 billion as of November 25, 1994
to $369.7 billion as of February 26, 1999, representing a compound annual growth
rate of 38%. As of February 26, 1999, we had $206.4 billion of assets under
management. We manage merchant banking funds that had $15.5 billion of capital
commitments as of the end of fiscal 1998.
Assets under supervision are comprised of assets under management and other
client assets. Assets under management typically generate fees based on a
percentage of their value. Other client assets are comprised of assets in
brokerage accounts of primarily high net worth individuals, on which we earn
commissions.
We pursue our strategy to grow our three core businesses through an
emphasis on:
EXPANDING HIGH VALUE-ADDED BUSINESSES
To achieve strong growth and high returns, we seek to build leadership
positions in high value-added services such as mergers and acquisitions,
executing large and complex transactions for institutional investors and asset
management.
INCREASING THE STABILITY OF OUR EARNINGS
While we plan to continue to grow each of our core businesses, our goal is
to gradually increase the stability of our earnings by emphasizing growth in
Investment Banking and Asset Management and Securities Services.
PURSUING INTERNATIONAL OPPORTUNITIES
We believe that our global reach will allow us to take advantage of
international growth opportunities. For example, we expect increased business
activity as a result of the establishment of the European Economic and Monetary
Union, the shift we anticipate toward privatization of pension systems and the
changing demographics around the world.
LEVERAGING THE FRANCHISE
We believe our various businesses are generally stronger and more
successful because they are part of the Goldman Sachs franchise. Our culture of
teamwork fosters cooperation among our businesses, which allows us to provide
our clients with a full range of products and services on a coordinated basis.
COMPETITIVE STRENGTHS
STRONG CLIENT RELATIONSHIPS
We focus on building long-term client relationships. For example, in fiscal
1998, over 75% of our Investment Banking revenues represented business from
existing clients.
DISTINCTIVE PEOPLE AND CULTURE
Our most important asset is our people. We seek to reinforce our employees'
commitment to our culture and values through recruiting, training, a
comprehensive review system and a compensation philosophy that rewards teamwork.
GLOBAL REACH
We have achieved leading positions in major international markets by
capitalizing on
5
<PAGE> 7
our product knowledge and global research, as well as by building a local
presence where appropriate. As a result, we are one of the few truly global
investment banking and securities firms with the ability to execute large and
complex cross-border transactions.
INDUSTRY AND ECONOMIC OUTLOOK
We believe that significant growth and profit opportunities exist in the
financial services industry over the long term. These opportunities derive from
long-term trends, including financial market deregulation, the globalization of
the world economy, the increasing focus of companies on shareholder value,
consolidations in various industries, growth in investable funds and
accelerating technology and financial product innovation. We believe that over
the last 15 years these trends, coupled with generally declining interest rates
and favorable market conditions, have contributed to a substantially higher rate
of growth in activity in the financial services industry than the growth in
overall economic activity. While the future economic environment may not be as
favorable as that experienced in the last 15 years and there may be periods of
adverse economic and market conditions, we believe that these trends should
continue to affect the financial services industry positively over the long
term.
The following table sets forth selected key industry indicators:
KEY INDUSTRY INDICATORS
($ in billions, except GDP)
(volume in millions of shares)
<TABLE>
<CAPTION>
AS OF OR FOR
YEAR ENDED DECEMBER 31,
----------------------------------- CAGR(6)
1983 1988 1993 1998 '83-'98
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Worldwide GDP (in trillions)(1)......... $ 10 $ 18 $ 24 $ 29(7) 8%(7)
Worldwide mergers and acquisitions(2)... 96 527 460 2,522 24
Worldwide equity issued(2).............. 50 51 172 269 12
Worldwide debt issued(2)................ 146 631 1,546 2,932 22
Worldwide equity market
capitalization(3)..................... 3,384 9,728 14,016 27,459 15
NYSE average daily volume............... 85 162 265 674 15
Worldwide pension assets(4)............. $1,900 $3,752 $ 6,560 $10,975 12
U.S. mutual fund assets(5).............. 293 810 2,075 5,530 22
</TABLE>
- ---------------
(1) Gross domestic product. Source: The Economist Intelligence Unit, January
1999.
(2) Source: Securities Data Company.
(3) Source: International Finance Corporation.
(4) Source: InterSec Research Corp.
(5) Source: Investment Company Institute.
(6) Compound annual growth rate.
(7) Data as of December 31, 1997; compound annual growth rate 1983-1997.
OUR HEADQUARTERS
Our headquarters are located at 85 Broad Street, New York, New York 10004,
telephone (212) 902-1000.
6
<PAGE> 8
THE OFFERINGS
<TABLE>
<S> <C> <C>
Common Stock:
Offered by Goldman Sachs.................................. 42,000,000 shares
Offered by Sumitomo Bank Capital Markets, Inc. ........... 9,000,000 shares
Offered by Kamehameha Activities Association.............. 9,000,000 shares
-----------
Total.................................................. 60,000,000 shares
===========
U.S. offering............................................. 48,000,000 shares
International offering.................................... 8,000,000 shares
Asia/Pacific offering..................................... 4,000,000 shares
-----------
Total(1)............................................... 60,000,000 shares
===========
Common Shares to be outstanding after the offerings(2)...... 465,768,581 shares
</TABLE>
- ---------------
(1) The offerings of Common Stock are collectively referred to as the
"offerings".
(2) Includes 30,070,535 shares of Common Stock underlying the restricted stock
units awarded based on a formula, 12,567,587 shares of Common Stock
irrevocably contributed to a defined contribution plan and 7,903,480 shares
of Nonvoting Common Stock that are convertible into shares of Common Stock
on a one-for-one basis. The shares of Common Stock underlying the restricted
stock units awarded based on a formula are included in Common Shares
outstanding since there is no future service required as a condition to the
delivery of the underlying shares of Common Stock. The underlying shares of
Common Stock generally will be issuable and deliverable in equal
installments on or about the first, second and third anniversaries of the
date of the offerings, assuming the relevant conditions are satisfied.
Common Shares exclude 9,000,000 shares of Common Stock issuable upon
exercise of the underwriters' options to purchase additional shares, which
are described under "Underwriting", and 73,303,623 shares of Common Stock
deliverable under the restricted stock units and stock options awarded to
employees on a discretionary basis. The defined contribution plan,
restricted stock units and employee stock options are described under
"Management -- The Employee IPO Awards".
------------------------
Voting Rights..........
The holders of Common Stock will have one vote per share.
Dividend Policy........
The holders of Common Stock, as well as the holders of
Nonvoting Common Stock, will share proportionately on a
per share basis in all dividends and other distributions
declared by our Board of Directors. Our Board of Directors
currently intends to declare quarterly dividends on all
outstanding shares of Common Stock and Nonvoting Common
Stock and expects that the first quarterly dividend will
be $0.12 per share, and that it will be declared during
the third quarter of fiscal 1999. For a discussion of the
factors that affect the determination by the Board of
Directors to declare dividends, as well as other matters
concerning our dividend policy, see "Dividend Policy" and
"Business -- Regulation".
Use of Proceeds........
We will receive net proceeds from our sales of Common
Stock in the offerings of approximately $2.0 billion. We
will use the net proceeds to provide additional funds for
our operations and for other general corporate purposes,
although we have not yet determined a specific use.
Pending specific application of the net proceeds, we
expect to use them to purchase short-term marketable
securities.
We will not receive any of the proceeds from sales of
Common Stock by Sumitomo Bank Capital Markets, Inc. or
Kamehameha Activities Association in the offerings.
Risk Factors...........
For a discussion of factors you should consider before
buying shares of Common Stock, see "Risk Factors".
New York Stock Exchange
Symbol...............
GS
7
<PAGE> 9
INCORPORATION AND RELATED TRANSACTIONS
Simultaneously with the consummation of the offerings, we will complete a
number of transactions in order to convert from partnership to corporate form.
The principal incorporation transactions and the related transactions are
summarized below:
INCORPORATION TRANSACTIONS
- - The profit participating limited partners who are active in our businesses
will exchange their interests for 265,019,073 shares of Common Stock;
- - Our retired partners will exchange their interests for an aggregate of
approximately $891 million in cash, $295 million principal amount of 12%
junior subordinated debentures of Goldman Sachs and 47,270,551 shares of
Common Stock;
- - Sumitomo Bank Capital Markets, Inc. will exchange its interests for 29,961,934
shares of Common Stock and 7,903,480 shares of Nonvoting Common Stock; and
- - Kamehameha Activities Association will exchange its interests for 30,975,421
shares of Common Stock.
RELATED TRANSACTIONS
- - The following awards will be granted to our employees, other than the profit
participating limited partners who are active in our businesses:
1. 30,070,535 restricted stock units awarded based on a formula;
2. an initial irrevocable contribution of 12,567,587 shares of Common Stock
to a defined contribution plan;
3. 33,303,595 restricted stock units awarded on a discretionary basis; and
4. options awarded on a discretionary basis to purchase 40,000,028 shares of
Common Stock at the initial public offering price per share for the
offerings; and
- - After the closing of the offerings, we will make a $200 million contribution
to the Goldman Sachs charitable foundation.
For a more detailed description of these and other transactions, see
"Certain Relationships and Related Transactions -- Incorporation and Related
Transactions", "Management -- The Employee IPO Awards" and "Pro Forma
Consolidated Financial Information".
8
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary historical consolidated income statement and balance sheet data
set forth below have been derived from our consolidated financial statements and
their notes. Our consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, as of November 28, 1997 and
November 27, 1998 and for the years ended November 29, 1996, November 28, 1997
and November 27, 1998. Our condensed consolidated financial statements have been
reviewed by PricewaterhouseCoopers LLP as of February 26, 1999 and for the three
months ended February 26, 1999. These financial statements are included
elsewhere in this prospectus, together with the reports thereon of
PricewaterhouseCoopers LLP.
The summary historical consolidated income statement and balance sheet data
set forth below as of November 25, 1994, November 24, 1995 and November 29, 1996
and for the years ended November 25, 1994 and November 24, 1995 have been
derived from our audited consolidated financial statements that are not included
in this prospectus.
The summary historical consolidated income statement and balance sheet data
set forth below as of and for the three months ended February 26, 1999, have
been derived from our unaudited condensed consolidated financial statements
that, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. The interim
results set forth below for the three months ended February 26, 1999 may not be
indicative of results for the full year.
The pro forma data set forth below for the year ended November 27, 1998 and
as of and for the three months ended February 26, 1999 have been derived from
the pro forma data set forth in "Pro Forma Consolidated Financial Information"
included elsewhere in this prospectus. The pro forma consolidated income
statement information set forth in "Pro Forma Consolidated Financial
Information" for the year ended November 27, 1998 has been examined by
PricewaterhouseCoopers LLP. The pro forma consolidated financial information as
of and for the three months ended February 26, 1999 has been reviewed by
PricewaterhouseCoopers LLP.
In addition to the offerings of Common Stock, the pro forma adjustments
reflect the transactions described under "Certain Relationships and Related
Transactions", compensation and benefits related to services rendered by our
former profit participating limited partners, the provision for corporate income
taxes and the other transactions described under "Pro Forma Consolidated
Financial Information".
The summary consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Pro Forma Consolidated Financial Information" and the consolidated
financial statements and their notes.
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SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED NOVEMBER AS OF OR FOR
--------------------------------------------------- THREE MONTHS
1994 1995 1996 1997 1998 ENDED FEBRUARY 1999
---- ---- ---- ---- ---- -------------------
(unaudited)
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................................. $ 3,537 $ 4,483 $ 6,129 $ 7,447 $ 8,520 $ 2,995
Pre-tax earnings(1)........................... 508 1,368 2,606 3,014 2,921 1,188
BALANCE SHEET DATA:
Total assets(2)............................... $95,296 $100,066 $152,046 $178,401 $217,380 $230,624
Long-term borrowings.......................... 14,418 13,358 12,376 15,667 19,906 20,405
Partners' capital............................. 4,771 4,905 5,309 6,107 6,310 6,612
PRO FORMA DATA(3):
Pro forma net earnings........................ -- -- -- -- $ 1,271 $ 520
Pro forma diluted earnings per share as
adjusted for the offerings(4)............... -- -- -- -- 2.70 1.08
Pro forma stockholders' equity as adjusted for
the offerings............................... -- -- -- -- -- $ 6,997
Pro forma book value per share as adjusted for
the offerings............................... -- -- -- -- -- 15.02
SELECTED DATA AND RATIOS (UNAUDITED):
Pre-tax return on average partners'
capital(1).................................. 10% 28% 51% 53% 47% --
Ratio of compensation and benefits to net
revenues(1)................................. 51 45 40 42 45 43%
Assets under supervision:
Assets under management..................... $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $206,380
Other client assets......................... 49,061 57,716 76,892 102,033 142,018 163,315
------- -------- -------- -------- -------- --------
Total assets under supervision................ $92,732 $110,074 $171,491 $237,962 $336,839 $369,695
======= ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Since we have historically operated in partnership form, payments to our
profit participating limited partners have been accounted for as
distributions of partners' capital rather than as compensation expense. As
a result, our pre-tax earnings and compensation and benefits expense have
not reflected any payments for services rendered by our profit
participating limited partners. Accordingly, our historical pre-tax
earnings understate the expected operating costs to be incurred by us after
the offerings. As a corporation, we will include payments for services
rendered by our former profit participating limited partners in
compensation and benefits expense. For financial information that reflects
pro forma compensation and benefits expense as if we had been a
corporation, see "Pro Forma Consolidated Financial Information".
(2) Total assets and liabilities were increased by $11.64 billion as of
November 27, 1998 and $8.99 billion as of February 26, 1999 due to the
adoption of the provisions of Statement of Financial Accounting Standards
No. 125 that were deferred by Statement of Financial Accounting Standards
No. 127. For a discussion of Statement of Financial Accounting Standards
Nos. 125 and 127, see "Accounting Developments" in Note 2 to the audited
consolidated financial statements.
(3) Reflects such adjustments as are necessary, in the opinion of management,
for a fair presentation of the results of operations and stockholders'
equity of Goldman Sachs on a pro forma basis. See "Pro Forma Consolidated
Financial Information" for more detailed information concerning these
adjustments.
(4) Calculated based on weighted-average diluted Common Shares outstanding
after giving effect to the Pro Forma Adjustments and as adjusted to reflect
the issuance of 42,000,000 shares of Common Stock offered by Goldman Sachs
at the midpoint of the range of initial public offering prices set forth on
the cover page of this prospectus. See "Pro Forma Consolidated Financial
Information" for more detailed information concerning these adjustments and
the calculation of pro forma earnings per share.
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<PAGE> 12
RISK FACTORS
An investment in the Common Stock involves a number of risks, some of
which, including market, liquidity, credit, operational, legal and regulatory
risks, could be substantial and are inherent in our businesses. You should
carefully consider the following information about these risks, together with
the other information in this prospectus, before buying shares of Common Stock.
MARKET FLUCTUATIONS COULD ADVERSELY AFFECT
OUR BUSINESSES IN MANY WAYS
As an investment banking and securities firm, our businesses are materially
affected by conditions in the financial markets and economic conditions
generally, both in the United States and elsewhere around the world. The equity
and debt markets in the United States and elsewhere have achieved record or near
record levels, and this favorable business environment will not continue
indefinitely. In the event of a market downturn, our businesses could be
adversely affected in many ways, including those described below. Our revenues
are likely to decline in such circumstances and, if we were unable to reduce
expenses at the same pace, our profit margins would erode. For example, in the
second half of fiscal 1998, we recorded negative net revenues from our Trading
and Principal Investments business and from mid-August to mid-October the number
of equity underwritings and announced mergers and acquisitions transactions in
which we participated declined substantially due to adverse economic and market
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Business Environment" for a discussion of the market
environment in which we operated during that period. Even in the absence of a
market downturn, we are exposed to substantial risk of loss due to market
volatility.
We May Incur Significant Losses from Our Trading and Investment Activities Due
to Market Fluctuations and Volatility
We generally maintain large trading and investment positions in the fixed
income, currency, commodity and equity markets. To the extent that we own
assets, i.e., have long positions, in any of those markets, a downturn in those
markets could result in losses from a decline in the value of those long
positions. Conversely, to the extent that we have sold assets we do not own,
i.e., have short positions, in any of those markets, an upturn in those markets
could expose us to potentially unlimited losses as we attempt to cover our short
positions by acquiring assets in a rising market. We may from time to time have
a trading strategy consisting of holding a long position in one asset and a
short position in another, from which we expect to earn revenues based on
changes in the relative value of the two assets. If, however, the relative value
of the two assets changes in a direction or manner that we did not anticipate or
against which we are not hedged, we might realize a loss in those paired
positions. We incurred significant losses in our Trading and Principal
Investments business in the second half of fiscal 1998 from this type of
"relative value" trade. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Business Environment" for a discussion of
those losses and the market environment in which we operated during that period.
In addition, we maintain substantial trading positions that can be adversely
affected by the level of volatility in the financial markets, i.e., the degree
to which trading prices fluctuate over a particular period, in a particular
market, regardless of market levels.
Our Investment Banking Revenues May Decline in Adverse Market or Economic
Conditions
Unfavorable financial or economic conditions would likely reduce the number
and size of transactions in which we provide underwriting, mergers and
acquisitions advisory and other services. Our Investment Banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. In particular,
our results of operations would be adversely affected by a significant
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<PAGE> 13
reduction in the number or size of mergers and acquisitions transactions.
We May Generate Lower Revenues from Commissions and Asset Management Fees in a
Market Downturn
A market downturn could lead to a decline in the volume of transactions
that we execute for our customers and, therefore, to a decline in the revenues
we receive from commissions and spreads. In addition, because the fees that we
charge for managing our clients' portfolios are in many cases based on the value
of those portfolios, a market downturn that reduces the value of our clients'
portfolios or increases the amount of withdrawals would reduce the revenue we
receive from our asset management business.
Holding Large and Concentrated Positions May Expose Us to Large Losses
Concentration of risk in the past has increased the losses that we have
incurred in our arbitrage, market-making, block trading, underwriting and
lending businesses and may continue to do so in the future. Goldman Sachs has
committed substantial amounts of capital to these businesses, which often
require Goldman Sachs to take large positions in the securities of a particular
issuer or issuers in a particular industry, country or region. Moreover, the
trend in all major capital markets is towards larger and more frequent
commitments of capital in many of these activities. For example, as described
under "Business -- Trading and Principal Investments -- Equities", we are
experiencing an increase in the number and size of block trades that we execute,
and we expect this trend to continue.
Our Hedging Strategies May Not Prevent Losses
If any of the variety of instruments and strategies we utilize to hedge our
exposure to various types of risk are not effective, we may incur losses. Many
of our strategies are based on historical trading patterns and correlations. For
example, if we hold a long position in an asset, we may hedge this position by
taking a short position in an asset where the short position has, historically,
moved in a direction that would offset a change in value in the long position.
However, these strategies may not be fully effective in mitigating our risk
exposure in all market environments or against all types of risk. We have often
hedged our exposure to corporate fixed income securities by taking a short
position in U.S. Treasury securities, since historically the value of U.S.
Treasury securities has changed in a manner similar to changes in the value of
corporate fixed income securities. Due to the move by investors to higher credit
quality fixed income securities in mid-August to mid-October 1998, however, the
prices for corporate fixed income securities declined while the prices for U.S.
Treasury securities increased and, as a result, we incurred losses on both
positions. Unexpected market developments also affected other hedging strategies
during this time, and unanticipated developments could impact these or different
hedging strategies in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Management" for a
discussion of the policies and procedures we use to identify, monitor and manage
the risks we assume in conducting our businesses and of refinements we have made
to our risk management policies and procedures as a result of our recent
experience.
A Prolonged Market Downturn Could Impair Our Operating Results
While we encountered extremely difficult market conditions in mid-August to
mid-October 1998, the financial markets rebounded late in the fourth quarter of
fiscal 1998. At some time in the future, there may be a more sustained period of
market decline or weakness that will leave us operating in a difficult market
environment and subject us to the risks that we describe in this section for a
longer period of time.
Market Risk May Increase the Other Risks That We Face
In addition to the potentially adverse effects on our businesses described
above, market risk could exacerbate other risks that we face. For example, if we
incur substantial
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<PAGE> 14
trading losses, our need for liquidity could rise sharply while our access to
liquidity could be impaired. In addition, in conjunction with a market downturn,
our customers and counterparties could incur substantial losses of their own,
thereby weakening their financial condition and increasing our credit risk to
them. Our liquidity risk and credit risk are described below.
OUR RISK MANAGEMENT POLICIES AND
PROCEDURES MAY LEAVE US EXPOSED TO
UNIDENTIFIED OR UNANTICIPATED RISK
We have devoted significant resources to develop our risk management
policies and procedures and expect to continue to do so in the future.
Nonetheless, our policies and procedures to identify, monitor and manage risks
may not be fully effective. Some of our methods of managing risk are based upon
our use of observed historical market behavior. As a result, these methods may
not predict future risk exposures, which could be significantly greater than the
historical measures indicate. For example, the market movements of the late
third and early fourth quarters of fiscal 1998 were larger and involved greater
divergences in relative asset values than we anticipated. This caused us to
experience trading losses that were greater and recurred more frequently than
some of our risk measures indicated were likely to occur. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Business Environment" for a discussion of the market environment
in which we operated during the second half of fiscal 1998 and "-- Risk
Management" for a discussion of the policies and procedures we use to identify,
monitor and manage the risks we assume in conducting our businesses and of
refinements we have made to our risk management policies and procedures as a
result of our recent experience.
Other risk management methods depend upon evaluation of information
regarding markets, clients or other matters that is publicly available or
otherwise accessible by Goldman Sachs. This information may not in all cases be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risk requires, among other things, policies and procedures
to record properly and verify a large number of transactions and events, and
these policies and procedures may not be fully effective.
LIQUIDITY RISK COULD IMPAIR OUR ABILITY
TO FUND OPERATIONS AND JEOPARDIZE OUR
FINANCIAL CONDITION
Liquidity, i.e., ready access to funds, is essential to our businesses. In
addition to maintaining a cash position, we rely on three principal sources of
liquidity: borrowing in the debt markets; access to the repurchase and
securities lending markets; and selling securities and other assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" for a discussion of our sources of liquidity.
An Inability to Access the Debt Capital Markets Could Impair Our Liquidity
We depend on continuous access to the debt capital markets to finance our
day-to-day operations. An inability to raise money in the long-term or
short-term debt markets, or to engage in repurchase agreements or securities
lending, could have a substantial negative effect on our liquidity. Our access
to debt in amounts adequate to finance our activities could be impaired by
factors that affect Goldman Sachs in particular or the financial services
industry in general. For example, lenders could develop a negative perception of
our long-term or short-term financial prospects if we incurred large trading
losses, if the level of our business activity decreased due to a market
downturn, if regulatory authorities took significant action against us or if we
discovered that one of our employees had engaged in serious unauthorized or
illegal activity. Our ability to borrow in the debt markets also could be
impaired by factors that are not specific to Goldman Sachs, such as a severe
disruption of the financial markets or negative views about the prospects for
the investment banking, securities or financial services industries generally.
We also depend on banks to finance our day-to-day operations. As a result
of the recent consolidation in the banking industry,
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<PAGE> 15
some of our lenders have merged or consolidated with other banks and financial
institutions. While we have not been materially adversely affected to date, it
is possible that further consolidation could lead to a loss of a number of our
key banking relationships and a reduction in the amount of credit extended to
us.
An Inability to Access the Short-Term Debt Markets Could Impair Our Liquidity
We depend on the issuance of commercial paper and promissory notes as a
principal source of unsecured short-term funding for our operations. As of
February 26, 1999, Goldman Sachs had $21.63 billion of outstanding commercial
paper and promissory notes with a weighted-average maturity of approximately 75
days. Our liquidity depends to an important degree on our ability to refinance
these borrowings on a continuous basis. Investors who hold our outstanding
commercial paper and promissory notes have no obligation to purchase new
instruments when the outstanding instruments mature.
Our Liquidity Could Be Adversely Affected If Our Ability to Sell Assets Is
Impaired
If we were unable to borrow in the debt capital markets, we would need to
liquidate assets in order to meet our maturing liabilities. In certain market
environments, such as times of market volatility or uncertainty, overall market
liquidity may decline. In a time of reduced liquidity, we may be unable to sell
some of our assets, or we may have to sell assets at depressed prices, which
could adversely affect our results of operations and financial condition.
Our ability to sell our assets may be impaired by other market participants
seeking to sell similar assets into the market at the same time. In the late
third and early fourth quarters of fiscal 1998, for example, the markets for
some assets were adversely affected by simultaneous attempts by a number of
institutions to sell similar assets.
A Reduction in Our Credit Ratings Could Adversely Affect Our Liquidity and
Competitive Position and Increase Our Borrowing Costs
Our borrowing costs and our access to the debt capital markets depend
significantly on our credit ratings. These ratings are assigned by rating
agencies, which may reduce or withdraw their ratings or place Goldman Sachs on
"credit watch" with negative implications at any time. On September 25, 1998,
Standard & Poor's Ratings Services revised its outlook for our credit ratings to
"negative", indicating that continued adverse market conditions could have an
adverse effect on our ratings over a one- to three-year time period. While this
negative outlook has not adversely affected our liquidity or businesses to date,
no assurance can be given that Standard & Poor's Ratings Services or any other
rating agency will not at some time in the future reduce our credit ratings.
Credit ratings are also important to Goldman Sachs when competing in certain
markets and when seeking to engage in longer-term transactions, including
over-the-counter derivatives. A reduction in our credit ratings could increase
our borrowing costs and limit our access to the capital markets. This, in turn,
could reduce our earnings and adversely affect our liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity -- Credit Ratings" for additional information concerning
our credit ratings.
CREDIT RISK EXPOSES US TO LOSSES CAUSED
BY FINANCIAL OR OTHER PROBLEMS
EXPERIENCED BY THIRD PARTIES
We are exposed to the risk that third parties that owe us money, securities
or other assets will not perform their obligations. These parties include our
trading counterparties, customers, clearing agents, exchanges, clearing houses
and other financial intermediaries as well as issuers whose securities we hold.
These parties may default on their obligations to us due to bankruptcy, lack of
liquidity, operational failure or other reasons. This risk may arise, for
example, from holding securities of third parties; entering into swap or other
derivative contracts under which counterparties have long-term obliga-
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<PAGE> 16
tions to make payments to us; executing securities, futures, currency or
commodity trades that fail to settle at the required time due to non-delivery by
the counterparty or systems failure by clearing agents, exchanges, clearing
houses or other financial intermediaries; and extending credit to our clients
through bridge or margin loans or other arrangements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Management -- Credit Risk" for a further discussion of the credit risks to which
we are exposed.
We May Suffer Significant Losses from Our Credit Exposures
In recent years, we have significantly expanded our swaps and other
derivatives businesses and placed a greater emphasis on providing credit and
liquidity to our clients. As a result, our credit exposures have increased in
amount and in duration. In addition, as competition in the financial services
industry has increased, we have experienced pressure to assume longer-term
credit risk, extend credit against less liquid collateral and price more
aggressively the credit risks that we take.
Our Clients and Counterparties May Be Unable to Perform Their Obligations to Us
as a Result of Economic or Political Conditions
Country, regional and political risks are components of credit risk, as
well as market risk. Economic or political pressures in a country or region,
including those arising from local market disruptions or currency crises, may
adversely affect the ability of clients or counterparties located in that
country or region to obtain foreign exchange or credit and, therefore, to
perform their obligations to us. See "-- We Are Exposed to Special Risks in
Emerging and Other Markets" for a further discussion of our exposure to these
risks.
Defaults by a Large Financial Institution Could Adversely Affect Financial
Markets Generally and Us Specifically
The commercial soundness of many financial institutions may be closely
interrelated as a result of credit, trading, clearing or other relationships
between the institutions. As a result, concerns about, or a default by, one
institution could lead to significant liquidity problems or losses in, or
defaults by, other institutions. This is sometimes referred to as "systemic
risk" and may adversely affect financial intermediaries, such as clearing
agencies, clearing houses, banks, securities firms and exchanges, with which we
interact on a daily basis.
The possibility of default by a major market participant in the second half
of fiscal 1998 and concerns throughout the financial industry regarding the
resulting impact on markets led us to participate in an industry-wide consortium
that invested in Long-Term Capital Portfolio, L.P., which is described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity -- The Balance Sheet". Actual defaults, increases in
perceived default risk and other similar events could arise in the future and
could have an adverse effect on the financial markets and on Goldman Sachs.
The Information That We Use in Managing Our Credit Risk May Be Inaccurate or
Incomplete
Although we regularly review our credit exposure to specific clients and
counterparties and to specific industries, countries and regions that we believe
may present credit concerns, default risk may arise from events or circumstances
that are difficult to detect, such as fraud. We may also fail to receive full
information with respect to the trading risks of a counterparty. In addition, in
cases where we have extended credit against collateral, we may find that we are
undersecured, for example, as a result of sudden declines in market values that
reduce the value of collateral.
OUR COMPUTER SYSTEMS AND THOSE OF THIRD PARTIES MAY NOT ACHIEVE YEAR 2000
READINESS -- YEAR 2000 READINESS DISCLOSURE
With the year 2000 approaching, many institutions around the world are
reviewing and modifying their computer systems to ensure that they are Year 2000
compliant. The issue, in general terms, is that many existing computer systems
and microproces-
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<PAGE> 17
sors (including those in non-information technology equipment and systems) use
only two digits to identify a year in the date field with the assumption that
the first two digits of the year are always "19". Consequently, on January 1,
2000, computers that are not Year 2000 compliant may read the year as 1900.
Systems that calculate, compare or sort using the incorrect date may
malfunction.
Because we are dependent, to a very substantial degree, upon the proper
functioning of our computer systems, a failure of our systems to be Year 2000
compliant would have a material adverse effect on us. Failure of this kind
could, for example, cause settlement of trades to fail, lead to incomplete or
inaccurate accounting, recording or processing of trades in securities,
currencies, commodities and other assets, result in generation of erroneous
results or give rise to uncertainty about our exposure to trading risks and our
need for liquidity. If not remedied, potential risks include business
interruption or shutdown, financial loss, regulatory actions, reputational harm
and legal liability.
We also depend upon the proper functioning of third-party computer and
non-information technology systems. These parties include trading
counterparties, financial intermediaries such as securities and commodities
exchanges, depositories, clearing agencies, clearing houses and commercial banks
and vendors such as providers of telecommunication services and other utilities.
We continue to assess counterparties, intermediaries and vendors with whom we
have important financial or operational relationships to determine the extent of
their Year 2000 preparedness. We have not yet received sufficient information
from all parties about their Year 2000 preparedness to assess the effectiveness
of their efforts. Moreover, in many cases, we are not in a position to verify
the accuracy or completeness of the information we receive from third parties
and as a result are dependent on their willingness and ability to disclose, and
to address, their Year 2000 problems. In addition, in some international markets
in which we do business, the level of awareness and remediation efforts relating
to the Year 2000 issue may be less advanced than in the United States.
If third parties with whom we interact have Year 2000 problems that are not
remedied, problems could include the following:
- - in the case of vendors, disruption of important services upon which Goldman
Sachs depends, such as telecommunications and electrical power;
- - in the case of third-party data providers, receipt of inaccurate or
out-of-date information that would impair our ability to perform critical data
functions, such as pricing our securities or other assets;
- - in the case of financial intermediaries, such as exchanges and clearing
agents, failed trade settlements, inability to trade in certain markets and
disruption of funding flows;
- - in the case of banks and other lenders, disruption of capital flows
potentially resulting in liquidity stress; and
- - in the case of counterparties and customers, financial and accounting
difficulties for those parties that expose Goldman Sachs to increased credit
risk and lost business.
Disruption or suspension of activity in the world's financial markets is also
possible.
In addition, we believe that uncertainty about the success of remediation
efforts generally may cause many market participants to reduce the level of
their market activities temporarily as they assess the effectiveness of these
efforts during a "phase-in" period beginning in late 1999. We believe that
lenders are likely to take similar steps, which will result in a reduction in
available funding sources. Consequently, there may be a downturn in customer and
general market activity for a short period of time before and after January 1,
2000. If this occurs, our net revenues may be adversely affected, possibly
materially, depending on how long the reduction in activity continues and how
broadly it affects the markets. In addition, we expect to reduce our own trading
activities and the size of our balance sheet in order to manage the number and
type of our transactions that settle during this period and our related funding
needs. This also could reduce our net revenues. We cannot predict the magnitude
of
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<PAGE> 18
the impact that these kinds of reductions would have on our businesses.
We may also be exposed to litigation with our customers and counterparties
as a result of Year 2000 problems. For example, litigation could arise from
problems relating to our internal systems or to external systems on which we
depend, as well as from problems involving companies in which our clients or the
funds we manage hold investments.
Goldman Sachs is implementing a worldwide program to prepare its computer
systems to be Year 2000 compliant. For a description of our program and the
steps that remain to be taken, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Management -- Operational
and Year 2000 Risks -- Year 2000 Readiness Disclosure". Our Year 2000 program
may not be effective and our estimates about the timing and cost of completing
our program may not be accurate.
OTHER OPERATIONAL RISKS MAY DISRUPT OUR
BUSINESSES, RESULT IN REGULATORY ACTION
AGAINST US OR LIMIT OUR GROWTH
We face operational risk arising from mistakes made in the confirmation or
settlement of transactions or from transactions not being properly recorded,
evaluated or accounted for. Our businesses are highly dependent on our ability
to process, on a daily basis, a large number of transactions across numerous and
diverse markets in many currencies, and the transactions we process have become
increasingly complex. Consequently, we rely heavily on our financial, accounting
and other data processing systems. If any of these systems do not operate
properly or are disabled, we could suffer financial loss, a disruption of our
businesses, liability to clients, regulatory intervention or reputational
damage. The inability of our systems to accommodate an increasing volume of
transactions could also constrain our ability to expand our businesses. In
recent years, we have substantially upgraded and expanded the capabilities of
our data processing systems and other operating technology, and we expect that
we will need to continue to upgrade and expand in the future to avoid disruption
of, or constraints on, our operations.
LEGAL AND REGULATORY RISKS ARE INHERENT AND
SUBSTANTIAL IN OUR BUSINESSES
Substantial legal liability or a significant regulatory action against
Goldman Sachs could have a material financial effect or cause significant
reputational harm to Goldman Sachs, which in turn could seriously harm our
business prospects.
Our Exposure to Legal Liability Is Significant
We face significant legal risks in our businesses and the volume and amount
of damages claimed in litigation against financial intermediaries are
increasing. These risks include potential liability under securities or other
laws for materially false or misleading statements made in connection with
securities and other transactions, potential liability for the "fairness
opinions" and other advice we provide to participants in corporate transactions
and disputes over the terms and conditions of complex trading arrangements. We
also face the possibility that counterparties in complex or risky trading
transactions will claim that we improperly failed to tell them of the risks or
that they were not authorized or permitted to enter into these transactions with
us and that their obligations to Goldman Sachs are not enforceable. Particularly
in our rapidly growing business focused on high net worth individuals, we are
increasingly exposed to claims against Goldman Sachs for recommending
investments that are not consistent with a client's investment objectives or
engaging in unauthorized or excessive trading. During a prolonged market
downturn, we would expect these types of claims to increase. We are also subject
to claims arising from disputes with employees for alleged discrimination or
harassment, among other things. These risks often may be difficult to assess or
quantify and their existence and magnitude often remain unknown for substantial
periods of time. We incur significant legal expenses every year in defending
against litigation, and we expect to continue to do so in the future. See
"Business -- Legal Mat-
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ters" for a discussion of some of the legal matters in which we are currently
involved.
Extensive Regulation of Our Businesses Limits Our Activities and May Subject Us
to Significant Penalties
The financial services industry is subject to extensive regulation. Goldman
Sachs is subject to regulation by governmental and self-regulatory organizations
in the United States and in virtually all other jurisdictions in which it
operates around the world.
The requirements imposed by our regulators are designed to ensure the
integrity of the financial markets and to protect customers and other third
parties who deal with Goldman Sachs and are not designed to protect our
shareholders. Consequently, these regulations often serve to limit our
activities, including through net capital, customer protection and market
conduct requirements. We face the risk of significant intervention by regulatory
authorities, including extended investigation and surveillance activity,
adoption of costly or restrictive new regulations and judicial or administrative
proceedings that may result in substantial penalties. Among other things, we
could be fined or prohibited from engaging in some of our business activities.
See "Business -- Regulation" for a further discussion of the regulatory
environment in which we conduct our businesses.
Legal Restrictions on Our Clients May Reduce the Demand for Our Services
New laws or regulations or changes in enforcement of existing laws or
regulations applicable to our clients may also adversely affect our businesses.
For example, changes in antitrust enforcement could affect the level of mergers
and acquisitions activity and changes in regulation could restrict the
activities of our clients and, therefore, the services we provide on their
behalf.
EMPLOYEE MISCONDUCT COULD HARM
GOLDMAN SACHS AND IS DIFFICULT TO
DETECT AND DETER
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. Misconduct by
employees could include binding Goldman Sachs to transactions that exceed
authorized limits or present unacceptable risks, or hiding from Goldman Sachs
unauthorized or unsuccessful activities, which, in either case, may result in
unknown and unmanaged risks or losses. Employee misconduct could also involve
the improper use or disclosure of confidential information, which could result
in regulatory sanctions and serious reputational or financial harm. It is not
always possible to deter employee misconduct and the precautions we take to
prevent and detect this activity may not be effective in all cases.
THE FINANCIAL SERVICES INDUSTRY IS INTENSELY
COMPETITIVE AND RAPIDLY CONSOLIDATING
The financial services industry -- and all of our businesses -- are
intensely competitive, and we expect them to remain so. We compete on the basis
of a number of factors, including transaction execution, our products and
services, innovation, reputation and price. We have experienced intense price
competition in some of our businesses in recent years, such as underwriting fees
on investment grade debt offerings and privatizations. We believe we may
experience pricing pressures in these and other areas in the future as some of
our competitors seek to obtain market share by reducing prices.
We Face Increased Competition Due to a Trend Toward Consolidation
In recent years, there has been substantial consolidation and convergence
among companies in the financial services industry. In particular, a number of
large commercial banks, insurance companies and other broad-based financial
services firms have established or acquired broker-dealers or have merged with
other financial institutions. Many of these firms have the ability to offer a
wide range of products, from loans, deposit-taking and insurance to brokerage,
asset management and investment banking services, which may enhance their
competitive position. They also have the ability to support investment banking
and securities products with commercial banking, insurance and other financial
services revenues in an effort to gain market
18
<PAGE> 20
share, which could result in pricing pressure in our businesses.
Consolidation Has Increased Our Need for Capital
This trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have had to commit capital to support our international
operations and to execute large global transactions.
Our Ability to Expand Internationally Will
Depend on Our Ability to Compete Successfully with Local Financial Institutions
We believe that some of our most significant challenges and opportunities
will arise outside the United States, as described under "Industry and Economic
Outlook". In order to take advantage of these opportunities, we will have to
compete successfully with financial institutions based in important non-U.S.
markets, particularly in Europe. Some of these institutions are larger, better
capitalized and have a stronger local presence and a longer operating history in
these markets.
Our Revenues May Decline Due to Competition from Alternative Trading Systems
Securities and futures transactions are now being conducted through the
Internet and other alternative, non-traditional trading systems, and it appears
that the trend toward alternative trading systems will continue and probably
accelerate. A dramatic increase in computer-based or other electronic trading
may adversely affect our commission and trading revenues, reduce our
participation in the trading markets and associated access to market information
and lead to the creation of new and stronger competitors.
WE ARE EXPOSED TO SPECIAL RISKS IN
EMERGING AND OTHER MARKETS
In conducting our businesses in major markets around the world, including
many developing markets in Asia, Latin America and Eastern Europe, we are
subject to political, economic, legal, operational and other risks that are
inherent in operating in other countries. These risks range from difficulties in
settling transactions in emerging markets to possible nationalization,
expropriation, price controls and other restrictive governmental actions. We
also face the risk that exchange controls or similar restrictions imposed by
foreign governmental authorities may restrict our ability to convert local
currency received or held by us in their countries into U.S. dollars or other
currencies, or to take those dollars or other currencies out of those countries.
To date, a relatively small part of our businesses has been conducted in
emerging and other markets. As we expand our businesses in these areas, our
exposure to these risks will increase.
Turbulence in Emerging Markets May
Adversely Affect Our Businesses
In the last several years, various emerging market countries have
experienced severe economic and financial disruptions, including significant
devaluations of their currencies and low or negative growth rates in their
economies. The possible effects of these conditions include an adverse impact on
our businesses and increased volatility in financial markets generally.
Moreover, economic or market problems in a single country or region are
increasingly affecting other markets generally. For example, the economic crisis
in Russia in August 1998 adversely affected other emerging markets and led to
turmoil in financial markets worldwide. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Business
Environment" for a discussion of the business environment in which we operated
during the second half of fiscal 1998. A continuation of these situations could
adversely affect global economic conditions and world markets and, in turn,
could adversely affect our businesses. Among the risks are regional or global
market downturns and, as noted above, increasing liquidity and credit risks,
particularly in Japan where the economy continues to be weak and we have
significant exposure.
19
<PAGE> 21
Compliance with Local Laws and Regulations May Be Difficult
In many countries, the laws and regulations applicable to the securities
and financial services industries are uncertain and evolving, and it may be
difficult for us to determine the exact requirements of local laws in every
market. Our inability to remain in compliance with local laws in a particular
foreign market could have a significant and negative effect not only on our
businesses in that market but also on our reputation generally. These
uncertainties may also make it difficult for us to structure our transactions in
such a way that the results we expect to achieve are legally enforceable in all
cases. See "-- Legal and Regulatory Risks Are Inherent and Substantial in Our
Businesses -- Our Exposure to Legal Liability Is Significant" for additional
information concerning these matters and "Business -- Regulation" for a
discussion of the regulatory environment in which we conduct our businesses.
OUR CONVERSION TO CORPORATE FORM
MAY ADVERSELY AFFECT OUR ABILITY TO RECRUIT,
RETAIN AND MOTIVATE KEY EMPLOYEES
Our performance is largely dependent on the talents and efforts of highly
skilled individuals. Competition in the financial services industry for
qualified employees is intense. Our continued ability to compete effectively in
our businesses depends on our ability to attract new employees and to retain and
motivate our existing employees.
In connection with the offerings and the conversion of Goldman Sachs from
partnership to corporate form, the profit participating limited partners who are
active in our businesses will receive substantial amounts of Common Stock in
exchange for their interests in Goldman Sachs. Because these shares of Common
Stock will be received in exchange for partnership interests, ownership of these
shares will not be dependent upon these partners' continued employment. However,
these shares will be subject to certain restrictions on transfer under a
shareholders' agreement and a portion may be pledged to support these partners'
obligations under noncompetition agreements. The transfer restrictions under the
shareholders' agreement may, however, be waived, as described under "Certain
Relationships and Related Transactions -- Shareholders' Agreement -- Transfer
Restrictions" and "-- Waivers". The steps we have taken to encourage the
continued service of these individuals after the offerings may not be effective.
For a description of the compensation plan for our senior professionals to be
implemented after the offerings, see "Management -- The Partner Compensation
Plan".
In connection with the offerings and conversion of Goldman Sachs from
partnership to corporate form, employees other than the profit participating
limited partners who are active in our businesses will receive grants of
restricted stock units, stock options or interests in a defined contribution
plan. The incentives to attract, retain and motivate employees provided by these
awards or by future arrangements may not be as effective as the opportunity,
which existed prior to conversion, to become a partner of Goldman Sachs. See
"Management -- The Employee IPO Awards" for a description of these awards.
GOLDMAN SACHS WILL BE CONTROLLED BY ITS MANAGING DIRECTORS WHOSE INTERESTS MAY
DIFFER FROM THOSE OF OTHER SHAREHOLDERS
Upon completion of the offerings, our managing directors will collectively
own not less than 281,000,000 shares of Common Stock, or 61% of the total shares
of Common Stock outstanding, which includes the shares of Common Stock
underlying the restricted stock units to be awarded based on a formula. These
shares will be subject to a shareholders' agreement, which will provide for
coordinated voting by the parties. Further, both Sumitomo Bank Capital Markets,
Inc. and Kamehameha Activities Association, which together will own 42,937,355
shares of Common Stock, or 9.4% of the total shares of Common Stock outstanding
after consummation of the offerings, have agreed to vote their shares of Common
Stock in the same manner as a majority of the shares held by our managing
directors are voted. See "Certain Relationships and Related Transactions --
Shareholders' Agreement -- Voting" and
20
<PAGE> 22
"-- Voting Agreement" for a discussion of these voting arrangements.
As a result of these arrangements, the managing directors initially will be
able to elect the entire Board of Directors, control the management and policies
of Goldman Sachs and, in general, determine, without the consent of the other
shareholders, the outcome of any corporate transaction or other matter submitted
to the shareholders for approval, including mergers, consolidations and the sale
of all or substantially all of the assets of Goldman Sachs. The managing
directors initially will be able to prevent or cause a change in control of
Goldman Sachs.
Provisions of Our Organizational Documents May Discourage an Acquisition of
Goldman Sachs
Our organizational documents contain provisions that will impede the
removal of directors and may discourage a third party from making a proposal to
acquire us. For example, the Board of Directors may, without the consent of
shareholders, issue Preferred Stock with greater voting rights than the Common
Stock. See "Description of Capital Stock -- Certain Anti-Takeover Matters" for a
discussion of these anti-takeover provisions.
OUR SHARE PRICE MAY DECLINE DUE TO THE
LARGE NUMBER OF SHARES ELIGIBLE
FOR FUTURE SALE
Sales of substantial amounts of Common Stock, or the possibility of such
sales, may adversely affect the price of the Common Stock and impede our ability
to raise capital through the issuance of equity securities. See "Shares Eligible
for Future Sale" for a discussion of possible future sales of Common Stock.
Upon completion of the offerings, there will be 457,865,101 shares of
Common Stock outstanding. Of these shares, the 60,000,000 shares of Common Stock
expected to be sold in the offerings will be freely transferable without
restriction or further registration under the Securities Act of 1933. The
remaining 397,865,101 shares of Common Stock will be available for future sale
upon the expiration or the waiver of the transfer restrictions or in accordance
with the registration rights described below.
Of the 397,865,101 shares:
- - 265,019,073 shares will be held by our former profit participating limited
partners who are active in our businesses and will be subject to restrictions
on transfer, as described under "Certain Relationships and Related
Transactions -- Shareholders' Agreement -- Transfer Restrictions", and also
will be subject to the 180-day underwriters' lock-up arrangement described
under "Underwriting";
- - 47,270,551 shares will be held by our retired limited partners, all of which
will be subject to restrictions on transfer for one year after completion of
the offerings and 16,082,168 of which will be subject to restrictions on
transfer for three years after completion of the offerings, as described under
"Shares Eligible for Future Sale". All of these shares also will be subject to
the 180-day underwriters' lock-up arrangement described under "Underwriting";
- - 20,961,934 shares will be held by Sumitomo Bank Capital Markets, Inc. and,
along with the 7,903,480 shares of Nonvoting Common Stock that it will hold,
will be subject to restrictions on transfer, as described under "Shares
Eligible for Future Sale -- Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association Registration Rights", and also will be subject to the
180-day underwriters' lock-up arrangement described under "Underwriting";
- - 21,975,421 shares will be held by Kamehameha Activities Association and will
be subject to restrictions on transfer, as described under "Shares Eligible
for Future Sale -- Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association Registration Rights", and also will be subject to the
180-day underwriters' lock-up arrangement described under "Underwriting";
- - 12,567,587 shares will be held in a defined contribution plan and will be
distributable to plan participants beginning on or about the third anniversary
of the date of initial contribution, assuming the relevant conditions
21
<PAGE> 23
are satisfied, as described under "Management -- The Employee IPO
Awards -- The Defined Contribution Plan"; and
- - 30,070,535 shares of Common Stock underlying the restricted stock units to be
awarded based on a formula generally will be deliverable beginning on or about
the first anniversary of the date of the consummation of the offerings,
assuming the relevant conditions are satisfied, as described under
"Management -- The Employee IPO Awards -- Formula Awards".
Shares of Common Stock underlying the restricted stock units to be awarded
on a discretionary basis will be deliverable beginning on or about the third
anniversary of the date of the consummation of the offerings; and discretionary
employee stock options awarded in connection with the offerings will be
exercisable beginning on or about the third anniversary of the date of the
consummation of the offerings, in each case if relevant conditions are
satisfied, as described under "Management -- The Employee IPO Awards". We expect
to register under the Securities Act of 1933 the shares of Common Stock
deliverable under these awards and under the restricted stock units to be
awarded based on a formula.
We have also entered into agreements with Sumitomo Bank Capital Markets,
Inc. and Kamehameha Activities Association that allow them, under certain
circumstances, to require us to register for public offering certain of their
shares of Common Stock. See "Shares Eligible for Future Sale -- Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association Registration Rights"
for a further discussion of these agreements. Further, our Board of Directors
may grant registration rights to our former profit participating limited
partners who are active in our businesses. See "Shares Eligible for Future
Sale -- Other Registration Rights" for a further discussion of these possible
registration rights.
The transfer restrictions described above may be waived, as discussed under
"Certain Relationships and Related Transactions" and "Underwriting".
OUR COMMON STOCK MAY TRADE AT
PRICES BELOW THE INITIAL PUBLIC
OFFERING PRICE
The price of the Common Stock after the offerings may fluctuate widely,
depending upon many factors, including the perceived prospects of Goldman Sachs
and the securities and financial services industries in general, differences
between our actual financial and operating results and those expected by
investors and analysts, changes in analysts' recommendations or projections,
changes in general economic or market conditions and broad market fluctuations.
The Common Stock may trade at prices significantly below the initial public
offering price.
THE LIQUIDITY OF OUR COMMON STOCK
MAY BE ADVERSELY AFFECTED BY AN INABILITY
OF GOLDMAN, SACHS & CO. TO ACT AS A
MARKET-MAKER IN THE COMMON STOCK
We have applied to list the Common Stock on the NYSE. The NYSE listing does
not, however, guarantee that a trading market for the Common Stock will develop
or, if a market does develop, the liquidity of that market for the Common Stock.
After the offerings, because Goldman, Sachs & Co. is a member of the NYSE
and because of Goldman, Sachs & Co.'s relationship to us, it will not be
permitted under the rules of the NYSE to make markets in, or recommendations
regarding the purchase or sale of, the Common Stock. This may adversely affect
the trading market for the Common Stock.
22
<PAGE> 24
USE OF PROCEEDS
Based upon an initial public offering price of $50.00 per share (the
midpoint of the range of initial public offering prices set forth on the cover
page of this prospectus), Goldman Sachs estimates that it will receive net
proceeds from the offerings of $2.0 billion (or $2.4 billion if the
underwriters' options to purchase additional shares are exercised in full),
after deducting the underwriting discounts and estimated expenses that are
payable by Goldman Sachs in the offerings. The above amounts do not include
underwriting discounts that will be received by Goldman, Sachs & Co. ("GS&Co."),
Goldman Sachs International and Goldman Sachs (Asia) L.L.C. as underwriters in
the offerings. We will use the net proceeds to provide additional funds for our
operations and for other general corporate purposes, although we have not yet
determined a specific use. Pending specific application of the net proceeds, we
intend to use them to purchase short-term marketable securities.
Goldman Sachs will not receive any of the proceeds from the sale of shares
of Common Stock by Sumitomo Bank Capital Markets, Inc. or Kamehameha Activities
Association.
DIVIDEND POLICY
The holders of Common Stock and Nonvoting Common Stock (together, the
"Common Shares") of Goldman Sachs will share proportionately on a per share
basis in all dividends and other distributions declared by our Board of
Directors. Our Board of Directors currently intends to declare quarterly
dividends on all outstanding Common Shares and expects that the first quarterly
dividend will be $0.12 per share, and that it will be declared during the third
quarter of fiscal 1999.
The declaration of dividends by Goldman Sachs is subject to the discretion
of the Board of Directors. The Board of Directors will take into account such
matters as general business conditions, our financial results, capital
requirements, contractual, legal and regulatory restrictions on the payment of
dividends by us to our shareholders or by our subsidiaries to us, the effect on
our debt ratings and such other factors as our Board of Directors may deem
relevant. See "Business -- Regulation" for a discussion of potential regulatory
limitations on our receipt of funds from our regulated subsidiaries.
23
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS ON
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
To the Partners,
The Goldman Sachs Group, L.P.:
We have examined the pro forma adjustments reflecting (i) the incorporation
transactions and the related transactions described under "Certain Relationships
and Related Transactions -- Incorporation and Related Transactions"; (ii)
compensation to managing directors who were profit participating limited
partners active in Goldman Sachs' businesses; (iii) compensation in the form of
restricted stock units awarded to employees in lieu of ongoing cash
compensation; and (iv) the provision for corporate income taxes (collectively,
the "Pro Forma Adjustments"), and the offerings, all as described in Note 2 to
the Pro Forma Consolidated Financial Information (included on pages 26 to 31 of
this prospectus) and the application of those adjustments to the historical
amounts in the Pro Forma Consolidated Income Statement Information for the year
ended November 27, 1998. The historical consolidated income statement
information is derived from the historical consolidated financial statements of
Goldman Sachs, which were audited by us and which are included elsewhere in this
prospectus. The Pro Forma Adjustments are based upon management's assumptions
described in Note 2 to the Pro Forma Consolidated Financial Information. Our
examination was made in accordance with standards established by the American
Institute of Certified Public Accountants and, accordingly, included such
procedures as we considered necessary in the circumstances.
The objective of this pro forma consolidated financial information is to
show what the significant effects on the historical income statement information
of Goldman Sachs might have been had the Pro Forma Adjustments and the offerings
occurred at an earlier date. However, the Pro Forma Consolidated Income
Statement Information is not necessarily indicative of the results of operations
that would have been attained had the above-mentioned Pro Forma Adjustments and
the offerings actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
Pro Forma Adjustments and the offerings, all as described in Note 2 to the Pro
Forma Consolidated Financial Information, the related pro forma adjustments give
appropriate effect to those assumptions, and the "Pro Forma" and "Pro Forma as
Adjusted for Offerings" columns reflect the proper application of those
adjustments to the historical consolidated income statement amounts in the Pro
Forma Consolidated Income Statement Information for the year ended November 27,
1998.
PricewaterhouseCoopers LLP
New York, New York
April 9, 1999.
24
<PAGE> 26
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS ON
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
To the Partners,
The Goldman Sachs Group, L.P.:
We have reviewed the pro forma adjustments reflecting (i) the incorporation
transactions and the related transactions described under "Certain Relationships
and Related Transactions -- Incorporation and Related Transactions"; (ii)
compensation to managing directors who were profit participating limited
partners active in Goldman Sachs' businesses; (iii) compensation in the form of
restricted stock units awarded to employees in lieu of ongoing cash
compensation; (iv) the provision for corporate income taxes; (v) the redemption
of Goldman Sachs' senior limited partnership interests; (vi) cash distributions
by The Goldman Sachs Group, L.P. to its partners in the second quarter of fiscal
1999 in accordance with the Goldman Sachs partnership agreement, including
distributions for partner income taxes related to Goldman Sachs' earnings in the
first quarter of fiscal 1999, capital withdrawals by profit participating
limited partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association and distributions to satisfy obligations to retired limited
partners; and (vii) the recognition of net tax assets (collectively, the "Pro
Forma Adjustments"), and the offerings, all as described in Note 2 to the Pro
Forma Consolidated Financial Information (included on pages 26 to 31 of this
prospectus) and the application of those adjustments to the historical amounts
in the Pro Forma Consolidated Balance Sheet Information as of February 26, 1999
and the Pro Forma Consolidated Income Statement Information for the three months
then ended. The historical consolidated financial statement information is
derived from the historical condensed consolidated financial statements of
Goldman Sachs, which were reviewed by us and which are included elsewhere in
this prospectus. The Pro Forma Adjustments are based upon management's
assumptions described in Note 2 to the Pro Forma Consolidated Financial
Information. Our review was made in accordance with standards established by the
American Institute of Certified Public Accountants.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion.
The objective of this pro forma consolidated financial information is to
show what the significant effects on the historical financial information of
Goldman Sachs might have been had the Pro Forma Adjustments and the offerings
occurred at an earlier date. However, the Pro Forma Consolidated Income
Statement Information and the Pro Forma Consolidated Balance Sheet Information
are not necessarily indicative of the results of operations or related effects
on financial position that would have been attained had the above-mentioned Pro
Forma Adjustments and the offerings actually occurred earlier.
Based on our review, nothing came to our attention that caused us to
believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
Pro Forma Adjustments and the offerings, all as described in Note 2 to the Pro
Forma Consolidated Financial Information, that the related pro forma adjustments
do not give appropriate effect to those assumptions, or that the "Pro Forma" and
"Pro Forma as Adjusted for Offerings" columns do not reflect the proper
application of those adjustments to the historical consolidated financial
statement amounts in the Pro Forma Consolidated Balance Sheet Information as of
February 26, 1999 and the Pro Forma Consolidated Income Statement Information
for the three months then ended.
PricewaterhouseCoopers LLP
New York, New York
April 9, 1999.
25
<PAGE> 27
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Consolidated Financial Information is based upon
the historical consolidated financial statements of Goldman Sachs. In addition
to the offerings of Common Stock, this information reflects the pro forma
effects of the following items:
- - the incorporation transactions and the related transactions described under
"Certain Relationships and Related Transactions -- Incorporation and Related
Transactions";
- - compensation to managing directors who were profit participating limited
partners active in our businesses (the "PLPs");
- - compensation in the form of restricted stock units awarded to employees in
lieu of ongoing cash compensation;
- - the provision for corporate income taxes;
- - the redemption of our senior limited partnership interests;
- - cash distributions by The Goldman Sachs Group, L.P. ("Group L.P.") to its
partners in the second quarter of fiscal 1999 in accordance with its
partnership agreement, including distributions for partner income taxes
related to earnings in the first quarter of fiscal 1999, capital withdrawals
by PLPs, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association and distributions to satisfy obligations to retired limited
partners; and
- - the recognition of net tax assets.
These items are collectively referred to as the "Pro Forma Adjustments".
The Pro Forma Consolidated Income Statement Information does not give
effect to the following items because of their non-recurring nature:
- - the restricted stock units awarded to employees based on a formula (the
"Formula RSUs");
- - the initial irrevocable contribution of shares of Common Stock to a defined
contribution plan (the "DCP");
- - the recognition of net tax assets; and
- - a contribution to the Goldman Sachs charitable foundation.
The Pro Forma Consolidated Balance Sheet Information, however, does give
effect to these non-recurring items.
The Pro Forma Adjustments are based upon available information and certain
assumptions that management believes are reasonable. The Pro Forma Consolidated
Financial Information and accompanying notes should be read in conjunction with
the consolidated financial statements and their notes.
THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION PRESENTED IS NOT
NECESSARILY INDICATIVE OF THE RESULTS OF OPERATIONS OR FINANCIAL POSITION THAT
MIGHT HAVE OCCURRED HAD THE PRO FORMA ADJUSTMENTS ACTUALLY TAKEN PLACE AS OF THE
DATES SPECIFIED, OR THAT MAY BE EXPECTED TO OCCUR IN THE FUTURE.
26
<PAGE> 28
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
(in millions, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 27, 1998
---------------------------------------------------------------------------
PRO FORMA
PRO FORMA ADJUSTMENT AS ADJUSTED
HISTORICAL ADJUSTMENTS PRO FORMA FOR OFFERINGS FOR OFFERINGS
---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues.............................. $22,478 $ -- $22,478 $ -- $22,478
Interest expense, principally on short-term
funding................................... 13,958 28(a) 13,986 -- 13,986
------- ------- ------- ----- -------
Revenues, net of interest expense........... 8,520 (28) 8,492 -- 8,492
Compensation and benefits, excluding
Employee IPO Awards....................... 3,838 303(b) 4,141 -- 4,141
Employee IPO Awards......................... -- 435(c) 435 -- 435
Other operating expenses.................... 1,761 -- 1,761 -- 1,761
------- ------- ------- ----- -------
Total operating expenses.................... 5,599 738 6,337 -- 6,337
Pre-tax earnings............................ 2,921 (766) 2,155 -- 2,155
Provision for taxes......................... 493 391(d) 884 -- 884
------- ------- ------- ----- -------
Net earnings................................ $ 2,428 $(1,157) $ 1,271 $ -- $ 1,271
======= ======= ======= ===== =======
Common Shares outstanding:
Basic..................................... 424(e) 42(f) 466
Diluted................................... 428(e) 42(f) 470
Earnings per share:
Basic..................................... $ 3.00 $ 2.73
Diluted................................... 2.97 2.70
</TABLE>
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
(unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 26, 1999
---------------------------------------------------------------------------
PRO FORMA
PRO FORMA ADJUSTMENT AS ADJUSTED
HISTORICAL ADJUSTMENTS PRO FORMA FOR OFFERINGS FOR OFFERINGS
---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues.............................. $ 5,856 $ -- $ 5,856 $ -- $ 5,856
Interest expense, principally on short-term
funding................................... 2,861 7(a) 2,868 -- 2,868
------- ------- ------- ----- -------
Revenues, net of interest expense........... 2,995 (7) 2,988 -- 2,988
Compensation and benefits, excluding
Employee IPO Awards....................... 1,275 191(b) 1,466 -- 1,466
Employee IPO Awards......................... -- 109(c) 109 -- 109
Other operating expenses.................... 532 -- 532 -- 532
------- ------- ------- ----- -------
Total operating expenses.................... 1,807 300 2,107 -- 2,107
Pre-tax earnings............................ 1,188 (307) 881 -- 881
Provision for taxes......................... 181 180(d) 361 -- 361
------- ------- ------- ----- -------
Net earnings................................ $ 1,007 $ (487) $ 520 $ -- $ 520
======= ======= ======= ===== =======
Common Shares outstanding:
Basic..................................... 428(e) 42(f) 470
Diluted................................... 438(e) 42(f) 480
Earnings per share:
Basic..................................... $ 1.22 $ 1.11
Diluted................................... 1.19 1.08
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Information.
27
<PAGE> 29
PRO FORMA CONSOLIDATED BALANCE SHEET INFORMATION
(unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
AS OF FEBRUARY 26, 1999
------------------------------------------------------------------------
PRO FORMA
PRO FORMA ADJUSTMENT AS ADJUSTED
HISTORICAL ADJUSTMENTS PRO FORMA FOR OFFERINGS FOR OFFERINGS
---------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 3,345 $ (200)(g) $ 134 $1,989 $ 2,123
(891)(h)
(888)(i)
(1,232)(k)
Other........................................ 227,279 1,764(l) 229,043 -- 229,043
-------- ------- -------- ------ --------
Total assets................................. $230,624 $(1,447) $229,177 $1,989 $231,166
======== ======= ======== ====== ========
Long-term borrowings......................... $ 20,405 $ 371(a) $ 20,776 $ -- $ 20,776
Other........................................ 203,228 165(b) 203,393 -- 203,393
-------- ------- -------- ------ --------
Total liabilities............................ 223,633 536 224,169 -- 224,169
Partners' capital, partners' capital
allocated for income taxes and potential
withdrawals, and accumulated other
comprehensive income....................... 6,991 (371)(a)
(891)(h)
(888)(i)
(3,609)(j)
(1,232)(k)
-------- ------- -------- ------ --------
Total partnership capital.................... 6,991 (6,991) -- -- --
Common Stock and Nonvoting Common Stock, par
value $0.01 per share...................... -- 4(j) 4 -- 4
Restricted stock units....................... -- 3,169(m) 3,169 -- 3,169
Additional paid-in capital................... -- 3,605(j) 4,233 1,989(f) 6,222
628(m)
Retained earnings............................ -- (165)(b) (733) -- (733)
(200)(g)
1,764(l)
(2,132)(m)
Unearned compensation........................ -- (1,665)(m) (1,665) -- (1,665)
-------- ------- -------- ------ --------
Total stockholders' equity................... -- 5,008 5,008 1,989 6,997
Total liabilities, partnership capital and
stockholders' equity....................... $230,624 $(1,447) $229,177 $1,989 $231,166
======== ======= ======== ====== ========
Book value per share......................... $ 11.82 $ 15.02
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Information.
28
<PAGE> 30
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
NOTE 1: BASIS OF PRESENTATION
As permitted by the rules and regulations of the Securities and Exchange
Commission, the Pro Forma Consolidated Financial Information is presented on a
condensed basis. The Pro Forma Consolidated Balance Sheet Information was
prepared as if the Pro Forma Adjustments had occurred as of February 26, 1999.
Book value per share equals stockholders' equity divided by Common Shares
outstanding of 423,768,581 prior to the offerings and 465,768,581 as adjusted
for the offerings. These amounts include the Nonvoting Common Stock, the shares
of Common Stock irrevocably contributed to the DCP, and the shares of Common
Stock underlying the Formula RSUs since there is no future service required as a
condition to the delivery of the underlying shares of Common Stock.
The Pro Forma Consolidated Income Statement Information for the fiscal year
ended November 27, 1998 and the three-month fiscal period ended February 26,
1999 was prepared as if the Pro Forma Adjustments had taken place at the
beginning of fiscal 1998.
For pro forma purposes, the offerings and, where applicable, the related
transactions reflect an assumed price of $50.00 per share, the midpoint of the
range of initial public offering prices set forth on the cover page of this
prospectus.
NOTE 2: PRO FORMA ADJUSTMENTS AND ADJUSTMENT FOR OFFERINGS
(a) RETIRED LIMITED PARTNERS EXCHANGE OF INTERESTS FOR
DEBENTURES. Adjustment to reflect the issuance of junior subordinated
debentures to the retired limited partners in exchange for their interests in
Group L.P. and certain affiliates. These junior subordinated debentures will
have a principal amount of $295 million, an initial carrying value of $371
million and an effective interest rate of 7.5%. The annual interest expense to
be recorded on these debentures in the first year will be $28 million.
(b) COMPENSATION AND BENEFITS, EXCLUDING EMPLOYEE IPO AWARDS. Adjustment
to reflect compensation and benefits expense of $427 million in fiscal 1998 and
$242 million in the three months ended February 26, 1999 ($10 million of which
related to restricted stock units assumed to be awarded in fiscal 1998) related
to services rendered by the former PLPs. The estimated total compensation and
benefits related to services rendered by the former PLPs is based upon measures
of financial performance, including net revenues, pre-tax earnings and the ratio
of compensation and benefits to net revenues, as described under
"Management -- The Partner Compensation Plan -- Determination of Salary and
Bonus".
This adjustment is offset by the effect of awarding restricted stock units
to employees in lieu of ongoing cash compensation, 50% of which will be expensed
over the four-year period following the year of grant as follows: 26%, 14%, 7%
and 3% in years two, three, four and five, respectively. As a result,
compensation expense was reduced by $124 million in fiscal 1998 and $51 million
in the three months ended February 26, 1999 (net of $16 million in expense
related to restricted stock units assumed to be awarded in fiscal 1998).
(c) EXPENSE RELATED TO EMPLOYEE IPO AWARDS. Adjustment to reflect the
amortization of the 33,303,595 restricted stock units awarded to employees on a
discretionary basis (the "Discretionary RSUs"). These Discretionary RSUs will
have a value of $1,665 million, approximately 26% of which will be amortized as
a non-cash expense in the year of grant. The remaining 74% of the value of the
Discretionary RSUs will be amortized over the four years following the year of
grant as follows: 26%, 26%, 15% and 7% in years two, three, four and five,
respectively.
The stock options to purchase 40,000,028 shares of Common Stock awarded to
employees on a discretionary basis (the "Discretionary Options") will be
accounted for pursuant to Accounting Principles Board Opinion No. 25, as
permitted by paragraph 5 of Statement of Financial Accounting Standards No. 123.
Since these options will have
29
<PAGE> 31
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
no intrinsic value on the date of grant, no compensation expense will be
recognized.
The estimated fair value of these Discretionary Options on the date of
grant is $667 million using a Black-Scholes option pricing model. If Statement
of Financial Accounting Standards No. 123 had been applied, compensation expense
of $174 million and $44 million would have been included in the Pro Forma
Consolidated Income Statement Information in fiscal 1998 and the three months
ended February 26, 1999, respectively. See "Management -- The Employee IPO
Awards" for a description of these awards.
(d) PRO FORMA PROVISION FOR INCOME TAXES. Adjustment to reflect a pro
forma provision for income taxes for Goldman Sachs in corporate form at an
effective tax rate of 41%.
(e) PRO FORMA COMMON SHARES. Common Shares outstanding, computed on a
weighted-average basis, after giving effect to the Pro Forma Adjustments. Pro
forma basic Common Shares outstanding prior to the offerings include the
Nonvoting Common Stock, the shares of Common Stock irrevocably contributed to
the DCP and, pursuant to Statement of Financial Accounting Standards No. 128,
the shares of Common Stock underlying the Formula RSUs since there is no future
service required as a condition to the delivery of the underlying shares of
Common Stock. With respect to the three months ended February 26, 1999, pro
forma basic Common Shares outstanding also includes the shares of Common Stock
underlying the restricted stock units assumed to be awarded in lieu of ongoing
cash compensation in fiscal 1998 for which no future service would have been
required as a condition to the delivery of the underlying shares of Common
Stock.
Pro forma diluted Common Shares outstanding prior to the offerings reflects
the dilutive effect of the Common Stock deliverable pursuant to the
Discretionary RSUs, and, with respect to the three months ended February 26,
1999, the dilutive effect of the shares of Common Stock underlying the
restricted stock units assumed to be awarded in lieu of ongoing cash
compensation in fiscal 1998 for which future service would have been required as
a condition to the delivery of the underlying shares of Common Stock.
(f) ADJUSTMENT FOR THE OFFERINGS. Common Shares as adjusted to reflect the
issuance of 42,000,000 shares of Common Stock offered by Goldman Sachs. Net
proceeds from the offerings reflect the deduction of underwriting discounts and
of estimated expenses payable by Goldman Sachs in connection with the offerings.
The adjustment for the offerings excludes 9,000,000 shares of Common Stock
issuable upon exercise of the underwriters' options to purchase additional
shares, which are described under "Underwriting".
(g) CHARITABLE CONTRIBUTION. Adjustment to reflect the charitable
contribution of $200 million.
(h) RETIRED LIMITED PARTNERS EXCHANGE OF INTERESTS FOR CASH. Adjustment to
reflect the payment of $891 million in cash to the retired limited partners in
exchange for their interests in Group L.P. and certain affiliates.
(i) REDEMPTION OF SENIOR LIMITED PARTNERSHIP INTERESTS FOR
CASH. Adjustment to reflect the redemption of the senior limited partnership
interests for cash of $888 million by Group L.P. prior to the incorporation
transactions.
(j) PLPS, RETIRED LIMITED PARTNERS, SUMITOMO BANK CAPITAL MARKETS, INC. AND
KAMEHAMEHA ACTIVITIES ASSOCIATION EXCHANGE OF INTERESTS FOR COMMON SHARES.
Adjustment of $3,609 million to reflect the issuance of 265,019,073 shares of
Common Stock to PLPs, 47,270,551 shares of Common Stock to retired limited
partners, 29,961,934 shares of Common Stock and 7,903,480 shares of Nonvoting
Common Stock to Sumitomo Bank Capital Markets, Inc. and 30,975,421 shares of
Common Stock to Kamehameha Activities Association, in exchange for their
respective interests in Group L.P. and certain affiliates.
(k) CASH DISTRIBUTIONS. Adjustment to reflect cash distributions of $1,232
million by
30
<PAGE> 32
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
Group L.P. to its partners, including Sumitomo Bank Capital Markets, Inc. and
Kamehameha Activities Association, in the second quarter of fiscal 1999 in
accordance with its partnership agreement, including distributions for partner
income taxes related to earnings in the first quarter of fiscal 1999, capital
withdrawals by PLPs, Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association and distributions to satisfy obligations to certain
retired limited partners.
Goldman Sachs expects that additional cash distributions for partner income
taxes related to earnings in the second quarter of fiscal 1999 will be
significant due, in part, to certain expenses that are not deductible by the
partners. Goldman Sachs expects to record a substantial tax asset on the
consummation of the offerings related to these expenses. These cash
distributions and the related tax asset are not reflected in the Pro Forma
Consolidated Balance Sheet Information.
(l) NET TAX ASSETS. Adjustment to reflect the addition to retained
earnings related to the recognition of a net tax asset of $1,764 million under
Statement of Financial Accounting Standards No. 109 at an effective tax rate of
41%. The components of this net tax asset, which will be included in "Other
assets" on the consolidated statement of financial condition, are (i) a net
benefit of $808 million related to the conversion of Group L.P. to corporate
form, (ii) a benefit of $874 million related to the 30,070,535 Formula RSUs and
the initial irrevocable contribution of 12,567,587 shares of Common Stock to the
DCP and (iii) a benefit of $82 million related to the charitable contribution.
As discussed in Note 2(k) above, Goldman Sachs expects to record a
substantial tax asset on the consummation of the offerings related to certain
expenses that are not deductible by the partners in fiscal 1999. The tax asset
associated with these expenses in the second quarter of fiscal 1999 is not
reflected in the Pro Forma Consolidated Balance Sheet Information.
(m) EFFECT ON STOCKHOLDERS' EQUITY OF EMPLOYEE IPO AWARDS. Adjustment to
reflect the effect on the components of stockholders' equity, excluding the tax
benefit described in Note 2(l), of (i) the Formula RSUs, (ii) the initial
irrevocable contribution of shares of Common Stock to the DCP and (iii) the
Discretionary RSUs.
The following table sets forth each of these components as of February 26,
1999:
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
AND NONVOTING RESTRICTED PAID-IN RETAINED UNEARNED
COMMON STOCK STOCK UNITS CAPITAL EARNINGS COMPENSATION
------------- ----------- ---------- -------- ------------
(in millions)
<S> <C> <C> <C> <C> <C>
Formula RSUs............................ $-- $1,504 $ -- $(1,504) $ --
Contribution of shares of Common Stock
to the DCP............................ -- -- 628 (628) --
Discretionary RSUs...................... -- 1,665 -- -- (1,665)
-- ------ ---- ------- -------
Total Adjustment........................ $-- $3,169 $628 $(2,132) $(1,665)
== ====== ==== ======= =======
</TABLE>
31
<PAGE> 33
DILUTION
As of February 26, 1999, the pro forma net tangible book value of Goldman
Sachs was approximately $4.84 billion, or approximately $11.43 per Common Share
(which includes the shares of Nonvoting Common Stock, the shares of Common Stock
irrevocably contributed to the DCP and the shares of Common Stock underlying the
Formula RSUs). "Pro forma net tangible book value" per Common Share represents
the amount of Goldman Sachs' total consolidated tangible assets minus total
consolidated liabilities, divided by the 423,768,581 Common Shares outstanding
on a pro forma basis after giving effect to the Pro Forma Adjustments. After
giving effect to the sale by Goldman Sachs of 42,000,000 shares of Common Stock
in the offerings at an assumed initial public offering price of $50.00 per share
(the midpoint of the range of initial public offering prices set forth on the
cover page of this prospectus) and after deducting the underwriting discounts
and estimated expenses payable by Goldman Sachs in the offerings, the pro forma
net tangible book value of Goldman Sachs as of February 26, 1999 would have been
approximately $6.83 billion, or approximately $14.67 per Common Share. This
represents an immediate increase in net tangible book value of $3.24 per Common
Share to existing shareholders and an immediate dilution in net tangible book
value of $35.33 per share to new investors purchasing shares of Common Stock at
the assumed initial public offering price.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common
Stock..................................................... $50.00
Pro forma net tangible book value per Common Share before
giving effect to the offerings(1)...................... $11.43
Increase in net tangible book value per Common Share
attributable to the sale of Common Stock in the
offerings(2)........................................... 3.24
------
Pro forma net tangible book value per Common Share after
giving effect to the offerings(1)......................... 14.67
------
Dilution in net tangible book value per Common Share to new
investors(3).............................................. $35.33
======
</TABLE>
- ---------------
(1) Goldman Sachs' intangible assets as of February 26, 1999 were $166
million, comprised primarily of goodwill, equivalent to $0.39 per
Common Share, after giving effect to the Pro Forma Adjustments, and
$0.36 per Common Share after giving effect to the offerings.
(2) After deducting the underwriting discounts and estimated expenses
payable by Goldman Sachs in the offerings.
(3) Dilution is determined by subtracting pro forma net tangible book
value per share after giving effect to the offerings from the assumed
initial public offering price per share paid by a new investor.
------------------------
The foregoing table assumes no exercise of the underwriters' options to
purchase 9,000,000 additional shares of Common Stock, which are described under
"Underwriting". Common Shares outstanding does not include 73,303,623 shares of
Common Stock deliverable pursuant to the Discretionary RSUs and the
Discretionary Options and shares of Common Stock that may be awarded in the
future under The Goldman Sachs 1999 Stock Incentive Plan. See "Management -- The
Employee IPO Awards" for a description of these awards and The Goldman Sachs
1999 Stock Incentive Plan.
32
<PAGE> 34
CAPITALIZATION
The following table sets forth the consolidated capitalization of Goldman
Sachs as of February 26, 1999:
- - on a historical basis;
- - on a pro forma basis after giving effect to the Pro Forma Adjustments; and
- - as adjusted for the sale of 42,000,000 shares of Common Stock by Goldman Sachs
in the offerings at an assumed initial public offering price of $50.00 per
share, the midpoint of the range of initial public offering prices set forth
on the cover page of this prospectus, and after deduction of the underwriting
discounts and estimated expenses payable by Goldman Sachs in the offerings.
This table should be read in conjunction with the consolidated financial
statements and their corresponding notes and the Pro Forma Consolidated
Financial Information and their corresponding notes, and assumes no exercise of
the underwriters' options to purchase additional shares that are described under
"Underwriting".
<TABLE>
<CAPTION>
AS OF FEBRUARY 26, 1999
-----------------------------------------
PRO FORMA
AS ADJUSTED
HISTORICAL PRO FORMA FOR OFFERINGS
---------- --------- -------------
($ in millions)
<S> <C> <C> <C>
Short-term borrowings (including commercial paper)(1)....... $33,863 $33,863 $33,863
======= ======= =======
Long-term borrowings(2):
Senior debt(3)............................................ $20,405 $20,405 $20,405
Junior Subordinated Debentures(4)......................... -- 371 371
------- ------- -------
Total long-term borrowings......................... 20,405 20,776 20,776
Partners' capital........................................... 6,612 -- --
Stockholders' equity:
Preferred Stock, par value $0.01 per share; 150,000,000
shares authorized, no shares issued and outstanding..... -- -- --
Common Stock, par value $0.01 per share; 4,000,000,000
shares authorized, 385,794,566 shares issued and
outstanding
(427,794,566 shares issued and outstanding as
adjusted)(5)............................................ -- 4 4
Restricted stock units; 63,374,130 units issued and
outstanding(6).......................................... -- 3,169 3,169
Nonvoting Common Stock, par value $0.01 per share;
200,000,000 shares authorized and 7,903,480 shares
issued and outstanding.................................. -- 0 0
Additional paid-in capital................................ -- 4,233 6,222
Retained earnings......................................... -- (733) (733)
Unearned compensation(7).................................. (1,665) (1,665)
------- ------- -------
Total stockholders' equity......................... -- 5,008 6,997
------- ------- -------
Total capitalization............................. $27,017 $25,784 $27,773
======= ======= =======
</TABLE>
- ---------------
(1) Includes current portion of long-term borrowings of $6,285 million. See Note
4 to the condensed consolidated financial statements as of February 26, 1999
for further information regarding Goldman Sachs' short-term borrowings.
(2) After the offerings and subject to market conditions, we intend to raise
additional funds in the public debt securities market, including through an
anticipated $1 billion offering of long-term debt securities.
(3) Includes subordinated debt of GS&Co. of $275 million.
(4) Consists of junior subordinated debentures issued to the retired limited
partners as part of the incorporation transactions. See "Certain
Relationships and Related Transactions -- Incorporation and Related
Transactions" for further information regarding the issuance of the
debentures.
(5) Common Stock outstanding includes 12,567,587 shares of Common Stock
irrevocably contributed to the DCP. Common Stock outstanding does not
include 40,000,028 shares of Common Stock deliverable pursuant to the
Discretionary Options. See "Management -- The Employee IPO Awards" for more
detailed information regarding these awards.
(6) Restricted stock units includes 30,070,535 shares of Common Stock underlying
the Formula RSUs and 33,303,595 shares of Common Stock underlying the
Discretionary RSUs.
(7) Unearned compensation relates to the award of the Discretionary RSUs.
33
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated income statement and balance sheet data
set forth below have been derived from Goldman Sachs' consolidated financial
statements and their notes. Goldman Sachs' consolidated financial statements
have been audited by PricewaterhouseCoopers LLP, independent public accountants,
as of November 28, 1997 and November 27, 1998 and for the years ended November
29, 1996, November 28, 1997 and November 27, 1998. Goldman Sachs' consolidated
financial statements have been reviewed by PricewaterhouseCoopers LLP as of
February 26, 1999 and for the three months ended February 27, 1998 and February
26, 1999. These financial statements are included elsewhere in this prospectus,
together with the reports thereon of PricewaterhouseCoopers LLP.
The selected historical consolidated income statement and balance sheet data
set forth below as of November 25, 1994, November 24, 1995 and November 29, 1996
and for the years ended November 25, 1994 and November 24, 1995 have been
derived from audited consolidated financial statements of Goldman Sachs not
included in this prospectus.
The selected historical consolidated income statement and balance sheet data
set forth below as of and for the three months ended February 26, 1999 and for
the three months ended February 27, 1998 have been derived from Goldman Sachs'
unaudited condensed consolidated financial statements that, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. The interim results set forth
below for the three months ended February 26, 1999 may not be indicative of
results for the full year.
The pro forma data set forth below for the year ended November 27, 1998 and
as of and for the three months ended February 26, 1999 have been derived from
the pro forma data set forth in "Pro Forma Consolidated Financial Information"
included elsewhere in this prospectus. The pro forma consolidated income
statement information set forth in "Pro Forma Consolidated Financial
Information" for the year ended November 27, 1998 have been examined by
PricewaterhouseCoopers LLP. The pro forma consolidated financial information as
of and for the three months ended February 26, 1999 has been reviewed by
PricewaterhouseCoopers LLP.
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Pro Forma Consolidated Financial Information" and the consolidated
financial statements and their notes.
<TABLE>
<CAPTION>
AS OF OR FOR
THREE MONTHS
AS OF OR FOR YEAR ENDED NOVEMBER ENDED FEBRUARY
--------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues.................................. $12,452 $ 14,324 $ 17,289 $ 20,433 $ 22,478 $ 5,903 $ 5,856
Interest expense................................ 8,915 9,841 11,160 12,986 13,958 3,431 2,861
------- -------- -------- -------- -------- -------- --------
Net revenues.................................... 3,537 4,483 6,129 7,447 8,520 2,472 2,995
Compensation and benefits(1).................... 1,789 2,005 2,421 3,097 3,838 1,100 1,275
Other operating expenses........................ 1,240 1,110 1,102 1,336 1,761 350 532
------- -------- -------- -------- -------- -------- --------
Pre-tax earnings(1)............................. $ 508 $ 1,368 $ 2,606 $ 3,014 $ 2,921 $ 1,022 $ 1,188
======= ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets(2)................................. $95,296 $100,066 $152,046 $178,401 $217,380 -- $230,624
Long-term borrowings............................ 14,418 13,358 12,376 15,667 19,906 -- 20,405
Total liabilities(2)............................ 89,981 94,686 145,753 171,864 210,996 -- 223,633
Partners' capital............................... 4,771 4,905 5,309 6,107 6,310 -- 6,612
PRO FORMA DATA:(3)
Pro forma net earnings.......................... -- -- -- -- $ 1,271 -- $ 520
Pro forma diluted earnings per share(4)......... -- -- -- -- 2.97 -- 1.19
Pro forma diluted earnings per share as adjusted
for the offerings(5).......................... -- -- -- -- 2.70 -- 1.08
Pro forma diluted Common Shares as adjusted for
the offerings(5).............................. -- -- -- -- 470 -- 480
Pro forma stockholders' equity as adjusted for
the offerings................................. -- -- -- -- -- -- $ 6,997
Pro forma book value per share as adjusted for
the offerings................................. -- -- -- -- -- -- 15.02
</TABLE>
34
<PAGE> 36
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR
THREE MONTHS
AS OF OR FOR YEAR ENDED NOVEMBER ENDED FEBRUARY
--------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED DATA AND RATIOS (UNAUDITED):
Pre-tax return on average partners'
capital(1).................................... 10% 28% 51% 53% 47% -- --
Ratio of compensation and benefits to net
revenues(1)................................... 51 45 40 42 45 44% 43%
Employees:
United States................................. 5,822 5,356 5,818 6,879 8,349 7,008 8,244
International................................. 3,176 2,803 3,159 3,743 4,684 3,891 4,634
------- -------- -------- -------- -------- -------- --------
Total employees(6).............................. 8,998 8,159 8,977 10,622 13,033 10,899 12,878
======= ======== ======== ======== ======== ======== ========
Assets under supervision:
Assets under management....................... $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $151,189 $206,380
Other client assets........................... 49,061 57,716 76,892 102,033 142,018 114,928 163,315
------- -------- -------- -------- -------- -------- --------
Total assets under supervision.................. $92,732 $110,074 $171,491 $237,962 $336,839 $266,117 $369,695
======= ======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Since we have historically operated in partnership form, payments to our
profit participating limited partners have been accounted for as
distributions of partners' capital rather than as compensation expense. As a
result, our pre-tax earnings and compensation and benefits expense have not
reflected any payments for services rendered by our profit participating
limited partners. Accordingly, our historical pre-tax earnings understate
the expected operating costs to be incurred by us after the offerings. As a
corporation, we will include payments for services rendered by our former
profit participating limited partners in compensation and benefits expense.
For financial information that reflects pro forma compensation and benefits
expense as if we had been a corporation, see "Pro Forma Consolidated
Financial Information".
(2) Total assets and liabilities were increased by $11.64 billion as of November
27, 1998 and $8.99 billion as of February 26, 1999 due to the adoption of
the provisions of Statement of Financial Accounting Standards No. 125 that
were deferred by Statement of Financial Accounting Standards No. 127. For a
discussion of Statement of Financial Accounting Standards Nos. 125 and 127,
see "Accounting Developments" in Note 2 to the audited consolidated
financial statements.
(3) Reflects such adjustments as are necessary, in the opinion of management,
for a fair presentation of the results of operations and stockholders'
equity of Goldman Sachs on a pro forma basis. See "Pro Forma Consolidated
Financial Information" for more detailed information concerning these
adjustments.
(4) Calculated based on weighted-average diluted Common Shares outstanding after
giving effect to the Pro Forma Adjustments. See "Pro Forma Consolidated
Financial Information" for more detailed information concerning these
adjustments and the calculation of pro forma earnings per share.
(5) Calculated based on weighted-average diluted Common Shares outstanding after
giving effect to the Pro Forma Adjustments and as adjusted to reflect the
issuance of 42,000,000 shares of Common Stock offered by Goldman Sachs at
the midpoint of the range of initial public offering prices set forth on the
cover page of this prospectus. See "Pro Forma Consolidated Financial
Information" for more detailed information concerning these adjustments and
the calculation of pro forma earnings per share.
(6) Excludes employees of Goldman Sachs' two property management subsidiaries,
The Archon Group, L.P. ("Archon") and Archon Group (France) S.C.A. ("Archon
France"). Substantially all of the costs of these employees are reimbursed
to Goldman Sachs by the real estate investment funds to which the two
companies provide property management services. In addition, as of February
26, 1999, we had 3,400 temporary staff and consultants. For more detailed
information regarding our employees, see "Business -- Employees".
35
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS ON MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To the Partners,
The Goldman Sachs Group, L.P.:
We have examined Management's Discussion and Analysis of Financial
Condition and Results of Operations, except as discussed in the third paragraph
below ("MD&A"), taken as a whole, of The Goldman Sachs Group, L.P. and
Subsidiaries (the "Firm") for the three-year period ended November 27, 1998,
included on pages 37 to 61 of this prospectus. Management is responsible for the
preparation of the Firm's MD&A pursuant to the rules and regulations adopted by
the Securities and Exchange Commission. Our responsibility is to express an
opinion on the presentation based on our examination. We have audited, in
accordance with generally accepted auditing standards, the consolidated
financial statements of the Firm as of November 27, 1998 and November 28, 1997,
and for each of the three years in the period ended November 27, 1998, and in
our report dated January 22, 1999, we expressed an unqualified opinion on those
financial statements.
Our examination of MD&A was made in accordance with attestation standards
established by the American Institute of Certified Public Accountants and,
accordingly, included examining, on a test basis, evidence supporting the
historical amounts and disclosures in the presentation. An examination also
includes assessing the significant determinations made by management as to the
relevance of information to be included and the estimates and assumptions that
affect reported information. We believe that our examination provides a
reasonable basis for our opinion.
The preparation of MD&A requires management to interpret the criteria, make
determinations as to the relevance of information to be included, and make
estimates and assumptions that affect reported information. MD&A includes
information regarding the estimated future impact of transactions and events
that have occurred or are expected to occur, expected sources of liquidity and
capital resources, operating trends, commitments, and uncertainties, including
those related to the Year 2000 readiness issue. Actual results in the future may
differ materially from management's present assessment of this information
because events and circumstances frequently do not occur as expected.
Our examination of MD&A of the Firm did not include (i) the information
presented under the headings "VaR" or "VaR Methodology, Assumptions and
Limitations" or (ii) information for the three months ended February 26, 1999
and February 27, 1998. Accordingly, we express no opinion on such information.
In our opinion, the Firm's presentation of MD&A for the three-year period
ended November 27, 1998 includes, in all material respects, the required
elements of the rules and regulations adopted by the Securities and Exchange
Commission; the historical financial amounts included therein have been
accurately derived, in all material respects, from the Firm's financial
statements; and the underlying information, determinations, estimates, and
assumptions of the Firm provide a reasonable basis for the disclosures contained
therein.
PricewaterhouseCoopers LLP
New York, New York
March 15, 1999.
36
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Goldman Sachs is a global investment banking and securities firm that
provides a wide range of services worldwide to a substantial and diversified
client base.
Our activities are divided into three principal business lines:
- - Investment Banking, which includes financial advisory services and
underwriting;
- - Trading and Principal Investments, which includes fixed income, currency and
commodities ("FICC"), equities and principal investments (principal
investments reflect primarily our investments in our merchant banking funds);
and
- - Asset Management and Securities Services, which includes asset management,
securities services and commissions.
All references to 1996, 1997 and 1998 refer to our fiscal year ended, or
the date, as the context requires, November 29, 1996, November 28, 1997 and
November 27, 1998, respectively, and all references to February 1998 and
February 1999 refer to our three-month fiscal period ended, or the date, as the
context requires, February 27, 1998 and February 26, 1999, respectively.
"Goldman Sachs", "we" and "our" mean, prior to the principal incorporation
transactions that are described under "Certain Relationships and Related
Transactions -- Incorporation and Related Transactions -- Incorporation
Transactions" (the "Incorporation Transactions"), The Goldman Sachs Group, L.P.,
a Delaware limited partnership ("Group L.P."), and its consolidated subsidiaries
and, after the Incorporation Transactions, The Goldman Sachs Group, Inc., a
Delaware corporation ("GS Inc."), and its consolidated subsidiaries.
BUSINESS ENVIRONMENT
Economic and market conditions can significantly affect our performance.
For a number of years leading up to the second half of 1998, we operated in a
generally favorable macroeconomic environment characterized by low inflation,
low interest rates and strong equity markets in the United States and many
international markets. This favorable economic environment provided a positive
climate for our investment banking activities, as well as for our
customer-driven and proprietary trading activities. Economic conditions were
also favorable for wealth creation which contributed positively to growth in our
asset management businesses.
From mid-August to mid-October 1998, the Russian economic crisis, the
turmoil in Asian and Latin American emerging markets and the resulting move to
higher credit quality fixed income securities by many investors led to
substantial declines in global financial markets. Investors broadly sold
credit-sensitive products, such as corporate and high-yield debt, and bought
higher-rated instruments, such as U.S. Treasury securities, which caused credit
spreads to widen dramatically. This market turmoil also caused a widespread
decline in global equity markets.
As a major dealer in fixed income securities, Goldman Sachs maintains
substantial inventories of corporate and high-yield debt. Goldman Sachs
regularly seeks to hedge the interest rate risk on these positions through,
among other strategies, short positions in U.S. Treasury securities. In the
second half of 1998, we suffered losses from both the decline in the prices of
corporate and high-yield debt instruments that we owned and the increase in the
prices of the U.S. Treasury securities in which we had short positions.
This market turmoil also led to trading losses in our fixed income relative
value trading positions. Relative value trading positions are intended to profit
from a perceived temporary dislocation in the relationship between the values of
different financial instruments. From mid-August to mid-October 1998, the
components of these relative value positions moved in directions that we did not
anticipate and the volatilities of some of our positions increased to three
times prior levels. When Goldman Sachs and other market participants with
similar positions simultaneously sought to reduce positions and exposures,
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<PAGE> 39
this caused a substantial reduction in market liquidity and a continuing decline
in prices.
In the second half of 1998, we also experienced losses in equity arbitrage
and in the value of a number of merchant banking investments.
Later in the fourth quarter of 1998, market conditions improved as the U.S.
Federal Reserve cut interest rates, the International Monetary Fund finalized a
credit agreement with Brazil and a consortium of 14 financial institutions,
including Goldman Sachs, recapitalized Long-Term Capital Portfolio, L.P. For a
further discussion of Long-Term Capital Portfolio, L.P., see
"-- Liquidity -- The Balance Sheet" below.
Our earnings in the second half of 1998 were adversely affected by market
conditions from mid-August to mid-October. In this difficult business
environment, Trading and Principal Investments recorded net revenues of $464
million in the third quarter of 1998 and net revenues of negative $663 million
in the fourth quarter of 1998. As a result, Trading and Principal Investments
did not make a significant contribution to pre-tax earnings in 1998.
In the first quarter of 1999, we operated in a generally favorable
macroeconomic environment characterized by low inflation and low interest rates.
Global financial markets recovered from the turbulent conditions of the second
half of 1998, leading to narrowing credit spreads and an increase in mergers and
acquisitions and other corporate activity.
The macroeconomic environment in the first quarter of 1999 was particularly
favorable in the United States, where inflationary pressures were minimal and
interest rates were left unchanged by the U.S. Federal Reserve. Economic growth
in Europe was sluggish despite a simultaneous cut in interest rates by 11
European central banks in December and the successful establishment of the
European Economic and Monetary Union in January. Markets in Asia and Latin
America were generally characterized by continuing economic and financial
difficulties, particularly in Japan and Brazil. In a number of Asian emerging
markets, however, economic and market conditions stabilized in the first quarter
of 1999.
RESULTS OF OPERATIONS
Management believes that the best measure by which to assess Goldman Sachs'
historical profitability is pre-tax earnings because, as a partnership, we
generally have not been subject to U.S. federal or state income taxes. See
"-- Provision for Taxes" below and Note 2 to the audited consolidated financial
statements for a further discussion of our provision for taxes.
Since historically we have operated as a partnership, payments to our
profit participating limited partners have been accounted for as distributions
of partners' capital rather than as compensation expense. As a result, our
compensation and benefits expense has not reflected any payments for services
rendered by our profit participating limited partners and has therefore
understated the expected operating costs to be incurred by us after the
offerings. As a corporation, we will include these payments to our former profit
participating limited partners in compensation and benefits expense, as
discussed under "Pro Forma Consolidated Financial Information". See
"Management -- The Partner Compensation Plan" for a further discussion of the
plan to be adopted for the purpose of compensating our former profit
participating limited partners.
Moreover, in connection with the offerings, we will record the effect of
the following non-recurring items in the second quarter of 1999:
- - the award of the Formula RSUs;
- - the initial irrevocable contribution of shares of Common Stock to the DCP;
- - the recognition of net tax assets; and
- - the contribution to the Goldman Sachs charitable foundation.
We also expect to record additional expense in the second quarter of 1999 equal
to (i) 50% of the estimated compensation and benefits of the former PLPs in 1999
based on the annualized results for the first half of 1999 offset by (ii) the
effect of issuing restricted stock units to employees in lieu of
38
<PAGE> 40
cash compensation, 50% of which will be expensed over the four-year period
beginning in fiscal 2000.
As a result of all of these factors, we expect to record a substantial
pre-tax loss in the second quarter of 1999.
The composition of our historical net revenues has varied over time as
financial markets and the scope of our operations have changed. The composition
of net revenues can also vary over the shorter term due to fluctuations in
economic and market conditions. As a result, period-to-period comparisons may
not be meaningful. See "Risk Factors" for a discussion of factors that could
affect our future performance.
OVERVIEW
The following table sets forth our net revenues and pre-tax earnings:
FINANCIAL OVERVIEW
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues................................ $6,129 $7,447 $8,520 $2,472 $2,995
Pre-tax earnings............................ 2,606 3,014 2,921 1,022 1,188
</TABLE>
------------------------
FEBRUARY 1999 VERSUS FEBRUARY 1998. Our net revenues were $2.99 billion in
the three-month period ended February 1999, an increase of 21% compared to the
same period in 1998. Net revenue growth was strong in Investment Banking, which
increased 42%, primarily due to higher market levels of mergers and acquisitions
and underwriting activity. Net revenues in Trading and Principal Investments
increased 15% as higher net revenues in FICC and equities more than offset a
reduction in principal investments. Net revenues in Asset Management and
Securities Services increased 12% due to increased assets under management and
higher customer balances in securities services. Pre-tax earnings increased 16%
to $1.19 billion for the period.
1998 VERSUS 1997. Our net revenues were $8.52 billion in 1998, an increase
of 14% compared to 1997. Net revenue growth was strong in Investment Banking,
which increased 30%, due to higher levels of mergers and acquisitions activity,
and in Asset Management and Securities Services, which increased 43%, due to
increased commissions, higher customer balances in securities services and
increased assets under management. Net revenues in Trading and Principal
Investments decreased 19% compared to the prior year, due primarily to a 30%
reduction of net revenues in FICC. Pre-tax earnings in 1998 were $2.92 billion
compared to $3.01 billion in the prior year.
1997 VERSUS 1996. Our net revenues were $7.45 billion in 1997, an increase
of 22% compared to 1996. Net revenue growth was strong in Asset Management and
Securities Services, which increased 46%, due to increased commissions and asset
management fees and higher assets under management and customer balances in
securities services. Net revenues in Investment Banking increased 22% due to
increased levels of mergers and acquisitions and debt underwriting activity. Net
revenues in Trading and Principal Investments increased 9% over the prior year,
due to higher net revenues in FICC and principal investments. Pre-tax earnings
were $3.01 billion in 1997, an increase of 16% over the prior year.
39
<PAGE> 41
The following table sets forth the net revenues of our principal business
lines:
NET REVENUES BY PRINCIPAL BUSINESS LINE
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Investment Banking...................... $2,113 $2,587 $3,368 $ 633 $ 902
Trading and Principal Investments....... 2,693 2,926 2,379 1,182 1,357
Asset Management and Securities
Services.............................. 1,323 1,934 2,773 657 736
------ ------ ------ ------ ------
Total net revenues...................... $6,129 $7,447 $8,520 $2,472 $2,995
====== ====== ====== ====== ======
</TABLE>
------------------------
Net revenues in our principal business lines represent total revenues less
allocations of interest expense to specific securities, commodities and other
positions in relation to the level of financing incurred by each position.
Interest expense is allocated to Trading and Principal Investments and the
securities services component of Asset Management and Securities Services. Net
revenues may not be indicative of the relative profitability of any principal
business line.
INVESTMENT BANKING
Goldman Sachs provides a broad range of investment banking services to a
diverse group of corporations, financial institutions, governments and
individuals. Our investment banking activities are divided into two categories:
- - FINANCIAL ADVISORY. Financial advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense
activities, restructurings and spin-offs; and
- - UNDERWRITING. Underwriting includes public offerings and private placements of
equity and debt securities.
The following table sets forth the net revenues of our Investment Banking
business:
INVESTMENT BANKING NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
------------------------------ ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Financial advisory.................... $ 931 $1,184 $1,774 $363 $522
Underwriting.......................... 1,182 1,403 1,594 270 380
------ ------ ------ ---- ----
Total Investment Banking.............. $2,113 $2,587 $3,368 $633 $902
====== ====== ====== ==== ====
</TABLE>
------------------------
FEBRUARY 1999 VERSUS FEBRUARY 1998. The Investment Banking business
achieved net revenues of $902 million in the three-month period ended February
1999, an increase of 42% compared to the same period in 1998. Net revenue growth
was strong in both financial advisory and underwriting, particularly in the
communications, media and
40
<PAGE> 42
entertainment, healthcare and financial institutions groups. Our Investment
Banking business was particularly strong in Europe and the United States.
Financial advisory revenues increased 44% compared to the same period in
1998, primarily due to higher market levels of mergers and acquisitions activity
as the trend toward consolidation continued in various industries. Underwriting
revenues increased 41%, primarily due to increased levels of equity underwriting
activity in Europe.
1998 VERSUS 1997. The Investment Banking business achieved net revenues of
$3.37 billion in 1998, an increase of 30% compared to 1997. Net revenue growth
was strong in financial advisory and, to a lesser extent, in underwriting as
Goldman Sachs' global presence and strong client base enabled it to capitalize
on higher levels of activity in many industry groups, including communications,
media and entertainment, financial institutions, general industrials and retail.
Net revenue growth in our Investment Banking business was strong in all major
regions in 1998 compared to the prior year.
Financial advisory revenues increased 50% compared to 1997 due to increased
revenues from mergers and acquisitions advisory assignments, which principally
resulted from consolidation within various industries and generally favorable
U.S. and European stock markets. Despite a substantial decrease in the number of
industry-wide underwriting transactions in August and September of 1998,
underwriting revenues increased 14% for the year, primarily due to increased
revenues from equity and high-yield corporate debt underwriting activities.
1997 VERSUS 1996. The Investment Banking business achieved net revenues of
$2.59 billion in 1997, an increase of 22% compared to 1996. Net revenue growth
was strong in both financial advisory and underwriting, particularly in the
financial institutions, general industrials and real estate groups.
Financial advisory revenues increased 27% compared to 1996 primarily due to
increased revenues from mergers and acquisitions activity in the market as a
whole. Underwriting revenues increased 19% primarily due to increased revenues
from investment grade and high-yield debt underwriting, which resulted from
lower interest rates. Revenues from equity underwriting activities increased
modestly over 1996 levels.
TRADING AND PRINCIPAL INVESTMENTS
Our Trading and Principal Investments business facilitates customer
transactions and takes proprietary positions through market-making in and
trading of fixed income and equity products, currencies, commodities, and swaps
and other derivatives. The Trading and Principal Investments business includes
the following:
- - FICC. We make markets in and trade fixed income products, currencies and
commodities, structure and enter into a wide variety of derivative
transactions and engage in proprietary trading and arbitrage activities;
- - EQUITIES. We make markets in and trade equities and equity-related products,
structure and enter into equity derivative transactions and engage in
proprietary trading and equity arbitrage; and
- - PRINCIPAL INVESTMENTS. Principal investments primarily represents net
revenues from our investments in our merchant banking funds.
Net revenues from principal investments do not include management fees and
overrides from our merchant banking funds. Overrides represent an increased
share of a fund's income and gains to Goldman Sachs when the return on
investments exceeds certain threshold returns to fund investors. These
management fees and overrides are included in the net revenues of Asset
Management and Securities Services.
Substantially all of our inventory is marked-to-market daily and,
therefore, its value and our net revenues are subject to fluctuations based on
market movements. In addition, net revenues derived from our principal
investments in privately held concerns and in real estate may fluctuate
significantly depending on the revaluation or sale of these investments in any
given period.
41
<PAGE> 43
The following table sets forth the net revenues of our Trading and
Principal Investments business:
TRADING AND PRINCIPAL INVESTMENTS NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
FICC.............................................. $1,749 $2,055 $1,438 $ 741 $ 876
Equities.......................................... 730 573 795 365 455
Principal investments............................. 214 298 146 76 26
------ ------ ------ ------ ------
Total Trading and Principal Investments........... $2,693 $2,926 $2,379 $1,182 $1,357
====== ====== ====== ====== ======
</TABLE>
------------------------
FEBRUARY 1999 VERSUS FEBRUARY 1998. The Trading and Principal Investments
business achieved net revenues of $1.36 billion in the three-month period ended
February 1999, an increase of 15% compared to the same period in 1998. Strong
performances in FICC and equities more than offset a net revenue reduction in
principal investments.
Net revenues in FICC increased 18% compared to the same period in 1998,
primarily due to higher net revenues from market-making and trading of
currencies, corporate bonds and mortgage-backed securities, partially offset by
lower net revenues from fixed income derivatives.
Net revenues in equities increased 25% compared to the same period in 1998,
primarily due to increased market-making net revenues resulting from strong
over-the-counter ("OTC") transaction volume in Europe and the United States.
Net revenues from principal investments decreased 66%, due to lower gains
on the disposition of investments and a reduction in net revenues related to the
mark-to-market of our principal investments.
1998 VERSUS 1997. Net revenues in Trading and Principal Investments were
$2.38 billion in 1998, a decrease of 19% compared to 1997. This decrease in net
revenues was concentrated in the second half of the year. See "-- Business
Environment" above for a discussion of the losses suffered in Trading and
Principal Investments in the second half of 1998. For the full year, significant
net revenue reductions in FICC and principal investments were partially offset
by increased net revenues in equities.
Net revenues in FICC decreased 30% compared to 1997 due to an
extraordinarily difficult environment in the second half of 1998. The net
revenue reduction in FICC was concentrated in fixed income arbitrage and
high-yield debt trading, which experienced losses in 1998 due to a reduction in
liquidity and widening credit spreads in the second half of the year. An
increase in net revenues from market-making and trading in fixed income
derivatives, currencies and commodities partially offset this decline.
Net revenues in equities increased 39% compared to 1997 as higher net
revenues in derivatives and European shares were partially offset by losses in
equity arbitrage. The derivatives business generated significantly higher net
revenues due, in part, to strong customer demand for OTC products, particularly
in Europe. Net revenues from European shares increased as Goldman Sachs
benefited from generally favorable equity markets and increased customer demand.
The equity arbitrage losses were due principally to the underperformance of
various equity positions versus their benchmark hedges, to widening of spreads
in a variety of relative value trades and to lower prices for event-oriented
securities resulting from a reduction in announced
42
<PAGE> 44
mergers and acquisitions and other corporate activity in the second half of
1998.
Net revenues from principal investments declined 51% compared to 1997 as
investments in certain publicly held companies decreased in value during the
second half of 1998. This decrease was partially offset by an increase in gains
on the disposition of investments, compared to the prior year.
1997 VERSUS 1996. The Trading and Principal Investments business achieved
net revenues of $2.93 billion in 1997, an increase of 9% compared to 1996.
Strong performances in FICC and principal investments more than offset a net
revenue reduction in equities.
Net revenues in FICC increased 17% compared to 1996 due principally to
higher net revenues from market-making and trading in currencies, fixed income
derivatives and commodities. Fixed income arbitrage activities also contributed
to net revenue growth in FICC. Net revenues from market-making in and trading of
emerging market debt securities and corporate bonds declined in 1997 compared to
1996.
Net revenues in equities decreased 22% in 1997 compared to 1996 due
principally to reductions in net revenues from derivatives and convertibles
resulting from volatility in the global equity markets in October and November
1997 and declining asset values in Japan in late November 1997. This reduction
was partially offset by increased net revenues from higher customer trading
volume in certain European OTC markets.
Net revenues from principal investments increased 39% in 1997 compared to
1996, as certain companies in which we invested through our merchant banking
funds completed initial public offerings and our positions in other publicly
held companies increased in value.
ASSET MANAGEMENT AND SECURITIES SERVICES
Asset Management and Securities Services is comprised of the following:
- - ASSET MANAGEMENT. Asset management generates management fees by providing
investment advisory services to a diverse and rapidly growing client base of
institutions and individuals;
- - SECURITIES SERVICES. Securities services includes prime brokerage, financing
services and securities lending and our matched book businesses, all of which
generate revenue primarily in the form of fees or interest rate spreads; and
- - COMMISSIONS. Commission-based businesses include agency transactions for
clients on major stock and futures exchanges. Overrides derived from our
merchant banking funds are also included in commissions.
The following table sets forth the net revenues of our Asset Management and
Securities Services business:
ASSET MANAGEMENT AND SECURITIES SERVICES NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- -------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Asset management............................. $ 242 $ 458 $ 675 $139 $202
Securities services.......................... 354 487 730 170 207
Commissions.................................. 727 989 1,368 348 327
------ ------ ------ ---- ----
Total Asset Management and Securities
Services................................... $1,323 $1,934 $2,773 $657 $736
====== ====== ====== ==== ====
</TABLE>
43
<PAGE> 45
Goldman Sachs' assets under supervision are comprised of assets under
management and other client assets. Assets under management typically generate
fees based on a percentage of their value and include our mutual funds, separate
accounts managed for institutional and individual investors, our merchant
banking funds and other alternative investment funds. Other client assets are
comprised of assets in brokerage accounts of primarily high net worth
individuals, on which we earn commissions. The following table sets forth our
assets under supervision:
ASSETS UNDER SUPERVISION
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------------- --------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Assets under management.......... $ 94,599 $135,929 $194,821 $151,189 $206,380
Other client assets.............. 76,892 102,033 142,018 114,928 163,315
-------- -------- -------- -------- --------
Total assets under supervision... $171,491 $237,962 $336,839 $266,117 $369,695
======== ======== ======== ======== ========
</TABLE>
------------------------
FEBRUARY 1999 VERSUS FEBRUARY 1998. The Asset Management and Securities
Services business achieved net revenues of $736 million in the three-month
period ended February 1999, an increase of 12% compared to the same period in
1998. Strong performances in asset management and securities services more than
offset a net revenue reduction in commissions.
Asset management revenues increased 45% compared to the same period in
1998, primarily reflecting a 43% increase in average assets under management. In
the 1999 period, approximately half of the increase in assets under management
was attributable to net asset inflows, with the balance reflecting market
appreciation. Net revenues from securities services increased 22% during the
period, primarily due to growth in our securities borrowing and lending
businesses. Commission revenues decreased 6%, as an increase in equity
commissions was more than offset by a reduction in merchant banking overrides
compared to a particularly strong period in the prior year.
1998 VERSUS 1997. The Asset Management and Securities Services business
achieved net revenues of $2.77 billion in 1998, an increase of 43% compared to
1997. All major components of the business line exhibited strong net revenue
growth.
Asset management revenues increased 47% during this period, reflecting a
41% increase in average assets under management over 1997. In 1998,
approximately 80% of the increase in assets under management was attributable to
net asset inflows, with the remaining 20% reflecting market appreciation. Net
revenues from securities services increased 50%, primarily due to growth in our
securities borrowing and lending businesses. Commission revenues increased 38%
as generally strong and highly volatile equity markets resulted in increased
transaction volumes in listed equity securities. Merchant banking overrides also
contributed significantly to the increase in commission revenues.
1997 VERSUS 1996. The Asset Management and Securities Services business
achieved net revenues of $1.93 billion in 1997, an increase of 46% compared to
1996. All major components of the business line exhibited strong net revenue
growth.
Asset management revenues increased 89% during this period, reflecting a
73% increase in average assets under management due to strong net asset inflows,
market appreciation and assets added through the acquisitions of Liberty
Investment Management in January 1997 and Commodities Corporation in June 1997.
Net revenue growth in
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<PAGE> 46
securities services was 38%, principally reflecting growth in our securities
borrowing and lending businesses. Commission revenues increased 36% as customer
trading volumes increased significantly on many of the world's principal stock
exchanges, including those in the United States where industry-wide volumes
increased substantially in the third and fourth quarters of 1997. Merchant
banking overrides also contributed significantly to the increase in commission
revenues.
OPERATING EXPENSES
In recent years, our operating expenses have increased as a result of
numerous factors, including higher levels of compensation, expansion of our
asset management business, increased worldwide activities, greater levels of
business complexity and additional systems and consulting costs relating to
various technology initiatives.
Since we have historically operated in partnership form, payments to our
profit participating limited partners have been accounted for as distributions
of partners' capital rather than as compensation expense. As a result, our
compensation and benefits expense has not reflected any payments for services
rendered by our profit participating limited partners. Accordingly, our
historical compensation and benefits, the principal component of our operating
expenses, will increase significantly after the offerings since, as a
corporation, we will include these payments to our former profit participating
limited partners in compensation and benefits expense.
We expect to record additional expense in the second quarter of 1999 equal
to (i) 50% of the estimated compensation and benefits of the former PLPs in 1999
based on the annualized results for the first half of 1999 offset by (ii) the
effect of issuing restricted stock units to employees in lieu of cash
compensation, 50% of which will be expensed over the four-year period beginning
in fiscal 2000. In addition, we expect to record non-cash compensation expense
related to the amortization of the Discretionary RSUs over the five-year period
following the consummation of the offerings. The non-cash expense related to the
Discretionary RSUs is a fixed amount that is not dependent on our operating
results in any given period. See "Pro Forma Consolidated Financial Information"
for a further discussion of these items.
The following table sets forth our operating expenses and number of
employees:
OPERATING EXPENSES AND EMPLOYEES
($ in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
---------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Compensation and benefits............... $2,421 $ 3,097 $ 3,838 $ 1,100 $ 1,275
Brokerage, clearing and exchange fees... 278 357 424 93 111
Market development...................... 137 206 287 54 77
Communications and technology........... 173 208 265 58 78
Depreciation and amortization........... 172 178 242 42 97
Occupancy............................... 154 168 207 44 78
Professional services and other......... 188 219 336 59 91
------ ------- ------- ------- -------
Total operating expenses................ $3,523 $ 4,433 $ 5,599 $ 1,450 $ 1,807
====== ======= ======= ======= =======
Employees at period end(1).............. 8,977 10,622 13,033 10,899 12,878
</TABLE>
- ---------------
(1) Excludes employees of Goldman Sachs' two property management
subsidiaries, Archon and Archon France. Substantially all of the costs
of these employees are reimbursed to Goldman Sachs by the real estate
investment funds to which the two companies provide property management
services. In addition, as of February 1999, we had approximately 3,400
temporary staff and consultants. For more detailed information regarding
our employees, see "Business -- Employees".
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<PAGE> 47
FEBRUARY 1999 VERSUS FEBRUARY 1998. Operating expenses were $1.81 billion
in the three-month period ended February 1999, an increase of 25% over the same
period in 1998, primarily due to increased compensation and benefits and higher
other operating expenses due to, among other things, Goldman Sachs' increased
worldwide activities.
Compensation and benefits decreased as a percentage of net revenues to 43%
from 44% in the same period in 1998. Employment levels increased 18% compared to
the same period in 1998, with particularly strong growth in investment banking
and asset management. Expenses associated with our temporary staff and
consultants were $98 million for the three-month period ended February 1999, an
increase of 55%, reflecting preparations for the Year 2000 and greater levels of
business activity.
Brokerage, clearing and exchange fees increased 19%, primarily due to
higher transaction volumes in fixed income derivatives and futures contracts.
Market development expenses increased 43% and professional services and other
expenses increased 54%, due to higher levels of business activity.
Communications and technology expenses increased 34%, reflecting higher
telecommunications and market data costs associated with higher employment
levels and additional spending on technology initiatives. Depreciation and
amortization increased significantly due to certain fixed asset write-offs and
to capital expenditures on telecommunications and technology-related equipment
and leasehold improvements in support of Goldman Sachs' increased worldwide
activities. Occupancy expenses increased 77%, reflecting additional office space
needed to accommodate higher employment levels.
1998 VERSUS 1997. Operating expenses were $5.60 billion in 1998, an
increase of 26% over 1997, primarily due to increased compensation and benefits
expense.
Compensation and benefits increased as a percentage of net revenues to 45%
from 42% in 1997, principally as a result of increases in employment levels and
in expenses associated with temporary staff and consultants. Employment levels
increased 23% during the year, with particularly strong growth in asset
management. Expenses associated with our temporary staff and consultants were
$330 million in 1998, an increase of 85% compared to 1997, reflecting greater
business activity, Goldman Sachs' global expansion and consulting costs
associated with various technology initiatives, including preparations for the
Year 2000 and the establishment of the European Economic and Monetary Union.
Brokerage, clearing and exchange fees increased 19%, primarily due to
higher transaction volumes in European and U.S. equities and futures contracts.
Market development expenses increased 39% and professional services and other
expenses increased 53%, due to higher levels of business activity and Goldman
Sachs' global expansion. Communications and technology expenses increased 27%,
reflecting higher telecommunications and market data costs associated with
higher employment levels and additional spending on technology initiatives.
Depreciation and amortization increased 36%, principally due to capital
expenditures on telecommunications and technology-related equipment and
leasehold improvements. Occupancy expenses increased 23%, reflecting additional
office space needed to accommodate higher employment levels.
1997 VERSUS 1996. Operating expenses were $4.43 billion in 1997, an
increase of 26% over 1996, primarily due to increased compensation and benefits
expense.
Compensation and benefits increased as a percentage of net revenues to 42%
from 40% in 1996. This increase primarily reflected higher compensation due to
higher profit levels and an 18% increase in employment levels across Goldman
Sachs due to higher levels of market activity and our global expansion into new
businesses and markets. Expenses associated with our temporary staff and
consultants also contributed to the increase in compensation and benefits as a
percentage of net revenues. These expenses were $178 million in 1997, an
increase of 55% compared to 1996, reflecting greater business
46
<PAGE> 48
activity, Goldman Sachs' global expansion and consulting costs associated with
various technology initiatives.
Brokerage, clearing and exchange fees increased 28%, primarily due to
higher transaction volumes in global equities, derivatives and currencies.
Market development expenses increased 50% and professional services and other
expenses increased 16%, due to higher levels of business activity and Goldman
Sachs' global expansion. Communications and technology expenses increased 20%,
reflecting higher telecommunications and market data costs associated with
higher employment levels and additional spending on technology initiatives.
Depreciation and amortization increased 3%. Occupancy expenses increased 9%,
reflecting additional office space needed to accommodate higher employment
levels.
PROVISION FOR TAXES
Group L.P., as a partnership, generally has not been subject to U.S.
federal and state income taxes. The earnings of Group L.P. and certain of its
subsidiaries have been subject to the 4% New York City unincorporated business
tax. In addition, certain of our non-U.S. subsidiaries have been subject to
income taxes in their local jurisdictions. The amount of our provision for
income and unincorporated business taxes has varied significantly from year to
year depending on the mix of earnings among our subsidiaries. For information on
the pro forma effective tax rate of Goldman Sachs under corporate form, see "Pro
Forma Consolidated Financial Information".
GEOGRAPHIC DATA
For a summary of the total revenues, net revenues, pre-tax earnings and
identifiable assets of Goldman Sachs by geographic region, see Note 9 to the
audited consolidated financial statements.
CASH FLOWS
Our cash flows are primarily related to the operating and financing
activities undertaken in connection with our trading and market-making
transactions.
YEAR ENDED NOVEMBER 1998
Cash and cash equivalents increased to $2.84 billion in 1998. Cash of $62
million was provided by operating activities. Cash of $656 million was used for
investing activities, primarily for leasehold improvements and the purchase of
telecommunications and technology-related equipment and certain financial
instruments. Financing activities provided $2.10 billion of cash, reflecting an
increase in the net issuance of long-term and short-term borrowings, partially
offset by a decrease in net repurchase agreements, distributions to partners,
cash outflows related to partners' capital allocated for income taxes and
potential withdrawals and the termination of our Profit Participation Plans. See
Note 8 to the audited consolidated financial statements for a discussion of the
termination of the Profit Participation Plans.
YEAR ENDED NOVEMBER 1997
Cash and cash equivalents decreased to $1.33 billion in 1997. Operating
activities provided cash of $70 million. Cash of $693 million was used for
investing activities, primarily for the purchase of certain financial
instruments and technology-related equipment. Cash of $258 million was used for
financing activities, principally due to a decrease in net repurchase
agreements, distributions to partners and cash outflows related to partners'
capital allocated for income taxes and potential withdrawals, partially offset
by the net issuance of long-term and short-term borrowings.
YEAR ENDED NOVEMBER 1996
Cash and cash equivalents increased to $2.21 billion in 1996. Cash of
$14.63 billion was used for operating activities, primarily to fund higher net
trading assets due to increased levels of business activity. Cash of $218
million was used for investing activities, primarily for the purchase of
technology-related equipment and leasehold improvements. Financing activities
provided $16.10 billion of cash, reflecting an increase in net repurchase
agreements and the net issuance of long-term borrowings, partially offset by
distributions to partners and cash outflows
47
<PAGE> 49
related to partners' capital allocated for
income taxes and potential withdrawals.
LIQUIDITY
MANAGEMENT OVERSIGHT OF LIQUIDITY
Management believes that one of the most important issues for a company in
the financial services sector is access to liquidity. Accordingly, Goldman Sachs
has established a comprehensive structure to oversee its liquidity and funding
policies.
The Finance Committee has responsibility for establishing and assuring
compliance with our asset and liability management policies and has oversight
responsibility for managing liquidity risk, the size and composition of our
balance sheet and our credit ratings. See "-- Risk Management -- Risk Management
Structure" below for a further description of the committees that participate in
our risk management process. The Finance Committee meets monthly, and more often
when necessary, to evaluate our liquidity position and funding requirements.
Our Treasury Department manages the capital structure, funding, liquidity
and relationships with creditors and rating agencies on a global basis. The
Treasury Department works jointly with our global funding desk in managing our
borrowings. The global funding desk is primarily responsible for our
transactional short-term funding activity.
LIQUIDITY POLICIES
In order to maintain an appropriate level of liquidity, management has
implemented several liquidity policies as outlined below.
DIVERSIFICATION OF FUNDING SOURCES AND LIQUIDITY PLANNING. Goldman Sachs
maintains diversified funding sources with both banks and non-bank lenders
globally. Management believes that Goldman Sachs' relationships with its lenders
are critical to its liquidity. We maintain close contact with our primary
lenders to keep them advised of significant developments that affect us.
Goldman Sachs also has access to diversified funding sources with over 800
creditors, including banks, insurance companies, mutual funds, bank trust
departments and other asset managers. We monitor our creditors to maintain broad
and diversified credit, and no single creditor represented more than 5% of our
uncollateralized funding sources as of November 1998. Uncollateralized funding
sources principally include our short-term and long-term borrowings and letters
of credit.
We access liquidity in a variety of markets in the United States as well as
in Europe and Asia. In addition, we make extensive use of the repurchase
agreement market and have raised debt in the private placement, Rule 144A and
commercial paper markets, as well as through Eurobonds, money broker loans,
commodity-based financings, letters of credit and promissory notes. After the
offerings and subject to market conditions, we intend to raise additional funds
in the public debt securities market, including through an anticipated $1
billion offering of long-term debt securities. We seek to structure our
liabilities to avoid significant amounts of debt coming due on any one day or
during any single week or year. In addition, we maintain and update annually a
liquidity crisis plan that provides guidance in the event of a liquidity crisis.
The annual update of this plan is reviewed and approved by our Finance
Committee.
ASSET LIQUIDITY. Goldman Sachs maintains a highly liquid balance sheet.
Many of our assets are readily funded in the repurchase agreement markets, which
generally have proven to be a consistent source of funding, even in periods of
market stress. Substantially all of our inventory turns over rapidly and is
marked-to-market daily. We maintain long-term borrowings and partners' capital
substantially in excess of our less liquid assets.
DYNAMIC LIQUIDITY MANAGEMENT. Goldman Sachs seeks to manage the composition
of its asset base and the maturity profile of its funding to ensure that it can
liquidate its assets prior to its liabilities coming due, even in times of
liquidity stress. We have traditionally been able to fund our liquidity needs
through collateralized funding, such as repurchase transactions and securities
lending, as well as short-term and long-term
48
<PAGE> 50
borrowings and partners' capital. To further evaluate the adequacy of our
liquidity management policies and guidelines, we perform weekly "stress funding"
simulations of disruptions to our access to unsecured credit.
EXCESS LIQUIDITY. In addition to maintaining a highly liquid balance sheet
and a significant portion of longer-term liabilities to assure liquidity even
during adverse conditions, we seek to maintain a liquidity cushion that consists
principally of unencumbered U.S. government and agency obligations to ensure the
availability of immediate liquidity. This pool of highly liquid assets averaged
$14.17 billion during 1998 and $12.54 billion during 1997.
LIQUIDITY RATIO MAINTENANCE. It is Goldman Sachs' policy to further manage
its liquidity by maintaining a "liquidity ratio" of at least 100%. This ratio
measures the relationship between the loan value of our unencumbered assets and
our short-term unsecured liabilities. The maintenance of this liquidity ratio is
intended to ensure that we could fund our positions on a fully secured basis in
the event that we were unable to replace our unsecured debt maturing within one
year. Under this policy, we seek to maintain unencumbered assets in an amount
that, if pledged or sold, would provide the funds necessary to replace unsecured
obligations that are scheduled to mature (or where holders have the option to
redeem) within the coming year.
INTERCOMPANY FUNDING. Most of the liquidity of Goldman Sachs is raised by
Group L.P., which then lends the necessary funds to its subsidiaries and
affiliates. We carefully manage our intercompany exposure by generally requiring
intercompany loans to have maturities equal to or shorter than the maturities of
the aggregate borrowings of Group L.P. This policy ensures that the
subsidiaries' obligations to Group L.P. will generally mature in advance of
Group L.P.'s third-party long-term borrowings. In addition, many of the advances
made to our subsidiaries and affiliates are secured by marketable securities or
other liquid collateral. We generally fund our equity investments in
subsidiaries with partners' capital.
THE BALANCE SHEET
Goldman Sachs maintains a highly liquid balance sheet that fluctuates
significantly between financial statement dates. In the fourth quarter of 1998,
we temporarily decreased our total assets to reduce risk and increase liquidity
in response to difficult conditions in the global financial markets.
Our total assets were $230.62 billion as of February 1999 and $217.38
billion as of November 1998.
Our balance sheet size as of February 1999 and November 1998 increased by
$8.99 billion and $11.64 billion, respectively, due to the adoption of the
provisions of SFAS No. 125 that were deferred by SFAS No. 127. For a discussion
of SFAS Nos. 125 and 127, see "-- Accounting Developments" below and Note 2 to
the audited consolidated financial statements.
As of February 1999 and November 1998, we held approximately $999 million
and $1.04 billion, respectively, in high-yield debt securities and $1.39 billion
and $1.49 billion, respectively, in bank loans, all of which are valued on a
mark-to-market basis. These assets may be relatively illiquid during times of
market stress. We seek to diversify our holdings of these assets by industry and
by geographic location.
As of February 1999 and November 1998, we held approximately $1.04 billion
and $1.17 billion, respectively, of emerging market securities, and $103 million
and $109 million, respectively, in emerging market loans, all of which are
valued on a mark-to-market basis. Of the $1.14 billion and $1.28 billion in
emerging market securities and loans, as of February 1999 and November 1998,
respectively, approximately $778 million and $968 million were sovereign
obligations, many of which are collateralized as to principal at stated
maturity.
In September 1998, a consortium of 14 banks and brokerage firms, including
Goldman Sachs, made an equity investment in Long-Term Capital Portfolio, L.P., a
major market participant. The objectives of this investment were to provide
sufficient capital to permit Long-Term Capital Portfolio, L.P., to
49
<PAGE> 51
continue active management of its positions and, over time, to reduce risk
exposures and leverage, to return capital to the participants in the consortium
and ultimately to realize the potential value of the portfolio. We invested $300
million in Long-Term Capital Portfolio, L.P.
CREDIT RATINGS
Goldman Sachs relies upon the debt capital markets to fund a significant
portion of its day-to-day operations. The cost and availability of debt
financing is influenced by our credit ratings. Credit ratings are also important
to us when competing in certain markets and when seeking to engage in
longer-term transactions, including OTC derivatives. A reduction in our credit
ratings could increase our borrowing costs and limit our access to the capital
markets. This, in turn, could reduce our earnings and adversely affect our
liquidity.
The following table sets forth our credit ratings as of November 1998:
<TABLE>
<CAPTION>
SHORT-TERM DEBT LONG-TERM DEBT
--------------- --------------
<S> <C> <C>
Moody's Investors Service, Inc. ....................... P-1 A1
Standard & Poor's Ratings Services(1).................. A-1+ A+
Fitch IBCA, Inc. ...................................... F1+ AA-
CBRS Inc. ............................................. A-1 (High) A+
</TABLE>
-----------------------------
(1) On September 25, 1998, Standard & Poor's Ratings Services
affirmed Goldman Sachs' credit ratings but revised its outlook
to "negative", indicating that continued adverse market
conditions could have an adverse effect on Goldman Sachs'
ratings over a one- to three-year time period.
------------------------
LONG-TERM DEBT
As of November 1998, our consolidated long-term borrowings were $19.91
billion. Substantially all of these borrowings were unsecured and consisted
principally of senior borrowings with maturities extending to 2024. The weighted
average maturity of our long-term borrowings as of November 1998 was
approximately four years. Substantially all of our long-term borrowings are
swapped into U.S. dollar obligations with short-term floating rates of interest
in order to minimize our exposure to interest rates and foreign exchange
movements. See Note 5 to the audited consolidated financial statements for
further information regarding our long-term borrowings.
REGULATED SUBSIDIARIES
Many of our principal subsidiaries are subject to extensive regulation in
the United States and elsewhere. GS&Co., a registered U.S. broker-dealer, is
regulated by the Securities and Exchange Commission, the Commodity Futures
Trading Commission, the Chicago Board of Trade, the New York Stock Exchange,
Inc. and the National Association of Securities Dealers, Inc. Goldman Sachs
International, a registered U.K. broker-dealer, is subject to regulation by the
Securities and Futures Authority Limited and the Financial Services Authority.
Goldman Sachs (Japan) Ltd., a Tokyo-based broker-dealer, is subject to
regulation by the Japanese Ministry of Finance, the Financial Supervisory
Agency, the Tokyo Stock Exchange, the Tokyo International Financial Futures
Exchange and the Japan Securities Dealers Association. Several other
subsidiaries of Goldman Sachs are regulated by securities, investment advisory,
banking and other regulators and authorities around the world. Compliance with
the rules of these regulators may prevent us from receiving distributions,
advances or repayment of liabilities from these subsidiaries. See Note 8 to the
audited consolidated financial statements and Note 5 to the unaudited condensed
consolidated financial statements for further information regarding our
regulated subsidiaries.
RISK MANAGEMENT
Goldman Sachs has a comprehensive risk management process to monitor,
evalu-
50
<PAGE> 52
ate and manage the principal risks assumed in conducting its activities. These
risks include market, credit, liquidity, operational, legal and reputational
exposures.
RISK MANAGEMENT STRUCTURE
Goldman Sachs seeks to monitor and control its risk exposure through a
variety of separate but complementary financial, credit, operational and legal
reporting systems. We believe that we have effective procedures for evaluating
and managing the market, credit and other risks to which we are exposed.
Nonetheless, the effectiveness of our policies and procedures for managing risk
exposure can never be completely or accurately predicted or fully assured. For
example, unexpectedly large or rapid movements or disruptions in one or more
markets or other unforeseen developments can have a material adverse effect on
our results of operations and financial condition. The consequences of these
developments can include losses due to adverse changes in inventory values,
decreases in the liquidity of trading positions, higher volatility in our
earnings, increases in our credit risk to customers and counterparties and
increases in general systemic risk. See "Risk Factors -- Market Fluctuations
Could Adversely Affect Our Businesses in Many Ways" for a discussion of the
effect that market fluctuations can have on our businesses.
Goldman Sachs has established risk control procedures at several levels
throughout the organization. Trading desk managers have the first line of
responsibility for managing risk within prescribed limits. These managers have
in-depth knowledge of the primary sources of risk in their individual markets
and the instruments available to hedge our exposures. In addition, a number of
committees described in the following table are responsible for establishing
trading limits, monitoring adherence to these limits and for general oversight
of our risk management process.
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<PAGE> 53
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COMMITTEE FUNCTION
- -----------------------------------------------------------------------------------------------------
<S> <C>
Management Committee All risk control functions ultimately report to the
Management Committee. Through both direct and delegated
authority, the Management Committee approves all of Goldman
Sachs':
- operating activities;
- trading risk parameters; and
- customer review guidelines.
- -----------------------------------------------------------------------------------------------------
Risk Committees The Firmwide Risk Committee:
- periodically reviews the activities of existing
businesses;
- approves new businesses and products;
- approves divisional market risk limits and reviews
business unit market risk limits;
- approves inventory position limits for selected country
exposures and business units;
- approves sovereign credit risk limits and credit risk
limits by ratings group; and
- reviews scenario analyses based on abnormal or
"catastrophic" market movements.
The FICC Risk Committee sets market risk limits for
individual business units and sets issuer-specific net
inventory position limits.
The Equities Risk Committee sets market risk limits for
individual business units that consist of gross and net
inventory position limits and, for equity derivatives,
limits based on market move scenario analysis.
The Asset Management Control Oversight Committee and Asset
Management Risk Committee oversee various operational,
credit, pricing and business practices issues.
- -----------------------------------------------------------------------------------------------------
Global Compliance and Control The Global Compliance and Control Committee provides
Committee oversight of our compliance and control functions, including
internal audit, reviews our legal, reputational, operational
and control risks, and periodically reviews the activities
of existing businesses.
- -----------------------------------------------------------------------------------------------------
Commitments Committee The Commitments Committee approves:
- equity and non-investment grade debt underwriting
commitments;
- loans extended by Goldman Sachs; and
- unusual financing structures and transactions that involve
significant capital exposure.
The Commitments Committee has delegated to the Credit
Department the authority to approve underwriting commitments
for investment grade debt and certain other products.
- -----------------------------------------------------------------------------------------------------
Credit Policy Committee The Credit Policy Committee establishes and reviews broad
credit policies and parameters that are implemented by the
Credit Department.
- -----------------------------------------------------------------------------------------------------
Finance Committee The Finance Committee is responsible for oversight of our
capital, liquidity and funding needs and for setting certain
inventory position limits.
- -----------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 54
Segregation of duties and management oversight are fundamental elements of
our risk management process. Accordingly, departments that are independent of
the revenue producing units, such as the Firmwide Risk, Credit, Controllers,
Global Operations, Central Compliance, Management Controls and Legal
Departments, in part perform risk management functions, which include
monitoring, analyzing and evaluating risk.
MARKET RISK
The potential for changes in the market value of our trading positions is
referred to as "market risk". Our trading positions result from underwriting,
market-making and proprietary trading activities.
The broadly defined categories of market risk include exposures to interest
rates, currency rates, equity prices and commodity prices.
- - Interest rate risks primarily result from exposures to changes in the level,
slope and curvature of the yield curve, the volatility of interest rates,
mortgage prepayment speeds and credit spreads.
- - Currency rate risks result from exposures to changes in spot prices, forward
prices and volatilities of currency rates.
- - Equity price risks result from exposures to changes in prices and volatilities
of individual equities, equity baskets and equity indices.
- - Commodity price risks result from exposures to changes in spot prices, forward
prices and volatilities of commodities, such as electricity, natural gas,
crude oil, petroleum products and precious and base metals.
We seek to manage these risk exposures through diversifying exposures,
controlling position sizes and establishing hedges in related securities or
derivatives. For example, we may hedge a portfolio of common stock by taking an
offsetting position in a related equity-index futures contract. The ability to
manage an exposure may, however, be limited by adverse changes in the liquidity
of the security or the related hedge instrument and in the correlation of price
movements between the security and related hedge instrument.
In addition to applying business judgment, senior management uses a number
of quantitative tools to manage our exposure to market risk. These tools
include:
- - risk limits based on a summary measure of market risk exposure referred to as
Value-at-Risk or "VaR";
- - risk limits based on a scenario analysis that measures the potential effect of
a significant widening of credit spreads on our trading net revenues;
- - inventory position limits for selected business units and country exposures;
and
- - scenario analyses which measure the potential effect on our trading net
revenues of abnormal market movements.
We also estimate the broader potential impact of a sustained market
downturn on our investment banking and merchant banking activities.
VaR. VaR is the potential loss in value of Goldman Sachs' trading
positions due to adverse movements in markets over a defined time horizon with a
specified confidence level.
For the VaR numbers reported below, a one-day time horizon and a 95%
confidence level were used. This means that there is a one in 20 chance that
daily trading net revenues will fall below the expected daily trading net
revenues by an amount at least as large as the reported VaR. Thus, shortfalls
from expected trading net revenues on a single trading day greater than the
reported VaR would be anticipated to occur, on average, about once a month.
Shortfalls on a single day can exceed reported VaR by significant amounts.
Shortfalls can also accumulate over a longer time horizon such as a number of
consecutive trading days. For a discussion of the limitations of our risk
measures, see "Risk Factors -- Our Risk Management Policies and Procedures May
Leave Us Exposed to Unidentified or Unanticipated Risk".
The VaR numbers below are shown separately for interest rate, currency,
equity and
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<PAGE> 55
commodity products, as well as for our overall trading positions.
These VaR numbers include the underlying product positions and related
hedges, which may include positions in other product areas. For example, the
hedge of a foreign exchange forward may include an interest rate futures
position and the hedge of a long corporate bond position may include a short
position in the related equity.
VaR METHODOLOGY, ASSUMPTIONS AND LIMITATIONS. The modeling of the risk
characteristics of our trading positions involves a number of assumptions and
approximations. While management believes that these assumptions and
approximations are reasonable, there is no uniform industry methodology for
estimating VaR, and different assumptions and/or approximations could produce
materially different VaR estimates.
We use historical data to estimate our VaR and, to better reflect asset
volatilities and correlations, these historical data are weighted to give
greater importance to more recent observations. Given its reliance on historical
data, VaR is most effective in estimating risk exposures in markets in which
there are no sudden fundamental changes or shifts in market conditions. An
inherent limitation of VaR is that past changes in market risk factors, even
when weighted toward more recent observations, may not produce accurate
predictions of future market risk. For example, the asset volatilities to which
we were exposed in the second half of 1998 were substantially larger than those
reflected in the historical data used during that time period to estimate our
VaR. Moreover, VaR calculated for a one-day time horizon does not fully capture
the market risk of positions that cannot be liquidated or offset with hedges
within one day.
VaR also should be evaluated in light of the methodology's other
limitations. For example, when calculating the VaR numbers shown below, we
assume that asset returns are normally distributed. Non-linear risk exposures on
options and the potentially mitigating impact of intra-day changes in related
hedges would likely produce non-normal asset returns. Different distributional
assumptions could produce a materially different VaR.
The following table sets forth our daily VaR for substantially all of our
trading positions:
DAILY VaR
(in millions)
<TABLE>
<CAPTION>
AS OF
NOVEMBER
RISK CATEGORIES 1998
--------------- --------
<S> <C>
Interest rates.............................................. $ 27.3
Currency rates.............................................. 9.0
Equity prices............................................... 25.3
Commodity prices............................................ 7.0
Diversification effect(1)................................... (25.7)
------
Firmwide.................................................... $ 42.9
======
</TABLE>
- ---------------
(1) Equals the difference between firmwide daily VaR and the sum of the daily
VaRs for the four risk categories. This effect arises because the four
market risk categories are not perfectly correlated.
------------------------
The daily VaR for substantially all of our trading positions as of February
1999 was not materially different from our daily VaR as of November 1998.
For a discussion of what our daily VaR would have been as of November 1998
had we used our volatility and correlation data as of May 29, 1998, see
"Business -- Trading and Principal Investments -- Trading Risk
Management -- Risk Reduction".
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<PAGE> 56
NON-TRADING RISK
The market risk associated with our non-trading financial instruments,
including investments in our merchant banking funds, is measured using a
sensitivity analysis that estimates the potential reduction in our net revenues
associated with hypothetical market movements. As of February 1999 and November
1998, non-trading market risk was not material.
RECENT ENHANCEMENTS TO RISK MANAGEMENT
While VaR continues to be a core tool in our risk management process,
management has increased its emphasis on the supplemental measures described
below:
- - CREDIT SPREAD LIMITS. In addition to VaR, the Firmwide Risk Committee now
sets market risk limits based on a scenario analysis of widening credit
spreads similar to those experienced in the second half of 1998; and
- - SCENARIO ANALYSES. Management is using scenario analyses that reflect more
extreme market conditions, such as large increases in market volatility as
well as substantial and sustained adverse movements in the volatility and
correlation of our relative value positions.
Notwithstanding these measures, we continue to hold trading positions that
are substantial in both number and size, and are subject to significant market
risk. In addition, management may choose to increase Goldman Sachs' risk levels
in the future. See "Risk Factors -- Market Fluctuations Could Adversely Affect
Our Businesses in Many Ways" and "-- Our Risk Management Policies and Procedures
May Leave Us Exposed to Unidentified or Unanticipated Risk" for a discussion of
the risks associated with our trading positions.
VALUATION OF TRADING INVENTORY
Substantially all of our inventory positions are marked-to-market on a
daily basis and changes are recorded in net revenues. The individual business
units are responsible for pricing the positions they manage. The Controllers
Department, in conjunction with the Firmwide Risk Department, regularly performs
pricing reviews.
TRADING NET REVENUES DISTRIBUTION
The following chart sets forth the frequency distribution for substantially
all of our daily trading net revenues for the year ended November 1998:
<TABLE>
<CAPTION>
Daily Trading Net Revenues
in Millions of Dollars Number of Days
- ------------------------------------------------------------
<S> <C>
less than (60)................................. 9
(60) - (40).................................... 5
(40) - (20).................................... 22
(20) - 0....................................... 31
0-20........................................... 87
20-40.......................................... 67
40-60.......................................... 24
greater than 60................................ 6
</TABLE>
55
<PAGE> 57
CREDIT RISK
Credit risk represents the loss that we would incur if a counterparty or
issuer of securities or other instruments we hold fails to perform its
contractual obligations to us. To reduce our credit exposures, we seek to enter
into netting agreements with counterparties that permit us to offset receivables
and payables with such counterparties. We do not take into account any such
agreements when calculating credit risk, however, unless management believes a
legal right of setoff exists under an enforceable master netting agreement.
For most businesses, counterparty credit limits are established by the
Credit Department, which is independent of the revenue-producing departments,
based on guidelines set by the Firmwide Risk and Credit Policy Committees. Our
global credit management systems monitor current and potential credit exposure
to individual counterparties and on an aggregate basis to counterparties and
their affiliates. The systems also provide management with information regarding
overall credit risk by product, industry sector, country and region.
RISK LIMITS
Business unit risk limits are established by the risk committees and may be
further segmented by the business unit managers to individual trading desks.
Market risk limits are monitored on a daily basis by the Firmwide Risk
Department and are reviewed regularly by the appropriate risk committee. Limit
violations are reported to the appropriate risk committee and the appropriate
business unit managers.
Inventory position limits are monitored by the Controllers Department and
position limit violations are reported to the appropriate business unit managers
and the Finance Committee. When inventory position limits are used to monitor
market risk, they are also monitored by the Firmwide Risk Department and
violations are reported to the appropriate risk committee.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments, such as futures, forwards,
swaps or option contracts, that derive their value from underlying assets,
indices, reference rates or a combination of these factors. Derivative
instruments may be entered into by Goldman Sachs in privately negotiated
contracts ("OTC derivatives"), or they may be listed and traded on an exchange.
Most of our derivative transactions are entered into for trading purposes.
We use derivatives in our trading activities to facilitate customer
transactions, to take proprietary positions and as a means of risk management.
We also enter into non-trading derivative contracts to manage the interest rate
and currency exposure on our long-term borrowings.
Derivatives are used in many of our businesses, and we believe that the
associated market risk can only be understood relative to the underlying assets
or risks being hedged, or as part of a broader trading strategy. Accordingly,
the market risk of derivative positions is managed with all of our other
non-derivative risk.
Derivative contracts are reported on a net-by-counterparty basis on our
consolidated statements of financial condition where management believes a legal
right of setoff exists under an enforceable master netting agreement.
For an OTC derivative, our credit exposure is directly with our
counterparty and continues until the maturity or termination of such contract.
The following table sets forth the distribution, by credit rating, of
substantially all of our exposure with respect to OTC derivatives as of November
1998, after taking into consideration the effect of netting agreements. The
categories shown reflect our internally determined public rating agency
equivalents.
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<PAGE> 58
OTC DERIVATIVES CREDIT EXPOSURE
($ in millions)
<TABLE>
<CAPTION>
CREDIT RATING EQUIVALENT AMOUNT PERCENTAGE
- ------------------------ ------ ----------
<S> <C> <C>
AAA/Aaa............................................... $ 2,170 12%
AA/Aa2................................................ 5,571 30
A/A2.................................................. 4,876 26
BBB/Baa2.............................................. 3,133 17
BB/Ba2 or lower....................................... 1,970 11
Unrated(1)............................................ 730 4
------- ---
$18,450 100%
======= ===
</TABLE>
- ---------------
(1) In lieu of making an individual assessment of such counterparties' credit,
we make a determination that the collateral held in respect of such
obligations is sufficient to cover our exposure. In making this
determination, we take into account various factors, including legal
uncertainties and market volatility.
------------------------
As of November 1998, we held approximately $2.97 billion in collateral
against these OTC derivatives exposures. This collateral consists predominantly
of cash and U.S. government and agency securities and is usually received by us
under agreements entitling us to require additional collateral upon specified
increases in exposure or the occurrence of negative credit events.
In addition to obtaining collateral and seeking netting agreements, we
attempt to mitigate default risk on derivatives by entering into agreements that
enable us to terminate or reset the terms of transactions after specified time
periods or upon the occurrence of credit-related events, and by seeking third-
party guarantees of the obligations of some counterparties.
Derivatives transactions may also involve the legal risk that they are not
authorized or appropriate for a counterparty, that documentation has not been
properly executed or that executed agreements may not be enforceable against the
counterparty. We attempt to minimize these risks by obtaining advice of counsel
on the enforceability of agreements as well as on the authority of a
counterparty to effect the derivative transaction.
OPERATIONAL AND YEAR 2000 RISKS
OPERATIONAL RISK. Goldman Sachs may face reputational damage, financial
loss or regulatory risk in the event of an operational failure or error. A
systems failure or failure to enter a trade properly into our records may result
in an inability to settle transactions in a timely manner or a breach of
regulatory requirements. Settlement errors or delays may cause losses due to
damages owed to counterparties or movements in prices. These operational and
systems risks may arise in connection with our own systems or as a result of the
failure of an agent acting on our behalf.
The Global Operations Department is responsible for establishing,
maintaining and approving policies and controls with respect to the accurate
inputting and processing of transactions, clearance and settlement of
transactions, the custody of securities and other instruments and the detection
and prevention of employee errors or improper or fraudulent activities. Its
personnel work closely with the Information Technology Department in creating
systems to enable appropriate supervision and management of its policies. The
Global Operations Department is also responsible, together with other areas of
Goldman Sachs, including the Legal and Compliance Departments, for ensuring
compliance with applicable regulations with respect to the clearance and
settlement of transactions and the margining of positions. The Network
Management Department oversees our relationships with our clearance and
settlement agents, regularly reviews agents' performance and meets with these
agents to review operational issues.
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YEAR 2000 READINESS DISCLOSURE. Goldman Sachs has determined that it will
be required to modify or replace portions of its information technology systems,
both hardware and software, and its non-information technology systems so that
they will properly recognize and utilize dates beyond December 31, 1999. We
presently believe that with modifications to existing software, conversions to
new software and replacement of some hardware, the Year 2000 issue will be
satisfactorily resolved in our own systems worldwide. However, if such
modifications and conversions are not made or are not completed on a timely
basis, the Year 2000 issue would have a material adverse effect on Goldman
Sachs. Moreover, even if these changes are successful, failure of third parties
to which we are financially or operationally linked to address their own Year
2000 problems would also have a material adverse effect on Goldman Sachs. For a
description of the Year 2000 issue and some of the related risks, including
possible problems that could arise, see "Risk Factors -- Our Computer Systems
and Those of Third Parties May Not Achieve Year 2000 Readiness -- Year 2000
Readiness Disclosure".
Recognizing the broad scope and complexity of the Year 2000 problem, we
have established a Year 2000 Oversight Committee to promote awareness and ensure
the active participation of senior management. This Committee, together with
numerous sub-committees chaired by senior managers throughout Goldman Sachs and
our Global Year 2000 Project Office, is responsible for planning, managing and
monitoring our Year 2000 efforts on a global basis. Our Management Controls
Department assesses the scope and sufficiency of our Year 2000 Program and
verifies that the principal aspects of our Year 2000 program are being
implemented according to plan.
Our Year 2000 plans are based on a five-phase approach, which includes
awareness; inventory, assessment and planning; remediation; testing; and
implementation. The awareness phase (in which we defined the scope and
components of the problem, our methodology and approach and obtained senior
management support and funding) was completed in September 1997. We also
completed the inventory, assessment and planning phase for our systems in
September 1997. By the end of March 1999, we completed the remediation, testing
and implementation phases for 99% of our mission-critical systems, and we plan
to complete these three phases for the remaining 1% by the end of June 1999. In
March 1999, we completed the first cycle of our internal integration testing
with respect to critical securities and transaction flows. This cycle, which
related to U.S. products, was completed successfully with no material problem.
The remaining cycle, which will relate primarily to non-U.S. products, is to be
completed in June 1999. This testing is intended to validate that our systems
can successfully perform critical business functions beginning in January 2000.
With respect to our non-mission-critical systems, we expect to complete our Year
2000 efforts during calendar 1999.
For technology products that are supplied by third-party vendors, we have
completed an inventory, ranked products according to their importance and
developed a strategy for achieving Year 2000 readiness for substantially all
non-compliant versions of software and hardware. While this process included
collecting information from vendors, we are not relying solely on vendors'
verifications that their products are Year 2000 compliant or ready. As of March
31, 1999, we had substantially completed testing and implementation of
vendor-supplied technology products that we consider mission-critical. With
respect to telecommunications carriers, we are relying on information provided
by these vendors as to whether they are Year 2000 compliant because these
vendors have indicated that they will not test with individual companies.
We are also addressing Year 2000 issues that may exist outside our own
technology activities, including our facilities, external service providers and
other third parties with which we interface. We have inventoried and ranked our
customers, business and trading partners, utilities, exchanges, depositories,
clearing and custodial banks and other third parties with which we have
important financial and operational relationships. We are continuing to assess
the Year 2000 preparedness of
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these customers, business and trading partners and other third parties.
By the end of March 1999, we had participated in approximately 115
"external", i.e., industry-wide or point-to-point, tests with exchanges,
clearing houses and other industry utilities, as well as the "Beta" test
sponsored by the Securities Industry Association for its U.S. members in July
1998. We successfully completed all of these tests with no material problems. By
the end of June 1999, we expect to have participated in approximately 75
additional external tests, including the Securities Industry Association
"Streetwide" test scheduled to be completed in April 1999 and other major
industry tests in those global markets where we conduct significant business.
Acknowledging that a Year 2000 failure, whether internal or external, could
have an adverse effect on the ability to conduct day-to-day business, we are
employing a comprehensive and global approach to contingency planning. Our
contingency planning objective is to identify potential system failure points
that support processes that are critical to our mission and to develop
contingency plans for those failures that may reasonably be expected to occur,
with the general goal of ensuring, to the maximum extent practical, that minimum
acceptable levels of service can be maintained by us. In the event of system
failures, our contingency plans will not guarantee that existing levels of
service will be fully maintained, especially if these failures involve external
systems or processes over which we have little or no direct control or involve
multiple failures across a variety of systems.
We anticipate that contingency plans for our core business units will be
substantially completed during June 1999, and by September 30, 1999 for the rest
of our businesses. In addition, we are developing contingency plans for funding
and balance sheet management and other related activities. We expect our
contingency plans to include establishing additional sources of liquidity that
could be drawn upon in the event of systems disruption. We are also developing a
crisis management group to guide us through the transition period. We expect to
reduce trading activity in the period leading up to January 2000 to minimize the
impact of potential Year 2000-related failures. A reduction in trading activity
by us or by other market participants in anticipation of possible Year 2000
problems could adversely affect our results of operations, as discussed under
"Risk Factors -- Our Computer Systems and Those of Third Parties May Not Achieve
Year 2000 Readiness -- Year 2000 Readiness Disclosure".
We have incurred and expect to continue to incur expenses allocable to
internal staff, as well as costs for outside consultants, to complete the
remediation and testing of internally developed systems and the replacement and
testing of third-party products and services, including non-technology products
and services, in order to achieve Year 2000 compliance. We currently estimate
that these costs will total approximately $150 million, a substantial majority
of which has been spent to date. These estimates include the cost of technology
personnel but do not include the cost of most non-technology personnel involved
in our Year 2000 effort. The remaining cost of our Year 2000 program is expected
to be incurred in 1999 and early 2000. The Year 2000 program costs will continue
to be funded through operating cash flow. These costs are expensed as incurred.
We do not expect that the costs associated with implementing our Year 2000
program will have a material adverse effect on our results of operations,
financial condition, liquidity or capital resources.
The costs of the Year 2000 program and the date on which we plan to
complete the Year 2000 modifications are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of resources, the timing and effectiveness of third-party
remediation plans and other factors. We can give no assurance that these
estimates will be achieved, and actual results could differ materially from our
plans. Specific factors that might cause material differences include, but are
not limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct relevant computer source codes and embedded chip
technology, the results of internal
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and external testing and the timeliness and effectiveness of remediation efforts
of third parties.
In order to focus attention on the Year 2000 problem, management has
deferred several technology projects that address other issues. However, we do
not believe that this deferral will have a material adverse effect on our
results of operations or financial condition.
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
effective for transactions occurring after December 31, 1996. SFAS No. 125
establishes standards for distinguishing transfers of financial assets that are
accounted for as sales from transfers that are accounted for as secured
borrowings.
The provisions of SFAS No. 125 relating to repurchase agreements,
securities lending transactions and other similar transactions were deferred by
the provisions of SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", and became effective for transactions
entered into after December 31, 1997. This Statement requires that the
collateral obtained in certain types of secured lending transactions be recorded
on the balance sheet with a corresponding liability reflecting the obligation to
return such collateral to its owner. Effective January 1, 1998, we adopted the
provisions of SFAS No. 125 that were deferred by SFAS No. 127. The adoption of
this standard increased our total assets and liabilities by $8.99 billion and
$11.64 billion as of February 1999 and November 1998, respectively.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
("EPS"), effective for periods ending after December 15, 1997, with restatement
required for all prior periods. SFAS No. 128 establishes new standards for
computing and presenting EPS. This Statement replaces primary and fully diluted
EPS with "basic EPS", which excludes dilution, and "diluted EPS", which includes
the effect of all potentially dilutive common shares and other dilutive
securities. Because we have not historically reported EPS, this Statement will
have no impact on our historical financial statements. This Statement will,
however, apply to our financial statements that are prepared after the
offerings. See "Pro Forma Consolidated Financial Information" for a calculation
of pro forma EPS.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", effective for fiscal years beginning
after December 15, 1997, with reclassification of earlier periods required for
comparative purposes. SFAS No. 131 establishes the criteria for determining an
operating segment and establishes the disclosure requirements for reporting
information about operating segments. We intend to adopt this standard at the
end of fiscal 1999. This Statement is limited to issues of reporting and
presentation and, therefore, will not affect our results of operations or
financial condition.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", effective for fiscal years
beginning after December 15, 1997, with restatement of disclosures for earlier
periods required for comparative purposes. SFAS No. 132 revises certain
employers' disclosures about pension and other post-retirement benefit plans. We
intend to adopt this standard at the end of fiscal 1999. This Statement is
limited to issues of reporting and presentation and, therefore, will not affect
our results of operations or financial condition.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", effective for fiscal years beginning after December 15, 1998.
SOP No. 98-1 requires that certain costs of computer software developed or
obtained for internal use be capitalized and amortized over the useful life of
the related
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software. We currently expense the cost of all software development in the
period in which it is incurred. We intend to adopt this Statement in fiscal 2000
and are currently assessing its effect.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This Statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative instrument depends on its intended use and the resulting
designation. We intend to adopt this standard in fiscal 2000 and are currently
assessing its effect.
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INDUSTRY AND ECONOMIC OUTLOOK
As a global provider of financial services, Goldman Sachs is affected by
overall macroeconomic and market conditions in various regions around the world.
For a number of years, we have operated in a generally favorable macroeconomic
environment characterized by low inflation, low and declining interest rates and
strong equity markets. In particular, the U.S. economy, the largest in the world
and an important influence on overall world economic activity, has been
undergoing one of the longest periods of post-war economic expansion. As of
March 1999, the current U.S. expansion had lasted 96 months compared to a
post-war average period of expansion of 46 months.
Recognizing that the favorable macroeconomic and market environments will
be subject to periodic reversals, which may significantly and adversely affect
our businesses, we believe that significant growth and profit opportunities
exist for financial intermediaries in the United States and abroad. These
opportunities derive from several long-term trends, including the following:
- - DEREGULATION. Financial market deregulation, including the elimination of
bank deposit interest rate ceilings and the expansion of commercial banks and
other financial institutions into securities underwriting activities, has
resulted in the creation of new and broader sources of credit, which have
reduced the variability and the cyclicality in the supply of credit. This, in
turn, has in the past reduced volatility in economic activity, leading to
longer economic expansions with increased investment spending, resulting in
higher levels of capital raising;
- - GLOBALIZATION. Heightened global competition has created a need for
cross-border capabilities and economies of scale, resulting in increased joint
venture and mergers and acquisitions activity;
- - FOCUS ON SHAREHOLDER VALUE. Increasing focus on shareholder value has fueled
an increase in restructuring and strategic initiatives, yielding additional
financial advisory and capital-raising opportunities;
- - CONSOLIDATION. Moderate growth, limited pricing flexibility and the need for
economies of scale have substantially increased consolidation opportunities in
certain industries, and record levels of profit have provided companies with
the resources to pursue strategic combinations, creating substantial demand
for mergers and acquisitions advisory services and subsequent capital raising;
- - DEMOGRAPHICS. Changing demographics in the United States and other developed
economies have increased the pool of savings available for private investment
and the need for increased funding of pension plans due to the aging of the
population, creating substantial demand for investment products and services;
and
- - FINANCIAL PRODUCT INNOVATION. Technology and financial expertise have led to
the development of new financial products better tailored to the risk/reward
requirements of investors, increasing trading flows and proprietary investment
opportunities.
We believe that over the last 15 years these trends, coupled with generally
declining interest rates and favorable market conditions, have contributed to a
substantially higher rate of growth in activity in the financial services
industry than the growth in overall economic activity. The future economic
environment may not be as favorable as that experienced in the last 15 years
and, in particular, the period of declining interest rates in the United States
may not continue. There may also be periods of adverse economic and market
conditions. Nonetheless, we believe that these trends should continue to affect
the financial services industry positively over the long term. However, see
"Risk Factors -- Market Fluctuations Could Adversely Affect Our Businesses in
Many Ways" for a discussion of the effect that adverse economic conditions and
market fluctuations can have on our businesses.
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The following table sets forth selected key industry indicators:
KEY INDUSTRY INDICATORS
($ in billions, except GDP)
(volume in millions of shares)
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED DECEMBER 31,
-------------------------------------- CAGR
1983 1988 1993 1998 '83-'98
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
GENERAL ECONOMIC ACTIVITY:
(in trillions)
Worldwide GDP(1)................................... $ 10 $ 18 $ 24 $ 29(8) 8%(8)
U.S. GDP(2)........................................ 4 5 7 9 6
ADVISORY ACTIVITIES/FINANCING:
Worldwide mergers and acquisitions(3).............. 96 527 460 2,522 24
Worldwide equity issued(3)......................... 50 51 172 269 12
Worldwide debt issued(3)........................... 146 631 1,546 2,932 22
WORLD EQUITY MARKETS:
Worldwide equity market capitalization(4).......... 3,384 9,728 14,016 27,459 15
U.S. market capitalization(4)...................... 1,898 2,794 5,136 13,451 14
FT/S&P Actuaries World Indices(TM) -- The World
Index(5)......................................... NA 129 178 359 11
Dow Jones Industrial Average....................... 1,259 2,169 3,754 9,181 14
S&P 500............................................ 165 278 466 1,229 14
NYSE average daily volume.......................... 85 162 265 674 15
INVESTED FUNDS:
Worldwide pension assets(6)........................ $1,900 $3,752 $ 6,560 $10,975 12
Number of U.S. mutual funds(7)..................... 1,026 2,715 4,558 7,343 14
U.S. mutual fund assets(7)......................... $ 293 $ 810 $ 2,075 $ 5,530 22
</TABLE>
- ---------------
(1) Gross domestic product. Source: The Economist Intelligence Unit, January
1999.
(2) Source: U.S. Department of Commerce, Bureau of Economic Analysis.
(3) Source: Securities Data Company.
(4) Source: International Finance Corporation.
(5) Index is calculated on a local currency basis based on total returns. CAGR
is based on 1988-1998 data. The FT/S&P Actuaries World Indices are owned by
FTSE International Limited, GS&Co. and Standard & Poor's Ratings Services.
The Indices are compiled by FTSE International and Standard & Poor's Ratings
Services in conjunction with the Faculty of Actuaries and the Institute of
Actuaries.
(6) Source: InterSec Research Corp.
(7) Source: Investment Company Institute.
(8) Data as of December 31, 1997; CAGR 1983-1997.
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We believe scale, global resources and leading market positions are
important competitive advantages for financial intermediaries in this
environment. In addition, we believe that circumstances in certain regions
should provide opportunities for financial intermediaries.
EUROPE
The European Economic and Monetary Union commenced on January 1, 1999 and
created a monetary union in Europe with a single currency. As a result, we
believe that over time a pan-European capital market will develop that is likely
to rival that of the United States in size and liquidity. We believe that
financial intermediaries generally are expected to benefit from a number of
anticipated developments, including:
- - pan-European consolidation and financial restructuring yielding an increase in
mergers and acquisitions activity;
- - an increase in third-party assets under management and a major shift towards
investments in equity securities due to an expected move to private pension
fund systems, changing demographics and the elimination of intra-European
Economic and Monetary Union currency risk;
- - a reallocation of equity portfolios to reflect pan-European indices;
- - the establishment of a European high-yield market to fund the growth of
emerging high-growth industries and to satisfy investors' demands for higher
yield; and
- - increased equity issuance and higher equity trading volumes.
ASIA
Since 1997, the currency weakness and disruptions, the deterioration in
certain of the region's banking systems, the weakness in the property sector in
many of the region's countries, as well as slowing consumer income growth, have
led to a significant and continuing weakening of these economies and their stock
markets. These developments have adversely affected the economic and market
conditions in the region and at times have affected economic and market
conditions elsewhere. We believe, however, that financial intermediaries could
have significant opportunities in this region if stability improves and the
economies, which represent approximately 60% of the world's population, resume
their growth. In the near term, these potential opportunities could include:
- - an increase in mergers and acquisitions and other financial advisory services
in connection with corporate restructurings;
- - an increase in trading opportunities as financial intermediaries meet the
liquidity needs of their clients; and
- - an increase in capital raising as Asian corporations and governments access
the international capital markets rather than the regional banking system to
refinance and to fund future growth.
In the longer term, these potential opportunities could include:
- - the emergence of corporate and real estate principal investment opportunities
as a result of corporate and government restructurings; and
- - an increase in third-party assets under management and a major shift towards
investments in equity securities due to an anticipated move to private
pension fund systems, changing demographics and the relaxation of foreign
exchange restrictions.
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BUSINESS
OVERVIEW
Goldman Sachs is a leading global investment banking and securities firm
with three principal business lines:
- - Investment Banking;
- - Trading and Principal Investments; and
- - Asset Management and Securities Services.
Our goal is to be the advisor of choice for our clients and a leading
participant in global financial markets. We provide services worldwide to a
substantial and diversified client base, which includes corporations, financial
institutions, governments and high net worth individuals.
Because we believe that the needs of our clients are global and that
international markets have high growth potential, we have built upon our
strength in the United States to achieve leading positions in other parts of the
world. Today, we have a strong global presence as evidenced by the geographic
breadth of our transactions, leadership in our core products and the size of our
international operations. As of February 1999, we operated offices in 23
countries and 36% of our 13,000 employees were based outside the United States.
We are committed to a distinctive culture and set of core values. These
values are reflected in our Business Principles, which emphasize placing our
clients' interests first, integrity, commitment to excellence and innovation,
and teamwork.
Goldman Sachs is managed by its principal owners. Simultaneously with the
offerings, we will grant restricted stock units, stock options or interests in a
defined contribution plan to substantially all of our employees. Following the
offerings, our employees, including former partners, will own approximately 66%
of Goldman Sachs. None of our employees are selling shares in the offerings.
Goldman Sachs is the successor to a commercial paper business founded in
1869 by Marcus Goldman. Since then, we have grown our business as a participant
and intermediary in securities and other financial activities to become one of
the leading firms in the industry.
In 1989, Group L.P. was formed to serve as the parent company of the
Goldman Sachs organization. As of November 30, 1996, Group L.P. was
restructured. On that date, the non-retiring former general partners of Group
L.P. converted their general partner interests into limited partner interests
and became profit participating limited partners of Group L.P. Concurrently, The
Goldman Sachs Corporation was admitted as Group L.P.'s sole general partner. The
common stock of The Goldman Sachs Corporation is owned by our profit
participating limited partners, all of whom are active in our businesses.
GS Inc. was formed to succeed to the business of Group L.P. Simultaneously
with the offerings, we will complete a number of transactions in order to
convert from partnership to corporate form. See "Certain Relationships and
Related Transactions -- Incorporation and Related Transactions" for additional
information concerning these transactions.
MARKET SHARE DATA
Except as otherwise indicated, all amounts with respect to the volume,
number and market share of mergers and acquisitions and underwriting
transactions and related ranking information have been derived from information
compiled and classified by Securities Data Company. Securities Data Company
obtains and gathers its information from sources it considers reliable, but
Securities Data Company does not guarantee the accuracy or completeness of the
information. In the case of mergers and acquisitions, data are based upon the
dollar value of announced transactions for the period indicated, taken as a
whole, with full credit to each of the advisors to each party in a transaction.
In the case of underwritings, data are based upon the dollar value of total
proceeds raised (exclusive of any option to purchase additional shares) with
equal credit to each bookrunner for the period indicated, taken as a whole. As a
result of this method of
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compiling data, percentages may add to more than 100%.
STRATEGY AND PRINCIPAL BUSINESS LINES
Our strategy is to grow our three core businesses -- Investment Banking,
Trading and Principal Investments, and Asset Management and Securities
Services -- in markets throughout the world. Our leadership position in
investment banking provides us with access to governments, financial
institutions and corporate clients globally. Trading and principal investing has
been an important part of our culture and earnings, and we remain committed to
these businesses irrespective of their volatility. Managing wealth is one of the
fastest growing segments of the financial services industry and we are
positioning our asset management and securities services businesses to take
advantage of that growth. Our assets under supervision, for example, have grown
from $92.7 billion as of November 1994 to $369.7 billion as of February 1999,
representing a compound annual growth rate of 38%.
Our business lines are comprised of various product and service offerings
that are set forth in the following chart:
PRIMARY PRODUCTS AND ACTIVITIES BY BUSINESS LINE
<TABLE>
<CAPTION>
TRADING AND PRINCIPAL ASSET MANAGEMENT AND
INVESTMENT BANKING INVESTMENTS SECURITIES SERVICES
------------------ --------------------- --------------------
<S> <C> <C>
- -- Equity and debt -- Bank loans -- Commissions
underwriting -- Commodities -- Institutional and high
- -- Financial restructuring -- Currencies net worth asset
advisory services -- Equity and fixed income management
- -- Mergers and acquisitions derivatives -- Margin lending
advisory services -- Equity and fixed income -- Matched book
- -- Real estate advisory securities -- Merchant banking fees
services -- Principal investments and overrides
-- Proprietary arbitrage -- Mutual funds
-- Prime brokerage
-- Securities lending
</TABLE>
------------------------
INVESTMENT BANKING
Investment Banking represented 39% of 1998 net revenues and 35% of 1997 net
revenues. We are a market leader in both the financial advisory and underwriting
businesses, serving over 3,000 clients worldwide. For the period January 1, 1994
to December 31, 1998, we had the industry-leading market share of 25.3% in
worldwide mergers and acquisitions advisory services, having advised on over
$1.7 trillion of transactions. Over the same period, we also achieved number one
market shares of 15.2% in underwriting worldwide initial public offerings and
14.4% in underwriting worldwide common stock issues.
TRADING AND PRINCIPAL INVESTMENTS
Trading and Principal Investments represented 28% of 1998 net revenues and
39% of 1997 net revenues. We make markets in equity and fixed income products,
currencies and commodities; enter into swaps and other derivative transactions;
engage in proprietary trading and arbitrage; and make principal investments. In
trading, we focus on building lasting relationships with our most active clients
while maintaining leadership positions in our key markets. We believe our
research, market-making and proprietary activities enhance our understanding of
markets and ability to serve our clients.
ASSET MANAGEMENT AND SECURITIES SERVICES
Asset Management and Securities Services represented 33% of 1998 net
revenues and 26% of 1997 net revenues. We provide global investment management
and advisory services; earn commissions on agency transactions; manage merchant
banking funds; and provide prime brokerage, securities lending and financing
services. Our asset management business has grown rapidly, with assets under
supervision increasing from $92.7 billion as of November 25, 1994 to $369.7
billion as of February 26, 1999, representing a compound annual growth rate of
38%. As of February 26, 1999, we had $206.4 billion of assets under management.
We manage merchant banking funds that had $15.5 billion of capital commitments
as of the end of 1998.
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We pursue our strategy to grow our three core businesses through an
emphasis on:
EXPANDING HIGH VALUE-ADDED BUSINESSES
To achieve strong growth and high returns, we seek to build leadership
positions in high value-added services for our clients. For example, we have
substantially increased the number of professionals in investment banking to
improve and expand our ability to execute mergers and acquisitions, initial
public offerings and high-yield financings. In trading, we structure and execute
large and complex transactions for institutional investors, pension funds and
corporate clients around the world. In asset management, we emphasize equity and
alternative investment products and use our established international presence
to build a global asset management franchise.
INCREASING THE STABILITY OF OUR EARNINGS
We seek to balance the stability of our earnings with return on equity and
long-term earnings growth. We believe our trading businesses are key ingredients
to our success. While we plan to continue to grow our trading businesses, the
financial market shocks of the past year underscored the importance of our
strategy of emphasizing growth in our investment banking, asset management and
securities services businesses. Through a greater relative emphasis on these
businesses, our goal is to gradually increase the stability of our earnings.
PURSUING INTERNATIONAL OPPORTUNITIES
We believe that our global reach will allow us to take advantage of growth
in international markets. In Europe, for example, we anticipate that the recent
establishment of the European Economic and Monetary Union will, over time,
create a large pan-European market rivaling the U.S. capital markets in size and
liquidity. We believe this will generate increased activity across our
businesses in the region. In Asia, we believe that an increase in corporate
restructurings and in the need for liquidity will increase our mergers and
acquisitions and trading opportunities. In the longer term, we anticipate
additional opportunities in asset management activities due to a shift we
anticipate toward the privatization of pension systems and in demographics.
LEVERAGING THE FRANCHISE
We believe our various businesses are generally stronger and more
successful because they are part of the Goldman Sachs franchise. Our culture of
teamwork fosters cooperation among our businesses, which allows us to provide
our clients with a full range of products and services on a coordinated basis.
Our investment bankers, for example, refer clients who are selling their
businesses to those in Goldman Sachs who manage wealth. In addition, our
merchant banking investments in companies lead to future clients for investment
banking.
COMPETITIVE STRENGTHS
STRONG CLIENT RELATIONSHIPS
We focus on building long-term client relationships. In 1998, over 75% of
our Investment Banking revenues represented business from existing clients. We
also aggressively pursue new client relationships as evidenced by the over 400
investment banking transactions we completed for first-time clients in 1998. In
our trading businesses, we structure and execute transactions across a wide
array of markets and countries to meet our clients' needs. In our asset
management business, we managed assets for three of the five largest pension
pools in the United States as ranked as of September 30, 1998 by Pensions &
Investments and maintain accounts for 41% of the 1998 "Forbes 400 List of the
Richest Americans".
DISTINCTIVE PEOPLE AND CULTURE
Our most important asset is our people. We seek to reinforce our employees'
commitment to our culture and values through recruiting, training, a
comprehensive 360-degree review system and a compensation philosophy that
rewards teamwork. We were ranked number seven in Fortune magazine's "The 100
Best Companies to Work for in America" in January 1999 and were ranked number
three in Fortune magazine's 1999 "The Top 50 MBA Dream Companies", the
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<PAGE> 69
highest-ranked investment banking and securities firm in each case.
GLOBAL REACH
Over the past decade, we have made a significant commitment to building a
worldwide business. We have achieved leading positions in major international
markets by capitalizing on our product knowledge and global research, as well as
by building a local presence where appropriate. In doing so, we have become one
of the few truly global investment banking and securities firms with the ability
to execute large and complex cross-border transactions. We had the number one
market share of 23.2% in cross-border mergers and acquisitions for the period
January 1, 1994 to December 31, 1998. In addition, in Japan, we were the largest
non-Japanese mutual fund manager as of the end of February 1999, according to
The Investment Trusts Association.
------------------------
SUMMARY FINANCIAL DATA
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues:
Investment Banking................ $2,113 $2,587 $3,368 $ 633 $ 902
Trading and Principal
Investments.................... 2,693 2,926 2,379 1,182 1,357
Asset Management and Securities
Services....................... 1,323 1,934 2,773 657 736
------ ------ ------ ------ ------
Total net revenues.................. $6,129 $7,447 $8,520 $2,472 $2,995
====== ====== ====== ====== ======
</TABLE>
------------------------
INVESTMENT BANKING
Goldman Sachs provides a broad range of investment banking services to a
diverse group of over 3,000 clients worldwide, including corporations, financial
institutions, governments and individuals. Our investment banking activities are
divided into two categories:
- - FINANCIAL ADVISORY. Financial advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense
activities, restructurings and spin-offs; and
- - UNDERWRITING. Underwriting includes public offerings and private placements
of equity and debt securities.
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<PAGE> 70
The following table sets forth the net revenues of our Investment Banking
business:
INVESTMENT BANKING NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial advisory...................... $ 931 $1,184 $1,774 $363 $522
Underwriting............................ 1,182 1,403 1,594 270 380
------ ------ ------ ---- ----
Total Investment Banking................ $2,113 $2,587 $3,368 $633 $902
====== ====== ====== ==== ====
</TABLE>
------------------------
In Investment Banking, we provide our clients with quality advice and
execution as part of our effort to develop and maintain long-term relationships
as their lead investment bank.
ORGANIZATION
We have continuously adapted our organizational structure to meet changing
market dynamics and our clients' needs. Our current structure, which is
organized along regional, execution and industry groups, seeks to combine
client-focused investment bankers with execution and industry expertise. Because
our businesses are global, we have adapted our organization to meet the demands
of our clients in each geographic region. Through our commitment to teamwork, we
believe that we provide services in an integrated fashion for the benefit of our
clients.
We believe an important competitive advantage in our marketing effort is
Investment Banking Services, a core group of professionals who focus on
developing and maintaining strong client relationships. These bankers, who are
organized regionally and/or by industry group, work with senior executives of
our clients to identify areas where Goldman Sachs can provide capital-raising,
financial advisory or other products and services. The broad base of experience
and knowledge of our Investment Banking Services professionals enables them to
analyze our clients' objectives efficiently and to bring to bear the appropriate
resources of Goldman Sachs to satisfy those objectives.
Our Corporate Finance, Debt and Equity Capital Markets, Leveraged Finance
and Mergers and Acquisitions groups bring product expertise and innovation to
clients in a variety of industries. These groups are responsible for the
execution of specific client transactions as well as the building of strong
client relationships.
In an effort to serve our clients' needs in targeted industries, we have
established several industry focus groups. These include: Chemicals;
Communications, Media and Entertainment; Energy and Power; Financial
Institutions; Healthcare; High Technology; Hotels and Gaming; Real Estate;
Retailing; and Transportation. Drawing on specialized knowledge of
industry-specific trends, these groups provide the full range of investment
banking products and services to our clients.
Reflecting our commitment to innovation, Investment Banking has established
a New Products group whose professionals focus on creating new financial
products. These professionals have particular expertise in integrating finance
with accounting, tax and securities laws and work closely with other investment
banking teams to provide innovative solutions to difficult client problems. Our
structuring expertise has proven to be particularly valuable in addressing
client needs in areas such as complex cross-border mergers and acquisitions and
convertible and other hybrid equity financings.
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<PAGE> 71
FINANCIAL ADVISORY
Financial advisory includes a broad range of advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense activities,
restructurings and spin-offs. Goldman Sachs is a leading investment bank in
worldwide mergers and acquisitions. During calendar 1998, we advised on 340
mergers and acquisitions transactions with a combined value of $957 billion.
Our mergers and acquisitions capabilities are evidenced by our significant
share of assignments in large, complex transactions where we provide multiple
services, including "one-stop" acquisition financing, currency hedging and
cross-border structuring expertise. Goldman Sachs advised on seven of the ten
largest mergers and acquisitions transactions through December 31, 1998. We have
also been successful in Europe, including in intra-country transactions, and we
are a leading mergers and acquisitions advisor in France, Germany and Spain.
The following table illustrates our leadership in the mergers and
acquisitions advisory market for the indicated period taken as a whole:
GOLDMAN SACHS' MERGERS AND ACQUISITIONS MARKET DATA
For the period January 1, 1994 through December 31, 1998
($ in billions)
<TABLE>
<CAPTION>
MARKET NUMBER OF
CATEGORY RANK(1) SHARE VOLUME TRANSACTIONS
-------- ------- ------ ------ ------------
<S> <C> <C> <C> <C>
Worldwide......................................... 1 25.3% $1,715 1,334
Worldwide, transactions over $500 million......... 1 34.8 1,593 470
Worldwide, transactions over $1 billion........... 1 38.4 1,470 297
United States..................................... 1 32.8 1,316 907
United States, transactions over $500 million..... 1 41.3 1,228 339
United States, transactions over $1 billion....... 1 44.3 1,142 221
</TABLE>
- ---------------
(1) Rank in any one year during the period presented may vary from the
rank for the period taken as a whole.
------------------------
Mergers and acquisitions is an example of how one activity can generate
cross-selling opportunities for other areas of Goldman Sachs. For example, a
client we are advising in a purchase transaction may seek our assistance in
obtaining financing and in hedging interest rate or foreign currency risks
associated with the acquisition. In the case of dispositions, owners and senior
executives of the acquired company often will seek asset management services. In
these cases, our high net worth relationship managers provide comprehensive
advice on investment alternatives and execute the client's desired strategy.
UNDERWRITING
From January 1, 1994 through March 31, 1999, Goldman Sachs has served as
lead manager in transactions that have raised more than $1 trillion of capital
for clients worldwide. We underwrite a wide range of securities and other
instruments, including common and preferred stock, convertible securities,
investment grade debt, high-yield debt, sovereign and emerging markets debt,
municipal debt, bank loans, asset-backed securities and real estate-related
securities, such as mortgage-backed securities and the securities of real estate
investment trusts.
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<PAGE> 72
EQUITY UNDERWRITING. Equity underwriting has been a long-term core
strength of Goldman Sachs. The following table illustrates our leadership
position in equity underwriting for the indicated period taken as a whole:
GOLDMAN SACHS' EQUITY UNDERWRITING MARKET DATA
For the period January 1, 1994 through December 31, 1998
($ in billions)
<TABLE>
<CAPTION>
TOTAL
MARKET PROCEEDS NUMBER OF
CATEGORY RANK(1) SHARE RAISED ISSUES(2)
-------- ------- ------ -------- ---------
<S> <C> <C> <C> <C>
Worldwide Initial Public Offerings ("IPOs").............. 1 15.2% $ 44 300
Worldwide IPOs, proceeds over $500 million............... 1 23.3 25 59
Worldwide public common stock offerings.................. 1 14.4 101 634
U.S. IPOs................................................ 1 15.3 31 179
U.S. IPOs, proceeds over $500 million.................... 1 30.1 16 29
U.S. public common stock offerings....................... 2 14.3 71 381
</TABLE>
- ---------------
(1) Rank in any one year during the period presented may vary from the rank for
the period taken as a whole.
(2) The number of issues reflects the number of tranches; an offering by a
single issuer could have multiple tranches.
------------------------
As with mergers and acquisitions, we have been particularly successful in
winning mandates for large, complex equity underwritings. As evidenced in the
chart above, our market share of IPOs with total proceeds over $500 million is
substantially higher than our market share of all IPOs. We believe our
leadership in large IPOs reflects our expertise in complex transactions,
research strengths, track record and distribution capabilities. In the
international arena, we have also acted as lead manager on many of the largest
IPOs. We were named the Asian Equity House of the Year by International
Financing Review in 1998.
We believe that a key factor in our equity underwriting success is the
close working relationship between the investment bankers, research analysts and
sales force as coordinated by our Equity Capital Markets group. Goldman Sachs'
equities sales force is one of the most experienced and effective sales
organizations in the industry. With 350 institutional sales professionals and
420 high net worth relationship managers located in every major market around
the world, Goldman Sachs has relationships with a large and diverse group of
investors.
Global Investment Research is critical to our ability to succeed in the
equity underwriting business. We believe that high quality equity research is a
significant competitive advantage in the market for new equity issues. In this
regard, Goldman Sachs' research has been consistently ranked among the
industry's global leaders. See "-- Global Investment Research" for detailed
information regarding our Global Investment Research Department.
DEBT UNDERWRITING. We engage in the underwriting and origination of
various types of debt instruments that we broadly categorize as follows:
investment grade debt for corporations, governments, municipalities and
agencies; leveraged finance, which includes high-yield debt and bank loans for
non-investment grade issuers; emerging market debt, which includes corporate and
sovereign issues; and asset-backed securities. We have employed a focused
approach in debt underwriting, emphasizing high value-added areas in servicing
our clients.
We believe that the leveraged finance market is a key growth opportunity
for our debt underwriting business. Over the last three years, we have more than
doubled the number of debt underwriting professionals dedicated to this area.
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<PAGE> 73
The table below sets forth our rank, market position, our total proceeds
raised and the number of debt transactions in which we
have acted as underwriter in the following areas for the indicated period taken
as a whole:
GOLDMAN SACHS' DEBT UNDERWRITING MARKET DATA
For the period January 1, 1994 through December 31, 1998
($ in billions)
<TABLE>
<CAPTION>
TOTAL
MARKET PROCEEDS NUMBER OF
CATEGORY(1) RANK(5) SHARE RAISED ISSUES(6)
----------- ------- ------ -------- ---------
<S> <C> <C> <C> <C>
Worldwide debt(2).................................. 3 8.4% $695 4,684
Worldwide straight debt(3)......................... 3 8.9 559 4,165
U.S. investment grade straight debt(3)............. 3 12.0 419 3,590
U.S. investment grade industrial straight
debt(3).......................................... 1 19.5 81 517
U.S. high-yield debt(4)............................ 5 8.0 33 184
</TABLE>
- ---------------
(1) All categories include publicly registered and Rule 144A issues.
(2) Includes non-convertible preferred stock, mortgage-backed securities,
asset-backed securities and taxable municipal debt.
(3) "Straight debt" excludes non-convertible preferred stock, mortgage-backed
securities, asset-backed securities and municipal debt.
(4) Excludes issues with both investment grade and non-investment grade ratings,
often referred to as "split-rated issues".
(5) Rank in any one year during the period presented may vary from the rank for
the period taken as a whole.
(6) The number of issues reflects the number of tranches; an offering by a
single issuer could have multiple tranches.
------------------------
TRADING AND PRINCIPAL INVESTMENTS
Our Trading and Principal Investments business facilitates customer
transactions and takes proprietary positions through market-making in and
trading of fixed income and equity products, currencies, commodities, and swaps
and other derivatives. In order to meet the needs of our clients, our Trading
and Principal Investments business is diversified across a wide range of
products. For example, we make markets in traditional investment grade debt
securities, structure complex derivatives and securitize mortgages and insurance
risk. A fundamental tenet of our approach is that we believe our willingness and
ability to take risk distinguishes us and substantially enhances our client
relationships. Our Trading and Principal Investments business includes the
following:
- - FIXED INCOME, CURRENCY AND COMMODITIES. Goldman Sachs makes markets in and
trades fixed income products, currencies and commodities, structures and
enters into a wide variety of derivative transactions and engages in
proprietary trading and arbitrage activities;
- - EQUITIES. Goldman Sachs makes markets in and trades equities and
equity-related products, structures and enters into equity derivative
transactions and engages in proprietary trading and equity arbitrage; and
- - PRINCIPAL INVESTMENTS. Principal investments primarily represents Goldman
Sachs' net revenues from its investments in its merchant banking funds.
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<PAGE> 74
The following table sets forth the net revenues of our Trading and
Principal Investments business:
TRADING AND PRINCIPAL INVESTMENTS NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FICC................................ $1,749 $2,055 $1,438 $ 741 $ 876
Equities............................ 730 573 795 365 455
Principal investments............... 214 298 146 76 26
------ ------ ------ ------ ------
Total Trading and Principal
Investments....................... $2,693 $2,926 $2,379 $1,182 $1,357
====== ====== ====== ====== ======
</TABLE>
------------------------
FIXED INCOME, CURRENCY AND COMMODITIES
FICC is a large and diversified operation through which we engage in a
variety of customer-driven market-making and proprietary trading and arbitrage
activities. FICC's principal products are:
- - Bank loans
- - Commodities
- - Currencies
- - Derivatives
- - Emerging market debt
- - Global government securities
- - High-yield securities
- - Investment grade corporate securities
- - Money market instruments
- - Mortgage securities and loans
- - Municipal securities
We generate trading net revenues from our customer-driven business in three
ways. First, in large, highly liquid markets we undertake a high volume of
transactions for modest spreads. Second, by capitalizing on our strong market
relationships and capital position, we also undertake transactions in less
liquid markets where spreads are generally larger. Finally, we generate net
revenues from structuring and executing transactions that address complex client
needs.
In our proprietary activities, we assume a variety of risks and devote
substantial resources to identify, analyze and benefit from these exposures. We
leverage our strong research capabilities and capitalize on our proprietary
analytical models to analyze information and make informed trading judgments. We
seek to benefit from perceived disparities in the value of assets in the trading
markets and from macroeconomic and company-specific trends.
FICC has established itself as a leading market participant by using a
three-part approach to deliver high quality service to its clients. First, we
offer broad market-making, research and market knowledge to our clients on a
global basis. Second, we create innovative solutions to complex client problems
by drawing upon our structuring and trading expertise. Third, we use our
expertise to take positions in markets when we believe the return is at least
commensurate with the risk.
A core activity in FICC is market-making in a broad array of securities and
products. For example, we are a primary dealer in many of the largest government
bond markets around the world, including the United States, Japan, the United
Kingdom and Canada; we are a member of the major futures exchanges; and we have
interbank dealer status in the currency markets in New York, London, Tokyo and
Hong Kong. Our willingness to make markets in a broad range of fixed income,
currency and commodity products and their derivatives is crucial both to our
client relationships and to support our underwriting business by providing
secondary market liquidity. Our clients value counterparties that are active in
the marketplace and are willing to provide liquidity and research-based points
of view. In addition, we believe that our significant investment in research
capabilities
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<PAGE> 75
and proprietary analytical models are critical to our ability to provide advice
to our clients. Our research capabilities include quantitative and qualitative
analyses of global economic, currency and financial market trends, as well as
credit analyses of corporate and sovereign fixed income securities.
Our clients often confront complex problems that require creative
approaches. We assist our clients who seek to hedge or reallocate their risks
and profit from expected price movements. To do this we bring to bear the
ability of our experienced professionals to understand the needs of our clients
and our ability to manage the risks associated with complex solutions to
problems. In recognition of our ability to meet these client needs, we were
ranked by Institutional Investor in February 1999 as the number two derivatives
dealer for the second straight year. In addition, we were named by Euroweek in
January 1999 as the "Best provider of swaps and other derivatives".
EQUITIES
Goldman Sachs engages in a variety of market-making, proprietary trading
and arbitrage activities in equity securities and equity-related products (such
as convertible securities and equity derivative instruments) on a global basis.
Goldman Sachs makes markets and positions blocks of stock to facilitate
customers' transactions and to provide liquidity in the marketplace. Goldman
Sachs is a member of most of the major stock exchanges, including New York,
London, Frankfurt, Tokyo and Hong Kong.
As agent, we execute brokerage transactions in equity securities for
institutional and individual customers that generate commission revenues.
Commissions earned on agency transactions are recorded in Asset Management and
Securities Services.
In equity trading, as in FICC, we generate net revenues from our
customer-driven business in three ways. First, in large, highly liquid principal
markets, such as the OTC market for equity securities, we undertake a high
volume of transactions for modest spreads. In the Nasdaq National Market, we
were the second largest market maker by aggregate volume in the top 100 most
actively traded stocks in calendar 1998. Second, by capitalizing on our strong
market relationships and capital position, we also undertake large transactions,
such as block trades and positions in securities, in which we benefit from
spreads that are generally larger. Finally, we also benefit from structuring
complex transactions.
Goldman Sachs was a pioneer and is a leader in the execution of large block
trades (trades of 50,000 or more shares) in the United States and abroad. In
calendar 1998, we executed over 50 block trades of at least $100 million each.
We have been able to capitalize on our expertise in block trading, our global
distribution network and our willingness to commit capital to effect
increasingly large and complex customer transactions. We expect corporate
consolidation and restructuring and increased demand for certainty and speed of
execution by sellers and issuers of securities to increase both the frequency
and size of sales of large blocks of equity securities. We believe that we are
well positioned to benefit from this trend. Block transactions, however, expose
us to increased risks, including those arising from holding large and
concentrated positions and decreasing spreads. See "Risk Factors -- Market
Fluctuations Could Adversely Affect Our Businesses in Many Ways -- Holding Large
and Concentrated Positions May Expose Us to Large Losses" for a discussion of
the risks associated with holding a large position in a single issuer and "Risk
Factors -- The Financial Services Industry Is Intensely Competitive and Rapidly
Consolidating" for a discussion of the competitive risks that we face.
We are active in the listed options and futures markets and structure,
distribute and execute OTC derivatives on market indices, industry groups and
individual company stocks to facilitate customer transactions and our
proprietary activities. We develop quantitative strategies and render advice
with respect to portfolio hedging and restructuring and asset allocation
transactions. We also create specially tailored instruments to enable
sophisticated investors to undertake hedging strategies and establish or
liquidate invest-
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<PAGE> 76
ment positions. We are one of the leading participants in the trading and
development of equity derivative instruments. We are an active participant in
the trading of futures and options on most of the major exchanges in the United
States, Europe and Asia.
Equity arbitrage has long been an important part of our equity franchise.
Our strategy is based on making investments on a global basis through a
diversified portfolio across different markets and event categories. This
business focuses on event-oriented special situations where we are not acting as
an advisor and relative value trades. These special situations include mergers
and acquisitions, corporate restructurings, recapitalizations and legal and
regulatory events. Equity arbitrage leverages our global infrastructure and
network of research analysts to analyze carefully a broad range of trading and
investment strategies across a wide variety of markets. Investment decisions are
the product of rigorous fundamental, situational and, frequently, regulatory and
legal analysis. Although market conditions led us to decrease the number and
size of positions maintained by our equity arbitrage business during 1998, we
believe that over time, as opportunities present themselves, our equity
arbitrage business will likely increase its activity.
TRADING RISK MANAGEMENT
We believe that our trading and market-making capabilities are key
ingredients to our success. While these businesses have generally earned
attractive returns, we have in the past incurred significant trading losses in
periods of market turbulence, such as in 1994 and 1998. Our trading risk
management process seeks to balance our ability to profit from trading positions
with our exposure to potential losses. Risk management includes input from all
levels of Goldman Sachs, from the trading desks to the Firmwide Risk Committee.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Management" for a further discussion of our risk management
policies and procedures.
1998 EXPERIENCE. From mid-August to mid-October 1998, the Russian economic
crisis, the turmoil in Asian and Latin American emerging markets and the
resulting move to higher quality fixed income securities by many investors led
to substantial declines in global financial markets. Investors broadly sold
credit-sensitive products, such as corporate and high-yield debt, and bought
higher-rated instruments, such as U.S. Treasury securities, which caused credit
spreads to widen dramatically. This market turmoil also caused a widespread
decline in global equity markets.
As a major dealer in fixed income securities, we maintain substantial
inventories of corporate and high-yield debt. We regularly seek to hedge the
interest rate risk on these positions through, among other strategies, short
positions in U.S. Treasury securities. In the second half of 1998, we suffered
losses from both the decline in the prices of corporate and high-yield debt
instruments that we owned and the increase in the prices of the U.S. Treasury
securities in which we had short positions.
These market shocks also led to trading losses in our fixed income relative
value trading positions. Relative value trading positions are intended to profit
from a perceived temporary dislocation in the relationship between the values of
different financial instruments. From mid-August to mid-October 1998, the
components of these relative value positions moved in directions that we did not
anticipate and the volatilities of certain positions increased to three times
prior levels. When we and other market participants with similar positions
simultaneously sought to reduce positions and exposures, this caused a
substantial reduction in market liquidity and a continuing decline in prices.
In the second half of 1998, we also experienced losses in equity arbitrage
and in the value of a number of merchant banking investments.
RISK REDUCTION. Over the course of this period, we actively reduced our
positions and exposure to severe market disruptions of the type described above.
Our current scenario models estimate our exposure to a substantial widening in
credit spreads and adverse
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<PAGE> 77
movements in relative value trades of the type experienced in mid-August to
mid-October 1998. These models indicate that, as of November 1998, our exposure
to a potential reduction in net trading revenues as a result of these events was
over 40% lower than in August 1998. In addition, the daily VaR of substantially
all of our trading positions declined from $47 million as of May 29, 1998 to $43
million as of November 1998. The November 1998 daily VaR reflects the reduction
in positions discussed above, offset by the higher market volatility, changes in
correlation and other market conditions experienced in the second half of 1998.
If the daily VaR as of November 1998 had been determined using the volatility
and correlation data as of May 29, 1998, the daily VaR would have been $31
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Management" for a discussion of VaR and its
limitations.
As part of the continuous effort to refine our risk management policies and
procedures, we have recently made a number of adjustments to the way that we
evaluate risk and set risk limits. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Management -- Market Risk"
for a further discussion of our policies and procedures for evaluating market
risk and setting related limits.
Notwithstanding these actions, we continue to hold trading positions that
are substantial in both number and size, and are subject to significant market
risk. In addition, management may choose to increase our risk levels in the
future. See "Risk Factors -- Market Fluctuations Could Adversely Affect Our
Businesses in Many Ways" and "-- Our Risk Management Policies and Procedures May
Leave Us Exposed to Unidentified or Unanticipated Risk" for a discussion of the
risks associated with our trading positions.
PRINCIPAL INVESTMENTS
In connection with our merchant banking activities, we invest with our
clients by making principal investments in funds that we raise and manage. As of
November 1998, we had committed $2.8 billion, of which $1.7 billion had been
funded, of the $15.5 billion total equity capital committed for our merchant
banking funds. The funds' investments generate capital appreciation or
depreciation and, upon disposition, realized gains or losses. See "-- Asset
Management and Securities Services -- Merchant Banking" for a discussion of our
merchant banking funds. As of November 1998, our aggregate carrying value of
principal investments held directly or through our merchant banking funds was
approximately $1.4 billion, which was comprised of corporate principal
investments with an aggregate carrying value of approximately $609 million and
real estate investments with an aggregate carrying value of approximately $753
million.
ASSET MANAGEMENT AND SECURITIES SERVICES
Asset Management and Securities Services is comprised of the following:
- - ASSET MANAGEMENT. Asset management generates management fees by providing
investment advisory services to a diverse and rapidly growing client base of
institutions and individuals;
- - SECURITIES SERVICES. Securities services includes prime brokerage, financing
services and securities lending and our matched book businesses, all of which
generate revenue primarily in the form of fees or interest rate spreads; and
- - COMMISSIONS. Commission-based businesses include agency transactions for
clients on major stock and futures exchanges. Overrides derived from our
merchant banking funds are also included in commissions.
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<PAGE> 78
The following table sets forth the net revenues of our Asset Management and
Securities Services business:
ASSET MANAGEMENT AND SECURITIES SERVICES NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Asset management........................ $ 242 $ 458 $ 675 $139 $202
Securities services..................... 354 487 730 170 207
Commissions............................. 727 989 1,368 348 327
------ ------ ------ ---- ----
Total Asset Management and Securities
Services.............................. $1,323 $1,934 $2,773 $657 $736
====== ====== ====== ==== ====
</TABLE>
------------------------
ASSET MANAGEMENT
Goldman Sachs is seeking to build a premier global asset management
business. We offer a broad array of investment strategies and advice across all
major asset classes: global equity; fixed income (including money markets);
currency; and alternative investment products (i.e., investment vehicles with
non-traditional investment objectives and/or strategies). Assets under
supervision are comprised of assets under management and other client assets.
Assets under management typically generate fees based on a percentage of their
value and include our mutual funds, separate accounts managed for institutional
and individual investors, our merchant banking funds and other alternative
investment funds. Other client assets are comprised of assets in brokerage
accounts of primarily high net worth individuals, on which we earn commissions.
Over the last five years, we have rapidly grown our assets under
supervision, as set forth in the graph below:
ASSETS UNDER SUPERVISION
(in billions)
<TABLE>
<CAPTION>
Assets under
management Other client assets Totals
<S> <C> <C> <C>
'1994' 44 49 $ 93
'1995' 52 58 110
'1996' 94 77 171
'1997' 136 102 238
'1998' 195 142 337
'February 1999' 207 163 370
</TABLE>
------------------------
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<PAGE> 79
As of February 1999, equities and alternative investments represented 51%
of our total assets under management. Since 1996, these two asset classes have
been the primary drivers of our growth in assets under management.
The following table sets forth the amount of assets under management by
asset class:
ASSETS UNDER MANAGEMENT BY ASSET CLASS
(in billions)
<TABLE>
<CAPTION>
AS OF
AS OF NOVEMBER FEBRUARY
------------------------------------ --------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ASSET CLASS
Equity............................... $ 6 $ 9 $34 $ 52 $ 69 $ 73
Fixed income and currency............ 17 19 26 36 50 53
Money markets........................ 18 20 27 31 46 48
Alternative investment(1)............ 3 4 8 17 30 32
--- --- --- ---- ---- ----
Total................................ $44 $52 $95 $136 $195 $206
=== === === ==== ==== ====
</TABLE>
-----------------------
(1) Includes private equity, real estate, quantitative asset allocation
and other funds that we manage.
------------------------
Since the beginning of 1996, we have increased the resources devoted to our
asset management business, including adding over 850 employees. In addition,
over the past three years, Goldman Sachs has made three asset management
acquisitions in order to expand its geographic reach and broaden its global
equity and alternative investment portfolio management capabilities.
Our global reach has been important in growing assets under management.
From November 1996 to February 1999, our assets under management, excluding our
merchant banking funds, sourced from outside the United States grew by over $35
billion. As of February 1999, we managed approximately $46 billion sourced from
Europe.
In Japan, deregulation, high individual savings rates and low local rates
of return have been important drivers of growth for our asset management
business during the 1990s. Over the last three years, we have built a
significant asset management business in Japan, and, as of February 1999, we
managed $23 billion of assets sourced from Japan. In Japan, as of the end of
February 1999, we were the largest non-Japanese investment trust manager,
according to The Investment Trusts Association, and we managed four of the top
15 open-ended mutual funds ranked by mutual fund assets, according to IFIS Inc.
We believe that substantial opportunities exist to grow our asset management
business in Japan, by increasing our institutional client base and expanding the
third-party distribution network through which we offer our mutual funds.
CLIENTS. Our primary clients are institutions, high net worth individuals
and retail investors. We access clients through both direct and third-party
channels.
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The table below sets forth the amount of assets under supervision by
distribution channel and client category as of November 1998:
ASSETS UNDER SUPERVISION BY DISTRIBUTION CHANNEL
(in billions)
<TABLE>
<CAPTION>
ASSETS UNDER
SUPERVISION(1) PRIMARY INVESTMENT VEHICLES
-------------- ---------------------------
<S> <C> <C>
- - Directly distributed
-- Institutional....................... $ 121 Separate managed accounts
Commingled vehicles
-- High net worth individuals.......... 156 Brokerage accounts
Limited partnerships
Separate managed accounts
- - Third-party distributed
-- Institutional and retail............ 48 Mutual funds
------
Total.................................... $ 325
======
</TABLE>
- ---------------
(1) Excludes $12 billion in our merchant banking funds.
------------------------
Our institutional clients include corporations, insurance companies,
pension funds, foundations and endowments. We managed assets for three of the
five largest pension pools in the United States as ranked as of September 30,
1998 by Pensions & Investments and we have 18 clients for whom we manage at
least $1 billion each.
In the individual high net worth area, we have established approximately
10,000 high net worth accounts worldwide, including accounts with 41% of the
1998 "Forbes 400 List of the Richest Americans". We believe this is a high
growth opportunity because this market (defined as the market for individual
investors with a net worth in excess of $5 million) is highly fragmented,
growing rapidly and accounts for approximately $10 trillion of investable assets
according to a study by McKinsey & Co. At the center of our effort is a team of
over 420 relationship managers, located in 12 U.S. and six international
offices. These professionals have an average of over seven years of experience
at Goldman Sachs and have exhibited low turnover and superior productivity
relative to the industry average.
In the third-party distribution channel, we distribute our mutual funds on
a worldwide basis through banks, brokerage firms, insurance companies and other
financial intermediaries. As of December 31, 1998, we were the third largest
manager in the U.S. institutional money market sector according to information
compiled by Strategic Insight. In Japan, we also utilize a third-party
distribution network consisting principally of the largest Japanese brokerage
firms.
MERCHANT BANKING
Goldman Sachs has an established successful record in the corporate and
real estate merchant banking business, having raised $15.5 billion of committed
capital for 15 private investment funds, as of November 1998, of which $9.0
billion had been funded. We have committed $2.8 billion and funded $1.7 billion
of these amounts; our clients, including pension plans, endowments, charitable
institutions and high net worth individuals, have provided the remainder. Some
of these investment funds pursue, on a global basis, long-term investments in
equity and debt securities in privately negotiated transactions, leveraged
buyouts and acquisitions. As of November 1998, these funds had total committed
capital of $7.7 billion, which includes two funds with $1.0 billion of committed
capital that are in the process of being wound down. Other funds, with total
committed capi-
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tal of $7.8 billion as of November 1998, invest in real estate operating
companies and debt and equity interests in real estate assets.
Our strategy with respect to each merchant banking fund is to invest
opportunistically to build a portfolio of investments that is diversified by
industry, product type, geographic region and transaction structure and type.
Our merchant banking funds leverage our long-standing relationships with
companies, investors, entrepreneurs and financial intermediaries around the
world to source potential investment opportunities. In addition, our merchant
banking funds and their portfolio companies have generated business for other
areas of Goldman Sachs, including equity underwriting, leveraged and other
financing fees and merger advisory fees.
Located in eight offices around the world, our investment professionals
identify, manage and sell investments on behalf of our merchant banking funds.
Goldman Sachs has two subsidiaries that manage real estate assets, Archon and
Archon France. In addition, our merchant banking professionals work closely with
other departments and benefit from the expertise of specialists in debt and
equity research, investment banking, leveraged and mortgage finance and equity
capital markets.
Merchant banking activities generate three revenue streams. First, we
receive a management fee that is generally a percentage of a fund's committed
capital, invested capital, total gross acquisition cost or asset value. These
annual management fees, which are included in our asset management revenues,
have historically been a recurring source of revenue. Second, we receive from
each fund, after that fund has achieved a minimum return for fund investors, an
increased share of the fund's income and gains ("override") which is a
percentage, typically 20%, of the capital appreciation and gains from the fund's
investments. Revenues from overrides are included in commissions. Third, Goldman
Sachs, as a substantial investor in these funds, is allocated its proportionate
share of the funds' unrealized appreciation or depreciation arising from changes
in fair value as well as gains and losses upon realization. These items are
included in Trading and Principal Investments.
SECURITIES SERVICES
Securities services consists predominantly of Global Securities Services,
which provides prime brokerage, financing services and securities lending to a
diversified U.S. and international customer base, including hedge funds, pension
funds and high net worth individuals. Securities services also includes our
matched book businesses.
We offer prime brokerage services to our clients, allowing them the
flexibility to trade with most brokers while maintaining a single source for
financing and portfolio reports. Our prime brokerage activities provide
multi-product clearing and custody in 50 markets, consolidated multi-currency
accounting and reporting and offshore fund administration and servicing for our
most active clients. Additionally, we provide financing to our clients through
margin loans collateralized by securities held in the client's account. In
recent years, we have significantly increased our prime brokerage client base.
Securities lending activities principally involve the borrowing and lending
of equity securities to cover customer and Goldman Sachs' short sales and to
finance Goldman Sachs' long positions. In addition, we are an active participant
in the securities lending broker-to-broker business and the third-party agency
lending business. Trading desks in New York, Boston, London, Tokyo and Hong Kong
provide 24-hour coverage in equity markets worldwide. We believe the rapidly
developing international stock lending market presents a significant growth
opportunity for us.
Lenders of securities include pension plan sponsors, mutual funds,
insurance companies, investment advisors, endowments, bank trust departments and
individuals. We have entered into exclusive relationships with certain lenders
that have given us access to large pools of securities, some of which are often
hard to locate in the general lender market, providing us with a competitive
advantage. We believe that a significant cause of the growth in short sales,
which require the
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borrowing of securities, has been the rapid increase in complex trading
strategies, such as index arbitrage, convertible bond and warrant arbitrage,
option strategies, and sector and market neutral strategies where shares are
sold short to hedge exposure from derivative instruments.
COMMISSIONS
Goldman Sachs generates commissions by executing agency transactions on
major stock and futures exchanges worldwide. We effect agency transactions for
clients located throughout the world. In recent years, aggregate commissions
have increased as a result of growth in transaction volume on the major
exchanges. As discussed above, commissions also include overrides from merchant
banking funds and commissions earned from brokerage transactions for high net
worth individuals. For a discussion regarding overrides, see "-- Merchant
Banking" above, and for a discussion regarding high net worth individuals, see
"-- Asset Management -- Clients" above.
In anticipation of continued growth in electronic connectivity and online
trading, Goldman Sachs has made strategic investments in alternative trading
systems to gain experience and participate in the development of this market.
See "Risk Factors -- The Financial Services Industry Is Intensely Competitive
and Rapidly Consolidating -- Our Revenues May Decline Due to Competition from
Alternative Trading Systems" for a discussion of the competitive risks posed by
alternative trading systems generally.
GLOBAL INVESTMENT RESEARCH
Our Global Investment Research Department provides fundamental research on
economies, debt and equity markets, commodities markets, industries and
companies on a worldwide basis. For over two decades, we have committed the
resources on a global scale to develop an industry-leading position for our
investment research products. We believe that investment research is a
significant factor in our strong competitive position in debt and equity
underwritings and in our generation of commission revenues.
Major investors worldwide recognize Goldman Sachs for its value-added
research products, which are highly rated in client polls across the Americas,
Europe and Asia. Our Research Department is the only one to rank in the top
three in each of the last 15 calendar years in Institutional Investor's "All-
America Research Team" survey. In December 1998, the Research Department also
achieved top honors for global investment research from Institutional Investor.
In Europe, based on the Institutional Investor "1999 All-Europe Research Team"
survey, the Research Department ranked number one for coverage of pan-European
sectors and number three in European Strategy and Economics.
Global Investment Research employs a team approach that provides equity
research coverage of approximately 2,300 companies worldwide, 53 economies and
26 stock markets. This is accomplished through four groups:
- - the Economic Research group, which formulates macroeconomic forecasts for
economic activity, foreign exchange, and interest rates based on the globally
coordinated views of its regional economists;
- - the Portfolio Strategy group, which forecasts equity market returns and
provides recommendations on both asset allocation and industry representation;
- - the Company/Industry group, which provides fundamental analysis, forecasts and
investment recommendations for companies and industries worldwide. Equity
research analysts are organized regionally by sector and globally into more
than 20 industry teams, which allows for extensive collaboration and knowledge
sharing on important investment themes; and
- - the Commodities Research group, which provides research on the global
commodity markets.
INTERNET STRATEGY
We believe that Internet technology and electronic commerce will, over
time, change the ways that securities are traded and distributed, creating both
opportunities and challenges for our businesses. In response, we
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have a program of internal development and external investment.
Internally, we are extending our global electronic trading and information
distribution capabilities to our clients via the Internet. These capabilities
cover many of our fixed income, equities and mutual fund products in markets
around the world. We are also using the Internet to improve the ease and quality
of communication with our institutional and high net worth clients. For example,
investors have on-line access to our investment research, mutual fund data and
valuation models and our high net worth clients are increasingly accessing their
portfolio information over the Internet. We have also recently established
GS-Online, which, in conjunction with GS&Co., will act as an underwriter of
securities offerings via the Internet and other electronic means. GS-Online will
deal initially only with other underwriters and syndicate members and not with
members of the public.
Externally, we have invested in electronic commerce concerns such as
Bridge, TradeWeb, Archipelago, Brut, Optimark and, most recently, Wit Capital.
Through these investments, we gain an increased understanding of business
developments and opportunities in this emerging sector. For a discussion of how
Goldman Sachs could be adversely affected by these developments, see "Risk
Factors -- The Financial Services Industry Is Intensely Competitive and Rapidly
Consolidating -- Our Revenues May Decline Due to Competition from Alternative
Trading Systems".
INFORMATION TECHNOLOGY
Technology is fundamental to our overall business strategy. Goldman Sachs
is committed to the ongoing development, maintenance and use of technology
throughout the organization, with expenditures, including employee costs, of
approximately $970 million in 1998 and a budget of $1.2 billion in 1999. We have
developed significant software and systems over the past several years. Our
technology initiatives can be broadly categorized into three efforts:
- - enhancing client service through increased connectivity and the provision of
high value-added, tailored services;
- - risk management; and
- - overall efficiency and control.
We have tailored our services to our clients by providing them with
electronic access to our products and services. For example, we developed the GS
Financial Workbench(SM), an Internet web site that clients and employees can use
to download research reports, access earnings and valuation models, submit
trades, monitor accounts, build and view presentations, calculate derivative
prices and view market data. First made available in early 1995, the GS
Financial Workbench(SM) represents a joint effort among all of our business
areas to create one comprehensive site for clients and employees to access our
products and services.
We have also developed software that enables us to monitor and analyze our
market and credit risks. This risk management software not only analyzes market
risk on firmwide, divisional and trading desk levels, but also breaks down our
risk into its underlying exposures, permitting management to evaluate exposures
on the basis of specific interest rate, currency rate, equity price or commodity
price changes. To assist further in the management of our credit exposures, data
from many sources are aggregated daily into credit management systems that give
senior management and professionals in the Credit and Controllers Departments
the ability to receive timely information with respect to credit exposures
worldwide, including netting information, and the ability to analyze complex
risk situations effectively. Our software accesses these data, allows for quick
analysis at the level of individual trades and interacts with other Goldman
Sachs systems.
Technology has been a significant factor in improving the overall
efficiency of many areas of Goldman Sachs. By automating many trading
procedures, we have substantially increased our efficiency and accuracy.
We currently have projects under way to ensure that our technology is Year
2000 compliant. See "Risk Factors -- Our Com-
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puter Systems and Those of Third Parties May Not Achieve Year 2000 Readiness --
Year 2000 Readiness Disclosure" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Management -- Operational
and Year 2000 Risks -- Year 2000 Readiness Disclosure" for a further discussion
of the risks we face in achieving Year 2000 readiness and our progress to date.
EMPLOYEES
Management believes that one of the strengths and principal reasons for the
success of Goldman Sachs is the quality and dedication of its people and the
shared sense of being part of a team. Goldman Sachs was ranked number seven in
Fortune magazine's "The 100 Best Companies to Work for in America" in January
1999 and was ranked number three in Fortune magazine's 1999 "The Top 50 MBA
Dream Companies", the highest ranking investment banking and securities firm in
each case. We strive to maintain a work environment that fosters
professionalism, excellence, diversity and cooperation among our employees
worldwide.
Instilling the Goldman Sachs culture in all employees is a continuous
process, of which training is an essential part. We recently opened a 34,000
square foot training center in New York City, near our world headquarters. All
employees are offered the opportunity to participate in education and periodic
seminars that we sponsor at various locations throughout the world. We also
sponsor off-site meetings for the various business units that are designed to
promote collaboration among co-workers.
Another important part of instilling the Goldman Sachs culture in all
employees is our employee review process. Employees are reviewed by supervisors,
co-workers and employees they supervise in a 360-degree review process that is
integral to our team approach. In 1998, over 140,000 reviews were completed,
evidencing the comprehensive nature of this process.
We also believe that good citizenship is an important part of being a
member of the Goldman Sachs team. To that end, we established our Community
TeamWorks initiative in 1997. As part of Community TeamWorks, all employees are
offered the opportunity to spend a day working at a charitable organization of
their choice while continuing to receive their full salary for that day. In
1998, approximately two-thirds of our employees participated in Community
TeamWorks. The commitment of our partners to the community is also demonstrated
by their having given over $90 million in each of the last two years to
charities, including private foundations.
As of February 1999, we had approximately 13,000 employees. In addition,
Archon and Archon France, subsidiaries of Goldman Sachs that provide real estate
services for our real estate investment funds, had a total of approximately
1,260 employees as of February 1999. Goldman Sachs is reimbursed for
substantially all of the costs of these employees by these funds.
See "Management -- The Employee IPO Awards" for a discussion of the steps
taken by Goldman Sachs to encourage the continued service of its employees after
the offerings and see "Risk Factors -- Our Conversion to Corporate Form May
Adversely Affect Our Ability to Recruit, Retain and Motivate Key Employees" for
a discussion of the factors that may have an adverse impact on the effectiveness
of these efforts.
COMPETITION
The financial services industry -- and all of our businesses -- are
intensely competitive, and we expect them to remain so. Our competitors are
other brokers and dealers, investment banking firms, insurance companies,
investment advisors, mutual funds, hedge funds, commercial banks and merchant
banks. We compete with some of our competitors globally and with some others on
a regional, product or niche basis. We compete on the basis of a number of
factors, including transaction execution, our products and services, innovation,
reputation and price.
Competition is also intense for the attraction and retention of qualified
employees. Our ability to continue to compete effectively in our businesses will
depend upon our ability to attract new employees and retain and moti-
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vate our existing employees. See "-- Employees" for a discussion of our efforts
in this regard.
In recent years there has been substantial consolidation and convergence
among companies in the financial services industry. In particular, a number of
large commercial banks, insurance companies and other broad-based financial
services firms have established or acquired broker-dealers or have merged with
other financial institutions. Many of these firms have the ability to offer a
wide range of products, from loans, deposit-taking and insurance to brokerage,
asset management and investment banking services, which may enhance their
competitive position. They also have the ability to support investment banking
and securities products with commercial banking, insurance and other financial
services revenues in an effort to gain market share, which could result in
pricing pressure in our businesses.
This trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have had to commit capital to support our international
operations and to execute large global transactions.
We believe that some of our most significant challenges and opportunities
will arise outside the United States. See "Industry and Economic Outlook" for a
discussion of these challenges and opportunities. In order to take advantage of
these opportunities, we will have to compete successfully with financial
institutions based in important non-U.S. markets, particularly in Europe. Some
of these institutions are larger, better capitalized and have a stronger local
presence and a longer operating history in these markets.
We have experienced intense price competition in some of our businesses in
recent years. For example, equity and debt underwriting discounts have been
under pressure for a number of years and the ability to execute trades
electronically, through the Internet and other alternative trading systems may
increase the pressure on trading commissions. It appears that this trend toward
alternative trading systems will continue and perhaps accelerate. Similarly,
underwriting spreads in Latin American and other privatizations have been
subject to considerable pressure in the last year. We believe that we may
experience pricing pressures in these and other areas in the future as some of
our competitors seek to obtain market share by reducing prices.
See "Risk Factors -- The Financial Services Industry Is Intensely
Competitive and Rapidly Consolidating" for a discussion of the competitive risks
we face in our businesses.
REGULATION
Goldman Sachs' business is, and the securities and commodity futures and
options industries generally are, subject to extensive regulation in the United
States and elsewhere. As a matter of public policy, regulatory bodies in the
United States and the rest of the world are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets, not with protecting the
interests of Goldman Sachs' shareholders or creditors. In the United States, the
Securities and Exchange Commission (the "SEC") is the federal agency responsible
for the administration of the federal securities laws. GS&Co. is registered as a
broker-dealer and as an investment adviser with the SEC and as a broker-dealer
in all 50 states and the District of Columbia. Self-regulatory organizations,
such as the NYSE, adopt rules and examine broker-dealers, such as GS&Co. In
addition, state securities and other regulators also have regulatory or
oversight authority over GS&Co. Similarly, our businesses are also subject to
regulation by various non-U.S. governmental and regulatory bodies and
self-regulatory authorities in virtually all countries where we have offices.
Broker-dealers are subject to regulations that cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure, record-keeping, the financing of customers' purchases and the conduct
of
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directors, officers and employees. Additional legislation, changes in rules
promulgated by self-regulatory organizations or changes in the interpretation or
enforcement of existing laws and rules, either in the United States or
elsewhere, may directly affect the mode of operation and profitability of
Goldman Sachs.
The U.S. and non-U.S. government agencies and self-regulatory
organizations, as well as state securities commissions in the United States, are
empowered to conduct administrative proceedings that can result in censure,
fine, the issuance of cease-and-desist orders or the suspension or expulsion of
a broker-dealer or its directors, officers or employees. Occasionally, our
subsidiaries have been subject to investigations and proceedings, and sanctions
have been imposed for infractions of various regulations relating to our
activities, none of which has had a material adverse effect on us or our
businesses.
The commodity futures and options industry in the United States is subject
to regulation under the Commodity Exchange Act, as amended. The Commodity
Futures Trading Commission is the federal agency charged with the administration
of the Commodity Exchange Act and the regulations thereunder. GS&Co. is
registered with the Commodity Futures Trading Commission as a futures commission
merchant, commodity pool operator and commodity trading advisor.
As a registered broker-dealer and member of various self-regulatory
organizations, GS&Co. is subject to the SEC's Rule 15c3-1 (the "Uniform Net
Capital Rule"). The Uniform Net Capital Rule specifies the minimum level of net
capital a broker-dealer must maintain and also requires that at least a minimum
part of its assets be kept in relatively liquid form. GS&Co. is also subject to
the net capital requirements of the Commodity Futures Trading Commission and
various securities and commodity exchanges. See Note 8 to the audited
consolidated financial statements and Note 5 to the unaudited condensed
consolidated financial statements for a discussion of our net capital.
The SEC and various self-regulatory organizations impose rules that require
notification when net capital falls below certain predefined criteria, dictate
the ratio of subordinated debt to equity in the regulatory capital composition
of a broker-dealer and constrain the ability of a broker-dealer to expand its
business under certain circumstances. Additionally, the Uniform Net Capital Rule
imposes certain requirements that may have the effect of prohibiting a
broker-dealer from distributing or withdrawing capital and requiring prior
notice to the SEC for certain withdrawals of capital.
In January 1999, the SEC adopted revisions to the Uniform Net Capital Rule
and related regulations that permit the registration of OTC derivatives dealers
as broker-dealers. An OTC derivatives dealer can, upon adoption of a risk
management framework in accordance with the new rules, utilize a capital
requirement based upon proprietary models for estimating market risk exposures.
We have established Goldman Sachs Financial Markets, L.P. and are in the process
of registering this company with the SEC as an OTC derivatives dealer to conduct
in a more capital efficient manner certain OTC derivative businesses now
conducted in other affiliates.
Goldman Sachs is an active participant in the international fixed income
and equity markets. Many of our affiliates that participate in those markets are
subject to comprehensive regulations that include some form of capital adequacy
rule and other customer protection rules. For example, Goldman Sachs provides
investment services in and from the United Kingdom under a regulatory regime
that is undergoing comprehensive restructuring aimed at implementing the
Financial Services Authority as the United Kingdom's unified regulator. The
relevant Goldman Sachs entities in London are at present regulated by the
Securities and Futures Authority Limited in respect of their investment banking,
individual asset management, brokerage and principal trading activities, and the
Investment Management Regulatory Organization in respect of their institutional
asset management and fund management activities. Some of these Goldman Sachs
entities are also regulated by the London Stock Exchange and other U.K.
securities and commodities exchanges of which they are members. It is expected,
however,
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that commencing in 2000 the responsibilities of the Securities and Futures
Authority Limited and Investment Management Regulatory Organization will be
taken over by the Financial Services Authority. The investment services that are
subject to oversight by U.K. regulators are regulated in accordance with
European Union directives requiring, among other things, compliance with certain
capital adequacy standards, customer protection requirements and conduct of
business rules. These standards, requirements and rules are similarly
implemented, under the same directives, throughout the European Union and are
broadly comparable in scope and purpose to the regulatory capital and customer
protection requirements imposed under the SEC and Commodity Futures Trading
Commission rules. European Union directives also permit local regulation in each
jurisdiction, including those in which we operate, to be more restrictive than
the requirements of such directives and these local requirements can result in
certain competitive disadvantages to Goldman Sachs. In addition, the Japanese
Ministry of Finance and the Financial Supervisory Agency in Japan as well as
German, French and Swiss banking authorities, among others, regulate various of
our subsidiaries and also have capital standards and other requirements
comparable to the rules of the SEC.
Compliance with net capital requirements of these and other regulators
could limit those operations of our subsidiaries that require the intensive use
of capital, such as underwriting and trading activities and the financing of
customer account balances, and also could restrict our ability to withdraw
capital from our regulated subsidiaries, which in turn could limit our ability
to repay debt or pay dividends on the Common Stock.
LEGAL MATTERS
We are involved in a number of judicial, regulatory and arbitration
proceedings (including those described below) concerning matters arising in
connection with the conduct of our businesses. We believe, based on currently
available information, that the results of such proceedings, in the aggregate,
will not have a material adverse effect on our financial condition, but might be
material to our operating results for any particular period, depending, in part,
upon the operating results for such period.
MOBILEMEDIA SECURITIES LITIGATION
GS&Co. has been named as a defendant in a purported class action lawsuit
commenced in December 1996 and pending in federal court in New Jersey. This
lawsuit was brought on behalf of purchasers of common stock of MobileMedia
Corporation ("MobileMedia") in an underwritten offering in 1995 and purchasers
of senior subordinated notes of MobileMedia Communications Inc. in a concurrent
underwritten offering. Defendants are MobileMedia, certain of its officers and
directors, and the lead underwriters, including GS&Co. MobileMedia is currently
reorganizing in bankruptcy.
GS&Co. underwrote 2,242,500 shares of common stock, for a total price of
approximately $53 million, and Goldman Sachs International underwrote 718,750
shares, for a total price of approximately $17 million. GS&Co. underwrote
approximately $38 million in principal amount of the senior subordinated notes.
The consolidated class action complaint alleges violations of the
disclosure requirements of the federal securities laws and seeks compensatory
and/or rescissory damages. In light of MobileMedia's bankruptcy, the action
against it has been stayed. Defendants' motion to dismiss was denied in October
1998.
UNDERWRITERS ANTITRUST LITIGATION
GS&Co. is one of numerous financial services companies that have been named
as defendants in certain purported class actions brought in New York federal
court by purchasers of securities in public offerings, who claim that the
defendants engaged in conspiracies in violation of federal antitrust laws in
connection with these offerings. The plaintiffs in each instance seek treble
damages as well as injunctive relief. One of the actions, which was commenced in
August 1998, alleges that the defendants have conspired to discourage or
restrict the resale of securities for a period
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after the offerings, including by imposing "penalty bids". Defendants moved to
dismiss the complaint in November 1998. The plaintiffs amended their complaint
in February 1999, modifying their claims in various ways, including limiting the
proposed class to retail purchasers of public offerings. Several other actions,
commenced in November and December 1998, allege that the defendants, many of
whom are also named in the other action discussed above, have conspired to fix
at 7% the discount that underwriting syndicates receive from issuers of shares
in certain offerings.
ROCKEFELLER CENTER PROPERTIES, INC. LITIGATION
Several former shareholders of Rockefeller Center Properties, Inc. brought
purported class actions in the federal and state courts in Delaware arising from
the acquisition of Rockefeller Center Properties, Inc. by an investor group in
July 1996. The defendants in the actions include, among others, GS&Co.,
Whitehall Real Estate Partnership V, a fund advised by GS&Co., a GS&Co. managing
director and other members of the investor group. The federal court actions,
which have since been consolidated, were filed beginning in November 1996, and
the state court action was filed in June 1998.
The complaints generally allege that the proxy statement disseminated to
former Rockefeller Center Properties, Inc. stockholders in connection with the
transaction was deficient, in violation of the disclosure requirements of the
federal securities laws. The plaintiffs are seeking, among other things,
unspecified damages, rescission of the acquisition, and/or disgorgement.
In a series of decisions, the federal court has granted summary judgment
dismissing all the claims in the federal action. The plaintiffs have appealed
those rulings.
The state action has been stayed pending disposition of the federal action.
REICHHOLD CHEMICALS LITIGATION
Reichhold Chemicals, Inc. and Reichhold Norway ASA (collectively,
"Reichhold") brought a claim in March 1998 in the Commercial Court in London
against Goldman Sachs International in relation to Reichhold's 1997 purchase of
the polymer division of one of Goldman Sachs International's Norwegian clients,
Jotun A/S. Reichhold claims that it overpaid by $40 million based upon
misrepresentations concerning the financial performance of the polymer division.
In November 1998, the Commercial Court granted Goldman Sachs
International's application for a stay of the action pending the outcome of
arbitration proceedings between Reichhold and Jotun A/S in Norway. The stay
order is currently being reviewed by an appellate court.
MATTERS RELATING TO MUNICIPAL SECURITIES
GS&Co., together with a number of other firms active in the municipal
securities area, has received requests beginning in June 1995 for information
from the SEC and certain other federal and state agencies and authorities with
respect to the pricing of escrow securities sold by GS&Co. to certain municipal
bond issuers in connection with the advanced refunding of municipal securities.
GS&Co. understands that certain municipal bond issuers to which GS&Co. sold
escrow securities have also received such inquiries.
There have been published reports that an action under the Federal False
Claims Act was filed in February 1995 alleging unlawful and undisclosed
overcharges in certain advance refunding transactions by a private plaintiff on
behalf of the United States and that GS&Co., together with a number of other
firms, is a named defendant in that action. The complaint was reportedly filed
under seal while the government determines whether it will pursue the claims
directly.
GS&Co. is also one of many municipal underwriting firms that have been
named as defendants in a purported class action brought in November 1998 Florida
federal court by the Clerk of Collier County, Florida on behalf of municipal
issuers which purchased escrow securities since October 1986 in connection with
advance refundings. The amended complaint alleges that the securities were
excessively "marked up" in violation of the Investment Advisers Act and Florida
law,
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and seeks to recover the difference between the actual and alleged "fair"
prices.
PROPERTIES
Our principal executive offices are located at 85 Broad Street, New York,
New York, and comprise approximately 969,000 square feet of leased space,
pursuant to a lease agreement expiring in June 2008 (with an option to renew for
up to 20 additional years). We also occupy over 500,000 square feet at each of 1
New York Plaza and 10 Hanover Square in New York, New York, pursuant to lease
agreements expiring in September 2004 (with an option to renew for ten years)
and June 2018, respectively. We also have a 15-year lease for approximately
590,000 square feet at 180 Maiden Lane in New York, New York, that expires in
March 2014. In total, we lease over 3.1 million square feet in the New York
area, having more than doubled our space since November 1996. We have additional
offices in the United States and elsewhere in the Americas. Together, these
offices comprise approximately 650,000 square feet of leased space.
Consistent with Goldman Sachs' global approach to its business, we also
have offices in Europe, Asia, Africa and Australia. In Europe, we have offices
that total approximately 790,000 square feet. Our largest presence in Europe is
in London, where we lease approximately 639,000 square feet through various
leases, with the principal one, for Peterborough Court, expiring in 2016. An
additional 396,000 square feet of leased space in London is expected to be
occupied during 2001.
In Asia, we have offices that total approximately 360,000 square feet. Our
largest offices in these regions are in Tokyo and Hong Kong. In Tokyo, we
currently lease approximately 175,000 square feet under leases that expire
between November 1999 and June 2005. In Hong Kong, we currently lease
approximately 103,000 square feet under a lease that expires in May 2000. We
recently entered into a new 12-year lease in Hong Kong for approximately 190,000
square feet. There are also significant expansion efforts underway in Tokyo and
Singapore.
Our space requirements have increased significantly over the last several
years. Currently, Goldman Sachs is at or near capacity at most of its locations.
As a result, we have been actively leasing additional space to support our
anticipated growth. Based on our progress to date, we believe that we will be
able to acquire additional space to meet our anticipated needs.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning the persons who will be the
directors and executive officers of Goldman Sachs as of the date of the
completion of the offerings. We anticipate appointing additional directors over
time who are not employees of Goldman Sachs or affiliated with management.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry M. Paulson, Jr. 53 Director, Chairman and Chief Executive Officer
Robert J. Hurst 53 Director and Vice Chairman
John A. Thain 43 Director, President and Co-Chief Operating Officer
John L. Thornton 45 Director, President and Co-Chief Operating Officer
Sir John Browne 51 Director
James A. Johnson 55 Director
John L. Weinberg 74 Director
Robert J. Katz 51 General Counsel
Gregory K. Palm 50 General Counsel
Robin Neustein 45 Chief of Staff
Leslie M. Tortora 42 Chief Information Officer
David A. Viniar 43 Chief Financial Officer
Barry L. Zubrow 46 Chief Administrative Officer
</TABLE>
------------------------
Executive officers are appointed by and serve at the pleasure of the Board
of Directors. A brief biography of each director and executive officer follows.
Mr. Paulson has been Co-Chairman and Chief Executive Officer or Co-Chief
Executive Officer of Group L.P. since June 1998 and served as Chief Operating
Officer from December 1994 to June 1998. From 1990 to November 1994, he was
Co-Head of Investment Banking.
Mr. Hurst has been Vice Chairman of Group L.P. since February 1997 and has
served as Head or Co-Head of Investment Banking since 1990. He is also a
director of VF Corporation and IDB Holding Corporation Ltd.
Mr. Thain has been President of Group L.P. since March 1999 and Co-Chief
Operating Officer since January 1999. From December 1994 to March 1999, he
served as Chief Financial Officer and Head of Operations, Technology and
Finance. From July 1995 to September 1997, he was also Co-Chief Executive
Officer for European Operations. In 1990, Mr. Thain transferred from FICC to
Operations, Technology and Finance to assume responsibility for Controllers and
Treasury. From 1985 to 1990, Mr. Thain was in FICC where he established and
served as Co-Head of the Mortgage Securities Department. Mr. Thain is a director
of The Depository Trust Company.
Mr. Thornton has been President of Group L.P. since March 1999 and Co-Chief
Operating Officer of Group L.P. since January 1999. From August 1998 until
January 1999, he had oversight responsibility for International Operations. From
September 1996 until August 1998, he was Chairman, Goldman Sachs -- Asia, in
addition to his senior strategic responsibilities in Europe. From July 1995 to
September 1997, he was Co-Chief Executive Officer for European Operations. From
1994 to 1995, he was Co-Head of Investment Banking in Europe and from 1992 to
1994 was Head of European Investment Banking Services. Mr. Thornton is also a
director of the Ford Motor Company, BSkyB PLC, Laura Ashley PLC and the Pacific
Century Group.
Sir John Browne has been Group Chief Executive of BP Amoco p.l.c. since
January 1999. He was Group Chief Executive of The
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British Petroleum Company from 1995 to 1999, having served as a Managing
Director since 1991. Sir John is also a director of SmithKline Beecham p.l.c.
and the Intel Corporation, a member of the supervisory board of DaimlerChrysler
AG and a trustee of the British Museum.
Mr. Johnson has been Chairman of the Executive Committee of the Board of
Directors of Fannie Mae since January 1999. He was Chairman and Chief Executive
Officer of Fannie Mae from February 1991 through December 1998. Mr. Johnson is
also a director of the Cummins Engine Company, Dayton Hudson Corporation,
UnitedHealth Group and Kaufman and Broad Home Corporation, Chairman of the John
F. Kennedy Center for the Performing Arts and Chairman of the Board of Trustees
of The Brookings Institution.
Mr. Weinberg has been Senior Chairman of Group L.P. since 1990. From 1984
to 1990, he was Senior Partner and Chairman and, from 1976 to 1984, he served
both as Senior Partner and Co-Chairman. Mr. Weinberg is also a director of
Knight-Ridder, Inc., Providian Financial Corp. and Tricon Global Restaurants,
Inc.
Mr. Katz has been General Counsel of Group L.P. since 1988. From 1980 to
1988, Mr. Katz was a partner in Sullivan & Cromwell.
Mr. Palm has been General Counsel of Group L.P. since 1992. He also has
senior oversight responsibility for Compliance and Management Controls, and is
Co-Chairman of the Global Compliance and Control Committee. From 1982 to 1992,
Mr. Palm was a partner in Sullivan & Cromwell.
Ms. Neustein has been Chief of Staff to the senior partners of Group L.P.
since 1992. From 1991 to 1992, Ms. Neustein managed strategic projects for the
senior partners. Prior to then, she was in Investment Banking.
Ms. Tortora has been Chief Information Officer of Group L.P. and the Head
of Information Technology since March 1999. She has headed Goldman Sachs' global
technology efforts since 1994.
Mr. Viniar has been Chief Financial Officer of Group L.P. and Co-Head of
Operations, Finance and Resources since March 1999. From July 1998 until then,
he was Goldman Sachs' Deputy Chief Financial Officer and from 1994 until then,
he was Head of Finance, with responsibility for Controllers and Treasury. From
1992 to 1994, Mr. Viniar was Head of Treasury and immediately prior to then was
in the Structured Finance Department of Investment Banking.
Mr. Zubrow has been Chief Administrative Officer of Group L.P. and Co-Head
of Operations, Finance and Resources since March 1999. From 1994 until then he
was Goldman Sachs' chief credit officer and Head of the Credit Department. From
1992 to 1994, Mr. Zubrow was Head of the Midwest Group in the Corporate Finance
Department of Investment Banking.
In addition, Mr. Corzine, 52, currently is a Director and Co-Chairman of
Goldman Sachs, but will resign both positions immediately prior to the date of
the offerings. Mr. Corzine has been Co-Chairman of Group L.P. since June 1998
and served as Chairman and Chief Executive Officer of Group L.P. from December
1994 to June 1998 and Co-Chief Executive Officer from June 1998 to January 1999.
Mr. Corzine is a member of the NASD's Board of Governors.
There are no family relationships between any of the executive officers or
directors of Goldman Sachs.
THE MANAGEMENT AND PARTNERSHIP
COMMITTEES
In January 1999, the Management and Partnership Committees were constituted
as part of Goldman Sachs' overall governance structure. The Management
Committee, which is chaired by Mr. Paulson, has responsibility for policy,
strategy and management of our businesses. In addition to Messrs. Paulson,
Thain, Thornton and Hurst, Ms. Neustein and Ms. Tortora, the members of this
Committee and their principal positions within Goldman Sachs are: Lloyd C.
Blankfein (Co-Head, FICC), Richard A. Friedman (Co-Head, Merchant Banking),
Steven "Mac" M. Heller (Co-Chief Operating Officer, Investment
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Banking), Robert S. Kaplan (Co-Chief Operating Officer, Investment Banking),
John P. McNulty (Co-Head, Asset Management), Michael P. Mortara (Co-Head, FICC),
Daniel M. Neidich (Co-Head, Merchant Banking), Mark Schwartz (President, Goldman
Sachs -- Japan), Robert K. Steel (Co-Head, Equities) and Patrick J. Ward
(Co-Head, Equities and Deputy Chairman -- Europe). Mr. Katz is counsel to the
Management Committee.
The Partnership Committee, which is chaired by Messrs. Thain and Thornton,
oversees personnel development and career management issues. It focuses on such
matters as recruiting, training, performance evaluation, diversity, mobility and
succession planning and, together with the Management Committee, is expected to
become integral in the process of selecting and compensating managing directors.
In addition to Messrs. Thain and Thornton and Ms. Neustein, the members of this
Committee and their principal positions within Goldman Sachs are: David W. Blood
(Head, Asset Management -- Europe), Gary D. Cohn (Head, FICC Commodities and
Emerging Markets), W. Mark Evans (Co-Head, Investment Research), Jacob D.
Goldfield (Head, FICC -- Europe), David B. Heller (Head, Equities Derivatives
Trading), Philip D. Murphy (President, Goldman Sachs -- Asia), Simon M.
Robertson (President, Goldman Sachs -- Europe), Esta E. Stecher (Head, Tax),
John S. Weinberg (Co-Head, Investment Banking Services), Peter A. Weinberg
(Co-Chief Operating Officer, Investment Banking and Deputy Chairman -- Europe)
and Jon Winkelried (Head, Leveraged Finance). Mr. Palm is counsel to the
Partnership Committee.
INFORMATION REGARDING THE BOARD OF DIRECTORS
Our Amended and Restated Certificate of Incorporation will provide for a
classified Board of Directors consisting of three classes. The term of the
initial Class I directors will terminate on the date of the 2000 annual meeting
of shareholders, the term of the initial Class II directors will terminate on
the date of the 2001 annual meeting of shareholders and the term of the initial
Class III directors will terminate on the date of the 2002 annual meeting of
shareholders. Messrs. Thain and Thornton will be members of Class I, Sir John
Browne and Messrs. Johnson and Weinberg will be members of Class II and Messrs.
Hurst and Paulson will be members of Class III. Beginning in 2000, at each
annual meeting of shareholders, successors to the class of directors whose term
expires at that annual meeting will be elected for a three-year term and until
their respective successors have been elected and qualified. A director may be
removed only for cause by the affirmative vote of the holders of not less than
80% of the outstanding shares of capital stock entitled to vote in the election
of directors.
It is anticipated that the Board of Directors will meet at least quarterly.
Members of the Board of Directors who are employees of Goldman Sachs or any of
its subsidiaries will not be compensated for service on the Board of Directors
or any committee thereof.
Upon completion of the offerings, Mr. Weinberg will continue in his role as
Senior Chairman under an agreement pursuant to which he will provide senior
advisory services to Goldman Sachs, receive annual compensation of $2 million
and participate in various employee benefit plans. The agreement expires
November 24, 2000, unless earlier terminated by either party on 90 days' notice.
Mr. Weinberg has had similar arrangements with Goldman Sachs since 1990.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors will have an Audit Committee, composed of directors
who are not employed by Goldman Sachs or affiliated with management. The Audit
Committee will review the results and scope of the audit and other services
provided by our independent auditors as well as review our accounting and
control procedures and policies.
The Board of Directors will also have a Compensation Committee. The
Compensation Committee will oversee the compensation and benefits of the
management and employees of Goldman Sachs and will consist entirely of
non-employee directors.
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The Board of Directors may from time to time establish other committees to
facilitate the management of Goldman Sachs.
EXECUTIVE COMPENSATION
Prior to the offerings, our business was carried on in partnership form. As
a result, meaningful individual compensation information for directors and
executive officers of Goldman Sachs based on operating in corporate form is not
available for periods prior to the offerings.
The following table sets forth the annual salaries that we intend to pay
our Chief Executive Officer and four of our executive officers named under
"-- Directors and Executive Officers" (the "Named Executive Officers") during
fiscal 1999. The Named Executive Officers will also be entitled to participate
in the Partner Compensation Plan and are eligible to receive awards under the
1999 Stock Incentive Plan, which are described below. It is not anticipated that
the Named Executive Officers will receive bonus payments other than through
their participation in the Partner Compensation Plan.
The amounts payable under the Partner Compensation Plan will be dependent
upon our operating results, and awards under the 1999 Stock Incentive Plan
(other than the awards described under "-- The Employee IPO Awards") will be
determined after the offerings. As a result, it is currently not possible for
Goldman Sachs to estimate the amount of such payments or awards. However, the
amounts payable under the Partner Compensation Plan are expected substantially
to exceed the base salaries indicated. For a discussion of this Plan, see
"-- The Partner Compensation Plan" below. None of the Named Executive Officers
will receive any of the awards described under "-- The Employee IPO Awards" or
initially participate in the DCP.
SUMMARY SALARY TABLE
<TABLE>
<CAPTION>
ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY(1)
--------------------------- ---- ---------
<S> <C> <C>
Henry M. Paulson, Jr.,...................................... 1999 $600,000
Director, Chairman and Chief Executive Officer
Robert J. Hurst,............................................ 1999 600,000
Director and Vice Chairman
John A. Thain,.............................................. 1999 600,000
Director, President and Co-Chief Operating Officer
John L. Thornton,........................................... 1999 600,000
Director, President and Co-Chief Operating Officer
David A. Viniar,............................................ 1999 600,000
Chief Financial Officer
</TABLE>
-------------------------
(1) The actual salary paid to the Named Executive Officers will be a
prorated portion of these amounts for fiscal 1999.
----------------------
Aggregate compensation paid to key employees who are not Named Executive
Officers may exceed that paid to the Named Executive Officers. Each of Messrs.
Paulson, Hurst, Thain, Thornton and Viniar have accrued benefits under The
Goldman, Sachs & Co. Employees' Pension Plan (the "Pension Plan") entitling them
to receive annual benefits upon retirement at age 65 of $10,533, $10,533,
$7,074, $11,801 and $6,906, respectively. These benefits had accrued prior to
November 1992 and none of the Named Executive Officers has earned additional
benefits under the Pension Plan since November 1992.
EMPLOYMENT, NONCOMPETITION AND
PLEDGE AGREEMENTS
Goldman Sachs is entering into employment agreements ("Employment
Agreements") with each PLP who continues as a managing director and pledge
agreements ("Pledge Agreements") and agreements relating to noncompetition and
other matters
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("Noncompetition Agreements") with all of the PLPs, whether or not they retire,
including, in both cases, each PLP who is a director or an executive officer.
The following are descriptions of the material terms of the Employment,
Noncompetition and Pledge Agreements with the PLPs. You should, however, refer
to the exhibits that are a part of the registration statement for a copy of the
form of each Agreement. See "Available Information".
EMPLOYMENT AGREEMENTS
Each Employment Agreement has an initial term extending through November
24, 2000 (thereafter no set term), requires the continuing PLP to devote his or
her entire working time to the business and affairs of Goldman Sachs and
generally may be terminated at any time by either the continuing PLP or Goldman
Sachs on 90 days' prior written notice.
Goldman Sachs has entered into similar employment agreements with all other
managing directors, except that they have no set term.
NONCOMPETITION AGREEMENTS
Each Noncompetition Agreement provides as follows:
CONFIDENTIALITY. Each PLP is required to protect and use "confidential
information" in accordance with the restrictions placed by Goldman Sachs on its
use and disclosure.
NONCOMPETITION. During the period ending 12 months after the date the PLP
ceases to be employed by Goldman Sachs, the PLP may not:
- - form, or acquire a 5% or greater ownership, voting or profit participation
interest in, any Competitive Enterprise; or
- - associate with any Competitive Enterprise and in connection with such
association engage in, or directly or indirectly manage or supervise personnel
engaged in, any activity that had a relationship to the PLP's activities at
Goldman Sachs.
"Competitive Enterprise" is any business enterprise that engages in any
activity, or owns a significant interest in any entity that engages in any
activity, that competes with any activity in which we are engaged.
NONSOLICITATION. During the period ending 18 months after the date the PLP
ceases to be employed by Goldman Sachs, the PLP may not, directly or indirectly,
in any manner:
- - solicit any client with whom the PLP worked, or whose identity became known to
the PLP in connection with his or her employment with Goldman Sachs, to
transact business with a Competitive Enterprise or reduce or refrain from
doing any business with Goldman Sachs;
- - interfere with or damage any relationship between Goldman Sachs and any client
or prospective client; or
- - solicit any employee of Goldman Sachs to apply for, or accept employment with,
any Competitive Enterprise.
TRANSFER OF CLIENT RELATIONSHIPS. Each PLP is required, upon termination
of the PLP's employment, to take all actions and do all things reasonably
requested by Goldman Sachs during a 90-day cooperation period to maintain for
Goldman Sachs the business, goodwill and business relationships with Goldman
Sachs' clients with which the PLP worked.
LIQUIDATED DAMAGES. In the case of any breach of the noncompetition or
nonsolicitation provisions by the PLP prior to the fifth anniversary of the date
of the consummation of the offerings (the "IPO Date"), the PLP will be liable
for liquidated damages. The amount of liquidated damages for each PLP who
initially serves on the Board of Directors, the Management Committee or the
Partnership Committee of Goldman Sachs is $15 million, and the amount of
liquidated damages for each other PLP is $10 million. These liquidated damages
are in addition to the forfeiture of any future equity-based awards that may
occur as a result of the breach of any noncompetition or nonsolicitation
provisions contained in those awards.
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PLEDGE AGREEMENT
The liquidated damage provisions of each Noncompetition Agreement will be
secured by a pledge of stock or other assets with an initial value equal to 100%
of each PLP's liquidated damages amount.
Each Pledge Agreement will terminate on the earliest to occur of:
- - the PLP's death;
- - the expiration of the 24-month period following the termination of the PLP's
employment; or
- - the fifth anniversary of the IPO Date.
NONEXCLUSIVITY AND ARBITRATION
The liquidated damages and pledge arrangements discussed above are not
exclusive of any injunctive relief that Goldman Sachs may be entitled to for a
breach of a Noncompetition Agreement and, after the termination of the Pledge
Agreement, Goldman Sachs will be entitled to all available remedies for a breach
of a Noncompetition Agreement.
The Employment, Noncompetition and Pledge Agreements generally provide that
any disputes thereunder will be resolved by binding arbitration.
THE EMPLOYEE IPO AWARDS
On the IPO Date, we intend to provide awards to our employees and a limited
number of consultants and advisors other than PLPs in one or more of the
following forms:
- - substantially all employees will receive a grant of Formula RSUs, with respect
to which up to an aggregate of 30,070,535 shares of Common Stock will be
deliverable;
- - certain senior employees, principally non-PLP managing directors, will be
selected to participate in the DCP described below, to which Goldman Sachs
will make an initial irrevocable contribution of 12,567,587 shares of Common
Stock;
- - certain employees will receive a grant of Discretionary RSUs, with respect to
which up to an aggregate of 33,303,595 shares of Common Stock will be
deliverable; and
- - certain employees will receive a grant of Discretionary Options, with respect
to which up to an aggregate of 40,000,028 shares of Common Stock will be
deliverable.
The Formula RSUs, the Discretionary RSUs and the Discretionary Options will
be granted under the 1999 Stock Incentive Plan described below. The award of
Formula RSUs and Discretionary RSUs described below will confer only the rights
of a general unsecured creditor of Goldman Sachs and no rights as a shareholder
of Goldman Sachs until the Common Stock underlying such award is delivered. Any
shares of Common Stock acquired by a managing director pursuant to the awards
will be subject to the Shareholders' Agreement described in "Certain
Relationships and Related Transactions -- Shareholders' Agreement".
FORMULA AWARDS
The Common Stock underlying the Formula RSUs generally will be deliverable
in equal installments on or about the first, second and third anniversaries of
the IPO Date, although the Common Stock may be deliverable earlier in the event
of certain terminations of employment following a change in control. While no
additional service will be required to obtain delivery of the underlying Common
Stock (i.e., the award is "vested"), delivery of the Common Stock will be
conditioned on the grantee's satisfying certain requirements, including not
being terminated under the circumstances described in the award agreement prior
to delivery of the Common Stock and not violating any policy of Goldman Sachs
(including in respect of confidentiality and hedging) or otherwise acting in a
manner detrimental to Goldman Sachs (including violating noncompetition or
nonsolicitation provisions of the award). While the RSUs are outstanding,
amounts equal to regular cash dividends that would have been paid on the Common
Stock underlying the Formula RSUs if the Common Stock had been actually issued
will be paid in cash at about the same
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time that the dividends are paid generally to the shareholders. These amounts
will be recorded as compensation expense since the underlying shares of Common
Stock will not have been issued.
Pursuant to Accounting Principles Board Opinion No. 25, we will record
non-cash compensation expense of $1,504 million related to the Formula RSUs on
the date of grant, since there is no future service required as a condition to
the delivery of the underlying shares of Common Stock. For purposes of
calculating both basic earnings per share (pursuant to Statement of Financial
Accounting Standards No. 128) and book value per share, the shares of Common
Stock underlying the Formula RSUs are included in Common Shares outstanding for
the reason described above.
DISCRETIONARY AWARDS
DISCRETIONARY RSUS. The Discretionary RSUs will vest, and the underlying
Common Stock will be delivered, in equal installments on or about the third,
fourth and fifth anniversaries of the IPO Date if the grantee has satisfied
certain conditions and the grantee's employment with Goldman Sachs has not been
terminated, with certain exceptions for terminations of employment due to death,
retirement, extended absence or following a change in control. While the RSUs
are outstanding, amounts equal to regular cash dividends that would have been
paid on the Common Stock underlying the Discretionary RSUs if the Common Stock
had been actually issued will be paid in cash at about the same time that the
dividends are paid generally to the shareholders. These amounts will be recorded
as compensation expense since the underlying shares of Common Stock will not
have been issued.
Pursuant to Accounting Principles Board Opinion No. 25, we will record
non-cash compensation expense of $1,665 million related to the Discretionary
RSUs over the related service period. For purposes of calculating both basic
earnings per share (pursuant to Statement of Financial Accounting Standards No.
128) and book value per share, the shares of Common Stock underlying the
Discretionary RSUs are excluded from Common Shares outstanding since there is
future service required as a condition to the delivery of the underlying shares
of Common Stock. The dilutive effect of these restricted stock units is,
however, included in diluted Common Shares outstanding using the treasury stock
method.
DISCRETIONARY OPTIONS. The Discretionary Options will be granted with an
exercise price generally equal to the initial public offering price per share
set forth on the cover page of this prospectus, although in certain non-U.S.
jurisdictions certain employees may be granted Discretionary Options with a
lower exercise price. The Discretionary Options will generally be exercisable in
equal installments commencing on or about the third, fourth and fifth
anniversaries of the IPO Date if the grantee has satisfied certain conditions
and the grantee's employment with Goldman Sachs has not been terminated, with
certain exceptions for terminations of employment due to death, retirement,
extended absence or following a change in control. Discretionary Options will
thereafter generally remain exercisable, subject to satisfaction of certain
conditions, until the tenth anniversary of the IPO Date or, if earlier, upon
expiration of a period, as specified in the award agreement, following
termination of employment.
The Discretionary Options will be accounted for pursuant to Accounting
Principles Board Opinion No. 25, as permitted by paragraph 5 of Statement of
Financial Accounting Standards No. 123. Since these options will have no
intrinsic value on the date of grant, no compensation expense will be
recognized.
CONTRIBUTION TO DCP. On the IPO Date, Goldman Sachs will make an initial
irrevocable contribution of 12,567,587 shares of Common Stock to the DCP.
Certain senior employees, principally managing directors who are not PLPs, will
be selected to participate in the DCP. The right to receive shares will vest,
and the underlying Common Stock will be distributable to participants in the
DCP, in equal installments on or about the third, fourth and fifth anniversaries
of the initial contribution if the participant has satisfied
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certain conditions and the participant's employment with Goldman Sachs has not
been terminated, with certain exceptions for terminations of employment due to
death or following a change in control. Dividends paid on shares allocated to
participants will be distributed currently.
We will record non-cash compensation expense of $628 million related to the
initial irrevocable contribution of shares of Common Stock to the DCP. This
non-cash expense will be recognized on the date it is funded in accordance with
Statement of Financial Accounting Standards No. 87.
CHANGE IN CONTROL
The Formula RSUs, the Discretionary RSUs, the Discretionary Options and the
DCP provide that (i) if a change in control occurs and (ii) within 18 months
thereafter a grantee's or participant's employment is terminated by Goldman
Sachs other than for cause or the grantee or participant terminates employment
for good reason, in each case, as determined by Goldman Sachs:
- - the Common Stock underlying any outstanding Formula RSUs will be delivered;
- - any outstanding Discretionary RSUs will vest and the Common Stock underlying
the Discretionary RSUs will be delivered;
- - any outstanding unexercised Discretionary Options will become exercisable and
will be exercisable for a period of one year following such termination of
employment (but in no event later than the tenth anniversary of the IPO Date)
and thereafter terminate; and
- - under the DCP, any unvested portion of the Common Stock attributable to the
initial contribution by Goldman Sachs to the DCP will vest and be distributed.
"Change in control" means the consummation of a merger, consolidation,
statutory share exchange or similar form of corporate transaction involving GS
Inc. or sale or other disposition of all or substantially all of the assets of
GS Inc. to an entity that is not an affiliate of GS Inc. that, in each case,
requires shareholder approval under the law of GS Inc.'s jurisdiction of
organization, unless immediately following such transaction, either:
- - at least 50% of the total voting power of the surviving entity or its parent
entity, if applicable, is represented by GS Inc.'s securities that were
outstanding immediately prior to the transaction; or
- - at least 50% of the members of the board of directors of the surviving entity,
or its parent entity, if applicable, following the transaction were incumbent
directors (including directors whose election or nomination was approved by
the incumbent directors) at the time of the Board of Directors' approval of
the execution of the initial agreement providing for the transaction.
"Cause" includes, among other things, the grantee's or participant's
conviction of certain misdemeanors or felonies, violation of applicable laws,
and violation of any policy of Goldman Sachs, including policies with respect to
hedging and confidentiality.
"Good reason" means a materially adverse alteration in the grantee's or
participant's position or in the nature or status of the grantee's or
participant's responsibilities from those in effect immediately prior to the
change in control, as determined by Goldman Sachs, or certain relocations by
Goldman Sachs of a grantee's or participant's principal place of employment.
THE 1999 STOCK INCENTIVE PLAN
The following is a description of the material terms of The Goldman Sachs
1999 Stock Incentive Plan (the "SIP"). You should, however, refer to the
exhibits that are a part of the registration statement for a copy of the SIP.
See "Available Information".
TYPES OF AWARDS. The SIP provides for grants of incentive stock options
("ISOs") (within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code")), nonqualified stock options, stock appreciation
rights ("SARs"), dividend equivalent rights, restricted stock, restricted stock
units ("RSUs") and other awards (collectively, "Awards"). The SIP also permits
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the making of loans to purchase shares of
Common Stock.
SHARES SUBJECT TO THE SIP; OTHER LIMITATIONS ON AWARDS. Subject to
adjustment as described below, the total number of shares of Common Stock of
Goldman Sachs that may be issued under the SIP through its fiscal year ending in
2002 may not exceed 300,000,000 shares and, in each fiscal year thereafter, may
not exceed five percent (5%) of the issued and outstanding shares of Common
Stock, determined as of the last day of the immediately preceding fiscal year,
increased by the number of shares available for Awards in previous fiscal years
but not covered by Awards granted in such years. These shares may be authorized
but unissued Common Stock or authorized and issued Common Stock held in Goldman
Sachs' treasury or otherwise acquired for the purposes of the SIP. If any Award
is forfeited or is otherwise terminated or canceled without the delivery of
shares of Common Stock, if shares of Common Stock are surrendered or withheld
from any Award to satisfy a grantee's income tax or other withholding
obligations, or if shares of Common Stock owned by a grantee are tendered to pay
the exercise price of Awards, then such shares will again become available under
the SIP. No more than 200,000,000 shares of Common Stock may be available for
delivery in connection with the exercise of ISOs.
The SIP Committee (as defined below) has the authority to adjust the terms
of any outstanding Awards and the number of shares of Common Stock issuable
under the SIP for any increase or decrease in the number of issued shares of
Common Stock resulting from a stock split, reverse stock split, stock dividend,
spin-off, combination or reclassification of the Common Stock, or any other
event that the SIP Committee determines affects our capitalization.
ELIGIBILITY. Awards may be made to any director, officer or employee of
Goldman Sachs, including any prospective employee, and to any consultant or
advisor to Goldman Sachs selected by the SIP Committee.
ADMINISTRATION. The SIP will be administered by the Board of Directors or
a committee appointed by the Board of Directors (the "SIP Committee").
The SIP Committee will have the authority to construe, interpret and
implement the SIP, and prescribe, amend and rescind rules and regulations
relating to the SIP. The determination of the SIP Committee on all matters
relating to the SIP or any Award agreement will be final and binding.
STOCK OPTIONS AND SARS. The SIP Committee may grant ISOs and nonqualified
stock options (collectively, "options") to purchase shares of Common Stock from
Goldman Sachs (at the price set forth in the Award agreement), and SARs in such
amounts, and subject to such terms and conditions, as the SIP Committee may
determine. No grantee of an option or SAR will have any of the rights of a
shareholder of GS Inc. with respect to shares subject to their Award until the
issuance of the shares.
RESTRICTED STOCK. The SIP Committee may grant restricted shares of Common
Stock in amounts, and subject to terms and conditions, as the SIP Committee may
determine. The grantee will have the rights of a shareholder with respect to the
restricted stock, subject to any restrictions and conditions as the SIP
Committee may include in the Award agreement.
RESTRICTED STOCK UNITS. The SIP Committee may grant RSUs in amounts, and
subject to terms and conditions, as the SIP Committee may determine. Recipients
of RSUs have only the rights of a general unsecured creditor of Goldman Sachs
and no rights as a shareholder of GS Inc. until the Common Stock underlying the
RSUs is delivered.
OTHER EQUITY-BASED AWARDS. The SIP Committee may grant other types of
equity-based Awards, including the grant of unrestricted shares, in amounts, and
subject to terms and conditions, as the SIP Committee may determine. These
Awards may involve the transfer of actual shares of Common Stock, or the payment
in cash or otherwise of amounts based on the value of shares of Common Stock,
and may include Awards designed to comply with, or take advantage
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of certain benefits of, the local laws of non-U.S. jurisdictions.
CHANGE IN CONTROL. The SIP Committee may provide in any Award agreement
for provisions relating to a "change in control" of Goldman Sachs or any of its
subsidiaries or affiliates, including, without limitation, the acceleration of
the exercisability of, or the lapse of restrictions with respect to, the Award.
DIVIDEND EQUIVALENT RIGHTS. The SIP Committee may in its discretion
include in the Award agreement a dividend equivalent right entitling the grantee
to receive amounts equal to the dividends that would be paid, during the time
such Award is outstanding, on the shares of Common Stock covered by such Award
as if such shares were then outstanding.
NONASSIGNABILITY. Except to the extent otherwise provided in the Award
agreement or approved by the SIP Committee, no Award or right granted to any
person under the SIP will be assignable or transferable other than by will or by
the laws of descent and distribution, and all Awards and rights will be
exercisable during the life of the grantee only by the grantee or the grantee's
legal representative.
AMENDMENT AND TERMINATION. Except as otherwise provided in an Award
agreement, the Board of Directors may from time to time suspend, discontinue,
revise or amend the SIP and the SIP Committee may amend the terms of any Award
in any respect.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SIP. The following is a brief
description of the material U.S. federal income tax consequences generally
arising with respect to Awards.
The grant of an option or SAR will create no tax consequences for the
participant or Goldman Sachs. Upon exercising an option, other than an ISO, the
participant will generally recognize ordinary income equal to the difference
between the exercise price and the fair market value of the shares acquired on
the date of exercise and Goldman Sachs generally will be entitled to a tax
deduction in the same amount. A participant generally will not recognize taxable
income upon exercising an ISO and Goldman Sachs will not be entitled to any tax
deduction with respect to an ISO if the participant holds the shares for the
applicable periods specified in the Code.
With respect to other Awards, upon the payment of cash or the issuance of
shares or other property that is either not restricted as to transferability or
not subject to a substantial risk of forfeiture (e.g., delivery under the RSUs),
the participant will generally recognize ordinary income equal to the cash or
the fair market value of shares or other property delivered. Goldman Sachs
generally will be entitled to a deduction in an amount equal to the ordinary
income recognized by the participant.
THE DEFINED CONTRIBUTION PLAN
The Goldman Sachs Defined Contribution Plan (the "DCP") is not intended to
be qualified under Section 401(a) of the Code and is not subject to the Employee
Retirement Income Security Act of 1974, as amended.
The following is a description of the material terms of the DCP. You
should, however, refer to the exhibits that are a part of the registration
statement for a copy of the DCP. See "Available Information".
ELIGIBILITY AND PARTICIPATION. The Board of Directors or a committee
appointed by the Board of Directors (the "DCP Committee") will select the
employees to participate in the DCP.
CONTRIBUTIONS. Goldman Sachs will make an initial irrevocable contribution
to the trust underlying the DCP (the "Trust") of 12,567,587 shares of Common
Stock simultaneously with the consummation of the offerings. Goldman Sachs may
contribute additional shares of Common Stock or cash to the Trust from time to
time in its sole discretion. We currently intend to make ongoing contributions
to the DCP and to reallocate forfeitures under the DCP to participants.
ALLOCATION OF CONTRIBUTIONS. There will be established an account in the
name of each participant (the "Account") and a separate account (the
"Unallocated Account") to which any forfeitures of Common Stock will
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be credited pending reallocation to participants. The DCP Committee will
designate the number of shares of Common Stock allocable to the Account of each
participant. Any Common Stock remaining in the Unallocated Account as of the
last day of each plan year due to forfeitures and any distributions received on
Common Stock credited to the Unallocated Account will be reallocated among the
Accounts of participants who are employed by Goldman Sachs on the last day of
each plan year pro rata to each such participant's share of Goldman Sachs
contributions, for that plan year, or on such other formulaic basis as the DCP
Committee may determine.
VOTING AND TENDERING OF COMMON STOCK. Shares of Common Stock allocated to
participants who are parties to the Shareholders' Agreement will be voted in
accordance with the Shareholders' Agreement and will be tendered by the trustee
of the Trust in accordance with confidential instructions provided by the
participants if the transfer restrictions under the Shareholders' Agreement are
waived (and will not be tendered if the transfer restrictions are not waived).
See "Certain Relationships and Related Transactions -- Shareholders' Agreement"
for a discussion of those provisions. Any shares of Common Stock allocated to
Accounts of participants who are not subject to the Shareholders' Agreement will
be voted and tendered by the trustee of the Trust in accordance with
confidential instructions provided by the participant. Shares held in Accounts
with respect to which the trustee of the Trust does not receive voting or
tendering directions will not be voted or tendered.
Shares of Common Stock held in the Unallocated Account will be voted by the
trustee in the same proportion as the shares of Common Stock allocated to
participants' Accounts with respect to which voting instructions are received.
DIVIDENDS. Any cash dividends on shares of Common Stock allocated to a
participant's Account will be distributed to each participant after the end of
the calendar quarter in which such dividend is received.
VESTING AND DISTRIBUTION. With respect to the initial contribution of
Common Stock to the DCP, the right to receive shares of Common Stock allocated
to a participant's Account generally will become vested, and the Common Stock
generally will be distributable, in equal installments on or about the third,
fourth and fifth anniversaries of the date of such contribution if the
participant satisfies certain conditions and the participant's employment with
Goldman Sachs has not been terminated, with certain exceptions for termination
due to death or following a change in control.
With respect to contributions to the DCP (other than the initial
contribution), the DCP Committee may determine the dates on which the right to
receive Common Stock (or cash) allocated to a participant's Account will vest
and be distributable.
ADMINISTRATION OF THE DCP. The DCP will be administered by the DCP
Committee. The Board of Directors may, however, determine allocations of
contributions or resolve to otherwise administer the DCP.
AMENDMENTS. Subject to limitations with respect to contributions
previously made to the DCP, the Board of Directors reserves the right to modify,
alter, amend or terminate the DCP or the Trust. No modification or amendment of
the DCP may be made which would cause or permit any part of the assets of the
Trust to be used for, or diverted to, purposes other than for the exclusive
benefit of participants or their beneficiaries, or which would cause any part of
the assets of the Trust to revert to or become the property of Goldman Sachs.
LIMIT ON LIABILITY. All distributions under the DCP will be paid or
provided solely from the assets of the Trust and Goldman Sachs will have no
responsibility or liability to any participant or beneficiary relating to the
Common Stock or other assets of the Trust. The agreement establishing the Trust
will provide that no creditor of Goldman Sachs will have any rights to the
assets of the Trust.
U.S. FEDERAL INCOME TAX CONSEQUENCES. The following is a brief description
of the material U.S. federal income tax consequences generally arising with
respect to participation in the DCP. A participant in the DCP will recognize
ordinary income upon the vesting of shares of Common Stock allocated
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to such participant's Account in an amount equal to the fair market value of the
vested shares. Goldman Sachs will generally be entitled to a deduction equal to
the fair market value of the shares at the time of the contribution in the
taxable year in which the participant recognizes income under the DCP in respect
of the vesting of shares of Common Stock.
THE PARTNER COMPENSATION PLAN
OVERVIEW
To perpetuate the sense of partnership and teamwork that exists among our
senior professionals, and to reinforce the alignment of employee and shareholder
interests, the Board of Directors has adopted The Goldman Sachs Partner
Compensation Plan (the "Partner Compensation Plan") for the purpose of
compensating senior professionals. The Partner Compensation Plan will be
administered by the Board of Directors or a committee appointed by the Board of
Directors (the "Partner Compensation Plan Committee").
Individuals will be selected to participate in the Partner Compensation
Plan for a one-or two-fiscal year cycle ("Contract Period"). Upon selection to
the Partner Compensation Plan, participants will be allocated a percentage
interest in a pool for annual bonus payments in addition to base salaries. The
size of the pool will be established by the Partner Compensation Plan Committee
annually, taking into account our results of operations and other measures of
financial performance. The Partner Compensation Plan Committee may also retain
an unallocated percentage of the pool that it may allocate among participants at
fiscal year end in its sole discretion. By linking the Partner Compensation Plan
participant's annual bonus payments to our results as a whole, as opposed to the
results of any participant's individual business unit, we believe it will
provide additional incentives for teamwork. Further, we believe that the tying
of the bonus payments to overall financial results will more closely align the
interests of the participants with our shareholders. Finally, we believe that
the retention of a percentage of the pool for allocation among participants at
fiscal year end in amounts determined at the sole discretion of the Partner
Compensation Plan Committee will provide appropriate compensation flexibility.
The following is a description of the material terms of the Partner
Compensation Plan. You should, however, refer to the exhibits that are a part of
the registration statement for a copy of the Partner Compensation Plan. See
"Available Information".
ELIGIBILITY AND PARTICIPATION
Consistent with our historical practice of partnership elections, the
initial Contract Period will be through the end of fiscal 2000. Although the
employees who will participate in the initial Contract Period have not yet been
designated, it is expected that the participants will consist of the continuing
PLPs. Prior to the Contract Period commencing with fiscal 2001, and on or before
each succeeding Contract Period, the Partner Compensation Plan Committee will
determine the participants in the Partner Compensation Plan. Individual
participants may also be added from time to time outside the biennial selection
process.
DETERMINATION OF SALARY AND BONUS
The aggregate amount of compensation to be included in the Partner
Compensation Plan for each fiscal year will be determined by the Partner
Compensation Plan Committee, taking into account measures of our financial
performance it deems appropriate (which in 1999 will include a full year's
results), including, but not limited to, earnings per share, return on average
common equity, pre-tax income, pre-tax operating income, net revenues, net
income, profits before taxes, book value per share, stock price, earnings
available to common shareholders and ratio of compensation and benefits to net
revenues.
Prior to the commencement of the first fiscal year in any Contract Period,
and prior to the completion of the offerings in the case of the initial Contract
Period, the Partner Compensation Plan Committee will determine both the salaries
of and the percentage of the Partner Compensation Plan pool that may be
allocable to any particular participant (the
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"Allocation Percentage"). The Allocation Percentage so determined is expected to
be applicable for each fiscal year within a Contract Period. Any remaining
portion of the Partner Compensation Plan pool not so allocated will be allocated
to individual participants at the end of the fiscal year in amounts determined
by the Partner Compensation Plan Committee.
Amounts payable under the Partner Compensation Plan will be satisfied in
cash or as Awards under the SIP, as determined by the Partner Compensation Plan
Committee and recommended to the SIP Committee.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of the date of this prospectus certain
information regarding the beneficial ownership of our Common Stock:
- - immediately prior to the consummation of the offerings, but after giving
effect to the Incorporation Transactions and the Related Transactions that
are described and defined under "Certain Relationships and Related
Transactions -- Incorporation and Related Transactions"; and
- - as adjusted to reflect the sale of the shares of Common Stock pursuant to the
offerings by:
1. each person who is known to Goldman Sachs to be the beneficial owner of
more than 5% of our Common Stock after the offerings;
2. each director and Named Executive Officer of Goldman Sachs; and
3. all directors and executive officers of Goldman Sachs as a group.
Except as otherwise indicated, the persons or entities listed below have
sole voting and investment power with respect to Common Shares beneficially
owned by them. None of our employees are selling shares in the offerings.
For purposes of this table, information as to the shares of Common Stock is
calculated based on 385,794,566 shares of Common Stock outstanding prior to the
consummation of the offerings and 427,794,566 shares of Common Stock outstanding
after the offerings, and assumes that the underwriters' options to purchase
additional shares are not exercised. For purposes of this table, "beneficial
ownership" is determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, pursuant to which a person or group of persons is deemed
to have "beneficial ownership" of any shares of Common Stock that such person
has the right to acquire within 60 days after the date of this prospectus. For
purposes of computing the percentage of outstanding shares of Common Stock held
by each person or group of persons named above, any shares which such person or
persons has the right to acquire within 60 days after the date of this
prospectus are deemed to be outstanding but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERINGS NUMBER OF OFFERINGS
--------------------- SHARES ---------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ---- ------ ------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
5% Shareholders:
Sumitomo Bank Capital Markets, Inc.(1)........... 29,961,934 7.8% 9,000,000 20,961,934 4.9%
Kamehameha Activities Association(2)............. 30,975,421 8.0 9,000,000 21,975,421 5.1
Directors and Named Executive Officers:
Henry M. Paulson, Jr.(3)......................... 4,132,235 1.1 0 4,132,235 *
Robert J. Hurst(3)............................... 3,835,124 * 0 3,835,124 *
John A. Thain(3)................................. 3,101,426 * 0 3,101,426 *
John L. Thornton(3).............................. 3,012,541 * 0 3,012,541 *
Sir John Browne(3)............................... 0 -- 0 0 --
James A. Johnson(3).............................. 0 -- 0 0 --
John L. Weinberg(3).............................. 444,444 * 0 444,444 *
David A. Viniar(3)............................... 1,715,282 * 0 1,715,282 *
All directors and executive officers as a group
(13 persons)(4)................................... 26,152,648 6.8 0 26,152,648 6.1
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
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(1) 277 Park Avenue, New York, New York 10172. For purposes of calculating the
number of shares of Common Stock beneficially owned prior to the offerings,
includes 9,000,000 shares of Common Stock beneficially owned by Sumitomo
Bank Capital Markets, Inc. that will be sold in the offerings. Excludes
7,903,480 shares of Common Stock that Sumitomo Bank Capital Markets, Inc.
would receive upon the conversion of its 7,903,480 shares of Nonvoting
Common Stock. The shares of Nonvoting Common Stock are not convertible until
the 185th day after completion of the offerings. For a description of the
Nonvoting Common Stock, see "Description of Capital Stock -- Nonvoting
Common Stock".
(2) 567 South King Street, Suite 150, Honolulu, Hawaii 96813.
(3) c/o The Goldman Sachs Group, Inc., 85 Broad Street, New York, New York
10004. Excludes any shares of Common Stock subject to the Shareholders'
Agreement that are owned by other parties to the Shareholders' Agreement.
While each of Messrs. Paulson, Hurst, Thain, Thornton and Viniar is a party
to the Shareholders' Agreement and, other than Mr. Viniar, is a member of
the Shareholders' Committee, each disclaims beneficial ownership of the
shares of Common Stock subject to the Shareholders' Agreement other than
those specified above for each such person individually. See "Certain
Relationships and Related Transactions -- Shareholders' Agreement" for a
discussion of the Shareholders' Agreement.
(4) Each executive officer is a party to the Shareholders' Agreement and each
disclaims beneficial ownership of the shares of Common Stock subject to the
Shareholders' Agreement other than those specified above. See "Certain
Relationships and Related Transactions -- Shareholders' Agreement" for a
discussion of the Shareholders' Agreement.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following are descriptions of the material provisions of agreements and
other documents discussed below. You should, however, refer to the exhibits that
are a part of the registration statement for a copy of each agreement and
document. See "Available Information".
INCORPORATION AND RELATED TRANSACTIONS
Simultaneously with the consummation of the offerings, we will complete a
number of transactions in order to have GS Inc. succeed to the business of Group
L.P.
The principal incorporation transactions (the "Incorporation Transactions")
and related transactions (the "Related Transactions") are summarized below.
INCORPORATION TRANSACTIONS
Pursuant to a plan of incorporation (the "Plan of Incorporation"):
- - The Goldman Sachs Corporation ("GS Corp."), which is the general partner of
Group L.P., will merge into GS Inc. In this transaction, the PLPs who are
shareholders of GS Corp. will receive Common Stock and the other shareholders
of GS Corp. will receive Common Stock;
- - The PLPs will exchange their interests in Group L.P. and certain affiliates
for 265,019,073 shares of Common Stock (these amounts include shares issuable
to PLPs in the merger of GS Corp. into GS Inc.);
- - The retired limited partners of Goldman Sachs (the "RLPs") will exchange their
interests in Group L.P. and certain affiliates for cash, Junior Subordinated
Debentures or Common Stock (or a combination thereof). It is expected that
these transactions will result in the payment of approximately $891 million in
cash and the issuance of $295 million principal amount of Junior Subordinated
Debentures and of 47,270,551 shares of Common Stock (these amounts include the
securities and cash issuable to the RLPs in the merger of GS Corp. into GS
Inc.);
- - Sumitomo Bank Capital Markets, Inc. will exchange its interests in Group L.P.
and GS&Co. for 29,961,934 shares of Common Stock and 7,903,480 shares of
Nonvoting Common Stock;
- - Kamehameha Activities Association will exchange its interests in Group L.P.
for 30,975,421 shares of Common Stock; and
- - After all the interests of Group L.P. have been transferred to GS Inc., Group
L.P. will be merged into GS Inc.
RELATED TRANSACTIONS
- - The Formula RSUs, Discretionary RSUs and Discretionary Options will be
granted, the initial irrevocable contribution of shares of Common Stock to the
DCP will be made and certain senior employees, principally managing directors
who are not PLPs, will be selected to participate in the DCP; and
- - After the consummation of the offerings, we will make a $200 million cash
contribution to the Goldman Sachs charitable foundation.
SHAREHOLDERS' AGREEMENT
PERSONS AND SHARES COVERED
Each PLP and each other person who is or becomes a managing director on the
IPO Date or thereafter will be a party to the Shareholders' Agreement
(collectively, the "Covered Persons"). After the consummation of the offerings,
not less than 281,000,000 shares of Common Stock will be subject to the
Shareholders' Agreement.
The shares covered by the Shareholders' Agreement (the "Covered Shares")
will include generally all shares of Common Stock acquired from Goldman Sachs by
a Covered Person. Covered Shares will include:
- - any shares of Common Stock received by the PLPs pursuant to the Incorporation
Transactions (except for certain shares that aggregate less than 120,000
shares);
- - any shares of Common Stock received by Covered Persons from the DCP;
- - any shares of Common Stock received by Covered Persons pursuant to the Formula
or Discretionary RSUs or the Discretionary Options; and
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- - unless otherwise determined by the Board of Directors, any shares of Common
Stock received by the Covered Persons from Goldman Sachs through any other
employee compensation, benefit or similar plan.
Covered Shares will not include any shares of Common Stock purchased by a
Covered Person in the open market or in a subsequent underwritten public
offering. The Shareholders' Committee may also exclude from the application of
all or part of the Shareholders' Agreement all or any portion of the Common
Stock acquired by a new employee of Goldman Sachs.
TRANSFER RESTRICTIONS
Each Covered Person will agree in the Shareholders' Agreement, among other
things, to:
- - have beneficial ownership of Covered Shares at least equal to 25% of the
cumulative number of Covered Shares beneficially owned by him or her at the
time he or she became a Covered Person or acquired by him or her thereafter
and with no credit for dispositions (the "General Transfer Restrictions") for
so long as he or she is a Covered Person and an employee of Goldman Sachs
(an "Employee Covered Person"); and
- - comply with the underwriters' 180-day lock-up arrangement described under
"Underwriting".
The PLPs will also be subject to limitations on their ability to transfer
Covered Shares received in connection with the Incorporation Transactions. Under
these restrictions, each PLP has agreed that he or she will not transfer the
Covered Shares received pursuant to the Plan of Incorporation until the third
anniversary of the IPO Date (the "PLP Transfer Restrictions" and, together with
the General Transfer Restrictions, the "Transfer Restrictions"). The PLP
Transfer Restrictions will lapse as to such Covered Shares in equal installments
on each of the third, fourth and fifth anniversaries of the IPO Date. The
Transfer Restrictions applicable to a Covered Person terminate upon the death of
the Covered Person.
WAIVERS
Except in the case of a third-party tender or exchange offer, the PLP
Transfer Restrictions may be waived or terminated at any time by the
Shareholders' Committee. The Shareholders' Committee also has the power to waive
the General Transfer Restrictions to permit Covered Persons to:
- - participate as sellers in underwritten public offerings of Common Stock and
tender and exchange offers and share repurchase programs by Goldman Sachs;
- - transfer Covered Shares to charities, including charitable foundations;
- - transfer Covered Shares held in employee benefit plans; and
- - transfer Covered Shares in specific transactions (for example, to immediate
family members and trusts) or circumstances.
In the case of a third-party tender or exchange offer, the Transfer
Restrictions may be waived or terminated:
- - if the Board of Directors is recommending acceptance or is not making any
recommendation with respect to acceptance of the tender or exchange offer, by
a majority of the Voting Interests (as defined below under "-- Voting"); or
- - if the Board of Directors is recommending rejection of the tender or exchange
offer, by 66 2/3% of the outstanding Voting Interests.
In the case of a tender or exchange offer by Goldman Sachs, a majority of
the outstanding Voting Interests may also elect to waive or terminate the
Transfer Restrictions.
VOTING
Prior to any vote of the shareholders of Goldman Sachs, the Shareholders'
Agreement requires a separate, preliminary vote of the Voting Interests on each
matter upon which a vote of the shareholders is proposed to be taken (the
"Preliminary Vote"). Each Covered Share held by an Employee Covered Person and
each other Covered Share subject to the PLP Transfer Restrictions ("Voted
Covered Shares") will be voted in accordance with the majority of the votes cast
by the Voting Interests in the Preliminary Vote. In
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elections of directors, each Voted Covered Share will be voted in favor of the
election of those persons receiving the highest numbers of votes cast by the
Voting Interests in the Preliminary Vote. "Voting Interests" are Covered Shares
beneficially owned by all Covered Persons through December 31, 2000 and
thereafter are Covered Shares beneficially owned by all Employee Covered
Persons.
OTHER RESTRICTIONS
The Shareholders' Agreement also prevents the Covered Persons from engaging
in certain activities relating to any securities of Goldman Sachs with any
person who is not a Covered Person or a director, officer or employee of Goldman
Sachs ("Restricted Persons"). Among other things, a Covered Person may not:
- - participate in a proxy solicitation to or with a Restricted Person;
- - deposit any Covered Shares in a voting trust or subject any Covered Shares to
any voting agreement or arrangement that includes any Restricted Person;
- - form, join or in any way participate in a "group" with any Restricted Person;
or
- - together with any Restricted Person, propose certain transactions with Goldman
Sachs or seek the removal of any directors of Goldman Sachs or any change in
the composition of the Board of Directors.
TERM, AMENDMENT AND CONTINUATION
The Shareholders' Agreement is to continue in effect until the earlier of
January 1, 2050 and the time it is terminated by the vote of 66 2/3% of the
outstanding Voting Interests. The PLP Transfer Restrictions will not terminate
upon the expiration or termination of the Shareholders' Agreement unless
previously waived or terminated or unless subsequently waived or terminated by
the Board of Directors. The Shareholders' Agreement may generally be amended at
any time by a majority of the outstanding Voting Interests.
Unless otherwise terminated, in the event of any transaction in which a
third party succeeds to the business of Goldman Sachs and in which Covered
Persons hold securities of the third party, the Shareholders' Agreement will
remain in full force and effect as to the securities of the third party, and the
third party shall succeed to the rights and obligations of Goldman Sachs under
the Shareholders' Agreement.
INFORMATION REGARDING THE SHAREHOLDERS' COMMITTEE
The terms and provisions of the Shareholders' Agreement will be
administered by the Shareholders' Committee. The Shareholders' Committee will
initially consist of those Covered Persons who are both employees of Goldman
Sachs and members of the Board of Directors. It is possible that over time all
or a majority of the members of the Shareholders' Committee will not be members
of the Board of Directors of Goldman Sachs.
Members of the Shareholders' Committee are entitled to indemnification from
Goldman Sachs in their capacities as members of the Shareholders' Committee as
described under "Description of Capital Stock -- Limitation of Liability and
Indemnification Matters".
VOTING AGREEMENT
Both Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association have agreed to vote their shares of Common Stock in the same manner
as a majority of the shares of Common Stock held by the managing directors of
Goldman Sachs are voted. The obligations of Sumitomo Bank Capital Markets, Inc.
and Kamehameha Activities Association under the Voting Agreement are enforceable
by GS Inc. The managing directors will have no right to enforce the voting
agreements.
INSTRUMENT OF INDEMNIFICATION
In connection with the offerings, Goldman Sachs will enter into an
Instrument of Indemnification (the "Instrument of Indemnification"). The
Instrument of Indemnification will cover certain former partners of Goldman
Sachs, including the PLPs, each current director and executive officer of
Goldman Sachs, the RLPs, Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association (each, an "Indemnitee"). Under the Instrument of
Indemnification, in the event any Indemnitee is, or is threatened to be, made a
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party to any action, suit or proceeding by
reason of the fact that such Indemnitee was a general or limited partner,
shareholder, member, director, officer, employee or agent (each, a "Designated
Capacity") of Group L.P. or certain of its affiliates or subsidiaries or is
serving or served, at the request of Group L.P. or certain of its affiliates or
subsidiaries, in a Designated Capacity in another enterprise, Goldman Sachs is,
subject to certain exceptions, obligated to indemnify and hold such Indemnitee
harmless from any losses, damages or expenses incurred by such Indemnitee in the
action, suit or proceeding. The Instrument of Indemnification does not duplicate
the obligations of Goldman Sachs under the Tax Indemnification Agreement
described below. The indemnification obligation of Goldman Sachs under the
Instrument of Indemnification also extends to the indemnification obligations
that certain Indemnitees, including each current director and executive officer
of GS Inc., may have to other Indemnitees.
The Instrument of Indemnification also provides that Goldman Sachs will,
subject to certain exceptions, release each Indemnitee from all actions, suits
or other claims that Group L.P. may have had or which Goldman Sachs, as a
successor to Group L.P., may have arising out of an Indemnitee's partnership or
other interest in Group L.P. or certain of its affiliates or subsidiaries or
arising out of the conduct of such Indemnitee engaged in the conduct of the
business of Group L.P. or its affiliates or subsidiaries.
DIRECTOR AND OFFICER INDEMNIFICATION
We will enter into an agreement that provides indemnification to our
directors and officers, directors of the general partner of Group L.P. and all
other persons requested or authorized by our Board of Directors or the board of
directors of the general partner of Group L.P. to take actions on behalf of us,
Group L.P. or the general partner of Group L.P. in connection with the Plan of
Incorporation, this registration statement and any other registration statement
contemplated by the Plan of Incorporation for all losses, claims, expenses,
liabilities, judgments, fines and settlement amounts incurred by the indemnified
person arising out of the relevant registration statements or the Plan of
Incorporation or the transactions contemplated by the Plan of Incorporation.
This agreement is in addition to our indemnification obligations under our
By-Laws as described under "Description of Capital Stock -- Limitation of
Liability and Indemnification Matters".
TAX INDEMNIFICATION AGREEMENT AND
RELATED MATTERS
An entity that has historically operated in corporate form generally is
liable for any adjustments to the corporation's taxes for periods prior to its
initial public offering. In contrast, the partners of Group L.P., rather than
Goldman Sachs, will be liable for any adjustments to any taxes (including U.S.
federal and state income taxes) attributable to the operations of Group L.P. and
its affiliates prior to the offerings. In connection with the offerings, Goldman
Sachs will enter into an agreement (the "Tax Indemnification Agreement") to
indemnify certain former limited partners of Group L.P., including the PLPs,
each current director and executive officer of GS Inc., the RLPs, Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association (collectively, the
"Tax Indemnitees"), against certain increases in each Tax Indemnitee's taxes
that relate to activities of Group L.P. or certain of its affiliates in respect
of periods prior to the offerings ("Increased Taxes"). We will be required to
make additional payments to offset any taxes payable by a Tax Indemnitee in
respect of payments made pursuant to the Tax Indemnification Agreement only to
the extent the payments made to that Tax Indemnitee exceed a fixed amount. Any
payment of Increased Taxes by Goldman Sachs will be offset by any tax benefit
received by the Tax Indemnitee.
The Tax Indemnification Agreement includes provisions that permit Goldman
Sachs to control any tax proceeding or contest which might result in Goldman
Sachs being required to make a payment under the Tax Indemnification Agreement.
The Incorporation Transactions are structured in a manner that is not
expected to result in a significantly disproportionate tax or
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other burden to any partner of Group L.P. If the Incorporation Transactions were
to have a disproportionate effect on any partner, Goldman Sachs may, but is not
required to, make special payments and arrangements with any person who incurs a
disproportionate tax or other burden.
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DESCRIPTION OF CAPITAL STOCK
Pursuant to our Amended and Restated Certificate of Incorporation (the
"Charter"), our authorized capital stock consists of 4,350,000,000 shares, each
with a par value of $0.01 per share, of which:
- - 150,000,000 shares are designated as preferred stock ("Preferred Stock");
- - 4,000,000,000 shares are designated as common stock ("Common Stock"),
457,865,101 shares of which will be outstanding as of the completion of the
offerings, including 30,070,535 shares of Common Stock underlying the Formula
RSUs; and
- - 200,000,000 shares are designated as nonvoting common stock ("Nonvoting Common
Stock" and, together with the shares of Common Stock, the "Common Shares"),
7,903,480 shares of which will be outstanding as of the completion of the
offerings.
All outstanding Common Shares are, and the shares of Common Stock offered hereby
will be, when issued and sold, validly issued, fully paid and nonassessable.
The Shareholders' Agreement contains provisions relating to the voting and
disposition of certain shares of Common Stock. See "Certain Relationships and
Related Transactions -- Shareholders' Agreement" for a discussion of those
provisions.
PREFERRED STOCK
The authorized capital stock of Goldman Sachs includes 150,000,000 shares
of Preferred Stock. Our Board of Directors is authorized to divide the Preferred
Stock into series and, with respect to each series, to determine the
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions thereof, including the dividend rights, conversion
or exchange rights, voting rights, redemption rights and terms, liquidation
preferences, sinking fund provisions and the number of shares constituting the
series. The Board of Directors could, without shareholder approval, issue
Preferred Stock with voting and other rights that could adversely affect the
voting power of the holders of Common Stock and which could have certain
anti-takeover effects.
Subject to the rights of the holders of any series of Preferred Stock, the
number of authorized shares of any series of Preferred Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by
resolution adopted by the Board of Directors and approved by the affirmative
vote of the holders of a majority of the voting power of all outstanding shares
of capital stock entitled to vote on the matter, voting together as a single
class.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters submitted to a vote of shareholders. There are no
cumulative voting rights. Accordingly, the holders of a majority of the shares
of Common Stock voting for the election of directors can elect all the directors
if they choose to do so, subject to any voting rights of holders of Preferred
Stock to elect directors. For a discussion of the ability of the parties to the
Shareholders' Agreement initially to elect all of our directors, see "Risk
Factors -- Goldman Sachs Will Be Controlled by Its Managing Directors Whose
Interests May Differ from Those of Other Shareholders".
Subject to the preferential rights of any holders of any outstanding series
of Preferred Stock, the holders of Common Stock, together with the holders of
the Nonvoting Common Stock, will be entitled to such dividends and
distributions, whether payable in cash or otherwise, as may be declared from
time to time by the Board of Directors from legally available funds. Subject to
the preferential rights of holders of any outstanding series of Preferred Stock,
upon the liquidation, dissolution or winding-up of Goldman Sachs (with the
shares of the Common Stock and the Nonvoting Common Stock being considered as a
single class for this purpose) and after payment of all prior claims, the
holders of Common Stock will be entitled to receive pro rata all assets of
Goldman Sachs.
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Any dividend in shares of Common Stock
paid on or with respect to shares of Common Stock may be paid only with shares
of Common Stock. Other than the Shareholder Protection Rights discussed below,
holders of Common Stock have no redemption or conversion rights or preemptive
rights to purchase or subscribe for securities of Goldman Sachs.
NONVOTING COMMON STOCK
The Nonvoting Common Stock will have the same rights and privileges as, and
will rank equally and share proportionately with, and be identical in all
respects as to all matters to, the Common Stock, except that the Nonvoting
Common Stock will have no voting rights other than those voting rights required
by law. All of the outstanding shares of Nonvoting Common Stock will be
beneficially owned by Sumitomo Bank Capital Markets, Inc. on the IPO Date.
The Board of Directors will not declare or pay dividends, and no dividend
will be paid, with respect to any outstanding share of Common Stock or Nonvoting
Common Stock, unless, simultaneously, the same dividend is paid with respect to
each share of Common Stock and Nonvoting Common Stock, except that in the case
of any dividend in the form of capital stock of a subsidiary of Goldman Sachs,
the capital stock of the subsidiary distributed to holders of Common Stock may
differ from the capital stock of the subsidiary distributed to holders of the
Nonvoting Common Stock to the extent and only to the extent that the Common
Stock and the Nonvoting Common Stock differ. Any dividend paid on or with
respect to Nonvoting Common Stock may be paid only with shares of Nonvoting
Common Stock.
The shares of Nonvoting Common Stock may not be converted into Common Stock
until the 185th day after the IPO Date. Beginning on the 185th day the Nonvoting
Common Stock will, upon transfer by Sumitomo Bank Capital Markets, Inc. to a
third party, and in certain other circumstances, convert into shares of Common
Stock on a one-for-one basis. The Nonvoting Common Stock has standard
anti-dilution provisions.
SHAREHOLDER PROTECTION RIGHTS
Each Common Share has attached to it a Shareholder Protection Right
(a "Right"). The Rights initially are represented only by the certificates for
the Common Shares and will not trade separately from the Common Shares unless
and until:
- - it is announced by Goldman Sachs that a person or group has become the
beneficial owner of 15% or more of the outstanding Common Stock (other than
persons deemed to beneficially own Common Stock solely because they are
parties to the Shareholders' Agreement, members of the Shareholders' Committee
or certain other persons)(an "Acquiring Person"); or
- - ten business days (or such later date as the Board of Directors may fix by
resolution) after the date a person or group commences a tender or exchange
offer that would result in such person or group becoming an Acquiring Person.
If and when the Rights separate and prior to the Flip-in Date occurring (as
described below), each Right will entitle the holder to purchase, in the case of
Rights relating to the Common Stock, 1/100 of a share of Series A Participating
Preferred Stock or, in the case of Rights relating to the Nonvoting Common
Stock, 1/100 of a share of Series B Participating Preferred Stock, in each case,
for an exercise price of $250. Each 1/100 of a share of Series A Participating
Preferred Stock and Series B Participating Preferred Stock would have economic
and voting terms equivalent to one share of Common Stock and Nonvoting Common
Stock, respectively.
Upon the date of the announcement by Goldman Sachs that any person or group
has become an Acquiring Person (the "Flip-in Date"), each Right (other than
Rights beneficially owned by the Acquiring Person or their transferees, which
Rights become void) will entitle its holder to purchase, for the exercise price,
a number of shares of Common Stock or, in the case of Rights relating to
Nonvoting Common Stock, a number of shares of Nonvoting Common Stock having a
market value of twice the exercise price. Also, if, after the
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Flip-in Date, the Acquiring Person controls the Board of Directors and:
- - Goldman Sachs is involved in a merger or similar form of business combination
and (i) any term of the transaction provides for different treatment of the
shares of capital stock held by the Acquiring Person as compared to the shares
of capital stock held by all other shareholders or (ii) the person with whom
such transaction occurs is the Acquiring Person or an affiliate thereof; or
- - Goldman Sachs sells or transfers assets representing more than 50% of its
assets or generating more than 50% of its operating income or cash flow to any
person other than Goldman Sachs or its wholly owned subsidiaries,
then each Right will entitle its holder to purchase, for the exercise price, a
number of shares (A) with respect to Rights relating to the Common Stock, of
capital stock with the greatest voting power in respect of the election of
directors and (B) with respect to Rights relating to the Nonvoting Common Stock,
of capital stock identical to the stock described in clause (A) except with
voting provisions identical to that of the Nonvoting Common Stock, of either the
Acquiring Person or the other party to such transaction, depending on the
circumstances of the transaction, having a market value of twice the exercise
price. If any person or group acquires from 15% to and including 50% of the
Common Stock, our Board of Directors may, at its option, exchange each
outstanding Right, except for those held by an Acquiring Person or their
transferees, for one share of Common Stock or, in the case of Rights relating to
Nonvoting Common Stock, one share of Nonvoting Common Stock.
The Rights may be redeemed by the Board of Directors for $0.01 per Right
prior to the Flip-in Date. Our Charter permits this redemption right to be
exercised by the Board of Directors (or certain directors specified or qualified
by the terms of the instrument governing the Rights).
The Rights will not prevent a takeover of Goldman Sachs. However, the
Rights may cause substantial dilution to a person or group that acquires 15% or
more of the Common Stock unless the Rights are first redeemed by the Board of
Directors.
LIMITATION OF LIABILITY AND
INDEMNIFICATION MATTERS
Our Charter provides that a director of Goldman Sachs will not be liable to
Goldman Sachs or its shareholders for monetary damages for breach of fiduciary
duty as a director, except in certain cases where liability is mandated by the
Delaware General Corporation Law (the "DGCL"). Our By-Laws provide for
indemnification, to the fullest extent permitted by law, of any person made or
threatened to be made a party to any action, suit or proceeding by reason of the
fact that such person is or was a director or officer of Goldman Sachs, or is or
was a director of a subsidiary of Goldman Sachs, or is or was a member of the
Shareholders' Committee acting under the Shareholders' Agreement or, at the
request of Goldman Sachs, serves or served as a director or officer of or in any
other capacity for, or in relation to, any other enterprise, against all
expenses, liabilities, losses and claims actually incurred or suffered by such
person in connection with the action, suit or proceeding. The By-Laws also
provide that, to the extent authorized from time to time by the Board of
Directors, Goldman Sachs may provide to any one or more employees and other
agents of Goldman Sachs or any subsidiary or other enterprise, rights of
indemnification and to receive payment or reimbursement of expenses, including
attorneys' fees, that are similar to the rights conferred by the By-Laws on
directors and officers of Goldman Sachs or any subsidiary or other enterprise.
CHARTER PROVISIONS APPROVING CERTAIN ACTIONS
Our Charter provides that the Board of Directors may determine to take the
following actions, in its sole discretion, and Goldman Sachs and each
shareholder of Goldman Sachs will, to the fullest extent permitted by law, be
deemed to have approved and rati-
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fied, and waived any claim relating to, the taking of any of these actions:
- - causing Goldman Sachs to register with the SEC for resale shares of Common
Stock held by our directors, employees and former directors and employees and
our subsidiaries and affiliates and former partners and employees of Group
L.P. and its subsidiaries and affiliates as discussed under "Shares Eligible
for Future Sale -- Other Registration Rights";
- - making payments to, and other arrangements with, certain former limited
partners of Goldman Sachs, including PLPs, in order to compensate them for, or
to prevent, significantly disproportionate adverse tax or other consequences
as discussed under "Certain Relationships and Related Transactions -- Tax
Indemnification Agreement and Related Matters"; and
- - making a $200 million contribution to the Goldman Sachs charitable foundation.
SECTION 203 OF THE DGCL
Upon completion of the offerings, Goldman Sachs will be subject to the
provisions of Section 203 of the DGCL ("Section 203"). In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or a transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or,
in certain cases, within three years prior, did own) 15% or more of the
corporation's outstanding voting stock. Under Section 203, a business
combination between Goldman Sachs and an interested stockholder is prohibited
unless it satisfies one of the following conditions:
- - prior to the time the stockholder became an interested stockholder, the Board
of Directors of Goldman Sachs must have previously approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
- - on consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of
the voting stock of Goldman Sachs outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, shares owned by persons who are directors and officers); or
- - the business combination is approved by the Board of Directors of Goldman
Sachs and authorized at an annual or special meeting of the stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
Our Board of Directors has adopted a resolution providing that the
Shareholders' Agreement will not create an "interested stockholder".
CERTAIN ANTI-TAKEOVER MATTERS
Our Charter and By-Laws will, upon consummation of the offerings, include a
number of provisions that may have the effect of encouraging persons considering
unsolicited tender offers or other unilateral takeover proposals to negotiate
with the Board of Directors rather than pursue non-negotiated takeover attempts.
These provisions include:
CLASSIFIED BOARD OF DIRECTORS
Our Charter will provide for a Board of Directors divided into three
classes, with one class to be elected each year to serve for a three-year term.
The terms of the initial classes of directors will terminate on the date of the
annual meetings of shareholders in 2000, 2001 and 2002. As a result, at least
two annual meetings of shareholders may be required for the shareholders to
change a majority of the Board of Directors. In addition, the shareholders of
Goldman Sachs can only remove directors for cause by the affirmative vote of the
holders of not less than 80% of
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the outstanding shares of capital stock of Goldman Sachs entitled to vote in the
election of directors. Vacancies on the Board of Directors may be filled only by
the Board of Directors. The classification of directors and the inability of
shareholders to remove directors without cause and to fill vacancies on the
Board of Directors will make it more difficult to change the composition of the
Board of Directors, but will promote a continuity of existing management.
CONSTITUENCY PROVISION
In accordance with our Charter, a director of Goldman Sachs may (but is not
required to) in taking any action (including an action that may involve or
relate to a change or potential change in control of Goldman Sachs) consider,
among other things, the effects that Goldman Sachs' actions may have on other
interests or persons (including its employees, former partners of Group L.P. and
the community) in addition to our shareholders.
ADVANCE NOTICE REQUIREMENTS
The By-Laws establish advance notice procedures with regard to shareholder
proposals relating to the nomination of candidates for election as directors or
new business to be brought before meetings of shareholders of Goldman Sachs.
These procedures provide that notice of such shareholder proposals must be
timely given in writing to the Secretary of Goldman Sachs prior to the meeting
at which the action is to be taken. Generally, to be timely, notice must be
received at the principal executive offices of Goldman Sachs not less than 90
days nor more than 120 days prior to the first anniversary date of the annual
meeting for the preceding year. The notice must contain certain information
specified in the By-Laws. We anticipate that our 2000 annual meeting will be
held in April 2000.
SPECIAL MEETINGS OF SHAREHOLDERS
The Charter and By-Laws deny shareholders the right to call a special
meeting of shareholders. The Charter and By-Laws provide that special meetings
of the shareholders may be called only by a majority of the Board of Directors.
NO WRITTEN CONSENT OF SHAREHOLDERS
The Charter requires all shareholder actions to be taken by a vote of the
shareholders at an annual or special meeting, and does not permit our
shareholders to act by written consent, without a meeting.
MAJORITY VOTE NEEDED FOR SHAREHOLDER PROPOSALS
The By-Laws require that any shareholder proposal be approved by a majority
of all of the outstanding shares of Common Stock and not by only a majority of
the shares present at the meeting and entitled to vote. This requirement may
make it more difficult to approve shareholder resolutions.
AMENDMENT OF BY-LAWS AND CHARTER
The Charter requires the approval of not less than 80% of the voting power
of all outstanding shares of Goldman Sachs' capital stock entitled to vote to
amend any By-Law by shareholder action or the Charter provisions described in
this section. Those provisions will make it more difficult to dilute the
anti-takeover effects of the By-Laws and the Charter.
BLANK CHECK PREFERRED STOCK
The Charter provides for 150,000,000 authorized shares of Preferred Stock.
The existence of authorized but unissued shares of Preferred Stock may enable
the Board of Directors to render more difficult or to discourage an attempt to
obtain control of Goldman Sachs by means of a merger, tender offer, proxy
contest or otherwise. For example, if in the due exercise of its fiduciary
obligations, the Board of Directors were to determine that a takeover proposal
is not in the best interests of Goldman Sachs, the Board of Directors could
cause shares of Preferred Stock to be issued without shareholder approval in one
or more private offerings or other transactions that might dilute the voting or
other rights of the proposed acquiror or insurgent shareholder or shareholder
group. In this regard, the Charter
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grants the Board of Directors broad power to establish the rights and
preferences of authorized and unissued shares of Preferred Stock. The issuance
of shares of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Shares. The issuance may also
adversely affect the rights and powers, including voting rights, of such holders
and may have the effect of delaying, deterring or preventing a change in control
of Goldman Sachs. The Board of Directors currently does not intend to seek
shareholder approval prior to any issuance of shares of Preferred Stock, unless
otherwise required by law.
LISTING
We intend to list the Common Stock on the NYSE.
TRANSFER AGENT
The transfer agent for the Common Stock will be ChaseMellon Shareholder
Services, L.L.C.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offerings, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market,
or the perception that such sales may occur, could adversely affect the
prevailing market price of the Common Stock. Upon completion of the offerings,
there will be 457,865,101 shares of Common Stock outstanding, including
30,070,535 shares of Common Stock underlying the Formula RSUs but excluding
7,903,480 shares of Nonvoting Common Stock. Of these shares, 60,000,000 shares
of Common Stock expected to be sold in the offerings will be freely transferable
without restriction or further registration under the Securities Act of 1933. Of
the remaining 397,865,101 shares of Common Stock outstanding:
- - 265,019,073 shares held by the PLPs will not be transferable until the third
anniversary of the IPO Date, unless these restrictions are waived and will
also be subject to the underwriters' lock-up described below. See "Certain
Relationships and Related Transactions -- Shareholders' Agreement";
- - 20,961,934 shares will be held by Sumitomo Bank Capital Markets, Inc. and,
along with the 7,903,480 shares of Nonvoting Common Stock that it will hold,
will be transferable only as described under "-- Sumitomo Bank Capital
Markets, Inc. and Kamehameha Activities Association Registration Rights",
unless these restrictions are waived by the Board of Directors. All of these
shares will also be subject to the underwriters' lock-up described below;
- - 21,975,421 shares will be held by Kamehameha Activities Association and will
be transferable only as described under "-- Sumitomo Bank Capital Markets,
Inc. and Kamehameha Activities Association Registration Rights", unless these
restrictions are waived by the Board of Directors. All of these shares will
also be subject to the underwriters' lock-up described below;
- - 47,270,551 shares will be held by the RLPs, of which 31,188,383 shares will be
transferable beginning one year after the IPO Date, and the remainder of which
will be transferrable beginning three years after the IPO Date, unless these
restrictions are waived by the Board of Directors. All of these shares are
also subject to the underwriters' lock-up described below;
- - 12,567,587 shares held by the DCP will not be distributable to the plan
participants until on or about the third, fourth and fifth anniversaries of
the date of the initial contribution, assuming the relevant conditions have
been satisfied. See "Management -- The Employee IPO Awards" for a description
of the DCP; and
- - 30,070,535 shares of Common Stock underlying the Formula RSUs generally will
be deliverable beginning on or about the first anniversary of the IPO Date,
assuming the relevant conditions are satisfied, as described in
"Management -- The Employee IPO Awards -- Formula Awards".
Shares of Common Stock underlying the Discretionary RSUs will be
deliverable beginning on or about the third anniversary of the IPO Date,
assuming the relevant conditions have been satisfied. The Discretionary Options
will be exercisable beginning on or about the third anniversary of the IPO Date,
assuming the relevant conditions have been satisfied. See "Management--The
Employee IPO Awards" for a discussion of the terms of the Formula and
Discretionary RSUs and the Discretionary Options.
Goldman Sachs, Sumitomo Bank Capital Markets, Inc., Kamehameha Activities
Association, the parties to the Shareholders' Agreement, including all of the
directors and executive officers of GS Inc., and the RLPs have agreed not to
dispose of or hedge any of their Common Stock or securities convertible into or
exchangeable for shares of Common Stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of GS&Co. This agreement does
not apply to the shares of Common Stock underlying any of the Formula or
Discretionary RSUs, the Discretionary Options or accounts in the DCP, in
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each case, received by non-managing directors or to any future Awards made under
the SIP.
We intend to file a registration statement with the SEC in order to
register the reoffer and resale of the shares of Common Stock issued pursuant to
the DCP, Formula and Discretionary RSUs and Discretionary Options. As a result,
any shares of Common Stock delivered under these awards will, subject to any
restrictions under the Shareholders' Agreement, be freely transferable to the
public unless the shares of Common Stock are acquired by an "affiliate" of
Goldman Sachs. Any shares of Common Stock acquired by an "affiliate" of Goldman
Sachs will be transferable to the public in accordance with Rule 144.
The shares of Common Stock received by the PLPs, Sumitomo Bank Capital
Markets, Inc. and Kamehameha Activities Association will constitute "restricted
securities" for purposes of the Securities Act of 1933. As a result, absent
registration under the Securities Act of 1933 or compliance with Rule 144
thereunder or an exemption therefrom, these shares of Common Stock will not be
freely transferable to the public. For a description of the registration rights
granted to Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association and the restrictions on the transfer of their shares of Common
Stock, see "-- Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association Registration Rights" below and for a description of the registration
rights that may be granted to the PLPs, see "-- Other Registration Rights"
below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who beneficially owns
"restricted securities" may not sell those securities until they have been
beneficially owned for at least one year. Thereafter, the person would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
- - 1% of the number of shares of Common Stock then outstanding (which will equal
approximately 4,277,946 shares immediately after the offerings); or
- - the average weekly trading volume of the Common Stock on the NYSE during the
four calendar weeks preceding the filing of a notice of Form 144 with respect
to such sale with the SEC.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice and availability of current public
information about Goldman Sachs.
Under Rule 144(k), a person who is not, and has not been at any time during
the 90 days preceding a sale, an affiliate of Goldman Sachs and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. While the
shares of Common Stock received by the RLPs will constitute "restricted
securities", these shares will be freely transferable by the RLPs in accordance
with Rule 144(k) upon the lapse or waiver of the transfer restrictions described
above.
SUMITOMO BANK CAPITAL MARKETS, INC. AND
KAMEHAMEHA ACTIVITIES ASSOCIATION
REGISTRATION RIGHTS
Goldman Sachs is a party to agreements with Sumitomo Bank Capital Markets,
Inc. and The Sumitomo Bank, Limited ("SBL" and together with Sumitomo Bank
Capital Markets, Inc., the "SBCM Group") (the "SBCM Registration Rights
Agreement") under which the SBCM Group may require Goldman Sachs to register
under the Securities Act of 1933 certain of Sumitomo Bank Capital Markets,
Inc.'s shares of Common Stock, which includes shares of Common Stock receivable
upon the conversion of the Nonvoting Common Stock. Goldman Sachs is a party to
similar agreements with Kamehameha Activities Association (the "KAA Registration
Rights Agreement" and, together with the SBCM Registration Rights Agreement, the
"Registration Rights Agreements"). The SBCM Group and Kamehameha Activities
Association and its affiliates are referred to herein as "Registration Rights
Holders".
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Except for certain transfers to wholly owned subsidiaries, each
Registration Rights Holder has agreed that it will only dispose of Common Stock
(x) by means of a widely dispersed underwritten public offering and (y) pursuant
to the exercise of the registration rights set forth below.
Each Registration Rights Holder has the right on up to ten occasions (but
not more than twice every 12 months) to require Goldman Sachs to register shares
of Common Stock under the Securities Act of 1933 ("demand rights"). Each
Registration Rights Holder also has the right to include its shares of Common
Stock in any registered public offering in which the managing directors
participate ("piggy-back rights").
Prior to the first anniversary of the IPO Date, the Registration Rights
Holders are not permitted to transfer shares of Common Stock or Nonvoting Common
Stock. Between the first and third anniversaries of the IPO Date, each
Registration Rights Holder may use its available demand rights and piggy-back
rights to sell:
- - In each 12-month period following the first and second anniversary of the IPO
Date, up to 20% of the shares of Common Stock received by such Registration
Rights Holder in the Incorporation Transactions (such holder's "Original
Block"); and
- - With the consent of Goldman Sachs, Common Stock constituting up to an
additional 13 1/3% of such holder's Original Block.
In each 12-month period following the third anniversary of the IPO Date,
each Registration Rights Holder may use its available demand rights and
piggy-back rights to sell Common Stock constituting up to 33 1/3% of its
Original Block.
The demand and piggy-back rights are not available for Nonvoting Common
Stock.
In addition to the rights described above, each Registration Rights Holder
will also be entitled to sell additional shares of Common Stock to the extent
that PLPs who are managing directors of Goldman Sachs immediately following the
offerings sell shares of Common Stock in an amount which in any one year period
following the offerings represents, in the aggregate, a greater percentage of
the number of shares of Common Stock issued to such PLPs in the Incorporation
Transactions than the percentages specified above (i.e., 0% during year one, 20%
during years two and three, and 33 1/3% thereafter). The exercise by the
Registration Rights Holders of their respective rights under the Registration
Rights Agreement may, if we determine that such exercise would interfere with a
public offering by us, be delayed by us for up to 90 days.
Goldman Sachs has agreed to bear certain customary expenses associated with
the offering of Common Stock by Sumitomo Bank Capital Markets, Inc. and
Kamehameha Activities Association in the offerings. Thereafter, the Registration
Rights Agreements provide that the expenses of an offering of Common Stock are
generally the responsibility of each participating Registration Rights Holder
selling Common Stock, apportioned on a pro rata basis. Under the Registration
Rights Agreements, Goldman Sachs has agreed to indemnify each participating
Registration Rights Holder against certain liabilities, including those arising
under the Securities Act of 1933.
The Registration Rights Agreements also provide that if Goldman Sachs makes
a general offer to purchase shares of Common Stock held by the PLPs, then a
Registration Rights Holder will be permitted to participate in such transaction
on a pro rata basis with the former PLPs. In addition, a Registration Rights
Holder may tender its shares of Common Stock in any tender or exchange offer
recommended for approval by our Board of Directors (or as to which our Board of
Directors makes no recommendation).
OTHER REGISTRATION RIGHTS
The PLPs are not being granted the right to require Goldman Sachs to
register the shares of Common Stock that they received in connection with the
Incorporation Transactions under the Securities Act of 1933. However, the Plan
of Incorporation and our Charter permit the Board of Directors to grant
registration rights to the PLPs. As a result, the Board of
117
<PAGE> 119
Directors may at any time and from time to time grant registration rights to the
PLPs.
The ability of the Board of Directors to grant registration rights to the
PLPs, together with the ability of the Shareholders' Committee under the
Shareholders' Agreement to waive the PLP Transfer Restrictions thereunder and
under the Plan of Incorporation, could, if exercised, permit the PLPs to sell
significant amounts of Common Stock at any time following the expiration of the
underwriters' lock-up. See "Risk Factors -- Our Share Price May Decline Due to
the Large Number of Shares Eligible for Future Sale" for a further discussion of
the risks associated with these actions.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for
Goldman Sachs by Sullivan & Cromwell, New York, New York, and for the
underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York. Certain
legal matters will be passed upon for Goldman Sachs by one of its General
Counsel, Robert J. Katz or Gregory K. Palm. Sullivan & Cromwell has in the past
represented, and continues to represent, one or more of the underwriters and
their affiliates in a variety of matters. Cleary, Gottlieb, Steen & Hamilton has
in the past represented, and continues to represent, Goldman Sachs in a variety
of matters.
EXPERTS
The financial statements of Goldman Sachs as of November 28, 1997 and
November 27, 1998 and for each of the three years in the period ended November
27, 1998 included in this prospectus and the financial statement schedule
included in the registration statement have been so included in reliance on the
report of Pricewaterhouse-Coopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The historical consolidated income statement data and balance sheet data
set forth in "Selected Consolidated Financial Data" for each of the five years
in the period ended November 27, 1998 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The Pro Forma Consolidated Income Statement Information for the year ended
November 27, 1998 included in this prospectus has been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, on their
examination of the Pro Forma Adjustments as described in Note 2 to the Pro Forma
Consolidated Financial Information, and the application of those adjustments to
the historical amounts in the Pro Forma Consolidated Income Statement
Information for the year ended November 27, 1998, given on the authority of said
firm as experts in performing examinations of pro forma financial information in
accordance with standards established by the American Institute of Certified
Public Accountants.
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations", except for the (i) information
presented under the headings "VaR" or "VaR Methodology, Assumptions and
Limitations" and (ii) information for the three months ended February 26, 1999
and February 27, 1998, taken as a whole, of Goldman Sachs for the three-year
period ended November 27, 1998 included in this prospectus has been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in performing
examinations of management's discussion and analysis of financial condition and
results of operations in accordance with standards established by the American
Institute of Certified Public Accountants.
118
<PAGE> 120
With respect to the unaudited historical financial information of Goldman
Sachs as of and for the three months ended February 26, 1999 and for the three
months ended February 27, 1998, and the unaudited pro forma balance sheet as of
February 26, 1999 and the related unaudited pro forma statement of income for
the three months then ended, included in this prospectus, PricewaterhouseCoopers
LLP reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
reports dated April 9, 1999 appearing herein state that they did not audit and
they do not express an opinion on the unaudited historical financial information
or the unaudited pro forma financial information. Accordingly, the degree of
reliance on their reports on such information should be restricted in light of
the limited nature of the review procedures applied. PricewaterhouseCoopers LLP
is not subject to the liability provisions of Section 11 of the Securities Act
of 1933 for their reports on the unaudited historical financial information and
on the unaudited pro forma financial information because those reports are not a
"report" or a "part" of the registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
Except as otherwise indicated, all amounts with respect to the volume,
number and market share of mergers and acquisitions and underwriting
transactions and related ranking information included in this prospectus have
been derived from information compiled and classified by Securities Data Company
and have been so included in reliance on Securities Data Company's authority as
experts in compiling and classifying information as to securities transactions.
AVAILABLE INFORMATION
Upon completion of the offerings, Goldman Sachs will be required to file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy any documents filed by us at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Our filings with the SEC are also available to the public through the
SEC's Internet site at http://www.sec.gov and through the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005, on which the Common
Stock is listed. After the offerings, we expect to provide annual reports to our
shareholders that include financial information reported on by our independent
public accountants.
We have filed a registration statement on Form S-1 with the SEC. This
prospectus is a part of the registration statement and does not contain all of
the information in the registration statement. Whenever a reference is made in
this prospectus to a contract or other document of Goldman Sachs, please be
aware that such reference is not necessarily complete and that you should refer
to the exhibits that are a part of the registration statement for a copy of the
contract or other document. You may review a copy of the registration statement
at the SEC's public reference room in Washington, D.C. as well as through the
SEC's Internet site.
119
<PAGE> 121
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements as of November 27, 1998
and November 28, 1997 and for the three years in the
period ended November 27, 1998
Report of Independent Accountants........................... F-2
Consolidated Statements of Earnings......................... F-3
Consolidated Statements of Financial Condition.............. F-4
Consolidated Statements of Changes in Partners' Capital..... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Financial Statements as of February
26, 1999 and for the three months ended February 26, 1999
and February 27, 1998 (unaudited)
Review Report of Independent Accountants.................... F-24
Condensed Consolidated Statements of Earnings............... F-25
Condensed Consolidated Statement of Financial Condition..... F-26
Condensed Consolidated Statement of Changes in Partners'
Capital................................................... F-27
Condensed Consolidated Statements of Cash Flows............. F-28
Notes to Condensed Consolidated Financial Statements........ F-29
</TABLE>
F-1
<PAGE> 122
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners,
The Goldman Sachs Group, L.P.:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of earnings, changes in partners'
capital and cash flows (included on pages F-3 to F-23 of this prospectus)
present fairly, in all material respects, the consolidated financial position of
The Goldman Sachs Group, L.P. and Subsidiaries (the "Firm") as of November 27,
1998 and November 28, 1997, and the results of their consolidated operations and
their consolidated cash flows for the three years in the period ended November
27, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Firm's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated statements of financial condition as of November 29,
1996, November 24, 1995 and November 25, 1994, and the related consolidated
statements of earnings, changes in partners' capital and cash flows for the
years ended November 24, 1995 and November 25, 1994 (none of which are presented
herein); and we expressed unqualified opinions on those consolidated financial
statements. In our opinion, the information set forth in the selected historical
consolidated income statement and balance sheet data for each of the five years
in the period ended November 27, 1998 (included on pages 34 and 35 of this
prospectus) is fairly stated, in all material respects, in relation to the
consolidated financial statements from which it has been derived.
PricewaterhouseCoopers LLP
New York, New York
January 22, 1999.
F-2
<PAGE> 123
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
REVENUES:
Investment banking........................................ $ 2,113 $ 2,587 $ 3,368
Trading and principal investments......................... 2,496 2,303 2,015
Asset management and securities services.................. 981 1,456 2,085
Interest income........................................... 11,699 14,087 15,010
------- ------- -------
Total revenues.................................. 17,289 20,433 22,478
Interest expense, principally on short-term funding....... 11,160 12,986 13,958
------- ------- -------
Revenues, net of interest expense............... 6,129 7,447 8,520
OPERATING EXPENSES:
Compensation and benefits................................. 2,421 3,097 3,838
Brokerage, clearing and exchange fees..................... 278 357 424
Market development........................................ 137 206 287
Communications and technology............................. 173 208 265
Depreciation and amortization............................. 172 178 242
Occupancy................................................. 154 168 207
Professional services and other........................... 188 219 336
------- ------- -------
Total operating expenses........................ 3,523 4,433 5,599
Pre-tax earnings.......................................... 2,606 3,014 2,921
Provision for taxes....................................... 207 268 493
------- ------- -------
Net earnings.............................................. $ 2,399 $ 2,746 $ 2,428
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 124
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF NOVEMBER
--------------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 1,328 $ 2,836
Cash and securities segregated in compliance with U.S.
federal and other regulations (principally U.S. government
obligations).............................................. 4,903 7,887
Receivables from brokers, dealers and clearing
organizations............................................. 3,754 4,321
Receivables from customers and counterparties............... 10,060 14,953
Securities borrowed......................................... 51,058 69,158
Securities purchased under agreements to resell............. 39,376 37,484
Right to receive securities................................. -- 7,564
Financial instruments owned, at fair value:
Commercial paper, certificates of deposit and time
deposits............................................... 1,477 1,382
U.S. government, federal agency and sovereign
obligations............................................ 25,736 24,789
Corporate debt............................................ 11,321 10,744
Equities and convertible debentures....................... 11,870 11,066
State, municipal and provincial obligations............... 1,105 918
Derivative contracts...................................... 13,788 21,299
Physical commodities...................................... 1,092 481
Other assets................................................ 1,533 2,498
-------- --------
$178,401 $217,380
======== ========
LIABILITIES AND NET WORTH:
Short-term borrowings, including commercial paper........... $ 21,008 $ 27,430
Payables to brokers, dealers and clearing organizations..... 952 730
Payables to customers and counterparties.................... 22,995 36,179
Securities loaned........................................... 17,627 21,117
Securities sold under agreements to repurchase.............. 44,057 36,257
Obligation to return securities............................. -- 9,783
Financial instruments sold, but not yet purchased, at fair
value:
U.S. government, federal agency and sovereign
obligations............................................ 22,371 22,360
Corporate debt............................................ 1,708 1,441
Equities and convertible debentures....................... 6,357 6,406
Derivative contracts...................................... 15,964 24,722
Physical commodities...................................... 78 966
Other liabilities and accrued expenses...................... 3,080 3,699
Long-term borrowings........................................ 15,667 19,906
-------- --------
171,864 210,996
Commitments and contingencies
Partners' capital allocated for income taxes and potential
withdrawals............................................... 430 74
Partners' capital........................................... 6,107 6,310
-------- --------
$178,401 $217,380
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 125
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
Partners' capital, beginning of year........................ $ 4,905 $ 5,309 $ 6,107
Additions:
Net earnings.............................................. 2,399 2,746 2,428
Capital contributions..................................... 4 89 9
------- ------- -------
Total additions................................... 2,403 2,835 2,437
Deductions:
Returns on capital and certain distributions to
partners............................................... (473) (557) (619)
Termination of the Profit Participation Plans............. -- -- (368)
Transfers to partners' capital allocated for income taxes
and potential withdrawals, net......................... (1,526) (1,480) (1,247)
------- ------- -------
Total deductions.................................. (1,999) (2,037) (2,234)
------- ------- -------
Partners' capital, end of year.............................. $ 5,309 $ 6,107 $ 6,310
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 126
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-------------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 2,399 $ 2,746 $ 2,428
Non-cash items included in net earnings:
Depreciation and amortization........................... 172 178 242
Deferred income taxes................................... 85 32 23
Changes in operating assets and liabilities:
Cash and securities segregated in compliance with U.S.
federal and other regulations.......................... (1,445) (670) (2,984)
Net receivables from brokers, dealers and clearing
organizations.......................................... 169 (1,599) (789)
Net payables to customers and counterparties............ 4,279 2,339 8,116
Securities borrowed, net................................ (17,075) (8,124) (14,610)
Financial instruments owned, at fair value.............. (9,415) (7,439) 148
Financial instruments sold, but not yet purchased, at
fair value............................................. 5,276 11,702 7,559
Other, net.............................................. 926 905 (71)
-------- ------- --------
Net cash (used for)/provided by operating
activities........................................... (14,629) 70 62
-------- ------- --------
Cash flows from investing activities:
Property, leasehold improvements and equipment............ (258) (259) (476)
Financial instruments owned, at fair value................ 115 (360) (180)
Acquisitions, net of cash acquired........................ (75) (74) --
-------- ------- --------
Net cash used for investing activities................ (218) (693) (656)
-------- ------- --------
Cash flows from financing activities:
Short-term borrowings, net................................ 391 1,082 2,193
Securities sold under agreements to repurchase, net....... 16,012 (4,717) (5,909)
Issuance of long-term borrowings.......................... 5,172 7,734 10,527
Repayment of long-term borrowings......................... (3,986) (1,855) (2,058)
Capital contributions..................................... 4 89 9
Returns on capital and certain distributions to
partners................................................ (473) (557) (619)
Termination of the Profit Participation Plans............. -- -- (368)
Partners' capital allocated for income taxes and potential
withdrawals............................................. (1,017) (2,034) (1,673)
-------- ------- --------
Net cash provided by/(used for) financing
activities........................................... 16,103 (258) 2,102
-------- ------- --------
Net increase/(decrease) in cash and cash equivalents...... 1,256 (881) 1,508
Cash and cash equivalents, beginning of year................ 953 2,209 1,328
-------- ------- --------
Cash and cash equivalents, end of year...................... $ 2,209 $ 1,328 $ 2,836
======== ======= ========
</TABLE>
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest approximated the related expense for each of the
fiscal periods presented. Payments of income taxes were not material.
A zero coupon bond of $32 million representing a portion of the acquisition
price of CIN Management Limited was recorded on the consolidated statement of
financial condition as of November 1996 and was excluded from the consolidated
statement of cash flows as it represented a non-cash item.
An increase in total assets and liabilities of $11.64 billion related to the
provisions of SFAS No. 125 that were deferred under SFAS No. 127 was excluded
from the consolidated statement of cash flows for the year ended November 1998
as it represented a non-cash item.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 127
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
The Goldman Sachs Group, L.P., a Delaware limited partnership ("Group
L.P."), together with its consolidated subsidiaries (collectively, the "Firm"),
is a global investment banking and securities firm that provides a wide range of
services worldwide to a substantial and diversified client base.
The Firm's activities are divided into three principal business lines:
- Investment Banking, which includes financial advisory services and
underwriting;
- Trading and Principal Investments, which includes fixed income, currency
and commodities ("FICC"), equities and principal investments (principal
investments reflect primarily the Firm's investments in its merchant
banking funds); and
- Asset Management and Securities Services, which includes asset
management, securities services and commissions.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Group L.P.
and its U.S. and international subsidiaries including Goldman, Sachs & Co.
("GS&Co.") and J. Aron & Company in New York, Goldman Sachs International
("GSI") in London and Goldman Sachs (Japan) Ltd. ("GSJL") in Tokyo. Certain
reclassifications have been made to prior year amounts to conform to the current
presentation.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles that require management to make
estimates and assumptions regarding trading inventory valuations, partner
retirements, the outcome of pending litigation and other matters that affect the
consolidated financial statements and related disclosures. These estimates and
assumptions are based on judgment and available information and, consequently,
actual results could be materially different from these estimates.
Unless otherwise stated herein, all references to 1996, 1997 and 1998 refer
to the Firm's fiscal year ended, or the date, as the context requires, November
29, 1996, November 28, 1997 and November 27, 1998, respectively.
CASH AND CASH EQUIVALENTS
The Firm defines cash equivalents as highly liquid overnight deposits held
in the ordinary course of business.
REPURCHASE AGREEMENTS AND COLLATERALIZED FINANCING ARRANGEMENTS
Securities purchased under agreements to resell and securities sold under
agreements to repurchase, principally U.S. government, federal agency and
investment-grade foreign sovereign obligations, represent short-term
collateralized financing transactions and are carried at their contractual
amounts plus accrued interest. These amounts are presented on a net-by-
counterparty basis, where management believes a legal right of setoff exists
under an enforceable master netting agreement. The Firm takes possession of
securities purchased under agreements to resell, monitors the market value of
the underlying securities on a daily basis and obtains additional collateral as
appropriate.
F-7
<PAGE> 128
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities borrowed and loaned are recorded on the statements of financial
condition based on the amount of cash collateral advanced or received. These
transactions are generally collateralized by either cash, securities or letters
of credit. The Firm takes possession of securities borrowed, monitors the market
value of securities loaned and obtains additional collateral as appropriate.
Income or expense is recognized as interest over the life of the transaction.
FINANCIAL INSTRUMENTS
Gains and losses on financial instruments and commission income and related
expenses are recorded on a trade date basis in the consolidated statements of
earnings. For purposes of the consolidated statements of financial condition
only, purchases and sales of financial instruments, including agency
transactions, are generally recorded on a settlement date basis. Recording such
transactions on a trade date basis would not result in a material adjustment to
the consolidated statements of financial condition.
Substantially all financial instruments used in the Firm's trading and
non-trading activities are carried at fair value or amounts that approximate
fair value and unrealized gains and losses are recognized in earnings. Fair
value is based generally on listed market prices or broker or dealer price
quotations. To the extent that prices are not readily available, fair value is
based on either internal valuation models or management's estimate of amounts
that could be realized under current market conditions, assuming an orderly
liquidation over a reasonable period of time. Certain over-the-counter ("OTC")
derivative instruments are valued using pricing models that consider, among
other factors, current and contractual market prices, time value, and yield
curve and/or volatility factors of the underlying positions. The fair value of
the Firm's trading and non-trading assets and liabilities is discussed further
in Notes 3, 4 and 5.
PRINCIPAL INVESTMENTS
Principal investments are carried at fair value, generally as evidenced by
quoted market prices or by comparable substantial third-party transactions.
Where fair value is not readily ascertainable, principal investments are
recorded at cost or management's estimate of the realizable value.
The Firm is entitled to receive merchant banking overrides (i.e., an
increased share of a fund's income and gains) when the return on the fund's
investments exceeds certain threshold returns. Overrides are based on investment
performance over the life of each merchant banking fund, and future investment
underperformance may require amounts previously distributed to the Firm to be
returned to the funds. Accordingly, overrides are recognized in earnings only
when management determines that the probability of return is remote. Overrides
are included in "Asset Management and Securities Services" on the consolidated
statements of earnings.
DERIVATIVE CONTRACTS
Derivatives used for trading purposes are reported at fair value and are
included in "Derivative contracts" on the consolidated statements of financial
condition. Gains and losses on derivatives used for trading purposes are
included in "Trading and Principal Investments" on the consolidated statements
of earnings.
Derivatives used for non-trading purposes include interest rate futures
contracts and interest rate and currency swap agreements, which are primarily
utilized to convert a substantial portion of the Firm's fixed rate debt into
U.S. dollar-based floating rate obligations. Gains and losses on
F-8
<PAGE> 129
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these transactions are generally deferred and recognized as adjustments to
interest expense over the life of the derivative contract. Gains and losses
resulting from the early termination of derivatives used for non-trading
purposes are generally deferred and recognized over the remaining life of the
underlying debt. If the underlying debt is terminated prior to its stated
maturity, gains and losses on these transactions, including the associated
hedges, are recognized in earnings immediately.
Derivatives are reported on a net-by-counterparty basis on the consolidated
statements of financial condition where management believes a legal right of
setoff exists under an enforceable master netting agreement.
PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Depreciation and amortization generally are computed using accelerated cost
recovery methods for all property and equipment and for leasehold improvements
where the term of the lease is greater than the economic useful life of the
asset. All other leasehold improvements are amortized on a straight-line basis
over the term of the lease.
GOODWILL
The cost of acquired companies in excess of the fair value of net assets
acquired at acquisition date is recorded as goodwill and amortized over periods
of 15 to 25 years on a straight-line basis.
PROVISION FOR TAXES
The Firm accounts for income taxes incurred by its corporate subsidiaries
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". The consolidated statements of earnings for the
periods presented include a provision for, or benefit from, income taxes on
income earned, or losses incurred, by Group L.P. and its subsidiaries including
a provision for, or benefit from, unincorporated business tax on income earned,
or losses incurred, by Group L.P. and its subsidiaries conducting business in
New York City. No additional income tax provision is required in the
consolidated statements of earnings because Group L.P. is a partnership and the
remaining tax effects accrue directly to its partners.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of subsidiaries whose functional currency is other
than the U.S. dollar are translated using currency exchange rates prevailing at
the end of the period presented, while revenues and expenses are translated
using average exchange rates during the period. Gains or losses resulting from
the translation of foreign currency financial statements are recorded as
cumulative translation adjustments, and are included as a component of
"Partners' capital allocated for income taxes and potential withdrawals" on the
consolidated statements of financial condition. Gains or losses resulting from
foreign exchange transactions are recorded in earnings.
INVESTMENT BANKING
Underwriting revenues and fees from mergers and acquisitions and other
corporate finance advisory assignments are recorded when the underlying
transaction is completed under the terms of the engagement. Syndicate expenses
related to securities offerings in which the Firm acts as an underwriter or
agent are deferred until the related revenue is recognized.
F-9
<PAGE> 130
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", effective for transactions occurring after
December 31, 1996. SFAS No. 125 establishes standards for distinguishing
transfers of financial assets that are accounted for as sales from transfers
that are accounted for as secured borrowings.
The provisions of SFAS No. 125 relating to repurchase agreements,
securities lending transactions and other similar transactions were deferred by
the provisions of SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", and became effective for transactions
entered into after December 31, 1997. This Statement requires that the
collateral obtained in certain types of secured lending transactions be recorded
on the balance sheet with a corresponding liability reflecting the obligation to
return such collateral to its owner. Effective January 1, 1998, the Firm adopted
the provisions of SFAS No. 125 that were deferred by SFAS No. 127. The adoption
of this standard increased the Firm's total assets and liabilities by $11.64
billion as of November 1998.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
("EPS"), effective for periods ending after December 15, 1997, with restatement
required for all prior periods. SFAS No. 128 establishes new standards for
computing and presenting EPS. This Statement replaces primary and fully diluted
EPS with "basic EPS", which excludes dilution, and "diluted EPS", which includes
the effect of all potentially dilutive common shares and other dilutive
securities. Because the Firm has not historically reported EPS, this Statement
will have no impact on the Firm's historical financial statements. This
Statement will, however, apply to financial statements of the Firm prepared
after the offerings.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997, with
reclassification of earlier periods required for comparative purposes. SFAS No.
130 establishes standards for the reporting and presentation of comprehensive
income and its components in the financial statements. The Firm intends to adopt
this standard in the first quarter of fiscal 1999. This Statement is limited to
issues of reporting and presentation and, therefore, will not affect the Firm's
results of operations or financial condition.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", effective for fiscal years beginning
after December 15, 1997, with reclassification of earlier periods required for
comparative purposes. SFAS No. 131 establishes the criteria for determining an
operating segment and establishes the disclosure requirements for reporting
information about operating segments. The Firm intends to adopt this standard at
the end of fiscal 1999. This Statement is limited to issues of reporting and
presentation and, therefore, will not affect the Firm's results of operations or
financial condition.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", effective for fiscal years
beginning after December 15, 1997, with restatement of disclosures for earlier
periods required for comparative purposes. SFAS No. 132 revises certain
employers' disclosures about pension and other post-retirement benefit plans.
The Firm intends to adopt this standard at the end of fiscal 1999. This
Statement is limited to issues of reporting and presentation and, therefore,
will not affect the Firm's results of operations or financial condition.
F-10
<PAGE> 131
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", effective for fiscal years beginning after December 15, 1998.
SOP No. 98-1 requires that certain costs of computer software developed or
obtained for internal use be capitalized and amortized over the useful life of
the related software. The Firm currently expenses the cost of all software
development in the period in which it is incurred. The Firm intends to adopt
this Statement in fiscal 2000 and is currently assessing its effect.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This Statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative instrument depends on its intended use and the resulting
designation. The Firm intends to adopt this standard in fiscal 2000 and is
currently assessing its effect.
NOTE 3. FINANCIAL INSTRUMENTS
Financial instruments, including both cash instruments and derivatives, are
used to manage market risk, facilitate customer transactions, engage in trading
transactions and meet financing objectives. These instruments can be either
executed on an exchange or negotiated in the OTC market.
Transactions involving financial instruments sold, but not yet purchased,
entail an obligation to purchase a financial instrument at a future date. The
Firm may incur a loss if the market value of the financial instrument
subsequently increases prior to the purchase of the instrument.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Firm's assets and liabilities are carried at fair
value or amounts that approximate fair value.
Trading assets and liabilities, including derivative contracts used for
trading purposes, are carried at fair value and reported as financial
instruments owned and financial instruments sold, but not yet purchased on the
consolidated statements of financial condition. Non-trading assets and
liabilities are carried at fair value or amounts that approximate fair value.
Non-trading assets include cash and cash equivalents, cash and securities
segregated in compliance with U.S. federal and other regulations, receivables
from brokers, dealers and clearing organizations, receivables from customers and
counterparties, securities borrowed, securities purchased under agreements to
resell, right to receive securities and certain investments, primarily those
made in connection with the Firm's merchant banking activities.
Non-trading liabilities include short-term borrowings, payables to brokers,
dealers and clearing organizations, payables to customers and counterparties,
securities loaned, securities sold under agreements to repurchase, obligation to
return securities, other liabilities and accrued expenses and long-term
borrowings. Fair value of the Firm's long-term borrowings and associated hedges
is discussed in Note 5.
F-11
<PAGE> 132
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TRADING AND PRINCIPAL INVESTMENTS
The Firm's Trading and Principal Investments business facilitates customer
transactions and takes proprietary positions through market-making in and
trading of securities, currencies, commodities and swaps and other derivatives.
Derivative financial instruments are often used to hedge cash instruments or
other derivative financial instruments as an integral part of the Firm's
strategies. As a result, it is necessary to view the results of any activity on
a fully-integrated basis, including cash positions, the effect of related
derivatives and the financing of the underlying positions.
Net revenues represent total revenues less allocations of interest expense
to specific securities, commodities and other positions in relation to the level
of financing incurred by each. The following table sets forth the net revenues
of the Firm's Trading and Principal Investments business:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
FICC................................................... $1,749 $2,055 $1,438
Equities............................................... 730 573 795
Principal investments.................................. 214 298 146
------ ------ ------
Total Trading and Principal Investments................ $2,693 $2,926 $2,379
====== ====== ======
</TABLE>
RISK MANAGEMENT
The Firm seeks to monitor and control its risk exposure through a variety
of separate but complementary financial, credit, operational and legal reporting
systems for individual entities and the Firm as a whole. Management believes
that it has effective procedures for evaluating and managing the market, credit
and other risks to which it is exposed. The Management Committee, the Firm's
primary decision-making body, determines (both directly and through delegated
authority) the types of business in which the Firm engages, approves guidelines
for accepting customers for all product lines, outlines the terms under which
customer business is conducted and establishes the parameters for the risks that
the Firm is willing to undertake in its business.
MARKET RISK. The Firmwide Risk Committee, which reports to senior
management and meets weekly, is responsible for managing and monitoring all of
the Firm's risk exposures. In addition, the Firm maintains segregation of
duties, with credit review and risk-monitoring functions performed by groups
that are independent from revenue-producing departments.
The potential for changes in the market value of the Firm's trading
positions is referred to as "market risk". The Firm's trading positions result
from underwriting, market-making and proprietary trading activities.
The broadly defined categories of market risk include exposures to interest
rates, currency rates, equity prices and commodity prices.
- - Interest rate risks primarily result from exposures to changes in the level,
slope and curvature of the yield curve, the volatility of interest rates,
mortgage prepayment speeds and credit spreads.
- - Currency rate risks result from exposures to changes in spot prices, forward
prices and volatilities of currency rates.
F-12
<PAGE> 133
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- - Equity price risks result from exposures to changes in prices and volatilities
of individual equities, equity baskets and equity indices.
- - Commodity price risks result from exposures to changes in spot prices, forward
prices and volatilities of commodities, such as electricity, natural gas,
crude oil, petroleum products and precious and base metals.
These risk exposures are managed through diversification, by controlling
position sizes and by establishing offsetting hedges in related securities or
derivatives. For example, the Firm may hedge a portfolio of common stock by
taking an offsetting position in a related equity-index futures contract. The
ability to manage these exposures may, however, be limited by adverse changes in
the liquidity of the security or the related hedge instrument and in the
correlation of price movements between the security and the related hedge
instrument.
CREDIT RISK. Credit risk represents the loss that the Firm would incur if
a counterparty or issuer of securities or other instruments it holds fails to
perform its contractual obligations to the Firm. To reduce its credit exposures,
the Firm seeks to enter into netting agreements with counterparties that permit
the Firm to offset receivables and payables with such counterparties. The Firm
does not take into account any such agreements when calculating credit risk,
however, unless management believes a legal right of setoff exists under an
enforceable master netting agreement.
Credit concentrations may arise from trading, underwriting and securities
borrowing activities and may be impacted by changes in economic, industry or
political factors. The Firm's concentration of credit risk is monitored actively
by the Credit Policy Committee. As of November 1998, U.S. government and federal
agency obligations represented 7% of the Firm's total assets. In addition, most
of the Firm's securities purchased under agreements to resell are collateralized
by U.S. government, federal agency and sovereign obligations.
DERIVATIVE ACTIVITIES
Most of the Firm's derivative transactions are entered into for trading
purposes. The Firm uses derivatives in its trading activities to facilitate
customer transactions, to take proprietary positions and as a means of risk
management. The Firm also enters into non-trading derivative contracts to manage
the interest rate and currency exposure on its long-term borrowings. Non-
trading derivatives related to the Firm's long-term borrowings are discussed in
Note 5.
Derivative contracts are financial instruments, such as futures, forwards,
swaps or option contracts, that derive their value from underlying assets,
indices, reference rates or a combination of these factors. Derivatives may
involve future commitments to purchase or sell financial instruments or
commodities, or to exchange currency or interest payment streams. The amounts
exchanged are based on the specific terms of the contract with reference to
specified rates, securities, commodities or indices.
Derivative contracts exclude certain cash instruments, such as
mortgage-backed securities, interest-only and principal-only obligations and
indexed debt instruments, that derive their values or contractually required
cash flows from the price of some other security or index. Derivatives also
exclude option features that are embedded in cash instruments, such as the
conversion features and call provisions embedded in bonds. The Firm has elected
to include commodity-related contracts in its derivative disclosure, although
not required to do so, as these contracts may be settled in cash or are readily
convertible into cash.
F-13
<PAGE> 134
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The gross notional (or contractual) amounts of derivative financial
instruments represent the volume of these transactions and not the amounts
potentially subject to market risk. In addition, measurement of market risk is
meaningful only when all related and offsetting transactions are taken into
consideration. Gross notional (or contractual) amounts of derivative financial
instruments used for trading purposes with off-balance-sheet market risk are set
forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
----------------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
INTEREST RATE RISK:
Financial futures and forward settlement contracts......... $334,916 $ 406,302
Swap agreements............................................ 918,067 1,848,977
Written option contracts................................... 351,359 423,561
EQUITY PRICE RISK:
Financial futures and forward settlement contracts......... 7,457 7,405
Swap agreements............................................ 1,993 2,752
Written option contracts................................... 51,916 54,856
CURRENCY AND COMMODITY PRICE RISK:
Financial futures and forward settlement contracts......... 355,882 420,138
Swap agreements............................................ 32,355 51,502
Written option contracts................................... 179,481 183,929
</TABLE>
Market risk on purchased option contracts is limited to the market value of
the option; therefore, purchased option contracts have no off-balance-sheet
market risk. The gross notional (or contractual) amounts of purchased option
contracts used for trading purposes are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
--------------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
PURCHASED OPTION CONTRACTS:
Interest rate............................................... $301,685 $509,770
Equity...................................................... 24,021 59,571
Currency and commodity...................................... 180,859 186,748
</TABLE>
The Firm utilizes replacement cost as its measure of derivative credit
risk. Replacement cost, as reported in financial instruments owned, at fair
value on the consolidated statements of financial condition, represents amounts
receivable from various counterparties, net of any unrealized losses owed where
management believes a legal right of setoff exists under an enforceable master
netting agreement. Replacement cost for purchased option contracts is the market
value of the contract. The Firm controls its credit risk through an established
credit approval process, by monitoring counterparty limits, obtaining collateral
where appropriate and, in some cases, using legally enforceable master netting
agreements.
F-14
<PAGE> 135
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of derivative financial instruments used for trading
purposes, computed in accordance with the Firm's netting policy, is set forth
below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
------------------------------------------------
1997 1998
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
(in millions)
<S> <C> <C> <C> <C>
PERIOD END:
Forward settlement contracts............................. $ 3,634 $ 3,436 $ 4,061 $ 4,201
Swap agreements.......................................... 4,269 5,358 10,000 11,475
Option contracts......................................... 5,787 7,166 7,140 9,038
------- ------- ------- -------
Total.................................................... $13,690 $15,960 $21,201 $24,714
======= ======= ======= =======
MONTHLY AVERAGE:
Forward settlement contracts............................. $ 3,351 $ 3,162 $ 4,326 $ 3,979
Swap agreements.......................................... 3,397 4,020 7,340 8,158
Option contracts......................................... 4,511 5,059 6,696 8,958
------- ------- ------- -------
Total.................................................... $11,259 $12,241 $18,362 $21,095
======= ======= ======= =======
</TABLE>
NOTE 4. SHORT-TERM BORROWINGS
The Firm obtains secured short-term financing principally through the use
of repurchase agreements and securities lending agreements, collateralized
mainly by U.S. government, federal agency, investment grade foreign sovereign
obligations and equity securities. The Firm obtains unsecured short-term
borrowings through issuance of commercial paper, promissory notes and bank
loans. The carrying value of these short-term obligations approximates fair
value due to their short-term nature.
Short-term borrowings are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
------------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
Commercial paper....................................... $ 4,468 $10,008
Promissory notes(1).................................... 10,411 10,763
Bank loans and other(1)................................ 6,129 6,659
------- -------
Total(2)............................................... $21,008 $27,430
======= =======
</TABLE>
- ---------------
(1) As of November 1997 and November 1998, short-term borrowings included $2,454
million and $2,955 million of long-term borrowings maturing within one year,
respectively.
(2) Weighted average interest rates for total short-term borrowings, including
commercial paper, were 5.43 % as of November 1997 and 5.19% as of November
1998.
The Firm maintains unencumbered securities with a market value in excess of
all uncollateralized short-term borrowings.
F-15
<PAGE> 136
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. LONG-TERM BORROWINGS
The Firm's long-term borrowings are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
-------------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
Fixed-rate obligations(1)
U.S. dollar denominated.............................. $ 5,217 $ 5,260
Non-U.S. dollar denominated.......................... 1,556 2,066
Floating-rate obligations(2)
U.S. dollar denominated.............................. 8,342 11,858
Non-U.S. dollar denominated.......................... 552 722
------- -------
Total long-term borrowings(3).......................... $15,667 $19,906
======= =======
</TABLE>
- ---------------
(1) Interest rate ranges for U.S. dollar and non-U.S. dollar fixed rate
obligations are set forth below:
<TABLE>
<CAPTION>
AS OF
NOVEMBER
---------------
1997 1998
---- ----
<S> <C> <C>
U.S. dollar denominated
High...................................................... 10.10% 10.10%
Low....................................................... 5.82 5.74
Non-U.S. dollar denominated
High...................................................... 9.51 9.51
Low....................................................... 1.90 1.90
</TABLE>
(2) Floating interest rates generally are based on LIBOR, the U.S. treasury bill
rate or the federal funds rate. Certain equity-linked and indexed
instruments are included in floating rate obligations.
(3) Long-term borrowings bear fixed or floating interest rates and have
maturities that range from 1 to 30 years from the date of issue.
Long-term borrowings by maturity date are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER 1997 AS OF NOVEMBER 1998
------------------------------ ------------------------------
U.S. NON-U.S. U.S. NON-U.S.
DOLLAR DOLLAR TOTAL DOLLAR DOLLAR TOTAL
------ -------- ----- ------ -------- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
MATURITY DATES:
1998................. $ 1,159 $ 135 $ 1,294 $ -- $ -- $ --
1999................. 2,436 451 2,887 2,443 199 2,642
2000................. 2,544 263 2,807 4,293 272 4,565
2001................. 971 142 1,113 2,261 148 2,409
2002................. 1,376 281 1,657 1,669 265 1,934
2003................. 941 109 1,050 1,409 412 1,821
2004-24.............. 4,132 727 4,859 5,043 1,492 6,535
------- ------ ------- ------- ------ -------
Total................ $13,559 $2,108 $15,667 $17,118 $2,788 $19,906
======= ====== ======= ======= ====== =======
</TABLE>
F-16
<PAGE> 137
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Firm enters into non-trading derivative contracts, such as interest
rate and currency swap agreements, to effectively convert a substantial portion
of its fixed rate long-term borrowings into U.S. dollar-based floating rate
obligations. Accordingly, the aggregate carrying value of these long-term
borrowings and related hedges approximates fair value. The effective weighted
average interest rates for long-term borrowings, after hedging activities, are
set forth below:
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER 1997 NOVEMBER 1998
--------------- ----------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
($ in millions)
<S> <C> <C> <C> <C>
Long-term borrowings:
Fixed-rate obligations................ $ 291 7.76% $ 222 8.09%
Floating-rate obligations............. 15,376 5.84 19,684 5.63
------- -------
Total long-term
borrowings................ $15,667 5.88 $19,906 5.66
======= =======
</TABLE>
The notional amounts, fair value and carrying value of the related swap
agreements used for non-trading purposes are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
--------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
Notional amount........................................ $8,708 $10,206
</TABLE>
<TABLE>
<CAPTION>
AS OF NOVEMBER
-----------------------------------------------
1997 1998
---------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(in millions)
<S> <C> <C> <C> <C>
Fair value.......................... $212 $4 $519 $7
Carrying value...................... 98 4 98 8
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Firm is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
businesses. Management believes, based on currently available information, that
the results of such proceedings, in the aggregate, will not have a material
adverse effect on the Firm's financial condition, but might be material to the
Firm's operating results for any particular period, depending, in part, upon the
operating results for such period.
LEASES
The Firm has obligations under long-term non-cancelable lease agreements,
principally for office space, expiring on various dates through 2016. Certain
agreements are subject to periodic escalation charges for increases in real
estate taxes and other charges. Minimum rental commitments, net of minimum
sublease rentals, under non-cancelable leases for 1999 and the
F-17
<PAGE> 138
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
succeeding four years and rent charged to operating expense for the last three
years are set forth below:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
MINIMUM RENTAL COMMITMENTS:
1999.......................................... $ 142
2000.......................................... 139
2001.......................................... 139
2002.......................................... 136
2003.......................................... 128
Thereafter.................................... 860
------
Total............................... $1,544
======
NET RENT EXPENSE:
1996.......................................... $ 83
1997.......................................... 87
1998.......................................... 104
</TABLE>
OTHER COMMITMENTS
The Firm acts as an investor in merchant banking transactions which
includes making long-term investments in equity and debt securities in privately
negotiated transactions, corporate acquisitions and real estate transactions,
and in connection with a bridge loan fund. In connection with these activities,
the Firm had commitments to invest up to $670 million and $1.39 billion in
corporate and real estate merchant banking investment and bridge loan funds as
of November 1997 and November 1998, respectively.
In connection with loan origination and participation, the Firm had loan
commitments of $5.23 billion and $1.51 billion as of November 1997 and November
1998, respectively. These commitments are agreements to lend to counterparties,
have fixed termination dates and are contingent on all conditions to borrowing
set forth in the contract having been met. Since these commitments may expire
unused, the total commitment amount does not necessarily reflect the actual
future cash flow requirements.
The Firm also had outstanding guarantees of $786 million and $790 million
relating to its fund management activities as of November 1997 and November
1998, respectively.
The Firm had pledged securities of $23.60 billion and $22.88 billion as
collateral for securities borrowed of approximately equivalent value as of
November 1997 and November 1998, respectively.
The Firm obtains letters of credit issued to counterparties by various
banks that are used in lieu of securities or cash to satisfy various collateral
and margin deposit requirements. Letters of credit outstanding were $10.13
billion and $8.81 billion as of November 1997 and November 1998, respectively.
NOTE 7. EMPLOYEE BENEFIT PLANS
The Firm sponsors various pension plans and certain other post-retirement
benefit plans, primarily health care and life insurance, which cover most
employees worldwide. The Firm also provides certain benefits to former or
inactive employees prior to retirement. Plan benefits are primarily based on the
employee's compensation and years of service. Pension costs are
F-18
<PAGE> 139
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined actuarially and are funded in accordance with the Internal Revenue
Code. Plan assets are held in a trust and consist primarily of listed stocks and
U.S. bonds. A summary of these plans is set forth below:
DEFINED BENEFIT PENSION PLANS
The components of pension expense/(income) are set forth below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost, benefits earned during the period............. $ 15 $ 15 $ 14
Interest cost on projected benefit obligation............... 8 10 11
Return on plan assets....................................... (24) (18) (14)
Net amortization............................................ 14 4 (1)
---- ---- ----
Total pension expense............................. $ 13 $ 11 $ 10
==== ==== ====
U.S. plans.................................................. $ (1) $ (3) $ (3)
International plans......................................... 14 14 13
---- ---- ----
Total pension expense............................. $ 13 $ 11 $ 10
==== ==== ====
</TABLE>
The weighted average assumptions used to develop net periodic pension cost
and the actuarial present value of the projected benefit obligation are set
forth below. The assumptions represent a weighted average of the assumptions
used for the U.S. and international plans and are based on the economic
environment of each applicable country.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
U.S. PLANS:
Discount rate............................................... 7.50% 7.50% 7.00%
Rate of increase in future compensation levels.............. 5.00 5.00 5.00
Expected long-term rate of return on plan assets............ 7.50 7.50 7.50
INTERNATIONAL PLANS:
Discount rate............................................... 5.70 5.70 5.00
Rate of increase in future compensation levels.............. 5.30 5.30 4.75
Expected long-term rate of return on plan assets............ 7.00 7.00 6.00
</TABLE>
F-19
<PAGE> 140
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the qualified plans is set forth below:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER
--------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
Actuarial present value of vested benefit obligation........ $(149) $(203)
----- -----
Accumulated benefit obligation.............................. (151) (207)
Effect of future salary increases........................... (16) (21)
----- -----
Projected benefit obligation................................ (167) (228)
Plan assets at fair market value............................ 187 208
----- -----
Projected benefit obligation less than/(greater than) plan
assets.................................................... 20 (20)
Unrecognized net loss....................................... 2 43
Unrecognized net transition gain............................ (20) (18)
----- -----
Prepaid pension cost, end of year........................... $ 2 $ 5
===== =====
PREPAID PENSION COST:
U.S. plans.................................................. $ 2 $ 5
International plans......................................... -- --
----- -----
Prepaid pension cost, end of year........................... $ 2 $ 5
===== =====
</TABLE>
POST-RETIREMENT PLANS
The Firm has unfunded post-retirement benefit plans that provide medical
and life insurance for eligible retirees, employees and dependents. The Firm's
accrued post-retirement benefit liability was $50 million and $53 million as of
November 1997 and November 1998, respectively. The Firm's expense for these
plans was $6 million, $7 million and $6 million in the years ended 1996, 1997
and 1998, respectively.
POST-EMPLOYMENT PLANS
Post-employment benefits include, but are not limited to, salary
continuation, supplemental unemployment benefits, severance benefits,
disability-related benefits, and continuation of health care and life insurance
coverage provided to former or inactive employees after employment but before
retirement. The accrued but unfunded liability under the plans was $12 million
and $10 million as of November 1997 and November 1998, respectively. The Firm's
expense for these plans was $2 million in each of the fiscal years ended 1996,
1997 and 1998.
DEFINED CONTRIBUTION PLANS
The Firm contributes to employer sponsored U.S. and international defined
contribution plans. The Firm's contribution to the U.S. plans was $39 million,
$44 million and $48 million for the years ended 1996, 1997 and 1998,
respectively. The Firm's contribution to the international plans was $7 million,
$14 million and $10 million for the years ended 1996, 1997 and 1998,
respectively.
F-20
<PAGE> 141
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. CAPITAL
PARTNERS' CAPITAL
Partners' capital includes both the general partner's and limited partners'
capital and is subject to certain withdrawal restrictions. As of November 1998,
the Firm had $6.31 billion in partners' capital. Managing directors that are
participating limited partners in Group L.P. ("PLPs") who elect to retire are
entitled to redeem their capital over a period of not less than five years
following retirement, but often reinvest a significant portion of their capital
as limited partners for longer periods. Partners' capital was reduced by $368
million in 1998 due to the termination of the Profit Participation Plans under
which certain employees received payments based on the earnings of the Firm.
Partners' capital allocated for income taxes and potential withdrawals
represents management's estimate of net amounts currently distributable,
primarily to the PLPs, under the Partnership Agreement, for items including,
among other things, income taxes and capital withdrawals.
Sumitomo Bank Capital Markets, Inc. ("SBCM"), a limited partner that had
capital invested of approximately $834 million as of November 1998, may require
Group L.P. to redeem its capital over a five-year period beginning no earlier
than 2007. Kamehameha Activities Association ("KAA"), a limited partner that had
capital invested of approximately $757 million as of November 1998, may require
Group L.P. to redeem $391 million of its capital over a five-year period
beginning no earlier than 2010 and $366 million of its capital over a five-year
period beginning no earlier than 2013.
Institutional Limited Partners (other than SBCM and KAA) had aggregate
capital invested of $755 million as of November 1998. Group L.P. must repay
these Institutional Limited Partners' capital as follows: $270 million in six
equal annual installments commencing in December 2001, $257 million in March
2005, $146 million in November 2013 and $82 million in November 2023.
Group L.P. may defer any required redemption of capital if the redemption
would cause a subsidiary subject to regulatory authority to be in violation of
the rules of such authority or if the withdrawal of funds to satisfy the
redemption from an unregulated subsidiary would have a material effect on such
subsidiary.
REGULATED SUBSIDIARIES
GS&Co. is a registered U.S. broker-dealer subsidiary, which is subject to
the Securities and Exchange Commission's "Uniform Net Capital Rule", and has
elected to compute its net capital in accordance with the "Alternative Net
Capital Requirement" of that rule. As of November 1997 and November 1998, GS&Co.
had regulatory net capital, as defined, of $1.77 billion and $3.25 billion,
respectively, which exceeded the amounts required by $1.37 billion and $2.70
billion, respectively.
GSI, a registered U.K. broker-dealer and subsidiary of Group L.P., is
subject to the capital requirements of the Securities and Futures Authority
Limited and GSJL, a Tokyo-based broker-dealer, is subject to the capital
requirements of the Japanese Ministry of Finance and the Financial Supervisory
Agency. As of November 1997 and November 1998, GSI and GSJL were in compliance
with their local capital adequacy requirements.
Certain other subsidiaries of the Firm are also subject to capital adequacy
requirements promulgated by authorities of the countries in which they operate.
As of November 1997 and November 1998, these subsidiaries were in compliance
with their local capital adequacy requirements.
F-21
<PAGE> 142
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. GEOGRAPHIC DATA
The Firm's activities as an investment banking and securities firm
constitute a single business segment pursuant to SFAS No. 14 "Financial
Reporting for Segments of a Business Enterprise".
Due to the highly integrated nature of international financial markets, the
Firm manages its business based on the profitability of the enterprise as a
whole, not by geographic region. Accordingly, management believes that
profitability by geographic region is not necessarily meaningful.
The total revenues, net revenues, pre-tax earnings and identifiable assets
of Group L.P. and its consolidated subsidiaries by geographic region are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
TOTAL REVENUES:
Americas(1)......................................... $12,864 $15,091 $15,972
Europe.............................................. 3,762 4,463 5,156
Asia................................................ 663 879 1,350
------- ------- -------
Total............................................... $17,289 $20,433 $22,478
======= ======= =======
NET REVENUES:
Americas(1)......................................... $ 4,397 $ 5,104 $ 5,436
Europe.............................................. 1,355 1,739 2,180
Asia................................................ 377 604 904
------- ------- -------
Total............................................... $ 6,129 $ 7,447 $ 8,520
======= ======= =======
PRE-TAX EARNINGS:
Americas(1)......................................... $ 1,963 $ 2,061 $ 1,527
Europe.............................................. 536 683 913
Asia................................................ 107 270 481
------- ------- -------
Total............................................... $ 2,606 $ 3,014 $ 2,921
======= ======= =======
</TABLE>
F-22
<PAGE> 143
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF NOVEMBER
-----------------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Americas(1).......................................... $ 171,345 $ 206,312 $ 229,412
Europe............................................... 62,172 80,551 106,721
Asia................................................. 6,894 13,240 19,883
Eliminations......................................... (88,365) (121,702) (138,636)
--------- --------- ---------
Total................................................ $ 152,046 $ 178,401 $ 217,380
========= ========= =========
</TABLE>
- ---------------
(1) Americas principally represents the United States.
NOTE 10. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 1996
------------------------------------
1ST 2ND 3RD 4TH
--- --- --- ---
(in millions)
<S> <C> <C> <C> <C>
Total revenues....................................... $4,030 $4,656 $4,313 $4,290
Interest expense, principally on short-term
funding............................................ 2,566 2,986 2,845 2,763
------ ------ ------ ------
Revenues, net of interest expense.................... 1,464 1,670 1,468 1,527
Operating expenses................................... 899 961 879 784
------ ------ ------ ------
Pre-tax earnings..................................... 565 709 589 743
Provision for taxes.................................. 21 23 31 132
------ ------ ------ ------
Net earnings.................................... $ 544 $ 686 $ 558 $ 611
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 1997
------------------------------------
1ST 2ND 3RD 4TH
--- --- --- ---
(in millions)
<S> <C> <C> <C> <C>
Total revenues....................................... $4,932 $4,608 $5,957 $4,936
Interest expense, principally on short-term
funding............................................ 2,975 2,934 3,727 3,350
------ ------ ------ ------
Revenues, net of interest expense.................... 1,957 1,674 2,230 1,586
Operating expenses................................... 1,052 1,064 1,298 1,019
------ ------ ------ ------
Pre-tax earnings..................................... 905 610 932 567
Provision for taxes.................................. 44 99 60 65
------ ------ ------ ------
Net earnings.................................... $ 861 $ 511 $ 872 $ 502
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 1998
------------------------------------
1ST 2ND 3RD 4TH
--- --- --- ---
(in millions)
<S> <C> <C> <C> <C>
Total revenues....................................... $5,903 $6,563 $5,735 $4,277
Interest expense, principally on short-term
funding............................................ 3,431 3,574 3,591 3,362
------ ------ ------ ------
Revenues, net of interest expense.................... 2,472 2,989 2,144 915
Operating expenses................................... 1,450 1,952 1,389 808
------ ------ ------ ------
Pre-tax earnings..................................... 1,022 1,037 755 107
Provision for taxes.................................. 138 190 102 63
------ ------ ------ ------
Net earnings.................................... $ 884 $ 847 $ 653 $ 44
====== ====== ====== ======
</TABLE>
F-23
<PAGE> 144
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners,
The Goldman Sachs Group, L.P.:
We have reviewed the condensed consolidated statement of financial condition of
The Goldman Sachs Group, L.P. and Subsidiaries (the "Firm") as of February 26,
1999, and the related condensed consolidated statements of earnings, and cash
flows for the three months ended February 26, 1999 and February 27, 1998 and the
related condensed consolidated statement of changes in partners' capital for the
three months ended February 26, 1999 (included on pages F-25 to F-33 of this
prospectus). These financial statements are the responsibility of the Firm's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
New York, New York
April 9, 1999.
F-24
<PAGE> 145
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY
------------------
1998 1999
------- -------
(unaudited)
(in millions)
<S> <C> <C>
REVENUES:
Investment banking.......................................... $ 633 $ 902
Trading and principal investments........................... 1,115 1,398
Asset management and securities services.................... 512 543
Interest income............................................. 3,643 3,013
------ ------
Total revenues.................................... 5,903 5,856
Interest expense, principally on short-term funding......... 3,431 2,861
------ ------
Revenues, net of interest expense................. 2,472 2,995
OPERATING EXPENSES:
Compensation and benefits................................... 1,100 1,275
Brokerage, clearing and exchange fees....................... 93 111
Market development.......................................... 54 77
Communications and technology............................... 58 78
Depreciation and amortization............................... 42 97
Occupancy................................................... 44 78
Professional services and other............................. 59 91
------ ------
Total operating expenses.......................... 1,450 1,807
Pre-tax earnings............................................ 1,022 1,188
Provision for taxes......................................... 138 181
------ ------
Net earnings................................................ $ 884 $1,007
====== ======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-25
<PAGE> 146
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF
FEBRUARY
1999
-------------
(unaudited)
(in millions)
<S> <C>
ASSETS:
Cash and cash equivalents................................... $ 3,345
Cash and securities segregated in compliance with U.S.
federal and other regulations (principally U.S. government
obligations).............................................. 7,361
Receivables from brokers, dealers and clearing
organizations............................................. 4,624
Receivables from customers and counterparties............... 19,311
Securities borrowed......................................... 74,036
Securities purchased under agreements to resell............. 41,776
Right to receive securities................................. 7,280
Financial instruments owned, at fair value:
Commercial paper, certificates of deposit and time
deposits............................................... 1,413
U.S. government, federal agency and sovereign
obligations............................................ 26,580
Corporate debt............................................ 9,080
Equities and convertible debentures....................... 11,298
State, municipal and provincial obligations............... 1,021
Derivative contracts...................................... 20,441
Physical commodities...................................... 688
Other assets................................................ 2,370
--------
$230,624
========
LIABILITIES AND NET WORTH:
Short-term borrowings, including commercial paper........... $ 33,863
Payables to brokers, dealers and clearing organizations..... 1,294
Payables to customers and counterparties.................... 32,143
Securities loaned........................................... 24,770
Securities sold under agreements to repurchase.............. 36,906
Obligation to return securities............................. 9,078
Financial instruments sold, but not yet purchased, at fair
value:
U.S. government, federal agency and sovereign
obligations............................................ 29,391
Corporate debt............................................ 1,579
Equities and convertible debentures....................... 8,238
Derivative contracts...................................... 22,677
Physical commodities...................................... 267
Other liabilities and accrued expenses...................... 3,022
Long-term borrowings........................................ 20,405
--------
223,633
Commitments and contingencies
Accumulated other comprehensive income...................... (37)
Partners' capital allocated for income taxes and potential
withdrawals............................................... 416
Partners' capital........................................... 6,612
--------
$230,624
========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-26
<PAGE> 147
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY
1999
--------
(unaudited)
(in millions)
<S> <C>
Partners' capital, beginning of period...................... $6,310
Additions:
Net earnings.............................................. 1,007
Capital contributions..................................... 48
------
Total additions................................... 1,055
Deductions:
Returns on capital and certain distributions to
partners............................................... (171)
Transfers to partners' capital allocated for income taxes
and potential withdrawals, net......................... (582)
------
Total deductions.................................. (753)
------
Partners' capital, end of period............................ $6,612
======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-27
<PAGE> 148
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY
-------------------
1998 1999
-------- -------
(unaudited)
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 884 $ 1,007
Non-cash items included in net earnings:
Depreciation and amortization.......................... 42 97
Deferred income taxes.................................. 8 5
Changes in operating assets and liabilities:
Cash and securities segregated in compliance with U.S.
federal and other regulations......................... (191) 526
Net receivables from brokers, dealers and clearing
organizations......................................... 233 260
Net payables to customers and counterparties........... 1,950 (8,394)
Securities borrowed, net............................... (12,579) (1,225)
Financial instruments owned, at fair value............. (51,461) (2,267)
Financial instruments sold, but not yet purchased, at
fair value............................................ 14,601 8,205
Other, net............................................. (759) (617)
-------- -------
Net cash used for operating activities............... (47,272) (2,403)
Cash flows from investing activities:
Property, leasehold improvements and equipment......... (63) (103)
Financial instruments owned, at fair value............. (45) 58
-------- -------
Net cash used for investing activities............... (108) (45)
-------- -------
Cash flows from financing activities:
Short-term borrowings, net............................. 11,500 2,567
Securities sold under agreements to repurchase, net.... 34,157 (3,643)
Issuance of long-term borrowings....................... 5,630 4,468
Repayment of long-term borrowings...................... (608) (105)
Capital contributions.................................. 6 48
Returns on capital and certain distributions to
partners.............................................. (157) (171)
Partners' capital allocated for income taxes and
potential withdrawals................................. (309) (207)
-------- -------
Net cash provided by financing activities............ 50,219 2,957
-------- -------
Net increase in cash and cash equivalents.............. 2,839 509
Cash and cash equivalents, beginning of period.............. 1,328 2,836
-------- -------
Cash and cash equivalents, end of period.................... $ 4,167 $ 3,345
======== =======
</TABLE>
- ---------------
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest approximated the related expense for each of the
fiscal periods presented. Payments of income taxes were not material.
The increases in total assets and liabilities related to the provisions of
Statement of Financial Accounting Standards No. 125 that were deferred under
Statement of Financial Accounting Standards No. 127 were excluded from the
consolidated statements of cash flows as they represented non-cash items.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-28
<PAGE> 149
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS
The Goldman Sachs Group, L.P., a Delaware limited partnership ("Group
L.P."), together with its consolidated subsidiaries (collectively, the "Firm"),
is a global investment banking and securities firm that provides a wide range of
services worldwide to a substantial and diversified client base.
The Firm's activities are divided into three principal business lines:
- Investment Banking, which includes financial advisory services and
underwriting;
- Trading and Principal Investments, which includes fixed income, currency
and commodities ("FICC"), equities and principal investments (principal
investments reflect primarily the Firm's investments in its merchant
banking funds); and
- Asset Management and Securities Services, which includes asset
management, securities services and commissions.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Group L.P.
and its U.S. and international subsidiaries including Goldman, Sachs & Co.
("GS&Co.") and J. Aron & Company in New York, Goldman Sachs International
("GSI") in London and Goldman Sachs (Japan) Ltd. ("GSJL") in Tokyo. The
consolidated financial statements are unaudited and should be read in
conjunction with the audited consolidated financial statements included
elsewhere in this prospectus.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles that require management to make
estimates and assumptions regarding trading inventory valuations, partner
retirements, the outcome of pending litigation and other matters that affect the
consolidated financial statements and related disclosures. These estimates and
assumptions are based on judgment and available information and, consequently,
actual results could be materially different from these estimates.
The unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, that are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. Interim period operating results may not be indicative of the
operating results for a full year.
Unless otherwise stated herein, all references to February 1998 and
February 1999 refer to the Firm's fiscal quarter ended, or the date, as the
context requires, February 27, 1998 and February 26, 1999, respectively.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting and presentation of comprehensive income
and its components in the financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997 and was adopted by the Firm in
the first quarter of 1999. The components of comprehensive income are set forth
below:
F-29
<PAGE> 150
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY
------------------
1998 1999
------- -------
(in millions)
<S> <C> <C>
Net earnings............................................. $ 884 $1,007
Other comprehensive loss
Foreign currency translation adjustment................ (5) (6)
------ ------
Total comprehensive income............................... $ 879 $1,001
====== ======
</TABLE>
NOTE 3. FINANCIAL INSTRUMENTS
Gains and losses on financial instruments and commission income and related
expenses are recorded on a trade date basis in the consolidated statements of
earnings. For purposes of the consolidated statement of financial condition
only, purchases and sales of financial instruments, including agency
transactions, are generally recorded on a settlement date basis. Recording such
transactions on a trade date basis would not result in a material adjustment to
the consolidated statement of financial condition.
Substantially all financial instruments used in the Firm's trading and
non-trading activities are carried at fair value or amounts that approximate
fair value and unrealized gains and losses are recognized in earnings. Fair
value is based generally on listed market prices or broker or dealer price
quotations. To the extent that prices are not readily available, fair value is
based on either internal valuation models or management's estimate of amounts
that could be realized under current market conditions, assuming an orderly
liquidation over a reasonable period of time. Certain over-the-counter
derivative instruments are valued using pricing models that consider, among
other factors, current and contractual market prices, time value, and yield
curve and/or volatility factors of the underlying positions.
The Firm's Trading and Principal Investments business facilitates customer
transactions and takes proprietary positions through market-making in and
trading of securities, currencies, commodities and swaps and other derivatives.
Derivative financial instruments are often used to hedge cash instruments or
other derivative financial instruments as an integral part of the Firm's
strategies. As a result, it is necessary to view the results of any activity on
a fully-integrated basis, including cash positions, the effect of related
derivatives and the financing of the underlying positions.
Net revenues represent total revenues less allocations of interest expense
to specific securities, commodities and other positions in relation to the level
of financing incurred by each.
F-30
<PAGE> 151
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table sets forth the net revenues of the Firm's Trading and
Principal Investments business:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY
------------------
1998 1999
------- -------
(in millions)
<S> <C> <C>
FICC..................................................... $ 741 $ 876
Equities................................................. 365 455
Principal investments.................................... 76 26
------ ------
Total Trading and Principal Investments.................. $1,182 $1,357
====== ======
</TABLE>
DERIVATIVE ACTIVITIES
Most of the Firm's derivative transactions are entered into for trading
purposes. The Firm uses derivatives in its trading activities to facilitate
customer transactions, to take proprietary positions and as a means of risk
management. The Firm also enters into non-trading derivative contracts to manage
the interest rate and currency exposure on its long-term borrowings.
Derivative contracts are financial instruments, such as futures, forwards,
swaps or option contracts, that derive their value from underlying assets,
indices, reference rates or a combination of these factors. Derivatives may
involve future commitments to purchase or sell financial instruments or
commodities, or to exchange currency or interest payment streams. The amounts
exchanged are based on the specific terms of the contract with reference to
specified rates, securities, commodities or indices.
Derivative contracts exclude certain cash instruments, such as
mortgage-backed securities, interest-only and principal-only obligations and
indexed debt instruments, that derive their values or contractually required
cash flows from the price of some other security or index. Derivatives also
exclude option features that are embedded in cash instruments, such as the
conversion features and call provisions embedded in bonds. The Firm has elected
to include commodity-related contracts in its derivative disclosure, although
not required to do so, as these contracts may be settled in cash or are readily
convertible into cash.
Derivatives used for trading purposes are reported at fair value and are
included in "Derivative contracts" on the consolidated statement of financial
condition. Gains and losses on derivatives used for trading purposes are
included in "Trading and Principal Investments" on the consolidated statements
of earnings.
The Firm utilizes replacement cost as its measure of derivative credit
risk. Replacement cost, as reported in financial instruments owned, at fair
value on the consolidated statement of financial condition, represents amounts
receivable from various counterparties, net of any unrealized losses owed where
management believes a legal right of setoff exists under an enforceable master
netting agreement. Replacement cost for purchased option contracts is the market
value of the contract. The Firm controls its credit risk through an established
credit approval process, by monitoring counterparty limits, obtaining collateral
where appropriate and, in some cases, using legally enforceable master netting
agreements.
F-31
<PAGE> 152
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The fair value of derivative financial instruments used for trading
purposes, computed in accordance with the Firm's netting policy, is set forth
below:
<TABLE>
<CAPTION>
AS OF
FEBRUARY 1999
----------------------
ASSETS LIABILITIES
------ -----------
(in millions)
<S> <C> <C>
Forward settlement contracts................................ $ 3,991 $ 3,725
Swap agreements............................................. 9,233 10,460
Option contracts............................................ 7,140 8,484
------- -------
Total....................................................... $20,364 $22,669
======= =======
</TABLE>
Derivatives used for non-trading purposes include interest rate futures
contracts and interest rate and currency swap agreements, which are primarily
utilized to convert a substantial portion of the Firm's fixed rate debt into
U.S. dollar-based floating rate obligations. Gains and losses on these
transactions are generally deferred and recognized as adjustments to interest
expense over the life of the derivative contract. Gains and losses resulting
from the early termination of derivatives used for non-trading purposes are
generally deferred and recognized over the remaining life of the underlying
debt. If the underlying debt is terminated prior to its stated maturity, gains
and losses on these transactions, including the associated hedges, are
recognized in earnings immediately. The fair value and carrying value of
derivatives used for non-trading purposes are set forth below:
<TABLE>
<CAPTION>
AS OF
FEBRUARY 1999
---------------------
ASSETS LIABILITIES
------ -----------
(in millions)
<S> <C> <C>
Fair value........................................ $319 $13
Carrying value.................................... 77 8
</TABLE>
NOTE 4. SHORT-TERM BORROWINGS
The Firm obtains secured short-term financing principally through the use
of repurchase agreements and securities lending agreements, collateralized
mainly by U.S. government, federal agency, investment grade foreign sovereign
obligations and equity securities. The Firm obtains unsecured short-term
borrowings through issuance of commercial paper, promissory notes and bank
loans. The carrying value of these short-term obligations approximates fair
value due to their short term nature.
Short-term borrowings are set forth below:
<TABLE>
<CAPTION>
AS OF
FEBRUARY
1999
-------------
(in millions)
<S> <C>
Commercial paper............................................ $10,740
Promissory notes*........................................... 10,893
Bank loans and other*....................................... 12,230
-------
Total....................................................... $33,863
=======
</TABLE>
- ---------------
* As of February 1999, short-term borrowings included $6,285 million of
long-term borrowings maturing within one year.
F-32
<PAGE> 153
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Firm maintains unencumbered securities with a market value in excess of
all uncollateralized short-term borrowings.
NOTE 5. REGULATED SUBSIDIARIES
GS&Co. is a registered U.S. broker-dealer subsidiary, which is subject to
the Securities and Exchange Commission's "Uniform Net Capital Rule", and has
elected to compute its net capital in accordance with the "Alternative Net
Capital Requirement" of that rule. As of February 1999, GS&Co. had regulatory
net capital, as defined, of $2.89 billion, which exceeded the amount required by
$2.40 billion.
GSI, a registered U.K. broker-dealer and subsidiary of Group L.P., is
subject to the capital requirements of the Securities and Futures Authority
Limited and GSJL, a Tokyo-based broker-dealer, is subject to the capital
requirements of the Japanese Ministry of Finance and the Financial Supervisory
Agency. As of February 1999, GSI and GSJL were in compliance with their local
capital adequacy requirements.
Certain other subsidiaries of the Firm are also subject to capital adequacy
requirements promulgated by authorities of the countries in which they operate.
As of February 1999, these subsidiaries were in compliance with their local
capital adequacy requirements.
NOTE 6. CONTINGENCIES
The Firm is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
businesses. Management believes, based on currently available information, that
the results of such proceedings, in the aggregate, will not have a material
adverse effect on the Firm's financial condition, but might be material to the
Firm's operating results for any particular period, depending, in part, upon the
operating results for such period.
F-33
<PAGE> 154
UNDERWRITING
GS Inc., Sumitomo Bank Capital Markets, Inc., Kamehameha Activities
Association and the underwriters for the U.S. offering (the "U.S. underwriters")
named below have entered into an underwriting agreement with respect to the
shares being offered in the United States and Canada. Subject to certain
conditions, each U.S. underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Bear, Stearns &
Co. Inc., Credit Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, J.P. Morgan Securities Inc., Morgan Stanley & Co.
Incorporated, PaineWebber Incorporated, Prudential Securities Incorporated,
Salomon Smith Barney Inc., Sanford C. Bernstein & Co., Inc. and Schroder & Co.
Inc. are the representatives of the U.S. underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .......................................
Bear, Stearns & Co. Inc. ...................................
Credit Suisse First Boston Corporation......................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Lehman Brothers Inc. .......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
J.P. Morgan Securities Inc. ................................
Morgan Stanley & Co. Incorporated...........................
PaineWebber Incorporated....................................
Prudential Securities Incorporated..........................
Salomon Smith Barney Inc. ..................................
Sanford C. Bernstein & Co., Inc. ...........................
Schroder & Co. Inc. ........................................
----------
Total....................................................... 48,000,000
==========
</TABLE>
---------------
If the U.S. underwriters sell more shares than the total number set forth
in the table above, the U.S. underwriters have an option to buy up to an
additional 7,200,000 shares from GS Inc. to cover such sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this option,
the U.S. underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the U.S. underwriters by GS Inc. Such amounts are
shown assuming both no exercise and full exercise of the U.S. underwriters'
option to purchase 7,200,000 additional shares.
Paid by GS Inc.
-------------------
<TABLE>
<CAPTION>
No Full
Exercise Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover page of this
prospectus. Any shares sold by the underwriters to securities dealers may be
sold at a discount of up to $ per share from the initial public offering
price. Any such securities dealers may resell any shares purchased from the
underwriters to certain other brokers or dealers at a discount of up to $
per share from the initial public offering price. If all of the shares are not
sold
U-1
<PAGE> 155
at the initial public offering price, the representatives may change the
offering price and the other selling terms.
GS Inc., Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association have entered into underwriting agreements with underwriters for the
sale of 8,000,000 shares outside of the United States, Canada and the
Asia/Pacific region and 4,000,000 shares in the Asia/Pacific region. The terms
and conditions of all three offerings are the same and the sale of shares in all
three offerings are conditioned on each other. Goldman Sachs International, ABN
AMRO Rothschild, Banque Nationale de Paris, Bayerische Hypo- und Vereinsbank AG,
Cazenove & Co., Commerzbank Aktiengesellschaft, Deutsche Bank AG London, ING
Barings Limited as Agent for ING Bank NV, London Branch, Kleinwort Benson
Limited, Mediobanca - Banca di Credito Finanziaro S.p.A., Paribas and UBS AG,
acting through its division Warburg Dillon Read, are representatives of the
underwriters for the international offering outside of the United States, Canada
and the Asia/Pacific region (the "International underwriters") and Goldman Sachs
(Asia) L.L.C., BOCI Asia Limited, China Development Industrial Bank Inc., China
International Capital Corporation (Hong Kong) Limited, Daiwa Securities (H.K.)
Limited, The Development Bank of Singapore Ltd, HSBC Investment Bank Asia
Limited, Jardine Fleming Securities Limited, Kokusai Securities (Hong Kong)
Limited, Kotak Mahindra (International) Limited, The Nikko Merchant Bank
(Singapore) Limited, Nomura International plc, Samsung Securities Co., Ltd.,
Standard Chartered Asia Limited and Were Stockbroking Limited are
representatives of the underwriters for the Asia/Pacific region offering (the
"Asia/Pacific underwriters"). GS Inc. has granted the International and
Asia/Pacific underwriters options similar to that described above to purchase up
to an aggregate of an additional 1,800,000 shares.
The underwriters for each of the three offerings have entered into an
agreement in which they have agreed to restrictions on where and to whom they
and any dealer purchasing from them may offer shares as a part of the
distribution of the shares. The underwriters have also agreed that they may sell
shares among each of the underwriting groups.
GS Inc., Sumitomo Bank Capital Markets, Inc., Kamehameha Activities
Association, the parties to the Shareholders' Agreement, including all of the
directors and executive officers of GS Inc., and the RLPs have agreed not to
dispose of or hedge any of their Common Stock or securities convertible into or
exchangeable for shares of Common Stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs & Co. This
agreement does not apply to the shares of Common Stock underlying any awards
described under "Management -- The Employee IPO Awards" that are received by
persons who are not managing directors or any future Awards granted under the
SIP. See "Shares Eligible for Future Sale" for a discussion of certain transfer
restrictions.
Prior to the offerings, there has been no public market for the shares. The
initial public offering price will be negotiated among GS Inc. and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be GS Inc.'s historical performance, estimates of the business
potential and earnings prospects of GS Inc., an assessment of GS Inc.'s
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
The Common Stock will be listed on the New York Stock Exchange under the
symbol "GS". In order to meet one of the requirements for listing the Common
Stock on the NYSE, the underwriters have undertaken to sell lots of 100 or more
shares to a minimum of 2,000 beneficial holders.
In connection with the offerings, the underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short
U-2
<PAGE> 156
sales involve the sale by the underwriters of a greater number of shares than
they are required to purchase in the offerings. Stabilizing transactions consist
of certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the Common Stock while the offerings are in
progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the Common Stock. As a result, the price of the
Common Stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the NYSE, in the
over-the-counter market or otherwise.
After the offerings, because Goldman, Sachs & Co. is a member of the NYSE
and because of its relationship to GS Inc., it will not be permitted under the
rules of the NYSE to make markets in or recommendations regarding the purchase
or sale of the Common Stock. This may adversely affect the trading market for
the Common Stock.
Also, because of the relationship between Goldman, Sachs & Co. and GS Inc.,
the offerings are being conducted in accordance with Rule 2720 of the NASD. That
rule requires that the initial public offering price can be no higher than that
recommended by a "qualified independent underwriter", as defined by the NASD.
Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated have served in
that capacity and performed due diligence investigations and reviewed and
participated in the preparation of the registration statement of which this
prospectus forms a part. Each of Donaldson, Lufkin & Jenrette Securities
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan
Stanley & Co. Incorporated has received $10,000 from GS Inc. as compensation for
such role.
The underwriters may not confirm sales to discretionary accounts without
the prior written approval of the customer.
Goldman, Sachs & Co., Goldman Sachs International and Goldman Sachs (Asia)
L.L.C. are subsidiaries of GS Inc. In aggregate, these three affiliated
underwriters have severally agreed to purchase % of the shares being
offered in the three offerings. If any of the shares underwritten by these three
affiliates are sold by them at a price less than the initial public offering
price, the net proceeds from the offerings to GS Inc. on a consolidated basis
will be reduced because such affiliates and GS Inc. are accounted for on a
consolidated basis.
GS Inc., Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association estimate that their shares of the total expenses of the offerings,
excluding underwriting discounts and commissions, will be approximately
$ , $ and $ , respectively.
GS Inc., Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offerings being made outside of the
United States, to persons located in the United States.
U-3
<PAGE> 157
The inside back cover of this prospectus is
a series of photographs of
Goldman Sachs employees participating in
our Community TeamWorks initiative.
The following text appears in the center of the page:
THE WORLD OF GOLDMAN SACHS
The dedication we bring to our professional relationships extends beyond
the world of finance into our communities. At Goldman Sachs, we work side by
side with our clients to 'adopt' schools, clean parks, build housing for those
in need and engage in a host of other acts of citizenship. Each volunteer
relationship is an investment with returns that not only enrich our communities,
but also benefit our clients--by strengthening our sense of teamwork and
enriching our understanding of and appreciation for people and places beyond our
daily responsibilities.
<PAGE> 158
- -------------------------------------------------------
- -------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell or to buy only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Our Business Principles............... 2
Prospectus Summary.................... 3
Risk Factors.......................... 11
Use of Proceeds....................... 23
Dividend Policy....................... 23
Reports of Independent Accountants on
Pro Forma Consolidated Financial
Information......................... 24
Pro Forma Consolidated Financial
Information......................... 26
Dilution.............................. 32
Capitalization........................ 33
Selected Consolidated Financial
Data................................ 34
Report of Independent Accountants on
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Industry and Economic Outlook......... 62
Business.............................. 65
Management............................ 89
Principal and Selling Shareholders.... 102
Certain Relationships and Related
Transactions........................ 104
Description of Capital Stock.......... 109
Shares Eligible for Future Sale....... 115
Validity of Common Stock.............. 118
Experts............................... 118
Available Information................. 119
Index to Consolidated Financial
Statements.......................... F-1
Underwriting.......................... U-1
</TABLE>
------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
60,000,000 Shares
THE GOLDMAN SACHS
GROUP, INC.
Common Stock
------------------
[GOLDMAN SACHS LOGO]
------------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
LEHMAN BROTHERS
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
SANFORD C. BERNSTEIN & CO., INC.
SCHRODER & CO. INC.
Representatives of the Underwriters
-------------------------------------------------------
-------------------------------------------------------
<PAGE> 159
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the estimated expenses, other than
underwriting discounts and commissions, to be incurred in connection with the
distribution of the securities registered under this registration statement:
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Securities and Exchange Commission registration fee......... $1,055,010
NASD fees and expenses...................................... 30,500
Legal fees and expenses..................................... *
Fees and expenses of qualification under state securities
laws (including legal fees)............................... 20,000
NYSE listing fees and expenses.............................. *
Accounting fees and expenses................................ *
Printing and engraving fees................................. *
Registrar and transfer agent's fees......................... *
Miscellaneous............................................... *
----------
Total............................................. $ *
==========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee of or agent to the Registrant. The
statute provides that it is not exclusive of other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise. Section 6.4 of the
Registrant's By-Laws provides for indemnification by the Registrant of any
director or officer (as such term is defined in the By-Laws) of the Registrant
who is or was a director of any of its subsidiaries, is or was a member of the
Shareholders' Committee (as defined in the prospectus included in this
registration statement) acting pursuant to the Shareholders' Agreement (as
defined in the prospectus included in this registration statement) or, at the
request of the Registrant, is or was serving as a director or officer of, or in
any other capacity for, any other enterprise, to the fullest extent permitted by
law. The By-Laws also provide that the Registrant shall advance expenses to a
director or officer and, if reimbursement of such expenses is demanded in
advance of the final disposition of the matter with respect to which such demand
is being made, upon receipt of an undertaking by or on behalf of such director
or officer to repay such amount if it is ultimately determined that the director
or officer is not entitled to be indemnified by the Registrant. To the extent
authorized from time to time by the Board of Directors of the Registrant, the
Registrant may provide to any one or more employees of the Registrant, one or
more officers, employees and other agents of any subsidiary or one or more
directors, officers, employees and other agents of any other enterprise, rights
of indemnification and to receive payment or reimbursement of expenses,
including attorneys' fees, that are similar to the rights conferred in the
By-Laws of the Registrant on directors and officers
II-1
<PAGE> 160
of the Registrant or any subsidiary or other enterprise. The By-Laws do not
limit the power of the Registrant or its Board of Directors to provide other
indemnification and expense reimbursement rights to directors, officers,
employees, agents and other persons otherwise than pursuant to the By-laws. The
Registrant intends to enter into agreements with certain directors, officers and
employees who are asked to serve in specified capacities at subsidiaries and
other entities.
The Registrant will enter into an agreement that provides indemnification
to its directors and officers, directors of the general partner of The Goldman
Sachs Group, L.P. ("Group L.P.") and all other persons requested or authorized
by the Registrant's Board of Directors or the board of directors of the general
partner of Group L.P. to take actions on behalf of the Registrant, Group L.P. or
the general partner of Group L.P. in connection with the Plan of Incorporation,
this registration statement and any other registration statement contemplated by
the Plan of Incorporation for all losses, claims, expenses, liabilities,
judgments, fines and settlement amounts incurred by the indemnified person
arising out of the relevant registration statements or the Plan of Incorporation
or the transactions contemplated by the Plan of Incorporation. This agreement is
in addition to the Registrant's indemnification obligations under its By-Laws.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The Registrant's Amended and Restated Certificate of Incorporation
provides for such limitation of liability.
Policies of insurance are maintained by the Registrant under which its
directors and officers are insured, within the limits and subject to the
limitations of the policies, against certain expenses in connection with the
defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.
Reference is also made to Section 9 of the Underwriting Agreement filed as
Exhibit 1.1 to the registration statement for information concerning the
underwriters' obligation to indemnify the Registrant and its officers and
directors in certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
As part of the Incorporation Transactions, the Registrant has entered into
definitive binding agreements to issue: (i) shares of the Registrant's common
stock, par value $0.01 per share (the "Common Stock"), to certain profit
participating limited partners (the "PLPs") of Group L.P. in exchange for all of
the PLPs' interests in Group L.P. and certain other entities; (ii) shares of
Common Stock and 12% junior subordinated debentures (the "Junior Subordinated
Debentures") of the Registrant to certain retired limited partners (the "RLPs")
of Group L.P. in exchange for all of such limited partners' interests in Group
L.P. and certain other entities; (iii) shares of Common Stock and shares of the
Registrant's nonvoting common stock, par value $0.01 per share ("Nonvoting
Common Stock"), to Sumitomo Bank Capital Markets, Inc.; and (iv) shares of
Common Stock to Kamehameha Activities Association. Also simultaneously with the
offerings, the Registrant will make awards of restricted stock units and/or
stock options to substantially all of its employees and will make an irrevocable
contribution of Common Stock to a nonqualified defined contribution plan. The
offering and sale of the shares of Common Stock, Junior Subordinated Debentures
and Nonvoting Common Stock to the PLPs, RLPs, Sumitomo Bank Capital Markets,
Inc. and Kamehameha Activities Association will not be registered under the
Securities Act of 1933, as amended (the "Securities Act"),
II-2
<PAGE> 161
because the offering and sale (i) will be made in reliance on the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), and Rule 506 thereunder for transactions by an issuer not
involving a public offering (with the recipients representing their intentions
to acquire the securities for their own accounts and not with a view to the
distribution thereof and acknowledging that the securities will be issued in a
transaction not registered under the Securities Act) or (ii) will be made
outside the United States pursuant to Regulation S under the Securities Act to
persons who are not citizens or residents of the United States. The foregoing
employee awards and contribution of Common Stock will not be registered under
the Securities Act because the awards and contribution either will not involve
an offer or sale for purposes of Section 2(a)(3) of the Securities Act, in
reliance on the fact that the awards will be made to a relatively broad class of
employees who will provide no consideration in exchange for their awards, or
will be offered and sold in transactions not involving a public offering, exempt
from registration under the Securities Act pursuant to Section 4(2) and in
compliance with Rule 506 thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Plan of Incorporation.*
3.1 Form of Amended and Restated Certificate of Incorporation of
The Goldman Sachs Group, Inc. ("GS Inc.").*
3.2 By-Laws of GS Inc.*
4.1 Specimen of certificate representing GS Inc.'s Common Stock,
par value $0.01 per share.**
4.2 Stockholder Protection Rights Agreement, dated as of April
5, 1999, between GS Inc. and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent.*
5.1 Opinion of Sullivan & Cromwell, counsel to GS Inc.*
10.1 Lease, dated June 11, 1985, between Metropolitan Life
Insurance Company and Goldman, Sachs & Co.**
10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank
(National Association) and The Goldman Sachs Group, L.P.
("Group L.P."), as amended.**
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and Group L.P.**
10.4 Lease, dated as of July 16, 1998, between TCC Acquisition
Corp. and Group L.P.**
10.5 Agreement for Lease, dated April 2, 1998, among (i) JC No. 3
(UK) Limited and Fleet Street Square Management Limited
trading as Fleet Street Partnership, (ii) Goldman Sachs
International ("GSI"), (iii) Restamove Limited, (iv) Group
L.P. and (v) Itochu Corporation.**
10.6 Annexure 1 to Agreement for Lease, dated April 2, 1998,
among (i) JC No. 3 (UK) Limited and Fleet Street Square
Management Limited trading as Fleet Street Partnership, (ii)
GSI, (iii) Restamove Limited, (iv) Group L.P. and (v) Itochu
Corporation (Form of Occupational Lease among (i) JC No. 3
(UK) Limited and Fleet Street Square Management Limited
trading as Fleet Street Partnership, (ii) GSI and (iii)
Group L.P.).**
10.7 Agreement relating to Developer's Fit Out Works to be
carried out at 120 Fleet Street, London, dated April 2,
1998, among (i) JC No. 3 (UK) Limited and Fleet Street
Square Management Limited, (ii) Goldman Sachs Property
Management, (iii) Itochu Corporation and (iv) Group L.P.**
</TABLE>
II-3
<PAGE> 162
<TABLE>
<C> <S>
10.8 Agreement relating to One Carter Lane, London EC4, dated
March 25, 1998, among Britel Fund Trustees Limited, GSI,
Group L.P., English Property Corporation plc and MEPC plc.**
10.9 Fit Out Works Agreement relating to One Carter Lane, London
EC4, dated March 25, 1998, among Britel Fund Trustees
Limited, GSI, Goldman Sachs Property Management, Group L.P.,
English Property Corporation plc and MEPC plc.**
10.10 Underlease of premises known as One Carter Lane, London EC4,
dated September 9, 1998, among Britel Fund Trustees Limited,
GSI and Group L.P.**
10.11 Lease, dated March 5, 1994, among Shine Hill Development
Limited, Shine Belt Limited, Fair Page Limited, Panhy
Limited, Maple Court Limited and Goldman Sachs (Asia)
Finance, as amended.**
10.12 Guarantee, dated November 17, 1993, between Shine Hill
Development Limited and Group L.P.**
10.13 Agreement for Lease, dated November 29, 1998, between Turbo
Top Limited and Goldman Sachs (Asia) Finance.**
10.14 Summary of Tokyo Leases.*
10.15 The Goldman Sachs 1999 Stock Incentive Plan.*
10.16 The Goldman Sachs Defined Contribution Plan.*
10.17 Trust Agreement.*
10.18 The Goldman Sachs Partner Compensation Plan.*
10.19 Form of Employment Agreement.*
10.20 Form of Agreement Relating to Noncompetition and Other
Covenants.*
10.21 Form of Pledge Agreement.*
10.22 Award Agreement (Formula RSUs).*
10.23 Award Agreement (Discretionary RSUs).*
10.24 Form of Option Agreement (Discretionary Options).*
10.25 Form of Tax Indemnification Agreement, dated as of
, 1999, by and among GS Inc. and various
parties.*
10.26 Shareholders' Agreement, dated as of , 1999,
among GS Inc. and various parties.*
10.27 Instrument of Indemnification.*
10.28 Form of Indemnification Agreement.*
10.29 Subscription Agreement, dated as of April 24, 1992, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and Group L.P.*
10.30 Subscription Agreement, dated as of November 21, 1994, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and Group L.P.*
10.31 Letter Agreement, dated March 15, 1999, among Kamehameha
Activities Association and Group L.P.*
10.32 Amended and Restated Subscription Agreement, dated as of
March 28, 1989, among The Sumitomo Bank, Limited, Sumitomo
Bank Capital Markets, Inc., Goldman, Sachs & Co. and Group
L.P.*
10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo
Bank, Limited, Sumitomo Bank Capital Markets, Inc. and Group
L.P.*
10.34 Letter Agreement with Mr. Weinberg.*
</TABLE>
II-4
<PAGE> 163
<TABLE>
<C> <S>
10.35 Lease, dated September 24, 1992, from LDT Partners to GSI.*
11.1 Statement re computation of per share earnings.*
15.1 Letter re Unaudited Interim Financial Information.
21.1 List of subsidiaries of Group L.P.**
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.1
above).*
23.3 Consent of Sir John Browne.
23.4 Consent of James A. Johnson.
23.5 Consent of Securities Data Company.
24.1 Powers of Attorney.**
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Condensed financial information of Group L.P. and report of
PricewaterhouseCoopers LLP thereon.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted against the Registrant by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(b) To provide to the underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
(c) (1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall
be deemed to be part of this registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE> 164
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement (No. 333-74449)
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, New York on the 9th day of April, 1999.
THE GOLDMAN SACHS GROUP, INC.
By: /s/ GREGORY K. PALM
------------------------------------
Name: Gregory K. Palm
Title: General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement (No. 333-74449) has been signed by the following
persons in the capacities indicated on the 9th day of April, 1999:
<TABLE>
<CAPTION>
TITLE SIGNATURE
----- ---------
<S> <C>
Director and Co-Chairman of the Board *
----------------------------------------------
Jon S. Corzine
Director, Co-Chairman of the Board and
Chief Executive Officer (Principal Executive
Officer) *
----------------------------------------------
Henry M. Paulson, Jr.
Director and Vice Chairman *
----------------------------------------------
Robert J. Hurst
Director, President and Co-Chief Operating Officer *
----------------------------------------------
John A. Thain
Director, President and Co-Chief Operating Officer *
----------------------------------------------
John L. Thornton
Chief Financial Officer (Principal Financial Officer) *
----------------------------------------------
David A. Viniar
Principal Accounting Officer *
----------------------------------------------
Sarah G. Smith
*By: /s/ GREGORY K. PALM
--------------------------------------------
Name: Gregory K. Palm
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 165
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners,
The Goldman Sachs Group, L.P.:
In connection with our audits of the consolidated financial statements of The
Goldman Sachs Group, L.P. and Subsidiaries as of November 27, 1998 and November
28, 1997, and for the three years in the period ended November 27, 1998, which
financial statements are included on pages F-3 to F-23 of this Form S-1, we have
also audited the financial statement schedule listed in Item 16(b) herein.
In our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
New York, New York
January 22, 1999.
S-1
<PAGE> 166
SCHEDULE IV
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE GOLDMAN SACHS GROUP, L.P.
CONDENSED STATEMENTS OF EARNINGS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
REVENUES:
Equity earnings of subsidiaries............................. $ 2,184 $ 2,378 $ 1,780
Principal investments....................................... 208 339 540
Interest income, principally from affiliates................ 2,602 2,943 4,369
------- ------- -------
Total revenues......................................... 4,994 5,660 6,689
Interest expense, principally on short-term funding......... 2,547 2,858 4,201
------- ------- -------
Revenues, net of interest expense...................... 2,447 2,802 2,488
OPERATING EXPENSES:
Compensation and benefits................................... 13 12 9
Other....................................................... 33 29 43
------- ------- -------
Total operating expenses............................... 46 41 52
Pre-tax earnings............................................ 2,401 2,761 2,436
Provision for unincorporated business taxes................. 2 15 8
------- ------- -------
Net earnings................................................ $ 2,399 $ 2,746 $ 2,428
======= ======= =======
</TABLE>
See note to condensed financial statements.
S-2
<PAGE> 167
SCHEDULE IV
THE GOLDMAN SACHS GROUP, L.P.
CONDENSED STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
AS OF NOVEMBER
------------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 4 $ 11
Financial instruments owned, at fair value.................. 1,896 2,147
Receivables from affiliates................................. 23,767 33,562
Subordinated loan receivables from affiliates............... 6,889 8,668
Investment in subsidiaries.................................. 5,005 5,077
Other....................................................... 434 1,123
------- -------
$37,995 $50,588
======= =======
LIABILITIES AND NET WORTH:
Short-term borrowings, including commercial paper........... $16,597 $23,364
Payables to affiliates...................................... 119 1,679
Other....................................................... 137 147
Long-term borrowings:
With third parties........................................ 14,290 18,584
With affiliates........................................... 315 430
------- -------
31,458 44,204
Partners' capital allocated for income taxes and potential
withdrawals............................................... 430 74
Partners' capital........................................... 6,107 6,310
------- -------
$37,995 $50,588
======= =======
</TABLE>
See note to condensed financial statements.
S-3
<PAGE> 168
SCHEDULE IV
THE GOLDMAN SACHS GROUP, L.P.
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 2,399 $ 2,746 $ 2,428
Non-cash items included in net earnings:
Equity in earnings of subsidiaries...................... (2,184) (2,378) (1,780)
Depreciation and amortization........................... 25 19 35
Changes in operating assets and liabilities:
Financial instruments owned, at fair value................ (110) (395) (8)
Other, net................................................ (43) (98) (501)
------- ------- -------
Net cash provided by/(used for) operating activities.... 87 (106) 174
------- ------- -------
Cash flows from investing activities:
Financial instruments owned, at fair value................ 126 (331) (243)
Receivables from affiliates, net.......................... (1,476) (4,320) (8,235)
Subordinated loan receivables from affiliates............. (480) (1,528) (1,779)
Investment in subsidiaries................................ 2,031 2,147 1,362
Property, leasehold improvements and equipment............ (1) (4) (145)
------- ------- -------
Net cash provided by/(used for) investing activities.... 200 (4,036) (9,040)
------- ------- -------
Cash flows from financing activities:
Short-term borrowings, net................................ 496 39 2,586
Issuance of long-term borrowings.......................... 4,636 7,498 10,289
Repayment of long-term borrowings......................... (3,886) (1,005) (1,698)
Capital contributions..................................... 4 89 9
Returns on capital and certain distributions to
partners................................................ (473) (557) (619)
Termination of the Profit Participation Plan.............. -- -- (21)
Partners' capital allocated for income taxes and potential
withdrawals, net........................................ (1,017) (2,034) (1,673)
------- ------- -------
Net cash (used for)/provided by financing activities.... (240) 4,030 8,873
------- ------- -------
Net increase/(decrease) in cash and cash equivalents...... 47 (112) 7
Cash and cash equivalents, beginning of year................ 69 116 4
------- ------- -------
Cash and cash equivalents, end of year...................... $ 116 $ 4 $ 11
======= ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest approximated the related expense for each of the
fiscal periods presented. Payments of unincorporated business taxes were not
material.
Cash payments of $347 million related to the termination of the Profit
Participation Plans in 1998 were paid by Group L.P.'s subsidiaries and were
excluded from the condensed statement of cash flows above as these payments
represented non-cash items to Group L.P.
See note to condensed financial statements.
S-4
<PAGE> 169
SCHEDULE IV
THE GOLDMAN SACHS GROUP, L.P.
NOTE TO CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed unconsolidated financial statements of The Goldman Sachs
Group, L.P. ("Group L.P.") should be read in conjunction with the consolidated
financial statements of The Goldman Sachs Group, L.P. and Subsidiaries and the
footnotes thereto. Certain reclassifications have been made to prior year
amounts to conform to the current presentation.
Investments in subsidiaries are accounted for using the equity method.
The condensed unconsolidated financial statements have been prepared in
accordance with generally accepted accounting principles that require management
to make estimates and assumptions regarding investment valuations, partner
retirements, the outcome of pending litigation and other matters that affect the
condensed unconsolidated financial statements and related disclosures. These
estimates and assumptions are based on judgment and available information and,
consequently, actual results could be materially different from these estimates.
S-5
<PAGE> 170
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
2.1 Plan of Incorporation.*
3.1 Form of Amended and Restated Certificate of Incorporation of
The Goldman Sachs Group, Inc. ("GS Inc.").*
3.2 By-Laws of GS Inc.*
4.1 Specimen of certificate representing GS Inc.'s Common Stock,
par value $0.01 per share.**
4.2 Stockholder Protection Rights Agreement, dated as of April
5, 1999, between GS Inc. and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent.*
5.1 Opinion of Sullivan & Cromwell, counsel to GS Inc.*
10.1 Lease, dated June 11, 1985, between Metropolitan Life
Insurance Company and Goldman, Sachs & Co.**
10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank
(National Association) and The Goldman Sachs Group, L.P.
("Group L.P."), as amended.**
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and Group L.P.**
10.4 Lease, dated as of July 16, 1998, between TCC Acquisition
Corp. and Group L.P.**
10.5 Agreement for Lease, dated April 2, 1998, among (i) JC No. 3
(UK) Limited and Fleet Street Square Management Limited
trading as Fleet Street Partnership, (ii) Goldman Sachs
International ("GSI"), (iii) Restamove Limited, (iv) Group
L.P. and (v) Itochu Corporation.**
10.6 Annexure 1 to Agreement for Lease, dated April 2, 1998,
among (i) JC No. 3 (UK) Limited and Fleet Street Square
Management Limited trading as Fleet Street Partnership, (ii)
GSI, (iii) Restamove Limited, (iv) Group L.P. and (v) Itochu
Corporation (Form of Occupational Lease among (i) JC No. 3
(UK) Limited and Fleet Street Square Management Limited
trading as Fleet Street Partnership, (ii) GSI and (iii)
Group L.P.).**
10.7 Agreement relating to Developer's Fit Out Works to be
carried out at 120 Fleet Street, London, dated April 2,
1998, among (i) JC No. 3 (UK) Limited and Fleet Street
Square Management Limited, (ii) Goldman Sachs Property
Management, (iii) Itochu Corporation and (iv) Group L.P.**
10.8 Agreement relating to One Carter Lane, London EC4, dated
March 25, 1998, among Britel Fund Trustees Limited, GSI,
Group L.P., English Property Corporation plc and MEPC plc.**
10.9 Fit Out Works Agreement relating to One Carter Lane, London
EC4, dated March 25, 1998, among Britel Fund Trustees
Limited, GSI, Goldman Sachs Property Management, Group L.P.,
English Property Corporation plc and MEPC plc.**
10.10 Underlease of premises known as One Carter Lane, London EC4,
dated September 9, 1998, among Britel Fund Trustees Limited,
GSI and Group L.P.**
</TABLE>
<PAGE> 171
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.11 Lease, dated March 5, 1994, among Shine Hill Development
Limited, Shine Belt Limited, Fair Page Limited, Panhy
Limited, Maple Court Limited and Goldman Sachs (Asia)
Finance, as amended.**
10.12 Guarantee, dated November 17, 1993, between Shine Hill
Development Limited and Group L.P.**
10.13 Agreement for Lease, dated November 29, 1998, between Turbo
Top Limited and Goldman Sachs (Asia) Finance.**
10.14 Summary of Tokyo Leases.*
10.15 The Goldman Sachs 1999 Stock Incentive Plan.*
10.16 The Goldman Sachs Defined Contribution Plan.*
10.17 Trust Agreement.*
10.18 The Goldman Sachs Partner Compensation Plan.*
10.19 Form of Employment Agreement.*
10.20 Form of Agreement Relating to Noncompetition and Other
Covenants.*
10.21 Form of Pledge Agreement.*
10.22 Award Agreement (Formula RSUs).*
10.23 Award Agreement (Discretionary RSUs).*
10.24 Form of Option Agreement (Discretionary Options).*
10.25 Form of Tax Indemnification Agreement, dated as of
, 1999, by and among GS Inc. and various
parties.*
10.26 Shareholders' Agreement, dated as of , 1999, among GS
Inc. and various parties.*
10.27 Instrument of Indemnification.*
10.28 Form of Indemnification Agreement.*
10.29 Subscription Agreement, dated as of April 24, 1992, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and Group L.P.*
10.30 Subscription Agreement, dated as of November 21, 1994, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and Group L.P.*
10.31 Letter Agreement, dated March 15, 1999, among Kamehameha
Activities Association and Group L.P.*
10.32 Amended and Restated Subscription Agreement, dated as of
March 28, 1989, among The Sumitomo Bank, Limited, Sumitomo
Bank Capital Markets, Inc., Goldman, Sachs & Co. and Group
L.P.*
10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo
Bank, Limited, Sumitomo Bank Capital Markets, Inc. and Group
L.P.*
10.34 Letter Agreement with Mr. Weinberg.*
10.35 Lease, dated September 24, 1992, from LDT Partners to GSI.*
11.1 Statement re computation of per share earnings.*
15.1 Letter re Unaudited Interim Financial Information.
21.1 List of subsidiaries of Group L.P.**
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.1
above).*
23.3 Consent of Sir John Browne.
23.4 Consent of James A. Johnson.
23.5 Consent of Securities Data Company.
24.1 Powers of Attorney.**
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
THE GOLDMAN SACHS GROUP, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
UNDERWRITING AGREEMENT
(U.S. VERSION)
........................., 1999
Goldman, Sachs & Co.,
Bear, Stearns & Co. Inc.,
Credit Suisse First Boston Corporation,
Donaldson, Lufkin & Jenrette Securities Corporation,
Lehman Brothers Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
J.P. Morgan Securities Inc.,
Morgan Stanley & Co. Incorporated,
PaineWebber Incorporated,
Prudential Securities Incorporated,
Salomon Smith Barney Inc.,
Sanford C. Bernstein & Co., Inc.,
Schroder & Co. Inc.,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
The Goldman Sachs Group, Inc., a Delaware corporation ("GS Inc."),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 33,600,000 shares and, at the election of the Underwriters, up to 7,200,000
additional shares of Common Stock, par value $.01 per share ("Stock"), of GS
Inc. and the stockholders of GS Inc. named in Schedule II hereto (the "Selling
Stockholders") propose, subject to the terms and conditions stated herein, to
sell to the Underwriters an aggregate of 14,400,000 shares of Stock. The
aggregate of 48,000,000 shares to be sold by GS Inc. and the Selling
Stockholders is herein called the "Firm Shares" and the aggregate of 7,200,000
additional
<PAGE> 2
shares to be sold by GS Inc. is herein called the "Optional Shares". The Firm
Shares and the Optional Shares that the Underwriters elect to purchase pursuant
to Section 2 hereof are herein collectively called the "Shares." For purposes of
the representations and warranties set forth in Section 1(a), the second
sentence of Section 3(e), Section 7 and the conditions set forth in Sections
8(k) and 8(l), prior to the consummation of the Incorporation Transactions (as
defined below), references to the "Company" shall be deemed to be references to
The Goldman Sachs Group, L.P., a Delaware limited partnership ("Group"), and
after consummation of the Incorporation Transactions, references to the
"Company" shall be deemed to be references to GS Inc.
It is understood and agreed to by all parties that GS Inc. and the
Selling Stockholders are concurrently entering into an agreement (the
"Asia/Pacific Underwriting Agreement") providing for the sale by GS Inc. and the
Selling Stockholders of up to a total of 4,600,000 shares of Stock (the
"Asia/Pacific Shares"), including the option to purchase additional shares
thereunder, through arrangements with certain underwriters in the Asia/Pacific
Region (the "Asia/Pacific Underwriters"), for whom Goldman Sachs (Asia) L.L.C.,
BOCI Asia Limited, China Development Industrial Bank Inc., China International
Capital Corporation (Hong Kong) Limited, Daiwa Securities (H.K.) Limited, The
Development Bank of Singapore Ltd, HSBC Investment Bank Asia Limited, Jardine
Fleming Securities Limited, Kokusai Securities (Hong Kong) Limited, Kotak
Mahindra (International) Limited, The Nikko Merchant Bank (Singapore) Limited,
Nomura International plc, Samsung Securities Co., Ltd., Standard Chartered Asia
Limited and Were Stockbroking Limited, are acting as lead managers, and an
agreement (the "International Underwriting Agreement") providing for the sale by
GS Inc. and the Selling Stockholders of up to a total of 9,200,000 shares of
Stock (the "International Shares"), including the option to purchase additional
shares thereunder, through arrangements with certain underwriters outside the
United States and the Asia/Pacific Region (the "International Underwriters"),
for whom Goldman Sachs International, ABN AMRO Rothschild, Banque Nationale de
Paris, Bayerische Hypo und Vereinsbank AG, Cazenove & Co., Commerzbank
Aktiengesellschaft, Deutsche Bank AG London, ING Barings Limited as Agent for
ING Bank NV, London Branch, Kleinwort Benson Limited, Mediobanca - Banca di
Credito Finanziaro S.p.A., Paribas and UBS AG, acting through its division
Warburg Dillon Read, are acting as lead managers. Anything herein or therein to
the contrary notwithstanding, the respective closings under this Agreement, the
Asia/Pacific Underwriting Agreement and the International Underwriting Agreement
are hereby expressly made conditional on one another. The Underwriters
hereunder, the Asia/Pacific Underwriters and the International Underwriters are
simultaneously entering into an Agreement among Underwriting Syndicates (the
"Agreement among Syndicates") which provides, among other things, that Goldman,
Sachs & Co. shall act as global coordinator for the offering of shares of Stock
and for the transfer of shares of Stock among the three syndicates.
Except as the context may otherwise require, the Asia/Pacific
Underwriters and the International Underwriters are referred to herein
collectively as the "Global Underwriters" and the Asia/Pacific Underwriting
Agreement and the International Underwriting Agreement are referred to herein
collectively as the "Global Underwriting Agreements".
-2-
<PAGE> 3
Three forms of prospectus are to be used in connection with the
offering and sale of shares of Stock contemplated by the foregoing, one relating
to the Shares hereunder (the "U.S. Prospectus"), one relating to the
Asia/Pacific Shares and another relating to the International Shares. The other
two forms of prospectus will be identical to the U.S. Prospectus except for the
front cover page, the back cover page, the text under the caption "Underwriting"
and for the addition of a section captioned "Certain United States Tax
Consequences to Non-U.S. Holders of Common Stock". Except as used in Sections 2,
4, 5, 11 and 13 herein, and except as the context may otherwise require,
references hereinafter to the Shares shall include all the shares of Stock which
may be sold pursuant to either this Agreement, the Asia/Pacific Underwriting
Agreement or the International Underwriting Agreement, and references herein to
any prospectus whether in preliminary or final form, and whether as amended or
supplemented, shall include the U.S., the Asia/Pacific and the International
versions thereof.
It is understood and agreed to by all parties that in connection with
the conversion of the business of Group to corporate form, a series of
transactions that are described in the Prospectus (as defined in Section 1(a)(i)
hereof) under the caption "Certain Relationships and Related Transactions--
Incorporation and Related Transactions--Incorporation Transactions" will occur
not later than concurrent with the First Time of Delivery (as defined in Section
5(a) hereof). Such transactions are hereinafter referred to as the
"Incorporation Transactions". The grant of the Formula RSUs, the Discretionary
RSUs and the Discretionary Options, and the contribution of the shares of Stock
to the DCP, as described in the Prospectus under the heading "Certain
Relationships and Related Transactions--Incorporation and Related
Transactions--Related Transactions" are hereinafter referred to as the "Related
Transactions".
1. (a) GS Inc. represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-74449)
(the "Initial Registration Statement") in respect of the Shares has
been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore delivered
to you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Act"), which became or will become effective upon filing, no
other document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order suspending
the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that purpose
has been initiated or threatened by the Commission (any preliminary
-3-
<PAGE> 4
prospectus included in the Initial Registration Statement or filed with
the Commission pursuant to Rule 424(a) of the rules and regulations of
the Commission under the Act is hereinafter called a "Preliminary
Prospectus"; the various parts of the Initial Registration Statement
and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of
final prospectus filed with the Commission pursuant to Rule 424(b)
under the Act in accordance with Section 6(a) hereof and deemed by
virtue of Rule 430A under the Act to be part of the Initial
Registration Statement at the time it was declared effective, each as
amended at the time such part of the Initial Registration Statement
became effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; and such
final prospectus, in the form first filed pursuant to Rule 424(b) under
the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to GS Inc. by
an Underwriter through Goldman, Sachs & Co. or by any QIU expressly for
use therein or by a Selling Stockholder expressly for use in the
preparation of the answers therein to Items 7 and 11(m) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
as to the Registration Statement and any amendment thereto and as of
the applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to GS Inc. by an Underwriter through
Goldman, Sachs & Co. or by any QIU expressly for use therein or by a
Selling Stockholder expressly for use in the preparation of the answers
therein to Items 7 and 11(m) of Form S-1;
(iv) Neither the Company nor any of its subsidiaries that are
listed or that are required to be listed pursuant to the requirements
of Form S-1 in Exhibit 21 to
-4-
<PAGE> 5
the Registration Statement (the "Significant Subsidiaries") has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the partners' capital or
capital stock, as applicable, or long-term debt of the Company or any
of its subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity
or partners' capital, as applicable, or results of operations of the
Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus;
(v) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(vi) GS Inc. has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; the
Company has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; each corporate subsidiary of the
Company that is a Significant Subsidiary (a "Corporate Significant
Subsidiary"), each partnership subsidiary of the Company in which the
Company or one of its subsidiaries is a general partner that is a
Significant Subsidiary (a "Partnership Significant Subsidiary"), each
unlimited liability company subsidiary of the Company that is a
Significant Subsidiary (a "ULLC Significant Subsidiary") and each
limited liability company in which the Company or one of its
subsidiaries is a managing member that is a Significant Subsidiary (an
"LLC Significant Subsidiary") has been duly incorporated or organized,
as the case may be, and is validly existing as a corporation,
partnership, unlimited liability company or limited liability company,
as the case may be, in good standing under the laws of its jurisdiction
of incorporation or organization, as the case may be, with the power
-5-
<PAGE> 6
(corporate, partnership, unlimited liability company or limited
liability company, as the case may be) and authority to own its
properties and conduct its business as described in the Prospectus; and
upon consummation of the Incorporation Transactions, which will occur
immediately prior to or simultaneously with the First Time of Delivery,
GS Inc. will succeed to the business of Group as described in the
Prospectus;
(vii) GS Inc. has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of GS
Inc. have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description of the capital stock
contained in the Prospectus; all of the issued shares of capital stock
of each Corporate Significant Subsidiary, all of the issued shares of
each ULLC Significant Subsidiary and all of the membership interests in
each LLC Significant Subsidiary have been duly and validly authorized
and issued, are fully paid and, in the case of any Corporate
Significant Subsidiaries and LLC Significant Subsidiaries, are
non-assessable and (except for (A) directors' qualifying shares, (B) as
of the date of this Agreement, interests in Goldman Sachs Holdings
L.L.C. ("GSHLLC") and (C) as of each Time of Delivery, GSHLLC) are
owned directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities or claims; and all of the partnership
interests in each Partnership Significant Subsidiary have been duly and
validly created and (except for (A) as of the date hereof, interests in
Goldman, Sachs & Co., Goldman Sachs Mitsui Marine Derivative Products,
L.P. ("GSMMDP") and J. Aron & Company and (B) as of each Time of
Delivery, GSMMDP) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims;
(viii) The Shares to be issued and sold by GS Inc. to the
Underwriters hereunder and under the Global Underwriting Agreements
have been duly and validly authorized and, when issued and delivered
against payment therefor as provided herein, will be duly and validly
issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(ix) The issue and sale of the Shares to be sold by GS Inc.
hereunder and under the Global Underwriting Agreements and the
compliance by GS Inc. with all of the provisions of this Agreement and
the Global Underwriting Agreements and the consummation of the
transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will such action
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of GS Inc. or the organizational documents of
any of its Significant Subsidiaries or any statute or any order, rule
or regulation of any court
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<PAGE> 7
or governmental agency or body having jurisdiction over the Company or
any of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
issue and sale of the Shares by GS Inc. or the consummation by GS Inc.
of the transactions contemplated by this Agreement and the Global
Underwriting Agreements, except the registration under the Act of the
Shares, the registration of the Stock under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), listing of the Shares on the
New York Stock Exchange, Inc., and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state or foreign securities or Blue Sky laws in connection with
the purchase and distribution of the Shares by the Underwriters and the
Global Underwriters;
(x) Neither the Company nor any of its Significant
Subsidiaries is in violation of its organizational documents or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound;
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the securities described therein,
in the Asia/Pacific and International versions of the Prospectus under
the caption "Certain United States Tax Consequences to Non-U.S. Holders
of Common Stock" and in the Prospectus under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the Company
or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, would individually
or in the aggregate have a material adverse effect on the current or
future consolidated financial position, partners' capital or
stockholders' equity, as applicable, or results of operations of the
Company and its subsidiaries; and, to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(xiii) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company",
as such term is defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act");
(xiv) The Company and its Significant Subsidiaries have such
concessions, permits, licenses, consents, exemptions, franchises,
authorizations, orders,
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<PAGE> 8
registrations, qualifications and other approvals (each, an
"Authorization") of, and have made all filings with and notices to, all
Federal, state and foreign governments, governmental or regulatory
authorities and self-regulatory organizations and all courts and other
tribunals, as are necessary to consummate the Incorporation
Transactions and the Related Transactions, except where the failure to
have any such Authorization or to make any such filing or notice would
not, singly or in the aggregate, reasonably be expected to (i) have a
material adverse effect on the prospects, financial position, partners'
capital or stockholders' equity, as applicable, or results of
operations of the Company and its subsidiaries, taken as a whole (a
"Material Adverse Effect"), or (ii) adversely effect the validity,
performance or consummation of the transactions contemplated by this
Agreement and the Global Underwriting Agreements. Each such
Authorization is valid and in full force and effect and the Company and
each of its Significant Subsidiaries is in compliance with all of the
terms and conditions thereof; and no event has occurred (including,
without limitation, the receipt of any notice from any authority or
governing body) which allows or, after notice or lapse of time or both,
would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both,
would result in any other impairment of the rights of the holder of any
such Authorization; and other than as disclosed in the Prospectus, such
Authorizations contain no restrictions that are materially more
burdensome than those imposed on Group or any of its Significant
Subsidiaries immediately prior to the consummation of the Incorporation
Transactions; except in each case described in this sentence where such
failure to be valid and in full force and effect or to be in compliance
or where the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, reasonably be
expected to have a Material Adverse Effect;
(xv) All stockholder, partnership and limited liability
company member approvals necessary for the Company and each Significant
Subsidiary to consummate the Incorporation Transactions and the Related
Transactions have been obtained and are in full force and effect. The
consummation of the Incorporation Transactions and the Related
Transactions will not (i) conflict with or constitute a breach of any
of the terms or provisions of, or a default under, (A) the
organizational documents of the Company, (B) any of the organizational
documents of any of the Company's Significant Subsidiaries, or (C) any
indenture, loan agreement, mortgage, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of their
respective properties is bound, or (ii) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of
any government or court or any governmental body or agency having
jurisdiction over the Company or any of its subsidiaries or any of
their respective properties; except in each case described in clauses
(i)(B) and (C) and clause (ii) of this sentence for such conflicts,
breaches, defaults and violations as would not, singly or in the
aggregate, reasonably be expected to (x) have a Material Adverse
Effect; or (y)
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<PAGE> 9
adversely affect the validity, performance or consummation of the
transactions contemplated by this Agreement and the Global Underwriting
Agreements;
(xvi) The Company and its Significant Subsidiaries possess all
Authorizations issued by the appropriate Federal, state and foreign
governments, governmental or regulatory authorities, self-regulatory
organizations and all courts or other tribunals, and are members in
good standing of each Federal, state or foreign exchange, board of
trade, clearing house or association and self-regulatory or similar
organization necessary to conduct their respective businesses as
described in the Prospectus;
(xvii) The statements set forth under the captions
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Management--Operational and Year 2000
Risks--Year 2000 Readiness Disclosure" and "Risk Factors--Firm and
Third-Party Computer Systems May Not Achieve Year 2000 Readiness--Year
2000 Readiness Disclosure" accurately and fairly set forth the current
state of the Company's efforts to address the Year 2000 Problem and the
risks and costs of the Company relating to the Year 2000 Problem. The
"Year 2000 Problem" as used herein means any significant risk that
computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, transmission or other
utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1,
2000;
(xviii) PricewaterhouseCoopers LLP, who have certified certain
financial statements of Group and its subsidiaries, are independent
public accountants as required by the Act and the rules and regulations
of the Commission thereunder;
(xix) It is not necessary in connection with the (i) grant,
issuance, offer, sale and delivery of the securities to be issued by GS
Inc. pursuant to the Incorporation Transactions, (ii) the grant of the
Formula RSUs, the Discretionary RSUs, and the Discretionary Options, or
(iii) the contribution of the shares of Stock to the DCP, to register
any such securities under the Act, or to qualify any indenture under
the Trust Indenture Act of 1939, as amended;
(xx) GS Inc. has duly authorized, executed and delivered the
Shareholders' Agreement, each Employment Agreement and each
Noncompetition Agreement (each such capitalized term not defined herein
having the meaning ascribed to it in the Prospectus); the Shareholders'
Agreement is a valid and legally binding agreement of the Company
enforceable against the Company in accordance with its terms, subject,
as to enforcement, to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors rights and to general equity
principles; and GS Inc. has obtained
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<PAGE> 10
the signature of each other party to each Employment Agreement, each
Noncompetition Agreement and the Shareholders' Agreement; provided,
however, that GS Inc., makes no representation or warranty as to the
authorization, execution or delivery of any such agreement by any other
party thereto; and
(xxi) No holders of securities of GS Inc. or Group have any
preemptive rights to acquire any securities of the Company or any
rights to the registration of any securities under the Registration
Statement.
(b) Each of the Selling Stockholders severally represents and warrants
to, and agrees with, each of the Underwriters and GS Inc. that:
(i) No consent, approval, authorization or order of, or filing
with, any governmental agency or body is required for the execution and
delivery of this Agreement and the Global Underwriting Agreements, the
sale of the Shares to be sold by such Selling Stockholder or the
consummation by such Selling Stockholder of the transactions
contemplated by this Agreement and the Global Underwriting Agreements,
except the registration under the Act of such Shares, the registration
under the Exchange Act of the Stock, the listing of such Shares on the
New York Stock Exchange and such as may be required under state
securities or Blue Sky laws, which consents, approvals, authorizations,
orders and filings are the only consents, approvals, authorizations,
orders and filings necessary for the execution and delivery by such
Selling Stockholder of this Agreement, the Global Underwriting
Agreements and the Power of Attorney hereinafter referred to in clause
(viii) below, and for the sale and delivery of the Shares to be sold by
such Selling Stockholder hereunder and under the Global Underwriting
Agreements, and such Selling Stockholder has full right, power and
authority to enter into this Agreement, the Global Underwriting
Agreements and the Power of Attorney and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder hereunder and
under the Global Underwriting Agreements;
(ii) The sale of the Shares to be sold by such Selling
Stockholder hereunder and under the Global Underwriting Agreements and
the compliance by such Selling Stockholder with all of the provisions
of this Agreement, the Global Underwriting Agreements and the Power of
Attorney and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Stockholder is a party or
by which such Selling Stockholder is bound, or to which any of the
property or assets of such Selling Stockholder is subject, nor will
such action result in any violation of the provisions of the
certificate of incorporation or by-laws of such Selling Stockholder or
any statute or any order, rule or regulation of any court or
governmental agency or body
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<PAGE> 11
having jurisdiction over such Selling Stockholder or the property of
such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to
the First Time of Delivery (as defined in Section 5 hereof) such
Selling Stockholder will have, good and valid title to the Shares to be
sold by such Selling Stockholder hereunder and under the Global
Underwriting Agreements, free and clear of all liens, encumbrances,
equities or claims; and, upon delivery of such Shares and payment
therefor pursuant hereto and thereto, good and valid title to such
Shares, free and clear of all liens, encumbrances, equities or claims,
will pass to the several Underwriters and the Global Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, it will not, directly or indirectly, offer, sell, contract
to sell or otherwise dispose of, including, without limitation, through
the entry into a cash-settled derivative instrument, except as provided
hereunder or under the Global Underwriting Agreements, any shares of
Stock or any securities of GS Inc. that are substantially similar to
the Stock, including but not limited to any securities that are
convertible into or exercisable or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar
securities, without the prior written consent of Goldman, Sachs & Co.;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of GS Inc.
to facilitate the sale or resale of the Shares;
(vi) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder will deliver to you prior to or
at the First Time of Delivery (as hereinafter defined) a properly
completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department
regulations in lieu thereof);
(vii) To the extent that any statements or omissions made in
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to GS Inc. by such
Selling Stockholder expressly for use therein, such Preliminary
Prospectus and the Registration Statement did, and the Prospectus and
any further amendments or supplements to the Registration Statement and
the Prospectus, when they become effective or are filed with the
Commission, as the case may be, will, conform in all material respects
to the
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<PAGE> 12
requirements of the Act and the rules and regulations of the Commission
thereunder and did not and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
(viii) Such Selling Stockholder has duly executed and
delivered a Power of Attorney, in the form heretofore furnished to you
(the "Power of Attorney"), appointing the persons indicated in Schedule
II hereto, and each of them, as such Selling Stockholder's
attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute
and deliver this Agreement and the Global Underwriting Agreements on
behalf of such Selling Stockholder, to authorize the delivery of the
Shares to be sold by such Selling Stockholder hereunder and otherwise
to act on behalf of such Selling Stockholder in connection with the
transactions contemplated by this Agreement and the Global Underwriting
Agreements; and
(ix) The appointment by such Selling Stockholder of the
Attorneys-in-Fact by the Power of Attorney, is to that extent
irrevocable; the obligations of the Selling Stockholders hereunder
shall not be terminated by operation of law, whether by the dissolution
of such Selling Stockholder or by the occurrence of any other event; if
such Selling Stockholder should be dissolved or if any other such event
should occur, before the delivery of the Shares hereunder, certificates
representing the Shares shall be delivered by or on behalf of the
Selling Stockholders in accordance with the terms and conditions of
this Agreement and of the Global Underwriting Agreement; and actions
taken by the Attorneys-in-Fact pursuant to the Powers of Attorney shall
be as valid as if such death, incapacity, termination, dissolution or
other event had not occurred, regardless of whether or not the
Attorneys-in-Fact, or any of them, shall have received notice of such
death, incapacity, termination, dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) GS Inc.
agrees to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly to purchase from GS Inc. at a purchase price per share
of $__________, and (b) each of the Selling Stockholders, severally and not
jointly, agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from each of the
Selling Stockholders, at the purchase price determined by GS Inc. and the
Underwriters as specified in clause (a), the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
the aggregate number of Firm Shares to be sold by GS Inc. and each of the
Selling Stockholders as set forth opposite their respective names in Schedule II
hereto by a fraction, the numerator of which is the aggregate number of Firm
Shares to be purchased by such Underwriter as set forth opposite the name of
such Underwriter in Schedule I hereto and the denominator of which is the
aggregate number of Firm Shares to be purchased by all of the Underwriters from
GS Inc. and all of the Selling Stockholders hereunder and (c) in the event and
to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided
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<PAGE> 13
below, GS Inc. agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from GS Inc., at the
purchase price per share set forth in clause (a) of this Section 2, that portion
of the number of Optional Shares as to which such election shall have been
exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
GS Inc., as and to the extent indicated in Schedule II hereto, hereby
grants to the Underwriters the right to purchase at their election up to
7,200,000 Optional Shares, at the purchase price per share set forth in the
paragraph above, for the sole purpose of covering overallotments in the sale of
the Firm Shares. Any such election to purchase Optional Shares may be exercised
only by written notice from you to GS Inc., given within a period of 30 calendar
days after the date of this Agreement and setting forth the aggregate number of
Optional Shares to be purchased and the date on which such Optional Shares are
to be delivered, as determined by you but in no event earlier than the First
Time of Delivery (as defined in Section 5 hereof) or, unless you and GS Inc.
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice.
3. (a) GS Inc. hereby confirms its engagement of Donaldson, Lufkin &
Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Morgan Stanley & Co. Incorporated as, and Donaldson, Lufkin &
Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Morgan Stanley & Co. Incorporated hereby severally confirm
their agreement with GS Inc. to render services as, "qualified independent
underwriters" within the meaning of Rule 2720(b)(15) of the National Association
of Securities Dealers, Inc. (the "NASD") with respect to the offering and sale
of the Shares. Donaldson, Lufkin & Jenrette Securities Corporation, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co.
Incorporated, in their capacities as qualified independent underwriters and not
otherwise, are referred to herein collectively as the "QIUs".
(b) Each QIU hereby severally represents and warrants to, and agrees
with, GS Inc. and the Underwriters that with respect to the offering and sale of
the Shares as described in the Prospectus:
(i) Such QIU constitutes a "qualified independent underwriter"
within the meaning of Rule 2720(b)(15);
(ii) Such QIU has participated in the preparation of the
Registration Statement and the Prospectus and has exercised the usual
standards of "due diligence" in respect thereto;
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<PAGE> 14
(iii) Such QIU has undertaken the legal responsibilities and
liabilities of an underwriter under the Act specifically including
those inherent in Section 11 thereof;
(iv) Such QIU recommends, as of the date of the execution and
delivery of this Agreement, a maximum initial public offering price per
share of $_______ for each Share; and
(v) Subject to the provisions of Section 8 hereof, such QIU
will furnish to the Underwriters at the First Time of Delivery a
letter, dated the First Time of Delivery, in form and substance
satisfactory to the Underwriters, to the effect of clauses (i) through
(iv) above.
(c) Each QIU severally agrees with GS Inc. and the Underwriters that,
as part of its services hereunder, in the event of any amendment or supplement
to the Prospectus, it will render services as a "qualified independent
underwriter" within the meaning of Rule 2720(b)(15) with respect to the offering
and sale of the Shares as described in the Prospectus as so amended or
supplemented that are substantially the same as those services being rendered
with respect to the offering and sale of the Shares as described in the
Prospectus (including all of those described in subsection (b) above).
(d) GS Inc., the several Underwriters and the several QIUs severally
agree to comply in all material respects with all of the requirements of Rule
2720 applicable to them in connection with the offering and sale of the Shares.
GS Inc. agrees to cooperate with the Underwriters and the QIUs to enable the
Underwriters to comply with Rule 2720 and the QIUs to perform the services
contemplated by this Agreement.
(e) As compensation for the services of the QIUs hereunder, GS Inc.
agrees to pay the QIUs $_____ in the aggregate at the First Time of Delivery to
be divided equally among the QIUs. In addition, the Company agrees promptly to
reimburse the QIUs for all out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with this Agreement
and the services to be rendered hereunder.
(f) Each QIU hereby consents to the references to it as set forth under
the caption "Underwriters" in the Prospectus.
4. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
5. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to GS Inc. and the Selling Stockholders shall be delivered by or on
behalf of GS Inc. and the Selling Stockholders to Goldman, Sachs & Co.,
including, at the option of Goldman, Sachs & Co.,
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<PAGE> 15
through the facilities of The Depository Trust Company ("DTC") for the account
of such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer of Federal (same-day) funds to the
account specified to Goldman, Sachs & Co. by GS Inc. and each of the Selling
Stockholders, upon at least forty-eight hours' prior notice. GS Inc. will cause
the certificates representing the Shares to be made available for checking and
packaging at least twenty-four hours prior to the Time of Delivery (as defined
below) with respect thereto at the office of Goldman, Sachs & Co., 85 Broad
Street, New York, New York 10004 or at the office of DTC or its designated
custodian, as the case may be (the "Designated Office"). The time and date of
such delivery and payment shall be 9:30 a.m., New York City time, on
............., 1999 or on such other time and date as Goldman, Sachs & Co. and
GS Inc. may agree upon in writing, and, with respect to the Optional Shares,
9:30 a.m., New York City time, on the date specified by Goldman, Sachs & Co. in
the written notice given by Goldman, Sachs & Co. of the Underwriters' election
to purchase such Optional Shares, or such other time and date as Goldman, Sachs
& Co. and GS Inc. may agree upon in writing. Such time and date for delivery of
the Firm Shares is herein called the "First Time of Delivery", such time and
date for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 8 hereof, including the
cross-receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 8(q) hereof, will be delivered at the offices
of Sullivan & Cromwell, 125 Broad Street, New York, N.Y. 10004 (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
each Time of Delivery. A meeting will be held at the Closing Location at 2:30
p.m., New York City time, on the New York Business Day next preceding each Time
of Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 5, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law or
executive order to close.
6. GS Inc. agrees with each of the Underwriters and with each of the
QIUs:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you and the QIUs, promptly after it receives notice thereof, of the time when
any amendment to the Registration Statement has been filed or becomes effective
or any supplement to the Prospectus or any amended Prospectus has been filed
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<PAGE> 16
and to furnish you and the QIUs copies thereof; to advise you and the QIUs,
promptly after it receives notice thereof, of the issuance by the Commission of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the qualification of
the Shares for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such qualification,
promptly to use its best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith GS Inc. shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction; and to comply with all applicable securities and
other laws, rules and regulations in each such jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters and the QIUs with copies of the Prospectus in New York City in
such quantities as you and the QIUs may reasonably request, and, if the delivery
of a prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering or
sale of the Shares and if at such time any events shall have occurred as a
result of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus, to notify you and the QIUs and upon your request to
prepare and furnish without charge to each Underwriter and each QIU and to any
dealer in securities as many copies as you may from time to time reasonably
request of an amended Prospectus or a supplement to the Prospectus which will
correct such statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of any
of the Shares at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter, to prepare
and deliver to such Underwriter as many copies as you may request of an amended
or supplemented Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the
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Registration Statement (as defined in Rule 158(c) under the Act), an earnings
statement of GS Inc. and its subsidiaries (which need not be audited) complying
with Section 11(a) of the Act and the rules and regulations of the Commission
thereunder (including, at the option of GS Inc., Rule 158 under the Act);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to,
directly or indirectly, offer, sell, contract to sell or otherwise dispose of,
including, without limitation, through the entry into a cash-settled derivative
instrument, except as provided hereunder and under the Global Underwriting
Agreements, any shares of Stock or any securities of GS Inc. that are
substantially similar to the Shares, including but not limited to any securities
that are convertible into or exercisable or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar securities (other
than as contemplated by the Prospectus and pursuant to employee benefit plans
existing on, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Agreement), and not to directly
or indirectly, agree to any amendment or waiver of the provisions of Section
2.3(a) of the Shareholders' Agreement to permit any Transfer (as defined in the
Shareholders' Agreement) in violation of such Section 2.3(a), in each case
without the prior written consent of Goldman, Sachs & Co.; and during the period
beginning from the date hereof and continuing to and including the date 180 days
after the date of the Prospectus, GS Inc. will not permit any RLP (as such term
is defined in the Prospectus) to directly or indirectly, offer, sell, contract
to sell or otherwise dispose of, including, without limitation, through the
entry into a cash-settled derivative instrument, any shares of Stock received in
the Incorporation Transactions or any securities of GS Inc. received in the
Incorporation Transactions that are substantially similar to the Stock,
including but not limited to any securities that are convertible into or
exercisable or exchangeable for, or that represent the right to receive, Stock
or any such substantially similar securities, in violation of the terms of the
Plan of Incorporation (as such term is defined in the Prospectus) without the
prior written consent of Goldman, Sachs & Co.;
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of GS Inc. and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), to make available to its stockholders
consolidated summary financial information of GS Inc. and its subsidiaries for
such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders generally, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of GS
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Inc. is listed; and (ii) such additional information concerning the business and
financial condition of GS Inc. as you may from time to time reasonably request
(such financial statements to be on a consolidated basis to the extent the
accounts of GS Inc. and its subsidiaries are consolidated in reports furnished
to its stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement and the Global Underwriting Agreements in the manner
specified in the Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list, subject to notice of issuance, the
Shares on the New York Stock Exchange, Inc. (the "Exchange");
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act; and
(k) If GS Inc. elects to rely upon Rule 462(b) under the Act, to file a
Rule 462(b) Registration Statement with the Commission in compliance with Rule
462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and
at the time of filing to either pay to the Commission the filing fee for the
Rule 462(b) Registration Statement or to give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act.
7. The Company covenants and agrees with each Selling Stockholder and
with the several Underwriters and the QIUs that the Company will pay or cause to
be paid the following: (i) the fees, disbursements and expenses of the Company's
counsel and accountants in connection with the registration of the Shares under
the Act and all other expenses in connection with the preparation, printing and
filing of the Registration Statement, any Preliminary Prospectus and the
Prospectus and amendments and supplements thereto and the mailing and delivering
of copies thereof to the Underwriters, the QIUs and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the
Global Underwriting Agreements, the Agreement among Syndicates, the Selling
Agreements, closing documents (including any compilations thereof) and any other
documents in connection with the offering, purchase, sale and delivery of the
Shares; (iii) all expenses in connection with the qualification of the Shares
for offering and sale under state securities laws as provided in Section 6(b)
hereof; (iv) all fees and expenses in connection with listing the Shares on the
New York Stock Exchange; (v) the filing fees incident to, and the fees and
disbursements of counsel in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (vi) the fees and reasonable expenses of the QIUs; (vii) the cost of
preparing stock certificates; (viii) the cost and charges of any transfer agent
or registrar; and (ix) all other costs and expenses incident to the performance
of its obligations hereunder which are not otherwise specifically provided for
in this Section. Each Selling Stockholder covenants and agrees with the Company,
the other Selling Stockholder, the
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<PAGE> 19
several Underwriters and the QIUs that such Selling Stockholder will pay or
cause to be paid all costs and expenses incident to the performance of such
Selling Stockholder's obligations hereunder which are not otherwise specifically
provided for in this Section, including: (i) any fees and expenses of counsel
for such Selling Stockholder; (ii) such Selling Stockholder's pro rata share of
the fees and expenses of the Attorneys-in-Fact and (iii) all expenses and taxes
incident to the sale and delivery of the Shares to be sold by such Selling
Stockholder to the Underwriters hereunder. In connection with clause (iii) of
the preceding sentence, Goldman, Sachs & Co. agrees to pay New York State stock
transfer tax, and the Selling Stockholder agrees to reimburse Goldman, Sachs &
Co. for associated carrying costs if such tax payment is not rebated on the day
of payment and for any portion of such tax payment not rebated. It is
understood, however, that the Company shall bear, and the Selling Stockholders
shall not be required to pay or to reimburse the Company for, the cost of any
other matters not directly relating to the sale and purchase of the Shares
pursuant to this Agreement, and that, except as provided in this Section, and
Sections 9, 10 and 13 hereof, the Underwriters will pay all of their own costs
and expenses, including the fees of their counsel, stock transfer taxes on
resale of any of the Shares by them, and any advertising expenses connected with
any offers they may make.
8. The respective obligations of the several Underwriters and the
several QIUs hereunder, as to the Shares to be delivered at each Time of
Delivery, shall be subject, in the discretion of the Underwriters and the QIUs,
respectively, to the condition that all representations and warranties and other
statements of GS Inc. and of the Selling Stockholders herein are, at and as of
such Time of Delivery, true and correct, the condition that GS Inc. and the
Selling Stockholders shall have performed all of its and their obligations
hereunder theretofore to be performed, the condition (in the case of the
Underwriters) that each QIU shall have furnished to the Underwriters the letter
referred to in clause (v) of Section 3(b) hereof and the following additional
conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 6(a) hereof; if GS Inc. has elected to rely
upon Rule 462(b) under the Act, the Rule 462(b) Registration Statement
shall have become effective by 10:00 P.M., Washington, D.C. time, on
the date of this Agreement; no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with
to the reasonable satisfaction of the Underwriters;
(b) Cleary, Gottlieb, Steen & Hamilton, counsel for the
Underwriters and the QIUs, shall have furnished to you and the QIUs
such written opinions and letter (a draft of such opinion and letter is
attached as Annex II(a) hereto), dated such
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<PAGE> 20
Time of Delivery, to the effect that the matters set forth in the
Asia/Pacific and International versions of the Prospectus under the
caption "Certain United States Tax Consequences to Non-U.S. Holders of
Common Stock", insofar as they purport to describe the provisions of
the laws referred to therein, are accurate, complete and fair and with
respect to the matters set forth in paragraphs (i), (ii), (vi), (ix)
and (xii) of subsection (d) below as well as such other related matters
as you may reasonably request, and such counsel shall have received
such papers and information as they may reasonably request to enable
them to pass upon such matters;
(c) Sullivan & Cromwell, counsel for GS Inc., shall have
furnished to you and the QIUs their written opinion (a draft of such
opinion is attached as Annex II(b) hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect
that:
(i) GS Inc. has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware;
(ii) All of the outstanding shares of Stock,
including the Shares, have been duly authorized and validly
issued and are fully paid and nonassessable;
(iii) All regulatory consents, authorizations,
approvals and filings required to be obtained or made by GS
Inc. under the Federal laws of the United States, the laws of
the State of New York and the General Corporation Law of the
State of Delaware for the issuance, sale and delivery of the
Shares sold by GS Inc. to the Underwriters have been obtained
or made;
(iv) The issuance of the Shares and the sale of the
Shares by GS Inc. to you pursuant to the Underwriting
Agreement and the Global Underwriting Agreements do not, and
the performance by GS Inc. of its obligations under, the
Underwriting Agreement and the Global Underwriting Agreements
will not, (a) violate the Certificate of Incorporation or
By-laws of GS Inc., (b) result in a default under or breach of
the agreements listed in Part II, Item 16(a), Exhibit Numbers
10.1 through 10.28 of the Registration Statement, (c) violate
any court orders listed in the Officer's Certificate of Robert
J. Katz, General Counsel of GS Inc., or (d) violate any
Federal law of the United States or law of the State of New
York applicable to GS Inc.; provided, however, that for
purposes of this paragraph (iv), such counsel may state that
they express no opinion with respect to Federal or state
securities laws, other antifraud laws and fraudulent transfer
laws; provided, further, that such counsel may also state that
insofar as performance by GS Inc. of its obligations under the
Underwriting Agreement is concerned, they
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are expressing no opinion as to bankruptcy, insolvency,
reorganization, moratorium or similar laws of general
applicability relating to or affecting creditors' rights;
(v) GS Inc. has duly authorized, executed and
delivered each Employment Agreement and each Noncompetition
Agreement;
(vi) This Agreement and the Global Underwriting
Agreements have been duly authorized, executed and delivered
by GS Inc.; and
(vii) GS Inc. is not, and after giving effect to the
offering and sale of the Shares will not be, an "investment
company", as such term is defined in the Investment Company
Act.
Such counsel shall also furnish you and the QIUs with a letter
to the effect that, as counsel to GS Inc., they reviewed the
Registration Statement and the Prospectus, participated in discussions
with your representatives and those of GS Inc. and its accountants and
advised GS Inc. as to the requirements of the Act and the applicable
rules and regulations thereunder; between the date of the Prospectus
and such Time of Delivery, such counsel participated in further
discussions with your representatives and those of GS Inc. and its
accountants in which the contents of certain portions of the Prospectus
and related matters were discussed and reviewed certain certificates of
certain officers of GS Inc., an opinion and letter addressed to you
from Gregory K. Palm, Esq. and letters addressed to you and the QIUs
from GS Inc.'s independent accountants; on the basis of the information
that such counsel gained in the course of the performance of the
services referred to above, considered in the light of such counsel's
understanding of the applicable law and the experience such counsel
have gained through their practice under the Act, they will confirm to
you and the QIUs that, in such counsel's opinion, the Registration
Statement, and the Prospectus, as of the effective date of the
Registration Statement, appeared on their face to be appropriately
responsive in all material respects to the requirements of the Act and
the applicable rules and regulations of the Commission thereunder;
nothing that came to such counsel's attention in the course of such
review has caused such counsel to believe that the Registration
Statement, as of its effective date, contained any untrue statement of
a material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; nothing that came to the attention of such counsel in the
course of the procedures described in the second clause of this
paragraph has caused such counsel to believe that the Prospectus, as of
its date or as of such Time of Delivery, contained or contains any
untrue statement of a material fact or omitted or omits to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
such counsel may state that the limitations inherent in the independent
verification of factual matters and the character of
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determinations involved in the registration process are such that such
counsel does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus except for those made under
the captions "Description of Capital Stock" and "Underwriting" in the
Prospectus insofar as they relate to provisions of documents therein
described and those made under the caption "Certain United States Tax
Consequences to Non-U.S. Holders of Common Stock" in the Asia/Pacific
and International versions of the Prospectus insofar as they relate to
provisions of U.S. Federal tax law therein described; also, such
counsel need express no opinion or belief as to the financial
statements or other financial data derived from accounting records
contained in the Registration Statement or the Prospectus; finally,
such counsel may assume that any Rule 462(b) Registration Statement was
filed with the Commission prior to the time that any confirmations of
the sale of any of the Shares were sent or given to investors. In
addition, such counsel shall state that they do not know of any
litigation instituted or threatened against GS Inc. that would be
required to be disclosed in the Prospectus that is not so disclosed,
provided, that such counsel may also state that they call to your
attention that GS Inc. has an internal legal department and that while
such counsel represents GS Inc. and its affiliates on a regular basis,
such counsel's engagement has been limited to specific matters as to
which it was consulted and, accordingly, such counsel's knowledge with
respect to litigation instituted or threatened against GS Inc. is
limited; and that they do not know of any documents that are required
to be filed as exhibits to the Registration Statement that are not so
filed.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
Federal laws of the United States, the laws of the State of New York
and the General Corporation Law of the State of Delaware. Such counsel
may also state that, insofar as such opinion involves factual matters,
they have relied upon certificates of officers of GS Inc. and its
subsidiaries, certificates of public officials and other sources
believed by such counsel to be responsible;
(d) Gregory K. Palm, Esq., a General Counsel for GS Inc.,
shall have furnished to you and the QIUs his written opinion (a draft
of such opinion is attached as Annex II(c) hereto), dated such Time of
Delivery, in form and substance satisfactory to you to the effect that:
(i) GS Inc. has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Delaware, with corporate power and authority to
own its properties and conduct its business as described in
the Prospectus;
(ii) GS Inc. has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of
capital stock of GS Inc. (including
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the Shares being delivered at such Time of Delivery) have been
duly and validly authorized and issued and are fully paid and
non-assessable; and the Shares conform to the description of
the Stock contained in the Prospectus;
(iii) GS Inc. has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to
require such qualification, or is subject to no material
liability or disability by reason of failure to be so
qualified in any such jurisdiction (such counsel being
entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact
upon certificates of officers of GS Inc., provided that such
counsel shall state that he believes that you and he are
justified in relying upon such opinions and certificates);
(iv) Each of Goldman, Sachs & Co. and J. Aron &
Company has been duly organized and is validly existing as a
limited partnership and general partnership, respectively, in
good standing under the laws of its jurisdiction of formation;
and the general partnership interests in Goldman, Sachs & Co.
and in J. Aron & Company have been duly and validly created
and are owned directly or indirectly by GS Inc., free and
clear of all liens, encumbrances, equities or claims (such
counsel being entitled to rely in respect of the opinion in
this clause upon opinions of local counsel and in respect of
matters of fact upon certificates of officers of GS Inc. or
its subsidiaries, provided that such counsel shall state that
he believes that you and he are justified in relying upon such
opinions and certificates);
(v) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which GS Inc. or any of
its subsidiaries is a party or of which any property of GS
Inc. or any of its subsidiaries is the subject which is
reasonably likely to individually or in the aggregate have a
material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of
operations of GS Inc. and its subsidiaries; and, to the best
of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(vi) This Agreement and the Global Underwriting
Agreements have been duly authorized, executed and delivered
by GS Inc.;
(vii) The issue and sale of the Shares being
delivered at such Time of Delivery to be sold by GS Inc., and
the compliance by GS Inc. with all of the provisions of this
Agreement and the Global Underwriting Agreements and the
consummation of the transactions herein and therein
contemplated (other than the Incorporation Transactions and
Related Transactions) will not
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conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
material indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument known to such counsel to which
GS Inc. or any of its subsidiaries is a party or by which GS
Inc. or any of its subsidiaries is bound or to which any of
the property or assets of GS Inc. or any of its subsidiaries
is subject, nor will such action result in any violation of
the provisions of the Certificate of Incorporation or By-laws
of GS Inc. or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or
body having jurisdiction over GS Inc. or any of its
subsidiaries or any of their properties; provided, however,
that, for the purposes of this paragraph (vii), such counsel
need not express any opinion with respect to Federal or state
securities laws, other antifraud laws, and fraudulent transfer
laws; provided, further, that insofar as the compliance by GS
Inc. with all of the provisions of this Agreement and the
Global Underwriting Agreements and the consummation of the
transactions herein and therein contemplated are concerned,
such counsel need not express any opinion as to bankruptcy,
insolvency, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors'
rights;
(viii) No consent, approval, authorization, order,
registration or qualification of or with any court or
governmental agency or body of the United States of America or
the State of New York is required for the issue and sale of
the Shares or the consummation by GS Inc. of the transactions
contemplated by this Agreement and the Global Underwriting
Agreements (other than the Incorporation Transactions and the
Related Transactions), except the registration under the Act
of the Shares, the registration of the Stock under the
Exchange Act and the listing of the Shares on the New York
Stock Exchange, each of which has been obtained or made, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution
of the Shares by the Underwriters and the Global Underwriters;
(ix) The statements set forth in the Prospectus under
the caption "Description of Capital Stock", insofar as they
purport to constitute a summary of the terms of the securities
described therein, and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws
and documents referred to therein, are accurate, complete and
fair;
(x) GS Inc. and its Significant Subsidiaries have
such Authorizations of, and have made all filings with and
notices to, the courts and governmental agencies or bodies of
the United States of America and the State of New York, as are
necessary to consummate the Incorporation
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Transactions and the Related Transactions, except where the
failure to have any such Authorization or to make any such
filing or notice would not, singly or in the aggregate,
reasonably be expected to (i) have a Material Adverse Effect
or (ii) adversely affect the validity, or materially affect
the performance, of the transactions contemplated by this
Agreement and the Global Underwriting Agreements (including
the Incorporation Transactions and Related Transactions). Each
such Authorization is valid and in full force and effect; and,
to the best of such counsel's knowledge, no event has occurred
that would reasonably be expected to result in the revocation,
suspension or termination of any such Authorization or results
or, after notice or lapse of time or both, would reasonably be
expected to result in any other material impairment of the
rights of the holder of any such Authorization; and other than
as disclosed in the Prospectus, such Authorizations contain no
restrictions that are materially more burdensome than those
imposed on Group or any of its Significant Subsidiaries
immediately prior to the consummation of the Incorporation
Transactions; except in each case described in this sentence
where such failure to be valid and in full force and effect or
the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, reasonably
be expected to have a Material Adverse Effect;
(xi) All stockholder, partnership and limited
liability company member approvals necessary for GS Inc. and
each Significant Subsidiary to consummate the Incorporation
Transactions and the Related Transactions have been obtained
and are in full force and effect. The consummation of the
Incorporation Transactions and the Related Transactions will
not (i) conflict with or constitute a breach of any of the
terms or provisions of, or a default under, (A) the
organizational documents of GS Inc., (B) the organizational
documents of any of GS Inc.'s Significant Subsidiaries, or (C)
any material indenture, mortgage, deed of trust, loan
agreement, or other agreement or instrument known to such
counsel to which GS Inc. or any of its subsidiaries is a party
or by which GS Inc. or any of its subsidiaries is bound or to
which any of the property or assets of GS Inc. and its
subsidiaries is subject, or (ii) violate or conflict with any
statute or any order, rule or regulation known to such counsel
of any court or governmental agency or body having
jurisdiction over GS Inc. or any of its subsidiaries or any of
their properties; provided, however, that, for the purposes of
this paragraph (xi), such counsel need not express any opinion
with respect to Federal or state securities laws, other
antifraud laws, and fraudulent transfer laws, and, insofar as
the consummation of the Incorporation Transactions and Related
Transactions are concerned, such counsel need not express any
opinion as to bankruptcy, insolvency, reorganization,
moratorium and similar laws of general applicability relating
to or affecting creditors' rights; provided, further, except
in each case described in clauses (i)(B) and (c) and
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clause (ii) of this sentence, for such conflicts, breaches,
defaults and violations as would not, singly or in the
aggregate, be reasonably expected to (x) have a Material
Adverse Effect, or (y) adversely affect the validity, or
materially affect the performance, of the transactions
contemplated by this Agreement and the Global Underwriting
Agreements (including the Incorporation Transactions and
Related Transactions); and
(xii) The Registration Statement and the Prospectus
and any further amendments and supplements thereto made by GS
Inc. prior to such Time of Delivery (other than the financial
statements and related schedules therein and other financial
data derived from GS Inc.'s accounting records, as to which
such counsel need not express any opinion) comply as to form
in all material respects with the requirements of the Act and
the rules and regulations thereunder; although he does not
assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration
Statement or the Prospectus, except for those referred to in
the opinion in subsections (ii) and (ix) of this Section 8(d),
he has no reason to believe that, as of its effective date,
the Registration Statement or any further amendment thereto
made by GS Inc. prior to such Time of Delivery (other than the
financial statements and related schedules therein and other
financial data derived from GS Inc.'s accounting records, as
to which such counsel need not express any opinion) contained
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading or that, as of its
date, the Prospectus or any further amendment or supplement
thereto made by GS Inc. prior to such Time of Delivery (other
than the financial statements and related schedules therein
and other financial data derived from GS Inc.'s accounting
records, as to which such counsel need not express any
opinion) contained an untrue statement of a material fact or
omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading or that, as of such Time
of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made
by GS Inc. prior to such Time of Delivery (other than the
financial statements and related schedules therein and other
financial data derived from GS Inc.'s accounting records, as
to which such counsel need not express any opinion) contains
an untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; and he does not know of any amendment to the
Registration Statement required to be filed or of any
contracts or other documents of a character required to be
filed as an exhibit to the Registration Statement or required
to be described in the Registration Statement or the
Prospectus which are not filed or described as required.
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In rendering such opinion, such counsel may state that he
expresses no opinion as to the laws of any jurisdiction other than the
Federal laws of the United States, the laws of the State of New York
and the General Corporation Law of the State of Delaware. Such counsel
may also state that, insofar as such opinion involves factual matters,
he has relied upon certificates of officers of GS Inc. and its
subsidiaries and certificates of public officials and other sources
believed by such counsel to be responsible. In addition, such counsel
may state that he has examined, or has caused members of GS Inc.'s
legal department to examine, such partnership records, certificates and
other documents, and such questions of law, as he has considered
necessary or appropriate for the purposes of such opinion;
(e) Linklaters & Paines, United Kingdom counsel for GS Inc.,
shall have furnished to you and the QIUs their written opinion (a draft
of such opinion is attached as Annex II(d) hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect
that:
(i) Goldman Sachs International has been duly
organized and is validly existing as an unlimited liability
company, in good standing under the laws of its jurisdiction
of formation; and
(ii) All of the issued shares of Goldman Sachs
International have been duly and validly authorized and
issued, are fully paid, and (except for directors' qualifying
shares) are owned directly or indirectly by GS Inc., free and
clear of all liens, encumbrances, equities or claims.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
Companies Act of England. Such counsel may also state that, insofar as
such opinion involves factual matters, they have relied upon
certificates of officers of GS Inc. and certificates of public
officials and other sources believed by such counsel to be responsible;
(f) Cravath, Swaine & Moore, special counsel to Sumitomo Bank
Capital Markets, Inc., as indicated in Schedule II hereto, shall have
furnished to you and the QIUs their written opinion (a draft of such
opinion is attached as Annex II(e) hereto) dated the First Time of
Delivery, in form and substance satisfactory to you, to the effect
that:
(i) This Agreement and the Global Underwriting
Agreements have been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder;
(ii) No consent, approval, authorization or order of,
or filing with, any court or governmental agency or body is
required for the consummation of the transactions contemplated
by this Agreement and the Global
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Underwriting Agreements in connection with the Shares to be
sold by such Selling Stockholder hereunder or thereunder,
except the registration under the Act of the Shares, the
registration under the Exchange Act of the Stock, the listing
of the Shares on the New York Stock Exchange, all of which
have been duly obtained and are in full force and effect, and
such as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of such
Shares by the Underwriters or the Global Underwriters;
(iii) Good and valid title to such Shares, free and
clear of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters or
International Underwriters or Asia/Pacific Underwriters, as
the case may be, who have purchased such Shares in good faith
and without notice of any such lien, encumbrance, equity or
claim or any other adverse claim within the meaning of the
Uniform Commercial Code; and
(iv) A Power of Attorney has been duly executed and
delivered by such Selling Stockholder and constitutes a valid
and binding agreement of such Selling Stockholder in
accordance with its terms.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
Federal laws of the United States, the laws of the State of New York
and the General Corporation Law of the State of Delaware;
(g) [Insert name], counsel to Sumitomo Bank Capital Markets,
Inc., as indicated in Schedule II hereto, shall have furnished to you
and the QIUs [his] [their] written opinion (a draft of such opinion is
attached as Annex II(f) hereto) dated the First Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) The sale of the Shares to be sold by such Selling
Stockholder hereunder and under the Global Underwriting
Agreements and the compliance by such Selling Stockholder with
all of the provisions of this Agreement, the Global
Underwriting Agreements and the Power of Attorney and the
consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or
violation of any terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling
Stockholder is bound, or to which any of the property or
assets of such Selling Stockholder is subject, nor will such
action result in any violation of the provisions of the
organizational documents of such Selling Stockholder or any
statute or any order, rule or regulation of any court or
governmental agency or body having
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jurisdiction over such Selling Stockholder or the property of
such Selling Stockholder;
(ii) Immediately prior to such Time of Delivery such
Selling Stockholder had good and valid title to the Shares to
be sold at such Time of Delivery by such Selling Stockholder
under this Agreement and the Global Underwriting Agreements,
free and clear of all liens, encumbrances, equities or claims,
and full right, power and authority to sell, assign, transfer
and deliver the Shares to be sold by such Selling Stockholder
hereunder and thereunder;
(iii) Good and valid title to such Shares, free and
clear of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters or
International Underwriters or Asia/Pacific Underwriters, as
the case may be, who have purchased such Shares in good faith
and without notice of any such lien, encumbrance, equity or
claim or any other adverse claim within the meaning of the
Uniform Commercial Code; and
(iv) A Power of Attorney has been duly executed and
delivered by such Selling Stockholder and constitutes a valid
and binding agreement of such Selling Stockholder in
accordance with its terms.
In rendering such opinion, such counsel may state that [he]
[they] express no opinion as to the laws of any jurisdiction other than
the Federal laws of the United States, the laws of the State of New
York and the General Corporation Law of the State of Delaware and in
rendering the opinion in subparagraph (iii) such counsel may rely upon
a certificate of such Selling Stockholder in respect of matters of fact
as to ownership of, and liens, encumbrances, equities or claims on the
Shares sold by such Selling Stockholder, provided that such counsel
shall state that [he] [they] believe[s] that you, the QIUs and [he]
[they] are justified in relying upon such certificate;
(h) Cravath, Swaine & Moore, special counsel for Kamehameha
Activities Association, as indicated in Schedule II hereto, shall have
furnished to you their written opinion (a draft of such opinion is
attached as Annex II(g) hereto), dated the First Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) This Agreement and the Global Underwriting
Agreements have been duly executed and delivered by or on
behalf of such Selling Stockholder;
(ii) No consent, approval, authorization or order of,
or filing with, any court or governmental agency or body is
required for the consummation
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<PAGE> 30
of the transactions contemplated by this Agreement and the
Global Underwriting Agreements in connection with the Shares
to be sold by such Selling Stockholder hereunder or
thereunder, except the registration under the Act of such
Shares, the registration under the Exchange Act of the Stock
and the listing of such Shares on the New York Stock Exchange,
all of which have been duly obtained and are in full force and
effect, and such as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution
of such Shares by the Underwriters or the Global Underwriters;
(iii) Good and valid title to such Shares, free and
clear of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters or
International Underwriters or Asia/Pacific Underwriters, as
the case may be, who have purchased such Shares in good faith
and without notice of any such lien, encumbrance, equity or
claim or any other adverse claim within the meaning of the
Uniform Commercial Code; and
(iv) A Power of Attorney has been duly executed and
delivered by such Selling Stockholder and constitutes a valid
and binding agreement of such Selling Stockholder in
accordance with its terms.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
Federal laws of the United States and the laws of the State of New
York. Such counsel may also state that as to matters of law of the
State of Hawaii, such counsel has relied on the opinion to you and the
QIUs referred to in Section 8(i) below;
(i) Cades Schutte Fleming & Wright, counsel for Kamehameha
Activities Association, as indicated in Schedule II hereto, shall have
furnished to you and the QIUs their written opinion (a draft of such
opinion is attached as Annex II(h) hereto), dated the First Time of
Delivery, in form and substance satisfactory to you, to the effect
that:
(i) This Agreement and the Global Underwriting
Agreements have been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder; and the sale of
the Shares to be sold by such Selling Stockholder hereunder
and thereunder and the compliance by such Selling Stockholder
with all of the provisions of this Agreement and the Global
Underwriting Agreements and the Power of Attorney and the
consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or
violation of any terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which such
Selling Stockholder is a party
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<PAGE> 31
or by which such Selling Stockholder is bound, or to which any
of the property or assets of such Selling Stockholder is
subject, nor will such action result in any violation of the
provisions of the organizational documents of such Selling
Stockholder or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction
over such Selling Stockholder or the property of such Selling
Stockholder;
(ii) No consent, approval, authorization or order of,
or filing with, any court or governmental agency or body is
required for the consummation of the transactions contemplated
by this Agreement and the Global Underwriting Agreements in
connection with the Shares to be sold by such Selling
Stockholder hereunder or thereunder, except such as may be
required under state securities or Blue Sky laws in connection
with the purchase and distribution of such Shares by the
Underwriters or the Global Underwriters;
(iii) Immediately prior to such Time of Delivery such
Selling Stockholder had good and valid title to the Shares to
be sold at such Time of Delivery by such Selling Stockholder
under this Agreement and the Global Underwriting Agreements,
free and clear, to the best of such counsel's knowledge, of
all liens, encumbrances, equities or claims, and full right,
power and authority to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder hereunder and
thereunder;
(iv) Good and valid title to such Shares, free and
clear of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters or
International Underwriters or Asia/Pacific Underwriters, as
the case may be, who have purchased such Shares in good faith
and without notice of any such lien, encumbrance, equity or
claim or any other adverse claim within the meaning of the
Uniform Commercial Code; and
(v) A Power of Attorney has been duly executed and
delivered by such Selling Stockholder and constitutes a valid
and binding agreement of such Selling Stockholder in
accordance with its terms.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
laws of the State of Hawaii and in rendering the opinion in
subparagraph (iii) such counsel may rely upon a certificate of such
Selling Stockholder in respect of matters of fact as to ownership of,
and liens, encumbrances, equities or claims on the Shares sold by such
Selling Stockholder, provided that such counsel shall state that they
believe that you and they are justified in relying upon such
certificate. In addition, such counsel may also
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<PAGE> 32
state that as to all matters of the laws of the State of New York, such
counsel is relying on the opinion to you and the QIUs referred to in
Section 8(h) hereof;
(j) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
each Time of Delivery, PricewaterhouseCoopers LLP shall have furnished
to you and the QIUs a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the
effect set forth in Annex I hereto (the executed copy of the letter
delivered prior to the execution of this Agreement is attached as Annex
I(a) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex I(b)
hereto);
(k)(i) Neither the Company nor any of its Significant
Subsidiaries shall have sustained since the date of the latest audited
financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus, and (ii) since the
respective dates as of which information is given in the Prospectus
there shall not have been any change in the partners' capital or
capital stock, as applicable, or long-term debt of the Company or any
of its Significant Subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set
forth or contemplated in the Prospectus, the effect of which, in any
such case described in Clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(l) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term
is defined by the Commission for purposes of Rule 436(g)(2) under the
Act, and (ii) no such organization shall have publicly announced that
it has under surveillance or review, with possible negative
implications, its rating of any of the Company's debt securities;
(m) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in
trading in securities generally on the New York Stock Exchange; (ii) a
suspension or material limitation in trading in GS Inc.'s securities on
the New York Stock Exchange; (iii) a general moratorium on
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<PAGE> 33
commercial banking activities declared by either Federal or New York
State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of
a national emergency or war, if the effect of any such event specified
in this clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(n) The Shares to be sold by GS Inc. and the Selling
Stockholders at such Time of Delivery shall have been duly listed,
subject to notice of issuance, on the New York Stock Exchange;
(o) The Incorporation Transactions shall have been consummated
in all material respects, as described in the Prospectus;
(p) GS Inc. shall have complied with the provisions of Section
6(c) hereof with respect to the furnishing of prospectuses on the New
York Business Day next succeeding the date of this Agreement;
(q) The Amended and Restated Certificate of Incorporation of
GS Inc., in substantially the form filed as an exhibit to the
Registration Statement, shall have been filed with the Secretary of
State of the State of Delaware and shall have become effective; and
(r) GS Inc. shall have furnished or caused to be furnished to
you, and the Selling Stockholders shall have furnished to you, at such
Time of Delivery, certificates of officers of GS Inc. and of the
Selling Stockholders, respectively, satisfactory to you as to the
accuracy of the representations and warranties of GS Inc. and the
Selling Stockholders, respectively, herein at and as of such Time of
Delivery, as to the performance by GS Inc. and the Selling Stockholders
of all of their respective obligations hereunder to be performed at or
prior to such Time of Delivery, and as to such other matters as you may
reasonably request, and GS Inc. shall have furnished or caused to be
furnished certificates as to the matters set forth in subsections (a)
and (i) of this Section, and as to such other matters as you may
reasonably request.
9. (a) GS Inc. will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or
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necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or
defending any such action or claim as such expenses are incurred;
provided, however, that GS Inc. shall not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to GS Inc. by any Underwriter through Goldman, Sachs & Co.
expressly for use therein or by any QIU expressly for use therein or
which constitutes a reference to a QIU consented to by it pursuant to
Section 3(f) hereof.
(b) Each Selling Stockholder, severally and not jointly, will
indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to GS Inc. by such Selling Stockholder expressly for use
therein; and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses
are incurred; provided, however, that such Selling Stockholder shall
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or
any such amendment or supplement in reliance upon and in conformity
with written information furnished to GS Inc. by any Underwriter
through Goldman, Sachs & Co. expressly for use therein or by any QIU
expressly for use therein or which constitutes a reference to a QIU
consented to by it pursuant to Section 3(f) hereof; provided, further,
that the liability of a Selling Stockholder pursuant to this subsection
(b) shall not exceed the amount of net proceeds received by such
Selling Stockholder from the sale of its Shares pursuant to this
Agreement.
(c) Each Underwriter will indemnify and hold harmless GS Inc.
and each Selling Stockholder against any losses, claims, damages or
liabilities to which GS
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Inc. or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in any Preliminary Prospectus,
the Registration Statement or the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to GS Inc. by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse GS Inc. and each Selling
Stockholder for any legal or other expenses reasonably incurred by GS
Inc. or such Selling Stockholder in connection with investigating or
defending any such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against an indemnifying party under such subsection, notify
the indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from
any liability which it may have to any indemnified party otherwise than
under such subsection. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (which
shall not, except with the consent of the indemnified party, be counsel
to the indemnifying party), and, after notice from the indemnifying
party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to such
indemnified party under such subsection for any legal expenses of other
counsel or any other expenses, in each case subsequently incurred by
such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall,
without the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect
of which indemnification or contribution may be sought under this
Section 9 (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement,
compromise or judgment (i) includes an unconditional release of the
indemnified party from all liability arising out of such action or
claim and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act, by or on behalf of any
indemnified party.
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(e) If the indemnification provided for in this Section 9 is
unavailable to or insufficient to hold harmless an indemnified party
under subsection (a), (b) or (c) above in respect of any losses,
claims, damages or liabilities (or actions in respect thereof) referred
to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received
by GS Inc. and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give
the notice required under subsection (d) above, then each indemnifying
party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of GS Inc. and
the Selling Stockholders on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The
relative benefits received by GS Inc. and the Selling Stockholders on
the one hand and the Underwriters on the other shall be deemed to be in
the same proportion as the total net proceeds from the offering of the
Shares purchased under this Agreement (before deducting expenses)
received by GS Inc. and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters
with respect to the Shares purchased under this Agreement, in each case
as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by GS Inc. or the Selling Stockholders on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. GS Inc., each of the Selling Stockholders
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this subsection (e) were determined by pro
rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (e). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Shares underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission and no
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Selling Stockholder shall be required to contribute an amount that
exceeds the net proceeds received by such Selling Stockholder from the
sale of its Shares pursuant to this Agreement. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(f) The obligations of GS Inc. and the Selling Stockholders
under this Section 9 shall be in addition to any liability which GS
Inc. and the respective Selling Stockholders may otherwise have and
shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section 9 shall be in
addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to
each officer and director of GS Inc. [(INCLUDING ANY PERSON WHO, WITH
HIS OR HER CONSENT, IS NAMED IN THE REGISTRATION STATEMENT AS ABOUT TO
BECOME A DIRECTOR OF GS INC.)] and to each person, if any, who controls
GS Inc. or any Selling Stockholder within the meaning of the Act.
10. (a) GS Inc. will indemnify and hold harmless each QIU, in
its capacity as QIU, against any losses, claims, damages or
liabilities, joint or several, to which such QIU may become subject, in
such capacity, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
will reimburse each QIU for any legal or other expenses reasonably
incurred by such QIU in connection with investigating or defending any
such action or claim as such expenses are incurred.
(b) Promptly after receipt by a QIU indemnified under
subsection (a) above of notice of the commencement of any action, such
QIU shall, if a claim in respect thereof is to be made against GS Inc.
under such subsection, notify GS Inc. in writing of the commencement
thereof; but the omission so to notify GS Inc. shall not relieve GS
Inc. from any liability which it may have to any QIU otherwise than
under such subsection. In case any such action shall be brought against
any QIU and it shall notify GS Inc. of the commencement thereof, GS
Inc. shall be entitled to participate therein, and, to the extent that
it shall wish to assume the defense thereof, with counsel satisfactory
to such QIU (who shall not, except with the consent of such QIU, be
counsel to GS Inc.), and, after notice from GS Inc. to such QIU of its
election so to assume the defense thereof, GS Inc. shall not be liable
to
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such QIU under such subsection for any legal expenses of other counsel
or any other expenses, in each case subsequently incurred by such QIU,
in connection with the defense thereof other than reasonable costs of
investigation. GS Inc. shall not, without the written consent of the
QIU being indemnified, effect the settlement or compromise of, or
consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or
contribution may be sought under this Section 10 (whether or not such
QIU is an actual or potential party to such action or claim) unless
such settlement, compromise or judgment (i) includes an unconditional
release of such QIU from all liability arising out of such action or
claim and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act, by or on behalf of such QIU.
(c) If the indemnification provided for in this Section 10 is
unavailable to or insufficient to hold harmless a QIU, in its capacity
as QIU, under subsection (a) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to
therein, then GS Inc. shall contribute to the amount paid or payable by
such QIU as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by GS Inc. on the one hand and
the QIUs on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the QIUs failed to give the notice
required under subsection (b) above, then GS Inc. shall contribute to
such amount paid or payable by such QIU in such proportion as is
appropriate to reflect not only such relative benefits but also the
relative fault of GS Inc. on the one hand and the QIUs on the other in
connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof),
as well as any other relevant equitable considerations. The relative
benefits received by GS Inc. on the one hand and the QIUs on the other
shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Shares purchased under this Agreement (before
deducting expenses) received by GS Inc., as set forth in the table on
the cover page of the Prospectus, bear to the total fee payable to the
QIUs pursuant to Section 3 hereof. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by GS
Inc. on the one hand or the QIUs on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. GS Inc. and each of the QIUs agree
that it would not be just and equitable if contributions pursuant to
this subsection (c) were determined by pro rata allocation (even if the
QIUs were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this subsection (c). The amount
paid or payable by a QIU as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (c) shall be deemed to include any legal or other expenses
reasonably
-38-
<PAGE> 39
incurred by such QIU in connection with investigating or defending any
such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) The obligations of GS Inc. under this Section 10 shall be
in addition to any liability which GS Inc. may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls a QIU within the meaning of the Act.
11. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time
of Delivery, you may in your discretion arrange for you or another
party or other parties to purchase such Shares on the terms contained
herein. If within thirty-six hours after such default by any
Underwriter you do not arrange for the purchase of such Shares, then GS
Inc. and the Selling Stockholders shall be entitled to a further period
of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In
the event that, within the respective prescribed periods, you notify GS
Inc. and the Selling Stockholders that you have so arranged for the
purchase of such Shares, or GS Inc. and the Selling Stockholders notify
you that they have so arranged for the purchase of such Shares, you or
GS Inc. and the Selling Stockholders shall have the right to postpone
such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and GS Inc. agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may
thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with
like effect as if such person had originally been a party to this
Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by
you and GS Inc. and the Selling Stockholders as provided in subsection
(a) above, the aggregate number of such Shares which remains
unpurchased does not exceed one-eleventh of the aggregate number of all
of the Shares to be purchased at such Time of Delivery, then GS Inc.
and the Selling Stockholders shall have the right to require each
non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and,
in addition, to require each non-defaulting Underwriter to purchase its
pro rata share (based on the number of Shares which such Underwriter
agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been
made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
-39-
<PAGE> 40
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by
you and GS Inc. and the Selling Stockholders as provided in subsection
(a) above, the aggregate number of such Shares which remains
unpurchased exceeds one-eleventh of the aggregate number of all of the
Shares to be purchased at such Time of Delivery, or if GS Inc. and the
Selling Stockholders shall not exercise the right described in
subsection (b) above to require non-defaulting Underwriters to purchase
Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of
the Underwriters to purchase and of GS Inc. to sell the Optional
Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or any QIU or GS Inc. or the Selling
Stockholders, except for the expenses to be borne by GS Inc. or Group,
as applicable, and the Selling Stockholders and the Underwriters as
provided in Section 3(e) and Section 7 hereof and the indemnity and
contribution agreements in Section 9 and Section 10 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its
default.
12. The respective indemnities, agreements, representations, warranties
and other statements of GS Inc., the Selling Stockholders, the several
Underwriters and the QIUs, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in full
force and effect, regardless of any investigation (or any statement as to the
results thereof) made by or on behalf of any Underwriter, any QIU or any
controlling person of any Underwriter or QIU, or GS Inc., or any of the Selling
Stockholders, or any officer or director or controlling person of GS Inc., or
any controlling person of any Selling Stockholder, and shall survive delivery of
and payment for the Shares.
Anything herein to the contrary notwithstanding, the indemnity
agreements of GS Inc. in subsection (a) of Section 9 hereof, the representations
and warranties in subsections (a)(ii) and (a)(iii) of Section 1 hereof and any
representation or warranty as to the accuracy of the Registration Statement or
the Prospectus contained in any certificate furnished by GS Inc. pursuant to
Section 8 hereof, insofar as they may constitute a basis for indemnification for
liabilities (other than payment by GS Inc. of expenses incurred or paid in the
successful defense of any action, suit or proceeding) arising under the Act,
shall not extend to the extent of any interest therein of a controlling person
or partner of an Underwriter who is a director or officer who signed the
Registration Statement or controlling person of GS Inc. when the Registration
Statement has become effective [OR WHO, WITH HIS OR HER CONSENT, IS NAMED IN THE
REGISTRATION STATEMENT AS ABOUT TO BECOME A DIRECTOR OF GS INC.], except in each
case to the extent that an interest of such character shall have been determined
by a court of appropriate jurisdiction as not against public policy as expressed
in the Act. Unless in the opinion of counsel for GS Inc. the matter has been
settled by controlling precedent, GS Inc. will, if a claim for such
indemnification is asserted, submit to a court of appropriate jurisdiction the
question of whether such interest
-40-
<PAGE> 41
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
13. If this Agreement shall be terminated pursuant to Section 11
hereof, none of GS Inc., Group or the Selling Stockholders shall then be under
any liability to any Underwriter or QIU except as provided in the second
sentence of Section 3(e) hereof and Sections 7, 9 and 10 hereof; but, if for any
other reason any Shares are not delivered by or on behalf of GS Inc. and the
Selling Stockholders as provided herein, GS Inc. will reimburse the Underwriters
through you for all out-of-pocket expenses approved in writing by you, including
fees and disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Shares not so
delivered, but GS Inc., Group and the Selling Stockholders shall then be under
no further liability to any Underwriter or QIU in respect of the Shares not so
delivered except as provided in the second sentence of Section 3(e) hereof and
Sections 7, 9 and 10 hereof.
14. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and GS Inc. shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9th Floor, New York, New York 10004, Attention: Registration
Department; if to the QIUs shall be delivered or sent by mail, telex, or
facsimile transmission to Donaldson, Lufkin & Jenrette Securities Corporation
[insert address], Merrill Lynch, Pierce, Fenner & Smith Incorporated [insert
address] and Morgan Stanley & Co. Incorporated [insert address]; if to any
Selling Stockholder shall be delivered or sent by mail, telex or facsimile
transmission to such Selling Stockholder at its address set forth in Schedule II
hereto; and if to GS Inc. or Group shall be delivered or sent by mail, telex or
facsimile transmission to the address of GS Inc. set forth in the Registration
Statement, Attention: Secretary; provided, however, that any notice to an
Underwriter pursuant to Section 9 (d) hereof shall be delivered or sent by mail,
telex or facsimile transmission to such Underwriter at its address set forth in
its Underwriters' Questionnaire or telex constituting such Questionnaire, which
address will be supplied to GS Inc. or the Selling Stockholders by you upon
request. Any such statements, requests, notices or agreements shall take effect
upon receipt thereof.
15. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the QIUs, GS Inc., Group and the Selling
Stockholders and, to the extent provided in Sections 9, 10 and 12 hereof, the
officers and directors of GS Inc. and each
-41-
<PAGE> 42
person who controls GS Inc., any Selling Stockholder, any QIU or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign by reason merely of such purchase.
16. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
17. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
18. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us ten counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, each of the
QIUs, GS Inc. and each of the Selling Stockholders. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a form of Agreement among Underwriters (U.S.
Version), the form of which shall be submitted to GS Inc. and the Selling
Stockholders for examination upon request, but without warranty on your part as
to the authority of the signers thereof.
-42-
<PAGE> 43
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Stockholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
The Goldman Sachs Group, Inc.
By:..........................................
Name:
Title:
The Goldman Sachs Group, L.P.
By: The Goldman Sachs Corporation
By:..........................................
Name:
Title:
Sumitomo Bank Capital Markets, Inc.
By:..........................................
Name:
Title:
As Attorney-in-Fact acting on behalf of
Sumitomo Bank Capital Markets, Inc.
Kamehameha Activities Association
By:..........................................
Name:
Title:
As Attorney-in-Fact acting on behalf of
Kamehameha Activities Association
Accepted as of the date hereof at ........,
-43-
<PAGE> 44
Goldman, Sachs & Co.
Names of Co-Representatives
By:.......................................................................
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
Donaldson, Lufkin & Jenrette Securities Corporation
By:.......................................................................
Name:
Title:
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By:.......................................................................
Name:
Title:
Morgan Stanley & Co. Incorporated
By:.......................................................................
Name:
Title:
-44-
<PAGE> 45
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- ---------
<S> <C> <C>
Goldman, Sachs & Co............................................
Bear, Stearns & Co. Inc........................................
Credit Suisse First Boston Corporation.........................
Donaldson, Lufkin & Jenrette Securities Corporation............
Lehman Brothers Inc............................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
J.P. Morgan Securities Inc.....................................
Morgan Stanley & Co. Incorporated..............................
PaineWebber Incorporated.......................................
Prudential Securities Incorporated.............................
Salomon Smith Barney Inc.......................................
Sanford C. Bernstein & Co., Inc................................
Schroder & Co. Inc.............................................
---------- ---------
Total................................................. 48,000,000 7,200,000
========== =========
</TABLE>
-45-
<PAGE> 46
SCHEDULE II
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number Sold if
of Firm Shares Maximum Option
to be Sold Exercised
---------- ---------
<S> <C> <C>
The Company ....................................... 33,600,000 7,200,000
The Selling Stockholders:
Sumitomo Bank Capital Markets, Inc. (a) .. 7,200,000
Kamehameha Activities Association (b) .... 7,200,000
---------- ---------
Total .................................... 48,000,000 7,200,000
========== =========
</TABLE>
(a) This Selling Stockholder [INSERT ADDRESS] is represented by
Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York
10019, and [insert name and address] and has appointed [NAMES OF
ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of them as the
Attorneys-in-Fact for such Selling Stockholder.
(b) This Selling Stockholder [INSERT ADDRESS] is represented by
Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York
10019, as to matters of the Federal law of the United States and the laws of the
State of New York, and [INSERT NAME AND ADDRESS OF HAWAIIAN COUNSEL], as to
matters of the laws of the State of Hawaii, and has appointed [NAMES OF
ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of them as the
Attorneys-in-Fact for such Selling Stockholder.
-46-
<PAGE> 47
ANNEX I
Pursuant to Section 8(g) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters and the QIUs to the effect that:
(i) They are independent certified public accountants with
respect to Group and its subsidiaries and GS Inc. within the meaning of
the Act and the applicable rules and regulations adopted by the
Commission;
(ii) In their opinion, the financial statements, the Selected
Consolidated Financial Data with respect to the consolidated results of
operations and financial position of Group for the five most recent
fiscal years, management's discussion and analysis of financial
condition and results of operations and any supplementary financial
information and schedules (and, if applicable, financial forecasts
and/or pro forma financial information) examined by them and included
in the Prospectus or the Registration Statement comply as to form in
all material respects with the applicable accounting requirements of
the Act, Item 301 of Regulations S-K under the Act, Item 303 of
Regulation S-K under the Act and the related rules and regulations
adopted by the Commission; and, if applicable, they have made an
examination or a review in accordance with standards established by the
American Institute of Certified Public Accountants of the unaudited
consolidated interim financial statements, selected financial data, pro
forma financial information, financial forecasts, management's
discussion and analysis of financial condition and results of
operations and/or condensed financial statements derived from audited
financial statements of the Group for the periods specified in such
letter, as indicated in their reports thereon, copies of which have
been furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of earnings,
consolidated statements of financial condition, consolidated statements
of changes in partners' capital and consolidated statements of cash
flows included in the Prospectus as indicated in their reports thereon
copies of which have been furnished to the Representatives; and on the
basis of specified procedures including inquiries of officials of Group
who have responsibility for financial and accounting matters regarding
whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related rules and regulations adopted by the Commission,
nothing came to their attention that caused them to believe that the
unaudited condensed consolidated financial statements do not comply as
to
<PAGE> 48
form in all material respects with the applicable accounting
requirements of the Act and the related rules and regulations adopted
by the Commission;
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of
Group for any interim period included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the
unaudited consolidated financial statements for such interim period(s);
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301 and
302, respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of Group and its subsidiaries, inspection
of the minute books of the Management Committee of Group and of the
Board of Directors of GS Inc. and of the general partner of Goldman,
Sachs & Co. since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of Group and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of
earnings, consolidated statements of financial position,
consolidated statements of changes in partners' capital and
consolidated statements of cash flows included in the
Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the
related rules and regulations adopted by the Commission, or
(ii) any material modifications should be made to the
unaudited condensed consolidated statements of earnings,
consolidated statements of financial position, consolidated
statements of changes in partners' capital and consolidated
statements of cash flows included in the Prospectus for them
to be in conformity with generally accepted accounting
principles;
(B) any other unaudited statement of earnings data
and statement of financial position items included in the
Prospectus do not agree with the corresponding items in the
unaudited consolidated financial statements from which such
data and items were derived, and any such unaudited data and
-2-
<PAGE> 49
items were not determined on a basis substantially consistent
with the basis for the corresponding amounts in the audited
consolidated financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited statement of earnings data and statement
of financial position items included in the Prospectus and
referred to in Clause (B) were not determined on a basis
substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) as of a specified date not more than five days
prior to the date of such letter, there have been any changes
in partners' capital or any increase in the consolidated
long-term debt of GS Inc. and its subsidiaries, or any
decreases in consolidated net current assets or other items
specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter;
and
(E) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (D) there were any
decreases in consolidated total revenues or consolidated
revenues, net of interest expense, or pre-tax earnings or
other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of Group and its subsidiaries, which appear in the Prospectus, or in
Part II of, or in exhibits and schedules to, the Registration Statement
specified by the Representatives, and have compared certain of such
amounts, percentages and financial information with the accounting
records of Group and its subsidiaries and have found them to be in
agreement.
-3-
<PAGE> 1
EXHIBIT 15.1
April 12, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: The Goldman Sachs Group, Inc.
Registration Statement on Form S-1
(File No. 333-74449)
Commissioners:
We are aware that our report dated April 9, 1999 on our review of condensed
interim financial information of The Goldman Sachs Group, L.P. and Subsidiaries
(the "Firm") as of February 26, 1999 and for the three months ended February 26,
1999 and February 27, 1998 is included in the Firm's Prospectus constituting
part of this Registration Statement on Form S-1. We are also aware that our
report dated April 9, 1999 on our review of Pro Forma Consolidated Financial
Information of The Goldman Sachs Group, L.P. and Subsidiaries as of February 26,
1999 and for the three months then ended is included in the Firm's Prospectus
constituting part of this Registration Statement on Form S-1. Pursuant to Rule
436(c) under the Securities Act of 1933, these reports should not be considered
a part of the Registration Statement prepared or certified by us within the
meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
<PAGE> 1
[Letterhead of PricewaterhouseCoopers LLP]
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Prospectus constituting part of this
Registration Statement on Form S-1 of (i) our reports dated January 22, 1999,
on our audits of the consolidated financial statements, selected historical
consolidated income statement and balance sheet data and the financial
statement schedule of The Goldman Sachs Group, L.P. and Subsidiaries (the
"Firm"); (ii) our report dated March 15, 1999 on our examination of the Pro
Forma Consolidated Income Statement Information for the year ended November 27,
1998; and (iii) our report dated March 15, 1999 relating to Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Firm for the three-year period ended November 27, 1998. We also consent to the
references to our firm under the captions "Experts", "Summary Consolidated
Financial Data", and "Selected Consolidated Financial Data".
/s/ PricewaterhouseCoopers LLP
New York, New York
April 12, 1999.
<PAGE> 1
Exhibit 23.3
CONSENT
I, Sir John Browne, hereby consent to be named as a director of The Goldman
Sachs Group, Inc., a Delaware corporation (the "Company"), in the Company's
three registration statements on Form S-1 (including any and all amendments or
supplements thereto), bearing File No. 333-74449, File No. 333-75213 and File
No. 333-75321, respectively.
Dated: 9 April, 1999
/s/ Sir John Browne
---------------------------
Name: Sir John Browne
<PAGE> 1
Exhibit 23.4
CONSENT
I, James A. Johnson, hereby consent to be named as a director of The
Goldman Sachs Group, Inc., a Delaware corporation (the "Company"), in the
Company's three registration statements on Form S-1 (including any and all
amendments or supplements thereto), bearing File No. 333-74449, File No.
333-75213 and File No. 333-75321, respectively.
Dated: April 8, 1999
/s/ James A. Johnson
---------------------------
Name: James A. Johnson
<PAGE> 1
EXHIBIT 23.5
[SECURITIES DATA COMPANY LETTERHEAD]
40 West 57th Street
Suite 1000
New York, New York 10019
Telephone: 212.484.4701
Facsimile: 212.484.4740
Client Support: 201.622.5200
April 9, 1999
We hereby consent to the use of the information we provided for use in Amendment
No. 1 to the Registration Statement (No. 333-74449) relating to the offering of
shares of Common Stock by The Goldman Sachs Group, Inc. and to the references
to our name in Amendment No. 1 to the Registration Statement, including under
the caption "Experts".
Securities Data Company,
A Division of Thomson Information Services
/s/ Kenneth J. Seng
Kenneth J. Seng
Director, Account Management & Client Training
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE AMOUNTS DISCLOSED IN THE FINANCIAL DATA SUMMARY SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-26-1999
<PERIOD-START> NOV-30-1998<F1>
<PERIOD-END> FEB-26-1999
<CASH> 10,706<F2>
<RECEIVABLES> 23,935
<SECURITIES-RESALE> 41,776
<SECURITIES-BORROWED> 74,036
<INSTRUMENTS-OWNED> 70,521
<PP&E> 962<F3>
<TOTAL-ASSETS> 230,624
<SHORT-TERM> 33,863
<PAYABLES> 33,437
<REPOS-SOLD> 36,906
<SECURITIES-LOANED> 24,770
<INSTRUMENTS-SOLD> 62,152
<LONG-TERM> 20,405
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 223,633<F4>
<TRADING-REVENUE> 1,398<F5>
<INTEREST-DIVIDENDS> 3,013
<COMMISSIONS> 327<F6>
<INVESTMENT-BANKING-REVENUES> 902
<FEE-REVENUE> 216<F6>
<INTEREST-EXPENSE> 2,861
<COMPENSATION> 1,275
<INCOME-PRETAX> 1,188
<INCOME-PRE-EXTRAORDINARY> 1,188
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,007
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>REPRESENTS THE FIRST MONDAY OF THE PERIOD.
<F2>INCLUDES CASH AND CASH EQUIVALENTS AND CASH AND SECURITIES SEGREGATED IN
COMPLIANCE WITH U.S. FEDERAL AND OTHER REGULATIONS AS DISCLOSED ON THE
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION.
<F3>INCLUDED IN OTHER ASSETS ON THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION.
<F4>EXCLUDES PARTNERS' CAPITAL AND PARTNERS' CAPITAL ALLOCATED FOR INCOME TAXES AND
POTENTIAL WITHDRAWALS AS DISCLOSED ON THE CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION.
<F5>INCLUDES REVENUES FROM PRINCIPAL INVESTMENTS, WHICH MAINLY REPRESENTS REVENUES
FROM INVESTMENTS IN MERCHANT BANKING FUNDS.
<F6>INCLUDED IN REVENUES FROM ASSET MANAGEMENT AND SECURITIES SERVICES ON THE
CONSOLIDATED STATEMENT OF EARNINGS.
</FN>
</TABLE>
