<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1999
REGISTRATION NO. 333-75213
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
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
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT 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. [X]
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(3)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Notes due 2009............... $1,500,000,000 100% $1,500,000,000 $417,000
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A portion of the notes to be registered represents notes that may be offered
outside the United States but that may be resold from time to time into the
United States. Those notes are not being registered for the purpose of sales
outside the United States. This registration statement also covers an
undeterminable amount of the notes that may be reoffered and resold on an
ongoing basis after the initial sale, in market-making transactions by
affiliates of the registrant.
(2) Estimated solely for purposes of determining the registration fee.
(3) Previously paid $278,000 on March 29, 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.
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- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This registration statement covers $1,500,000,000 aggregate principal
amount of % Notes due 2009 of The Goldman Sachs Group, Inc. for sale in an
initial offering. This registration statement also covers an undeterminable
amount of the notes for resale by affiliates of The Goldman Sachs Group, Inc.,
including Goldman, Sachs & Co., in market-making transactions on an ongoing
basis after the initial offering has begun. The prospectus to be used in the
initial offering follows immediately after this explanatory note. The prospectus
to be used in market-making transactions will be identical, except that it will
have:
- different front and back cover pages; and
- a section entitled "Plan of Distribution" instead of the section entitled
"Underwriting".
The alternate and additional pages of the market-making prospectus follow
immediately after the prospectus for the initial offering.
i
<PAGE> 3
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 May 10, 1999.
$1,500,000,000
THE GOLDMAN SACHS GROUP, INC.
[GOLDMAN SACHS LOGO]
% Notes due 2009
------------------------
The Goldman Sachs Group, Inc. will pay interest on the notes on May 15 and
November 15 of each year, beginning on November 15, 1999. If Goldman Sachs
becomes obligated to pay additional amounts to non-U.S. investors due to changes
in U.S. withholding tax requirements, Goldman Sachs may redeem the notes before
their stated maturity at a price equal to 100% of the principal amount redeemed
plus accrued interest to the redemption date.
Goldman Sachs has filed an application to list the notes on the Luxembourg
Stock Exchange.
See "Risk Factors" beginning on page 11 to read about factors you should
consider before investing in the notes.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Note Total
-------- -----
<S> <C> <C>
Initial public offering price............................... % $
Underwriting discount....................................... % $
Proceeds, before expenses, to Goldman Sachs................. % $
</TABLE>
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the notes will accrue from , 1999 and
must be paid by the purchaser if the notes are delivered after ,
1999.
------------------------
The underwriters expect to deliver the notes in New York, New York on
, 1999.
GOLDMAN, SACHS & CO.
BANC ONE CAPITAL MARKETS, INC. BLAYLOCK & PARTNERS, L.P.
BT ALEX. BROWN CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS
MERRILL LYNCH & CO. J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER NATIONSBANC MONTGOMERY SECURITIES LLC
PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY THE WILLIAMS CAPITAL GROUP, L.P.
------------------------
Prospectus dated , 1999.
<PAGE> 4
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 other 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.
<PAGE> 5
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 notes. You should read the entire prospectus carefully,
especially the risks of investing in the notes discussed under "Risk Factors" on
pages 11-23.
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 $2.9
billion in 1998, representing a compound annual growth rate of 13%. Economic and
market conditions can, however, significantly affect our performance. For
example, in the second half of fiscal 1998, our performance was adversely
affected by turbulence in global financial markets.
We have achieved this growth, which has been generated without the benefit
of a large acquisition, by maintaining an intense commitment to our clients,
focusing on our core businesses and key opportunities, and operating as an
integrated franchise.
Because we believe that the needs of our clients are global and that
international markets have high growth potential, we have built upon our
strength in the United States to achieve leading positions in other parts of the
world. Today, we have a strong global presence as evidenced by the geographic
breadth of our transactions, leadership in our core products and the size of our
international operations. As of February 26, 1999, we operated offices in 23
countries and 36% of our 13,000 employees were based outside the United States.
We are committed to a distinctive culture and set of core values. These
values are reflected in our Business Principles, which emphasize placing our
clients' interests first, integrity, commitment to excellence and innovation,
and teamwork.
3
<PAGE> 6
SUMMARY FINANCIAL DATA
($ 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
Ratio of earnings to fixed charges(1)(2).... 1.23x 1.23x 1.21x 1.30x 1.41x
</TABLE>
- ---------------
Read the table above in conjunction with the footnotes to "Selected Consolidated
Financial Data" as well as the following footnotes:
(1) Since we historically operated in partnership form, payments to our profit
participating limited partners were 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 managing directors who were profit
participating limited partners. Accordingly, our historical pre-tax earnings
understate the expected operating costs to be incurred by us after our
conversion to corporate form. As a corporation, we will include payments for
services rendered by our managing directors who were 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) For purposes of the ratio of earnings to fixed charges, "earnings" represent
pre-tax earnings plus fixed charges and "fixed charges" represent interest
expense plus that portion of rent expense that, in our opinion, approximates
the interest factor included in rent expense. For a pro forma ratio of
earnings to fixed charges reflecting our conversion to corporate form,
please see "Pro Forma Consolidated Financial Information". The ratio of
earnings to fixed charges does not give effect to this offering of notes, or
to our euro debt offering or our new medium-term note program described
below.
------------------------
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
4
<PAGE> 7
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.
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'
commit-
5
<PAGE> 8
ment 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 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 gross domestic product)
(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 gross domestic product (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) 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> 9
THE OFFERING
Please refer to "Description of Notes We Are Offering" in this prospectus
for more information about the notes.
Notes offered.............. % Notes due 2009.
Issuer..................... The Goldman Sachs Group, Inc.
Stated maturity............ May 15, 2009.
Total principal amount
being issued............... $1,500,000,000.
Ranking.................... The notes will rank equally in right of payment
with all other senior, unsecured debt obligations
of The Goldman Sachs Group, Inc.
Interest rate.............. % annually.
Date interest starts
accruing................... , 1999.
Interest payment dates..... Every May 15 and November 15.
First interest payment
date....................... November 15, 1999.
Regular record dates for
interest................. May 1 for May 15 interest; November 1 for November
15 interest.
Payment of additional
amounts.................... We intend to make all payments on the notes without
deducting U.S. withholding taxes. If any deduction
is required on payments to non-U.S. investors, we
will pay additional amounts on those payments to
the extent described under "Description of Notes We
Are Offering -- Payment of Additional Amounts".
Redemption features........ We will not be permitted to redeem the notes before
they mature unless we are obligated to pay
additional amounts due to changes in U.S.
withholding tax requirements. In that event, we may
redeem the outstanding notes in whole at any time,
at a price equal to 100% of their principal amount
plus accrued interest to the redemption date.
Book-entry issuance,
settlement and
clearance................ We will issue the notes only in book-entry
form -- i.e., as global notes registered in the
name of The Depository Trust Company, New York, New
York, or its nominee. The sale of the notes will
settle in immediately available funds through DTC.
Investors may hold interests in a global note
through organizations that participate, directly or
indirectly, in the DTC system. Those organizations
will include the Cedel and Euroclear systems in
Europe.
Listing.................... The Goldman Sachs Group, Inc. has filed an
application to list the notes on the Luxembourg
Stock Exchange.
Use of proceeds............ We intend to use the net proceeds from the sale of
the notes to provide additional funds for our
operations and for other general corporate
purposes, including the repayment of short-term
obligations and the portion of long-term
obligations coming due during the remainder of this
calendar year.
7
<PAGE> 10
OUR COMMON STOCK OFFERING
On May 7, 1999 we converted from partnership to corporate form, with The
Goldman Sachs Group, Inc. as the successor parent company. At the same time, The
Goldman Sachs Group, Inc. completed an initial public offering of its common
stock. In that offering, The Goldman Sachs Group, Inc. sold 51,000,000 shares
for its own account and two of its shareholders, Sumitomo Bank Capital Markets,
Inc. and Kamehameha Activities Association, sold a total of 18,000,000 shares
for their accounts.
We received net proceeds from our common stock offering of $2.6 billion,
based on the initial public offering price of $53.00 per share, after deducting
the underwriting discounts and estimated offering expenses payable by us in our
common stock offering. We intend to use those proceeds in the manner described
below under "Use of Proceeds".
We are managed by our principal owners. Simultaneously with our conversion
from partnership to corporate form and our common stock offering, we made
equity-based awards to substantially all of our employees. We also completed a
number of other transactions in order to convert from partnership to corporate
form at the time of the closing of our common stock offering. Upon the closing
of those transactions, our employees, including former partners, owned
approximately 65% of The Goldman Sachs Group, Inc. None of our employees sold
shares in our common stock offering. For a more detailed description of these
and other transactions, see "Certain Relationships and Related
Transactions -- Incorporation and Related Transactions", "Management -- The
Employee Initial Public Offering Awards" and "Pro Forma Consolidated Financial
Information".
OUR EURO DEBT OFFERING
Shortly after this offering, we plan to issue approximately E1.0 billion
aggregate principal amount of debt securities payable in euros, the currency of
the European Economic and Monetary Union, in a separate underwritten public
offering. Based on the noon buying rate for cable transfers of euros in New York
City on May 6, 1999 of $1.0779 for (euro)1.00, the aggregate principal amount
would be approximately $1.08 billion. Those securities would be general,
unsecured obligations of The Goldman Sachs Group, Inc., would rank equally in
right of payment with the notes, would bear interest at a fixed rate payable
semi-annually and would have a stated maturity of ten years. If we complete our
euro debt offering, we intend to use the net proceeds of that offering for the
purposes described in "Use of Proceeds". We may decide to postpone or cancel our
euro debt offering or to conduct it on terms other than those described above.
Thus, we may not receive the proceeds referred to above.
OUR NEW MEDIUM-TERM NOTE PROGRAM
Shortly after this offering, we also plan to begin offering debt securities
on an ongoing basis under a new medium-term note program. Under that program, we
expect to issue up to approximately $15 billion aggregate principal amount of
our debt securities over the next two years. Those debt securities would be
general, unsecured obligations of The Goldman Sachs Group, Inc. and would rank
equally in right of payment with the notes. The specific terms of those debt
securities, including as to maturity and interest, will be fixed at the time of
sale. We do not know the principal amount of debt securities we will sell under
our new medium-term note program or when sales will occur.
8
<PAGE> 11
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.
In addition to our common stock offering, the pro forma adjustments reflect
the transactions described under "Certain Relationships and Related
Transactions", compensation and benefits related to services rendered by our
managing directors who were 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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<PAGE> 12
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)
<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 (UNAUDITED)(3):
Pro forma net earnings........................ -- -- -- -- $ 1,256 $ 516
Pro forma ratio of earnings to fixed
charges(4).................................. -- -- -- -- 1.15x 1.30x
Pro forma stockholders' equity as adjusted for
our common stock offering................... -- -- -- -- -- $ 7,627
SELECTED DATA AND RATIOS (UNAUDITED):
Ratio of earnings to fixed charges(1)(4)...... 1.06x 1.14x 1.23x 1.23x 1.21x 1.41x
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 historically operated in partnership form, payments to our profit
participating limited partners were 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 managing directors who were
profit participating limited partners. Accordingly, our historical pre-tax
earnings understate the expected operating costs to be incurred by us after
our conversion to corporate form. As a corporation, we will include
payments for services rendered by our managing directors who were 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) For purposes of the ratio of earnings to fixed charges, "earnings"
represent pre-tax earnings plus fixed charges and "fixed charges" represent
interest expense plus that portion of rent expense that, in our opinion,
approximates the interest factor included in rent expense. Neither the pro
forma ratio of earnings to fixed charges nor the historical ratio of
earnings to fixed charges gives effect to this offering of notes, our euro
debt offering or our new medium-term note program.
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<PAGE> 13
RISK FACTORS
An investment in the notes we are offering involves a number of risks. You
should carefully consider the following information about these risks, together
with the other information in this prospectus, before investing in the notes.
THE RISKS WE FACE IN OUR BUSINESSES COULD REDUCE THE MARKET VALUE OF THE NOTES
AND IMPAIR OUR ABILITY TO REPAY THEM
We face a number of risks in our businesses, including market, liquidity,
credit, operational, legal and regulatory risks. Many of these risks are
substantial and inherent in our businesses. These risks could harm our operating
results, our business prospects or our financial condition. If that were to
occur, the value of an investment in the notes could also be reduced, in two
main ways.
Business Risks Could Hurt the Credit Ratings of the Notes and, Therefore, Their
Market Value and Marketability
The business risks we describe in this section entitled "Risk Factors"
could reduce our profitability and our ability to borrow or otherwise raise
cash. For example, we could incur large trading losses due to severe market
fluctuations, our investment banking revenues could decline due to a prolonged
market downturn or we could become unable to refinance our debt due to a
disruption in the credit markets. If this were to occur, the rating agencies
that provide the credit ratings assigned to the notes could withdraw or lower
their ratings or could place us on "credit watch" with negative implications. If
that happened, the market value of the notes could fall. In addition, the number
of potential investors who might be willing to purchase the notes, even at a
lower price, could decrease, thereby impairing your ability to sell the notes in
any trading market for the notes that may develop. Any of these developments
could reduce the value of your investment in the notes.
Even if the business risks we describe below did not have an immediate
impact on Goldman Sachs, they could harm our business prospects. For example,
serious employee misconduct could hurt our business reputation, we could become
the target of serious, protracted litigation or regulatory action or the
competition we face from other firms could hamper our ability to enhance or even
maintain our position in important markets in the future. Developments such as
these could harm our business prospects, which in turn could lead the rating
agencies to question our ability to meet our payment obligations in a timely
manner and thus to lower our credit ratings.
If Severe Enough, Business Risks Could Also Impair Our Ability to Obtain the
Cash We Will Need to Pay Interest or Principal on the Notes
The business risks we describe below could, if severe or protracted,
prevent us from obtaining the cash we will need to make timely payments on our
debt, including the notes. This could occur, for example, if our revenues
declined or our expenses increased relative to our revenues. In addition, we may
be unable to raise the funds needed to pay our obligations if our ability to
borrow in the credit markets were impaired, either because of a general
disruption in those markets or because of a decline in our credit ratings due to
events affecting our financial position in particular or our industry generally.
Similarly, our available cash could be reduced if we were unable to sell
securities or other assets we hold as needed or if The Goldman Sachs Group, Inc.
were unable to obtain sufficient funds from its subsidiaries because of
regulatory restrictions or financial problems affecting them. A significant and
sustained reduction in the cash available to The Goldman Sachs Group, Inc. could
make it difficult for us to meet our payment obligations on our debt, including
the notes, in a timely manner.
MARKET FLUCTUATIONS COULD HARM OUR
BUSINESSES IN MANY WAYS AND,
CONSEQUENTLY, COULD LOWER THE VALUE
OF AN INVESTMENT IN THE NOTES
As an investment banking and securities firm, our businesses are materially
affected by
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<PAGE> 14
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.
Developments such as lower revenues, declining profit margins and losses
from trading and investment activities could negatively affect the credit
ratings of the notes and, therefore, their market value. In addition, if
sufficiently severe, these developments could reduce the cash available to us to
make payments on our debt, including the notes. In the following paragraphs, we
describe several ways in which these developments could occur.
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 reduction
in the number or size of mergers and acquisitions transactions.
12
<PAGE> 15
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.
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<PAGE> 16
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 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.
If we were unable to manage our risk exposure effectively, the rating
agencies could lower our credit ratings, which could reduce the market value of
the notes and your ability to resell them at attractive prices. If we suffer
serious losses due to an inability to manage risk, this could also diminish our
available cash and make it difficult for us to make timely payments on our debt,
including the notes.
A LACK OF LIQUIDITY COULD HURT AN INVESTMENT IN THE NOTES BY IMPAIRING OUR
ABILITY TO FUND OUR OPERATIONS OR, IN SOME CASES, TO PAY AMOUNTS WE OWE ON OUR
DEBT
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.
If we were unable to meet our liquidity needs, we could find it necessary
to reduce our business activities or it could become difficult to continue them
in their current form. This could lead the rating agencies to reduce our credit
ratings, lowering the market value of the notes and making it harder for
investors to sell them. Moreover, if our ability to obtain financing or sell
assets were sufficiently impaired, we would be unable to obtain the cash we need
to meet our payment obligations on our debt, including the notes. In the
following paragraphs, we describe our
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<PAGE> 17
liquidity needs and the risks we face in meeting them.
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, 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, perhaps including
the notes. 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. 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. In addition, a reduction in the credit rating of
the
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<PAGE> 18
notes could adversely affect their market value or your ability to sell the
notes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity -- Credit Ratings" for additional information
concerning our credit ratings.
LOSSES DUE TO FINANCIAL OR OTHER PROBLEMS EXPERIENCED BY THIRD PARTIES COULD
IMPAIR AN INVESTMENT IN THE NOTES
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 obligations 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.
Significant failures by third parties to perform their obligations to us
could reduce our revenue and make it difficult for us to borrow in the credit
markets. If severe enough, these developments could reduce the amount of funds
available to us to meet our payment obligations on our debt, including the
notes, in a timely manner. Even in less severe cases, these developments could
raise concerns about our financial condition and lead the rating agencies to
lower our credit ratings. Thus, even if our ability to repay the notes were not
impaired, their market value could decline. In the following paragraphs, we
describe the ways in which we are exposed to these credit risks.
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.
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<PAGE> 19
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 microprocessors (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.
The Year 2000 problems described below could disrupt our normal funding
administration process, resulting in late payments or the payment of wrong
amounts on our debt, including the notes. If sufficiently severe and protracted,
these problems could also lead the rating agencies to reduce our credit ratings,
which could hurt the market value of the notes and possibly your ability to
resell them.
Our Computer Systems May Fail
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.
The Computer Systems of Third Parties on Which We Depend May Fail
We 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 dis-
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<PAGE> 20
close, 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.
Our Revenues May Decline If Market Activity Decreases Shortly Before and After
the Year 2000
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 the
impact that these kinds of reductions would have on our businesses.
We May Be Exposed to Litigation as a Result of Year 2000 Problems
We may 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.
Our Year 2000 Program May Not Be Effective and Our Estimates of Timing and Cost
May Not Be Accurate
Our Year 2000 program may not be effective and our estimates about the
timing and cost of completing our program may not be accurate. 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".
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. Conse-
18
<PAGE> 21
quently, 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.
If sufficiently severe and protracted, problems caused by our inability to
manage our operations effectively could lead the rating agencies to question our
controls and financial condition and to lower the credit ratings of the notes.
Problems of this kind could also reduce our profitability or make lenders less
willing to provide funding to us. If these two important sources of liquidity
were impaired, we could find it difficult to obtain the cash we need to make
payments on our debt, including payments on the notes.
LEGAL AND REGULATORY RISKS ARE INHERENT AND
SUBSTANTIAL IN OUR BUSINESSES AND COULD
LEAD TO A REDUCTION IN OUR CREDIT RATINGS
OR IN OUR ABILITY TO REPAY THE NOTES
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. In that event, the credit ratings, and therefore the market
value, of the notes could decline. In some cases, these developments could have
a negative effect on the willingness of our lenders to provide us with the funds
we may need to meet our payment obligations on our debt, including the notes, in
a timely manner.
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 Matters" 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
19
<PAGE> 22
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.
INVESTORS IN THE NOTES FACE ADDITIONAL RISK BECAUSE THE GOLDMAN SACHS GROUP,
INC. IS A HOLDING COMPANY
Because The Goldman Sachs Group, Inc. is a holding company, it depends on
dividends, distributions and other payments from its subsidiaries to fund all
payments on its debt obligations, including its obligations to make payments on
the notes we are offering. The Goldman Sachs Group, Inc.'s right to participate
in a distribution of assets of any of its subsidiaries, whether on liquidation,
reorganization or otherwise, however, will be subject to the prior claims of the
creditors of that subsidiary. The ability of holders of the notes to benefit
from distributions of assets from The Goldman Sachs Group, Inc.'s subsidiaries
will also be subject to those prior claims. Consequently, the notes will be
effectively subordinated to all existing and future liabilities and obligations
of The Goldman Sachs Group, Inc.'s subsidiaries. This means that, if any
subsidiary of The Goldman Sachs Group, Inc. were to become bankrupt or
insolvent, its assets would be used to satisfy its own liabilities and
obligations before The Goldman Sachs Group, Inc. could use those assets to make
payment on The Goldman Sachs Group, Inc.'s own liabilities and obligations,
including the notes.
THE VALUE OF THE NOTES MAY BE IMPAIRED
BECAUSE WE DEPEND ON FUNDS
FROM OUR REGULATED SUBSIDIARIES
Many of our subsidiaries, including Goldman, Sachs & Co., our principal
U.S. subsidiary, are subject to laws that authorize regulatory bodies to block
or reduce the flow of funds from those subsidiaries to The Goldman Sachs Group,
Inc. Regulatory action of that kind could impede our access to the funds we need
to make payments on our debt, including the notes.
WE MAY BE LIABLE TO CREDITORS
OF OUR PARTNERSHIP SUBSIDIARIES
Goldman, Sachs & Co. is structured as a partnership in which The Goldman
Sachs Group, Inc. is a general partner, and we may structure other subsidiaries
the same way. A general partner of a partnership may be liable for the
partnership's obligations. Thus, for example, if there were a bankruptcy or
liquidation proceeding with respect to any partnership subsidiary in which The
Goldman Sachs Group, Inc. is a general partner and the assets of that subsidiary
were insufficient to meet all its outstanding liabilities and obligations, The
Goldman Sachs Group, Inc.'s own assets could become available to the
subsidiary's creditors. This could reduce the assets of The Goldman Sachs Group,
Inc. that are available to satisfy The Goldman Sachs Group, Inc.'s direct
creditors, including investors in the notes.
WE MAY BE ABLE TO OBTAIN WAIVERS OF
SOME OF OUR COVENANTS UNDER THE NOTES
WITHOUT YOUR APPROVAL
The indenture governing the notes permits us to issue an unlimited amount
of debt securities in different series from time to time. The notes will be a
single, distinct series of debt securities under the indenture. If we want to
make some types of changes to the indenture or obtain a waiver of compliance
with our covenants under it, we must obtain the approval of the holders of a
majority in
20
<PAGE> 23
principal amount of all series of debt
securities that we issue under the indenture and that are affected by the change
or waiver, taken together as a single class. In many cases, the approval of
those holders will be sufficient for us to make the change or to obtain the
waiver, even if it affects the notes and the holders of a majority in principal
amount of the notes do not grant their approval. For a description of provisions
governing consents and waivers, see "Description of Notes We Are Offering --
Modification and Waiver of Covenants -- Changes Requiring Majority Approval".
EMPLOYEE MISCONDUCT IS DIFFICULT TO
DETECT AND DETER AND COULD HARM GOLDMAN SACHS AND REDUCE THE VALUE OF THE NOTES
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.
Employee misconduct could hurt our business, operations or financial
condition and could lead to a decline in our credit ratings and the
marketability of the notes. If these problems were severe enough, they could
also make it difficult for us to obtain from our operations or our lenders the
cash we may need to repay the notes when they come due.
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.
If we were unable to compete effectively, or if competition became too
costly, our business and operations could suffer. This in turn could lead to a
decline in the credit ratings of the notes. In the following paragraphs, we
describe some of the ways in which competition could affect us.
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 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.
21
<PAGE> 24
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, WHICH COULD IMPAIR
OUR ABILITY TO FUND PAYMENTS ON OUR DEBT
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.
If our business or operations were hurt by events in emerging and other
markets described below, the rating agencies could reduce the credit ratings of
the notes, making it more difficult for you to sell them at a favorable price.
If these events were severe enough, they could also diminish the cash generated
by our operations or impair our ability to borrow in the credit markets, making
it difficult for us to obtain the funds we need to meet our payment obligations
on the notes.
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.
22
<PAGE> 25
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 our common stock offering and the conversion of Goldman
Sachs from partnership to corporate form, the managing directors who were profit
participating limited partners received substantial amounts of common stock in
exchange for their interests in Goldman Sachs. Because these shares of common
stock were received in exchange for partnership interests, ownership of these
shares is not dependent upon these partners' continued employment. However,
these shares are 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 our common stock offering may not
be effective. For a description of the compensation plan for our senior
professionals that we have implemented in connection with our common stock
offering, see "Management -- The Partner Compensation Plan".
In connection with our common stock offering and conversion of Goldman
Sachs from partnership to corporate form, employees, other than the managing
directors who were profit participating limited partners, 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 Initial Public Offering Awards" for a description of
these awards.
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<PAGE> 26
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the notes in this
offering of approximately $1.5 billion. We intend to use the net proceeds from
this offering to provide additional funds for our operations and for other
general corporate purposes, including the repayment of short-term obligations
and the portion of long-term obligations coming due during the remainder of this
calendar year. Until we apply the proceeds to these uses, we expect to invest
them in short-term marketable securities. We intend to use the net proceeds from
our euro debt offering for the same purposes.
We do not expect to receive any proceeds from subsequent resales of the
notes by Goldman, Sachs & Co. or any of our other affiliates in market-making
transactions. We expect our affiliates to retain the proceeds of their
market-making resales and not pay the proceeds to us.
We intend to use the net proceeds from our common stock offering 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.
24
<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 our common stock offering, 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;
- - 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. 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 the managing directors
who were profit participating limited partners, 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 initial irrevocable contribution of shares of common stock to the defined
contribution plan;
- - the recognition of net tax assets; and
- - a contribution to the Goldman Sachs Fund, a charitable foundation.
The Pro Forma Consolidated Balance Sheet Information, however, does give
effect to these non-recurring items.
This Pro Forma Consolidated Financial Information, including the pro forma
ratio of earnings to fixed charges, does not give effect to this offering, our
euro debt offering or our new medium-term note program.
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.
25
<PAGE> 28
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
(unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 27, 1998
-----------------------------------------------------------------------------
PRO FORMA
ADJUSTMENT AS ADJUSTED
PRO FORMA FOR OUR COMMON FOR OUR COMMON
HISTORICAL ADJUSTMENTS PRO FORMA STOCK OFFERING STOCK OFFERING
---------- ----------- ------------ -------------- --------------
<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 initial public offering
awards............................. 3,838 303(b) 4,141 -- 4,141
Employee initial public offering
awards............................. -- 461(c) 461 -- 461
Other operating expenses............. 1,761 -- 1,761 -- 1,761
------- ------- ------- ----- -------
Total operating expenses............. 5,599 764 6,363 -- 6,363
Pre-tax earnings..................... 2,921 (792) 2,129 -- 2,129
Provision for taxes.................. 493 380(d) 873 -- 873
------- ------- ------- ----- -------
Net earnings......................... $ 2,428 $(1,172) $ 1,256 $ -- $ 1,256
======= ======= ======= ===== =======
Ratio of earnings to fixed charges... 1.21x 1.15x 1.15x
Shares outstanding:
Basic.............................. 424(e) 51(f) 475
Diluted............................ 428(e) 51(f) 479
Earnings per share:
Basic.............................. $ 2.96 $ 2.65
Diluted............................ 2.93 2.62
</TABLE>
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
(unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 26, 1999
-----------------------------------------------------------------------------
PRO FORMA
ADJUSTMENT AS ADJUSTED
PRO FORMA FOR OUR COMMON FOR OUR COMMON
HISTORICAL ADJUSTMENTS PRO FORMA STOCK OFFERING STOCK OFFERING
---------- ----------- ------------ -------------- --------------
<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 initial public offering
awards............................. 1,275 191(b) 1,466 -- 1,466
Employee initial public offering
awards............................. -- 115(c) 115 -- 115
Other operating expenses............. 532 -- 532 -- 532
------- ------- ------- ----- -------
Total operating expenses............. 1,807 306 2,113 -- 2,113
Pre-tax earnings..................... 1,188 (313) 875 -- 875
Provision for taxes.................. 181 178(d) 359 -- 359
------- ------- ------- ----- -------
Net earnings......................... $ 1,007 $ (491) $ 516 $ -- $ 516
======= ======= ======= ===== =======
Ratio of earnings to fixed charges... 1.41x 1.30x 1.30x
Shares outstanding:
Basic.............................. 427(e) 51(f) 478
Diluted............................ 437(e) 51(f) 488
Earnings per share:
Basic.............................. $ 1.21 $ 1.08
Diluted............................ 1.18 1.06
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Information.
26
<PAGE> 29
PRO FORMA CONSOLIDATED BALANCE SHEET INFORMATION
(unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
AS OF FEBRUARY 26, 1999
--------------------------------------------------------------------------
PRO FORMA
ADJUSTMENT AS ADJUSTED
PRO FORMA FOR OUR COMMON FOR OUR COMMON
HISTORICAL ADJUSTMENTS PRO FORMA STOCK OFFERING STOCK OFFERING
---------- ----------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 3,345 $ (200)(g) $ 134 $2,568(f) $ 2,702
(891)(h)
(888)(i)
(1,232)(k)
Other.................................. 227,279 1,815(l) 229,094 -- 229,094
-------- ------- -------- ------ --------
Total assets........................... $230,624 $(1,396) $229,228 $2,568 $231,796
======== ======= ======== ====== ========
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................. -- 3,356(m) 3,356 -- 3,356
Additional paid-in capital............. -- 3,605(j) 4,271 2,568(f) 6,839
666(m)
Retained earnings...................... -- (165)(b) (807) -- (807)
(200)(g)
1,815(l)
(2,257)(m)
Unearned compensation.................. -- (1,765)(m) (1,765) -- (1,765)
-------- ------- -------- ------ --------
Total stockholders' equity............. -- 5,059 5,059 2,568 7,627
Total liabilities, partnership capital
and stockholders' equity............. $230,624 $(1,396) $229,228 $2,568 $231,796
======== ======= ======== ====== ========
Book value per share................... $ 11.94 $ 16.07
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Information.
27
<PAGE> 30
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
NOTE 1: BASIS OF PRESENTATION
As permitted by the rules and regulations of the SEC, 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 the shares of common stock and nonvoting common
stock outstanding, including the shares of common stock underlying the
restricted stock units awarded to employees based on a formula, of 423,712,271
prior to our common stock offering and 474,712,271 as adjusted for our common
stock offering. Our nonvoting common stock has no voting rights (except as
required by law) but otherwise has the same rights and privileges, including
dividend rights, as the common stock. See Note 2(e) below for a further
discussion of shares outstanding.
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, our common stock offering and, where applicable,
the related transactions reflect the initial public offering price of $53.00 per
share.
For purposes of the pro forma ratio of earnings to fixed charges,
"earnings" represent pre-tax earnings plus fixed charges and "fixed charges"
represent interest expense plus that portion of rent expense that, in our
opinion, approximates the interest factor included in rent expense. Neither the
pro forma ratio of earnings to fixed charges nor the historical ratio of
earnings to fixed charges gives effect to this offering of notes, our euro debt
offering or our new medium-term note program.
NOTE 2: PRO FORMA ADJUSTMENTS AND ADJUSTMENT FOR OUR COMMON STOCK OFFERING
(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
The Goldman Sachs Group, L.P. and certain affiliates. These junior subordinated
debentures 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 INITIAL PUBLIC OFFERING
AWARDS. Since Goldman Sachs has operated as a partnership, there is no
meaningful historical measure of the compensation and benefits that would have
been paid, in corporate form, to the managing directors who were profit
participating limited partners for services rendered in fiscal 1998 and in the
three months ended February 26, 1999. Accordingly, management has estimated
these amounts, which are substantially performance-based, by reference to a pro
forma ratio of total compensation and benefits to net revenues that it deemed
appropriate for Goldman Sachs as a whole, given the historical operating results
in these periods. As a result, additional compensation and benefits expense
related to the managing directors who were profit participating limited partners
of $427 million in fiscal 1998 and $242 million in the three months ended
February 26, 1999 has been recorded on the Pro Forma Consolidated Income
Statement Information.
The future compensation and benefits related to services rendered by the
managing directors who were profit participating limited partners will be 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". Management anticipates that, consistent with industry practice, it will
adjust the form and structure of its compensation
28
<PAGE> 31
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
arrangements to achieve a relationship of compensation and benefits to net
revenues within a range that it believes is appropriate given prevailing market
conditions.
In addition to the employee initial public offering awards, restricted
stock units will also be granted to employees in lieu of a portion of ongoing
cash compensation. Of the total restricted stock units assumed to be granted in
lieu of cash compensation, 50% will require future service as a condition to the
delivery of the underlying shares of common stock. In accordance with Accounting
Principles Board Opinion No. 25, the restricted stock units with future service
requirements will be recorded as compensation expense over the four-year service
period following the date of grant. Goldman Sachs expects to record this expense
over the service period as follows: 52%, 28%, 14% and 6% in years one, two,
three and four, respectively. If these stock-based awards had been made from the
beginning of fiscal 1998, historical compensation expense would have been
reduced by $124 million in fiscal 1998 and $51 million in the three months ended
February 26, 1999 because a portion of cash compensation recorded in these
periods would have been replaced by restricted stock units with future service
requirements. These reductions are reflected in the Pro Forma Consolidated
Income Statement Information.
The adjustment of $165 million to the Pro Forma Consolidated Balance Sheet
Information reflects the additional compensation and benefits that we would have
recorded assuming the Pro Forma Adjustments had occurred as of February 26,
1999. This adjustment includes $232 million in compensation and benefits related
to the managing directors who were profit participating limited partners offset
by a reduction of $67 million related to the issuance of restricted stock units
to employees, in lieu of a portion of cash compensation, for which future
service is required as a condition to the delivery of the underlying shares of
common stock. This adjustment to the Pro Forma Consolidated Balance Sheet
Information excludes the compensation expense of $26 million in the first
quarter of fiscal 1999 related to the portion of restricted stock units that,
for pro forma income statement purposes only, were assumed to be awarded in
fiscal 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations -- Operating Expenses" for a
discussion of the actual expense we expect to record in the second quarter of
fiscal 1999.
(c) EXPENSE RELATED TO EMPLOYEE INITIAL PUBLIC OFFERING AWARDS. Adjustment
to reflect the amortization of the 33,292,869 restricted stock units awarded to
employees on a discretionary basis. On the date of grant, these restricted stock
units had a value of $1,765 million, approximately 26% of which will be
amortized as a non-cash expense in the twelve months following the date of
grant. The remaining 74% of the value of these restricted stock units will be
amortized over the next four years as follows: 26%, 26%, 15% and 7% in years
two, three, four and five, respectively.
The options to purchase 40,127,592 shares of common stock awarded to
employees on a discretionary basis 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 had 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 was $709 million using a Black-Scholes option pricing model. If Statement
of Financial Accounting Standards No. 123 had been applied, compensation expense
of $185 million and $46 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 Initial
Public Offering 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
29
<PAGE> 32
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
Sachs in corporate form at an effective tax rate of 41%.
(e) PRO FORMA COMMON STOCK AND NON-VOTING COMMON STOCK. Shares
outstanding, computed on a weighted-average basis, after giving effect to the
Pro Forma Adjustments. For the purpose of calculating basic earnings per share
and book value per share, shares outstanding prior to our common stock offering
includes the nonvoting common stock, the shares of common stock irrevocably
contributed to the defined contribution plan and, pursuant to Statement of
Financial Accounting Standards No. 128, the shares of common stock underlying
the restricted stock units awarded to employees on a discretionary basis since
future service is not 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 future service would not have been
required as a condition to the delivery of the underlying shares of common
stock.
Pro forma diluted shares outstanding prior to our common stock offering
reflects the dilutive effect of the common stock deliverable pursuant to the
restricted stock units awarded to employees on a discretionary basis, 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 OUR COMMON STOCK OFFERING. Shares as adjusted to
reflect the issuance of 51,000,000 shares of common stock offered by The Goldman
Sachs Group, Inc. in our common stock offering, which reflects the exercise, in
full, of the underwriters' options to purchase 9,000,000 shares of common stock.
Net proceeds from our common stock offering reflect the deduction of
underwriting discounts and of estimated expenses payable by Goldman Sachs in
connection with our common stock offering.
(g) CHARITABLE CONTRIBUTION. Adjustment to reflect the charitable
contribution of $200 million.
(h) RETIRED LIMITED PARTNER EXCHANGES 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 The Goldman Sachs 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 The Goldman Sachs Group, L.P. prior to the
incorporation transactions described under "Certain Relationships and Related
Transactions -- Incorporation and Related Transactions -- Incorporation
Transactions".
(j) PARTNER EXCHANGES OF INTERESTS FOR SHARES. Adjustment of $3,609
million to reflect the issuance of 265,019,073 shares of common stock to the
managing directors who were profit participating limited partners, 47,270,551
shares of common stock to retired limited partners, 30,425,052 shares of common
stock and 7,440,362 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 The Goldman Sachs
Group, L.P. and certain affiliates.
(k) CASH DISTRIBUTIONS. Adjustment to reflect cash distributions of $1,232
million by The Goldman Sachs 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
30
<PAGE> 33
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
the managing directors who were profit participating limited partners, Sumitomo
Bank Capital Markets, Inc. and Kamehameha Activities Association and
distributions to satisfy obligations to certain retired limited partners.
Goldman Sachs made additional cash distributions for partner income taxes
related to earnings in the second quarter of fiscal 1999 that were significant
due, in part, to certain expenses that were not deductible by the partners.
Goldman Sachs recognized a substantial tax asset on the consummation of our
common stock offering 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 $1,815 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 The Goldman Sachs Group,
L.P. to corporate form, (ii) a benefit of $925 million related to the 30,025,946
restricted stock units awarded to employees based on a formula and the initial
irrevocable contribution of 12,555,866 shares of common stock to the defined
contribution plan and (iii) a benefit of $82 million related to the charitable
contribution.
As discussed in Note 2(k) above, Goldman Sachs recognized a substantial tax
asset on the consummation of our common stock offering related to certain
expenses that were 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 INITIAL PUBLIC OFFERING
AWARDS. Adjustment to reflect the effect on the components of stockholders'
equity, excluding the tax benefit described in Note 2(l) above, of (i) the
restricted stock units awarded to employees based on a formula, (ii) the initial
irrevocable contribution of shares of common stock to the defined contribution
plan and (iii) the restricted stock units awarded to employees on a
discretionary basis.
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>
Restricted stock units awarded based on
a formula............................. $-- $1,591 $ -- $(1,591) $ --
Contribution of shares of common stock
to the defined contribution plan...... -- -- 666 (666) --
Restricted stock units awarded on a
discretionary basis................... -- 1,765 -- -- (1,765)
--- ------ ---- ------- -------
Total Adjustment........................ $-- $3,356 $666 $(2,257) $(1,765)
=== ====== ==== ======= =======
</TABLE>
31
<PAGE> 34
CAPITALIZATION
The following table sets forth the consolidated capitalization of Goldman
Sachs as of February 26, 1999 on an historical basis, and on a pro forma basis
after giving effect to the Pro Forma Adjustments, described under "Pro Forma
Consolidated Financial Information", and as further adjusted for:
- - the sale of 51,000,000 shares of common stock by The Goldman Sachs Group, Inc.
in our common stock offering at the initial public offering price of $53.00
per share, after deduction of the underwriting discounts and estimated
expenses payable by Goldman Sachs in our common stock offering;
- - the sale of the notes in this offering; and
- - the issuance of (euro)1.0 billion aggregate principal amount of our debt
securities, payable in euros, in our euro debt offering.
The table below does not give effect to our new medium-term note program.
This table should be read in conjunction with the consolidated financial
statements and their notes and the Pro Forma Consolidated Financial Information
and their notes.
<TABLE>
<CAPTION>
AS OF FEBRUARY 26, 1999
---------------------------------------------------
PRO FORMA AS
ADJUSTED
FOR OUR COMMON STOCK
OFFERING, THIS OFFERING
AND OUR
HISTORICAL PRO FORMA EURO DEBT OFFERING
---------- --------- -----------------------
($ in millions)
<S> <C> <C> <C>
Short-term borrowings (including commercial paper)(1)....... $33,863 $33,863 $ 33,863
======= ======= =========
Long-term borrowings:
Senior debt other than the notes we are offering and euro
debt securities(2)...................................... $20,405 $20,405 $ 20,405
Notes to be sold in this offering......................... -- -- 1,500
Debt securities to be sold in our euro debt offering(3)... -- -- 1,078
Junior subordinated debentures(4)......................... -- 371 371
------- ------- ---------
Total long-term borrowings......................... 20,405 20,776 23,354
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, 437,245,963 shares issued and
outstanding(5).......................................... -- 4 4
Restricted stock units; 63,318,815 units issued and
outstanding(6).......................................... -- 3,356 3,356
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized and 7,440,362 shares
issued and outstanding.................................. -- 0 0
Additional paid-in capital................................ -- 4,271 6,839
Retained earnings......................................... -- (807) (807)
Unearned compensation(7).................................. (1,765) (1,765)
------- ------- ---------
Total stockholders' equity......................... -- 5,059 7,627
------- ------- ---------
Total capitalization............................. $27,017 $25,835 $ 30,981
======= ======= =========
</TABLE>
- ---------------
(1) Includes current portion of long-term borrowings of $6,285 million. See Note
4 to the unaudited condensed consolidated financial statements as of
February 26, 1999 for further information regarding Goldman Sachs'
short-term borrowings.
(2) Includes subordinated debt of Goldman, Sachs & Co. of $275 million.
(Footnotes
continued on following page)
32
<PAGE> 35
(3) Euros have been converted to dollars at the rate of $1.0779 for (euro)1.00,
the noon buying rate for cable transfers in New York City on May 6, 1999.
(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 12,555,866 shares of common stock
irrevocably contributed to the defined contribution plan. Common stock
outstanding excludes 40,127,592 shares of common stock deliverable pursuant
to the options awarded to employees on a discretionary basis. See
"Management -- The Employee Initial Public Offering Awards" for more
detailed information regarding these awards.
(6) Restricted stock units include 30,025,946 shares of common stock underlying
the restricted stock units awarded to employees based on a formula and
33,292,869 shares of common stock underlying the restricted stock units
awarded to employees on a discretionary basis.
(7) Unearned compensation relates to the award of the restricted stock units
awarded to employees on a discretionary basis.
33
<PAGE> 36
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'
condensed 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 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)
<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 (UNAUDITED)(3):
Pro forma net earnings.......................... -- -- -- -- $ 1,256 -- $ 516
Pro forma ratio of earnings to fixed
charges(4).................................... -- -- -- -- 1.15x -- 1.30x
Pro forma stockholders' equity as adjusted for
our common stock offering..................... -- -- -- -- -- -- $ 7,627
</TABLE>
34
<PAGE> 37
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
---- ---- ---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED DATA AND RATIOS (UNAUDITED):
Ratio of earnings to fixed charges(1)(4)........ 1.06x 1.14x 1.23x 1.23x 1.21x 1.30x 1.41x
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(5).............................. 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 historically operated in partnership form, payments to our profit
participating limited partners were 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 managing directors who were profit
participating limited partners. Accordingly, our historical pre-tax earnings
understate the expected operating costs to be incurred by us after our
conversion to corporate form. As a corporation, we will include payments for
services rendered by our managing directors who were 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) For purposes of the ratio of earnings to fixed charges, "earnings" represent
pre-tax earnings plus fixed charges and "fixed charges" represent interest
expense plus that portion of rent expense that, in our opinion, approximates
the interest factor included in rent expense. Neither the pro forma ratio of
earnings to fixed charges nor the historical ratio of earnings to fixed
charges gives effect to this offering of notes, our euro debt offering or
our new medium-term note program.
(5) Excludes employees of Goldman Sachs' two property management subsidiaries,
The Archon Group, L.P. and Archon Group (France) S.C.A. 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> 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.
When we use the terms "Goldman Sachs", "we" and "our", we mean, prior to
the principal incorporation transactions that are described under "Certain
Relationships and Related Transactions -- Incorporation and Related
Transactions -- Incorporation Transactions", The Goldman Sachs Group, L.P., a
Delaware limited partnership, and its consolidated subsidiaries and, after the
incorporation transactions, The Goldman Sachs Group, Inc., a Delaware
corporation, 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, this
caused a substantial reduction in market liquidity and a continuing decline in
prices.
36
<PAGE> 39
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 were not 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 operated as a partnership, payments to our profit
participating limited partners were 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
managing directors who were profit participating limited partners and has
therefore understated the expected operating costs to be incurred by us after
our conversion to corporate form. As a corporation, we will include these
payments to managing directors who were 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
managing directors who were profit participating limited partners.
Moreover, in connection with our common stock offering, we recognized the
effect of the following non-recurring items in the second quarter of 1999:
- - the award of the restricted stock units to employees based on a formula;
- - the initial irrevocable contribution of shares of common stock to the defined
contribution plan;
- - the net tax assets; and
- - the contribution to the Goldman Sachs Fund, a 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 managing directors
who were profit participating limited partners in 1999 based on the annualized
results for the first
37
<PAGE> 40
half of 1999 offset by (ii) the effect of issuing restricted stock units to
employees in lieu of cash compensation, for which future service is required as
a condition to the delivery of the underlying shares of common stock. In
accordance with Accounting Principles Board Opinion No. 25, these restricted
stock units will be recorded as compensation expense over the four-year vesting
period following the date of grant.
As a result, we expect to record a substantial pre-tax loss in the second
quarter of 1999. See "Risk Factors -- We Expect to Record a Substantial Pre-Tax
Loss in the Second Quarter of Fiscal 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
---- ---- ---- ---- ----
<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.
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<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
---- ---- ---- ---- ----
<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
---- ---- ---- ---- ----
<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 entertainment, healthcare and financial institutions
groups. Our Investment Banking business was particularly strong in Europe and
the United States.
39
<PAGE> 42
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
the increased share of the income and gains from our merchant banking funds to
which Goldman Sachs is entitled when the return on investments exceeds certain
threshold returns to fund investors. These management fees and increased shares
of income and gains 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.
40
<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
---- ---- ---- ---- ----
<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 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 over-the-counter 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 mergers and
acquisi-
41
<PAGE> 44
tions 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 over-the-counter 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. Revenues from the increased
share of the income and gains 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
---- ---- ---- ---- ----
<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>
42
<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
---- ---- ---- ---- ----
<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 revenues from the increased
share of income and gains from our merchant banking funds 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. Revenues from the increased
share of income and gains from our merchant banking funds 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 Cor-
43
<PAGE> 46
poration in June 1997. Net revenue growth in 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. Revenues from the
increased share of income and gains from our merchant banking funds 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 historically operated in partnership form, payments to our profit
participating limited partners were 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
managing directors who were profit participating limited partners. Accordingly,
our historical compensation and benefits, the principal component of our
operating expenses, will increase significantly as a result of our conversion to
corporate form since, as a corporation, we will include these payments to our
managing directors who were 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 managing directors
who were profit participating limited partners 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, for which
future service is required as a condition to the delivery of the underlying
shares of common stock. In accordance with Accounting Principles Board Opinion
No. 25, these restricted stock units will be recorded as compensation expense
over the four-year vesting period following the date of grant. In addition, we
expect to record non-cash compensation expense related to the amortization of
the restricted stock units awarded to employees on a discretionary basis over
the five-year period following the consummation of our common stock offering.
The non-cash expense related to these restricted stock units 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.
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<PAGE> 47
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
---- ---- ---- ---- ----
<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, The Archon Group, L.P. and Archon Group (France) S.C.A.
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".
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 as-
45
<PAGE> 48
sociated 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 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
The Goldman Sachs Group, L.P., as a partnership, generally was not subject
to U.S. federal and state income taxes. The earnings of The Goldman Sachs 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.
46
<PAGE> 49
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 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
47
<PAGE> 50
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, the SEC's Rule
144A and the commercial paper markets, as well as through Eurobonds, money
broker loans, commodity-based financings, letters of credit and promissory
notes. We also intend to begin raising debt in the public securities market,
including through this offering, our euro debt offering and our new medium-term
note program. 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 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
the parent company, which, since our conversion to corporate form, is The
Goldman Sachs Group, Inc. The parent company 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 the parent company. This
policy ensures that the subsidiaries' obligations to the parent company will
generally mature in advance of the parent company'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.
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<PAGE> 51
Prior to our conversion to corporate form, we generally funded 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 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" 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 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 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.
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
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<PAGE> 52
States and elsewhere. Goldman, Sachs & Co.,
a registered U.S. broker-dealer, is regulated by the SEC, the Commodity Futures
Trading Commission, the Chicago Board of Trade, the NYSE and the NASD. Goldman
Sachs International, a registered United Kingdom 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,
evaluate 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 Harm Our Businesses in Many Ways and, Consequently, Could Lower the Value
of an Investment in the Notes" 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 the
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>
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<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 Harm 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:
DAILY TRADING NET REVENUES
[DAILY TRADING NET REVENUES BAR CHART]
<TABLE>
<S> <C>
NUMBER OF DAYS DOLLARS
- -------------- -----------------------------------------
<(60) 9.00
(60)-(40) 5.00
(40)-(20) 22.00
(20)-0 31.00
0-20 87.00
20-40 67.00
40-60 24.00
>60 6.00
</TABLE>
DAILY TRADING NET REVENUES (IN MILLIONS OF DOLLARS)
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<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, which are often referred to as over-the-counter 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 over-the-counter 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 over-the-counter derivatives
as of November 1998, after taking into consideration the effect of netting
agreements. The categories shown reflect our in-
55
<PAGE> 58
ternally determined public rating agency equivalents.
OVER-THE-COUNTER DERIVATIVE CREDIT EXPOSURES
($ 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 over-the-counter derivative 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 com-
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<PAGE> 59
pliance 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.
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 ser-
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<PAGE> 60
vice 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 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, as well as the Securities
Industry Association "Streetwide" test in April 1999, with no material problems.
By the end of June 1999, we expect to have participated in approximately 60
additional external tests, including 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
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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 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 issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities", effective for
transactions occurring after December 31, 1996. Statement of Financial
Accounting Standards 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 Statement of Financial Accounting Standards No. 125
relating to repurchase agreements, securities lending transactions and other
similar transactions were deferred by the provisions of Statement of Financial
Accounting Standards 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 Statement of Financial Accounting Standards No. 125 that were
deferred by Statement of Financial Accounting Standards 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 Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", effective for
periods ending after December 15, 1997, with restatement required for all prior
periods. Statement of Financial Accounting Standards No. 128 establishes new
standards for computing and presenting earnings per share. This Statement
replaces primary and fully diluted earnings per share with "basic earnings per
share", which excludes dilution, and "diluted earnings per share", which
includes the effect of all potentially dilutive common shares and other dilutive
securities. Because we have not historically reported earnings per share, this
Statement will have no impact on our historical financial statements. This
Statement will, however, apply to our financial statements that are prepared
after our common stock offering. See "Pro Forma Consolidated Financial
Information" for a calculation of pro forma earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. Statement of Financial Accounting Standards 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 Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits", effective for fiscal years
beginning after December 15,
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1997, with restatement of disclosures for earlier periods required for
comparative purposes. Statement of Financial Accounting Standards 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 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.
Statement of Position 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. 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 Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", effective for fiscal years beginning after June 15,
1999. Statement of Financial Accounting Standards 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 gross domestic product)
(volume in millions of shares)
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED DECEMBER 31,
-------------------------------------- CAGR(8)
1983 1988 1993 1998 '83-'98
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
GENERAL ECONOMIC ACTIVITY:
(in trillions)
Worldwide gross domestic product(1).............. $ 10 $ 18 $ 24 $ 29(9) 8%(9)
U.S. gross domestic product(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) 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, Goldman, Sachs & 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) Compound annual growth rate.
(9) 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
closing of our common stock offering we granted restricted stock units, stock
options and interests in a defined contribution plan to substantially all of our
employees. Upon the closing of our common stock offering, our employees,
including former partners, owned approximately 65% of Goldman Sachs. None of our
employees sold shares in our common stock offering.
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, The Goldman Sachs Group, L.P. was formed to serve as the parent
company of the Goldman Sachs organization. As of November 30, 1996, The Goldman
Sachs Group, L.P. was restructured. On that date, the non-retiring former
general partners of The Goldman Sachs Group, L.P. converted their general
partner interests into limited partner interests and became profit participating
limited partners of The Goldman Sachs Group, L.P. Concurrently, The Goldman
Sachs Corporation was admitted as The Goldman Sachs Group, L.P.'s sole general
partner. The common stock of The Goldman Sachs Corporation was owned by our
managing directors who were profit participating limited partners, all of whom
were active in our businesses.
The Goldman Sachs Group, Inc. was formed to succeed to the business of The
Goldman Sachs Group, L.P. Simultaneously with the closing of our common stock
offering, we completed a number of transactions in order to convert from
partnership to corporate form. See "Certain Relationships 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
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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 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 net
- -- Financial restructuring -- Currencies worth asset management
advisory services -- Equity and fixed income -- Margin lending
- -- Mergers and acquisitions derivatives -- Matched book
advisory services -- Equity and fixed income -- Merchant banking fees
- -- Real estate advisory securities -- Increased shares of
services -- Principal investments merchant banking fund income
-- Proprietary arbitrage and gains
-- 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
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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.
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'
commit-
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ment 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 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
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
====== ====== ====== ====== ======
</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.
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>
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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.
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 $957 billion.
Our mergers and acquisitions capabilities are evidenced by our significant
share of assignments in large, complex transactions where we provide multiple
services, including "one-stop" acquisition financing, currency hedging and
cross-border structuring expertise. Goldman Sachs advised on seven of the ten
largest mergers and acquisitions transactions through December 31, 1998. We have
also been successful in Europe, including in intra-country transactions, and we
are a leading mergers and acquisitions advisor in France, Germany and Spain.
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<PAGE> 71
The following table illustrates our leadership in the mergers and
acquisitions advisory market for the indicated period taken as a whole:
GOLDMAN SACHS' MERGERS AND ACQUISITIONS MARKET DATA
For the period January 1, 1994 through December 31, 1998
($ 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....................... 1 15.2% $ 44 300
Worldwide initial public offerings, proceeds over $500
million................................................ 1 23.3 25 59
Worldwide public common stock offerings.................. 1 14.4 101 634
U.S. initial public offerings............................ 1 15.3 31 179
U.S. initial public offerings, 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 initial public offerings with total proceeds
over $500 million is substantially higher than our market share of all initial
public offerings. We believe our leadership in large initial public offerings
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 initial public offerings. 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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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 over-the-counter 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, among 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 Harm Our Businesses in Many Ways and, Consequently, Could
Lower the Value of an Investment in the Notes -- 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 we structure,
distribute and execute over-the-counter 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
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<PAGE> 76
undertake hedging strategies and establish or liquidate investment 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 on 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 Harm Our Businesses in
Many Ways and, Consequently, Could Lower the Value of an Investment in the
Notes" 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. Revenues from the increased
share of income and gains 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
[PROJECT ECHO BAR GRAPH] (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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<PAGE> 80
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 and
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
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capital that are in the process of being wound down. Other funds, with total
committed capital 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, The Archon
Group, L.P. and Archon Group (France) S.C.A. 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 that is a percentage, typically
20%, of the capital appreciation and gains from the fund's investments. Revenues
from the increased share of the fund's income and gains 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
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market, providing us with a competitive advantage. We believe that a significant
cause of the growth in short sales, which require the 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 the increased share of
income and gains from merchant banking funds as well as commissions earned from
brokerage transactions for high net worth individuals. For a discussion
regarding our increased share of the income and gains from our merchant banking
funds, 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.
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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 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(SM), which, in conjunction with Goldman, Sachs & Co., acts as an
underwriter of securities offerings via the Internet and other electronic means.
GS-Online(SM) 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
Information Systems, Inc., TradeWeb LLC, Archipelago L.L.C., The BRASS Utility,
L.L.C., OptiMark Technologies, Inc. and, most recently, Wit Capital Group, Inc.
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.
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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 Computer 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,
The Archon Group, L.P. and Archon Group (France) S.C.A., 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 Initial Public Offering Awards" for a
discussion of the steps taken by Goldman Sachs to encourage the continued
service of its employees after our common stock offering.
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 com-
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petitors 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 motivate 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 finan-cial 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
SEC is the federal agency responsible for the administration of the federal
securities laws. Goldman, Sachs & 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 Goldman, Sachs & Co. In addition,
state securities and other regulators also have regulatory or oversight
authority over Goldman, Sachs & Co. Similarly, our businesses are also subject
to
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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 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. Goldman, Sachs &
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, Goldman, Sachs & Co. is subject to the SEC's uniform net capital
rule, Rule 15c3-1. This 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. Goldman, Sachs & 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 SEC's 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 its uniform net capital rule
and related regulations that permit the registration of over-the-counter
derivatives dealers as broker-dealers. An over-the-counter 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 over-the-counter derivatives dealer to conduct in a more capital efficient
manner certain over-the-counter 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 Finan-
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cial 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 United Kingdom
securities and commodities exchanges of which they are members. It is expected,
however, 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 United Kingdom 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, including the notes. See "Risk Factors -- Legal and Regulatory
Risks Are Inherent and Substantial in Our Businesses", "-- Investors in the
Notes Face Additional Risk Because The Goldman Sachs Group, Inc. Is a Holding
Company" and "-- The Value of the Notes May Be Impaired Because We Depend on
Funds from Our Regulated Subsidiaries" for a discussion of limitations on our
ability to receive funds from regulated subsidiaries.
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
Goldman, Sachs & Co. has been named as a defendant in a purported class
action lawsuit commenced on December 6, 1996 and pending in the U.S. District
Court for the District of New Jersey. This lawsuit was brought on behalf of
purchasers of common stock of MobileMedia Corporation in an underwritten
offering in 1995 and purchasers of senior subordinated notes of MobileMedia
Communications Inc. in a concurrent underwritten offering. Defendants are
MobileMedia Corporation, certain of its officers and directors, and the lead
underwriters, including Goldman, Sachs & Co. MobileMedia Corporation is
currently reorganizing in bankruptcy.
Goldman, Sachs & 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 approxi-
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mately $17 million. Goldman, Sachs & 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 Corporation's bankruptcy, the
action against it has been stayed. Defendants' motion to dismiss was denied in
October 1998.
ANTITRUST MATTERS RELATING TO UNDERWRITINGS
Goldman, Sachs & Co. is one of numerous financial services companies that
have been named as defendants in certain purported class actions brought in the
U.S. District Court for the Southern District of New York 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 on August 21, 1998,
alleges that the defendants have conspired to discourage or restrict the resale
of securities for a period 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 were commenced, beginning on November 3,
1998, that 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.
Goldman, Sachs & Co. received a Civil Investigative Demand on April 29,
1999 from the U.S. Department of Justice requesting information with respect to
its investigation of an alleged conspiracy among securities underwriters to fix
underwriting fees.
ROCKEFELLER CENTER PROPERTIES, INC. LITIGATION
Several former shareholders of Rockefeller Center Properties, Inc. brought
purported class actions in the U.S. District Court for the District of Delaware
and the Delaware Chancery Court arising from the acquisition of Rockefeller
Center Properties, Inc. by an investor group in July 1996. The defendants in the
actions include, among others, Goldman, Sachs & Co., Whitehall Real Estate
Partnership V, a fund advised by Goldman, Sachs & Co., a Goldman, Sachs & Co.
managing director and other members of the investor group. The federal court
actions, which have since been consolidated, were filed beginning on November
15, 1996, and the state court action was filed on May 29, 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 brought a claim on March
30, 1998 in the Commercial Court in London against Goldman Sachs International
in relation to the plaintiffs' 1997 purchase of the polymer division of one of
Goldman Sachs International's Norwegian clients, Jotun A/S. The plaintiffs claim
that they 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
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Reichhold Chemicals, Inc. and Reichhold Norway ASA, on the one hand, and Jotun
A/S in Norway, on the other. The stay order is currently being reviewed by an
appellate court.
MATTERS RELATING TO MUNICIPAL SECURITIES
Goldman, Sachs & 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 Goldman,
Sachs & Co. to certain municipal bond issuers in connection with the advanced
refunding of municipal securities. Goldman, Sachs & Co. understands that certain
municipal bond issuers to which Goldman, Sachs & 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 Goldman, Sachs & 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.
Goldman, Sachs & Co. is also one of many municipal underwriting firms that
have been named as defendants in a purported class action brought on November
24, 1998 in the U.S. District Court for the Middle District of Florida 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, and seeks to recover
the difference between the actual and alleged "fair" prices. The defendants
moved to dismiss the complaint on April 30, 1999.
AMF SECURITIES LITIGATION
The Goldman Sachs Group, L.P., Goldman, Sachs & Co. and a Goldman, Sachs &
Co. managing director have been named as defendants in a purported class action
lawsuit commenced on April 27, 1999 in the U.S. District Court for the Southern
District of New York. This lawsuit was brought on behalf of purchasers of stock
of AMF Bowling, Inc. in an underwritten initial public offering of 15,525,000
shares of common stock in November 1997 at a price of $19.50 per share.
Defendants are AMF Bowling, Inc., certain officers and directors of AMF Bowling,
Inc. (including the Goldman, Sachs & Co. managing director), and the lead
underwriters of the offering (including Goldman, Sachs & Co.). The complaint
alleges violations of the disclosure requirements of the federal securities laws
and seeks compensatory damages and/or rescission. The complaint asserts that The
Goldman Sachs Group, L.P. and the Goldman, Sachs & Co. managing director are
liable as controlling persons under the federal securities laws because certain
funds managed by Goldman Sachs owned a majority of the outstanding common stock
of AMF Bowling, Inc. and the managing director served as its chairman at the
time of the offering.
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
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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 directors and executive
officers of Goldman Sachs as of the date of this prospectus. 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 our 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 The Goldman Sachs 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 The Goldman Sachs 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 The Goldman Sachs 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 The Goldman Sachs Group, L.P. since
March 1999 and Co-Chief Operating Officer of The Goldman Sachs 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
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1999. He was Group Chief Executive of The 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 The Goldman Sachs 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 The Goldman Sachs Group, L.P. or its
predecessor since 1988. From 1980 to 1988, Mr. Katz was a partner in Sullivan &
Cromwell.
Mr. Palm has been General Counsel of The Goldman Sachs 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 The Goldman
Sachs 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 The Goldman Sachs 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 The Goldman Sachs Group,
L.P. and Co-Head of Operations, Finance and Resources since March 1999. From
July 1998 until then, he was 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 The Goldman Sachs
Group, L.P. and Co-Head of Operations, Finance and Resources since March 1999.
From 1994 until then he was 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, Jon S. Corzine, 52, resigned his positions as a Director and
Co-Chairman of Goldman Sachs immediately prior to the date of our common stock
offering. After seeing through the completion of our common stock offering, a
project Mr. Corzine believes is of great importance to Goldman Sachs, he left
Goldman Sachs to pursue other interests. Mr. Corzine was Co-Chairman of The
Goldman Sachs Group, L.P. since June 1998 and served as Chairman and Chief
Executive Officer of The Goldman Sachs 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
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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 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 charter provides 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
are members of Class I, Sir John Browne and Messrs. Johnson and Weinberg are
members of Class II and Messrs. Hurst and Paulson are 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 our board of directors will meet at least quarterly.
Members of our 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.
Since the completion of our common stock offering, Mr. Weinberg has
continued 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
Our 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.
Our board of directors will also have a Compensation Committee. The
Compensation
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Committee will oversee the compensation and benefits of the management and
employees of Goldman Sachs and will consist entirely of non-employee directors.
Our board of directors may from time to time establish other committees to
facilitate the management of Goldman Sachs.
EXECUTIVE COMPENSATION
Prior to our common stock offering, 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 our common stock offering.
However, Goldman Sachs does not believe that the aggregate compensation that
will be paid in fiscal 1999 to the continuing named executive officers referred
to below will exceed levels that are customary for similarly situated executives
in the investment banking industry.
The following table sets forth compensation information for our Chief
Executive Officer, three of our continuing executive officers named under
"-- Directors and Executive Officers" and two former executive officers of The
Goldman Sachs Group, L.P. (the "named executive officers").
FISCAL 1998 COMPENSATION INFORMATION(1)
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION
- ---------------------------
<S> <C>
Henry M. Paulson, Jr.,...................................... $12,700,000
1998: Co-Chairman and Co-Chief Executive Officer
(1999: Director, Chairman and Chief Executive Officer)
Robert J. Hurst,............................................ 11,300,000
1998: Vice Chairman
(1999: Director and Vice Chairman)
John A. Thain,.............................................. 11,200,000
1998: Chief Financial Officer
(1999: Director, President and Co-Chief Operating Officer)
John L. Thornton,........................................... 9,900,000
1998: Chairman of International Operations
(1999: Director, President and Co-Chief Operating Officer)
Jon S. Corzine(2),.......................................... 12,800,000
1998: Co-Chairman and Co-Chief Executive Officer
Roy J. Zuckerberg(3),....................................... 11,000,000
1998: Vice Chairman
</TABLE>
-------------------------
(1) The amounts in the table represent compensation for fiscal 1998
only and do not include that portion of each named executive
officer's total partnership return from The Goldman Sachs Group,
L.P. in 1998 attributable to a return on his invested capital or
to his share of the income from investments made by Goldman Sachs
in prior years that was allocated to the individuals who were
partners in those years. The return on invested capital for each
named executive officer was determined using a rate of 12%, the
actual fixed rate of return that was paid in 1998 to our retired
limited partners on their long-term capital.
(2) Mr. Corzine resigned from Goldman Sachs prior to the consummation
of our common stock offering.
(3) Mr. Zuckerberg retired in November 1998.
----------------------
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, Corzine and Zuckerberg has accrued benefits
under the employees' pension plan entitling him to receive annual benefits upon
retirement at age 65 of $10,533, $10,533, $7,074, $11,801, $9,942 and $7,721,
respectively. These benefits had accrued prior to November 1992 and none of
these executive officers has earned additional benefits under the pension plan
since November 1992.
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EMPLOYMENT, NONCOMPETITION AND
PLEDGE AGREEMENTS
In connection with our common stock offering, Goldman Sachs has entered
into employment agreements with each profit participating limited partner who
continues as a managing director and pledge agreements and agreements relating
to noncompetition and other covenants with all of the managing directors who
were profit participating limited partners, whether or not they retire,
including, in both cases, each managing director who is a member of our board of
directors or is an executive officer.
The following are descriptions of the material terms of the employment,
noncompetition and pledge agreements with the managing directors who were profit
participating limited partners. 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 each continuing managing director
who was a profit participating limited partner 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 that managing director 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 managing director who was a profit participating
limited partner 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 a
managing director who was a profit participating limited partner ceases to be
employed by Goldman Sachs, that managing director 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 that managing director's
activities at Goldman Sachs.
When we refer to a "competitive enterprise", we are referring to 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 a
managing director who was a profit participating limited partner ceases to be
employed by Goldman Sachs, that managing director may not, directly or
indirectly, in any manner:
- - solicit any client with whom that managing director worked, or whose identity
became known to him or her 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 managing director who was a profit
participating limited partner is required, upon termination of his or her
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
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relationships with Goldman Sachs' clients with which he or she worked.
LIQUIDATED DAMAGES. In the case of any breach of the noncompetition or
nonsolicitation provisions prior to the fifth anniversary of the date of the
consummation of our common stock offering, the breaching managing director will
be liable for liquidated damages. The amount of liquidated damages for each
managing director 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 managing director who was a profit
participating limited partner 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.
PLEDGE AGREEMENT
The liquidated damages provisions of each noncompetition agreement are
secured by a pledge of stock or other assets with an initial value equal to 100%
of the applicable liquidated damages amount.
Each pledge agreement will terminate on the earliest to occur of:
- - the death of the relevant managing director;
- - the expiration of the 24-month period following the termination of the
employment of the relevant managing director; or
- - the fifth anniversary of the date of the consummation of our common stock
offering.
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 INITIAL PUBLIC OFFERING AWARDS
In connection with the consummation of our common stock offering, we
provided awards to our employees and a limited number of consultants and
advisors, other than managing directors who were profit participating limited
partners, in one or more of the following forms:
- - substantially all employees received a grant of restricted stock units awarded
based on a formula, with respect to which up to an aggregate of 30,025,946
shares of common stock will be deliverable;
- - certain senior employees, principally managing directors who were not profit
participating limited partners, were selected to participate in the defined
contribution plan described below, to which Goldman Sachs has made an initial
irrevocable contribution of 12,555,866 shares of common stock;
- - certain employees received a grant of restricted stock units awarded on a
discretionary basis, with respect to which up to an aggregate of 33,292,869
shares of common stock will be deliverable; and
- - certain employees received a grant of options to purchase shares of common
stock awarded on a discretionary basis, with respect to which up to an
aggregate of 40,127,592 shares of common stock will be deliverable.
The restricted stock units awarded to employees based on a formula, the
restricted stock units awarded to employees on a discretionary basis and the
options to purchase shares of common stock awarded to employees on a
discretionary basis were granted under the stock incentive plan described below.
The restricted stock units awarded to employees on a discretionary and a formula
basis described below 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
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subject to the shareholders' agreement described in "Certain Relationships and
Related Transactions -- Shareholders' Agreement".
FORMULA AWARDS
The common stock underlying the restricted stock units awarded based on a
formula generally will be deliverable in equal installments on or about the
first, second and third anniversaries of the date of the consummation of our
common stock offering, 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 these
restricted stock units are outstanding, amounts equal to regular cash dividends
that would have been paid on the common stock underlying these units 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 recorded
non-cash compensation expense of $1,591 million related to the restricted stock
units awarded based on a formula on the date of grant, since future service is
not 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 restricted stock units awarded based
on a formula are included in common stock outstanding for the reason described
above.
DISCRETIONARY AWARDS
RESTRICTED STOCK UNITS AWARDED ON A DISCRETIONARY BASIS. The restricted
stock units awarded on a discretionary basis will vest, and the underlying
common stock will be delivered, in equal installments on or about the third,
fourth and fifth anniversaries of the date of consummation of our common stock
offering 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 these restricted stock units are
outstanding, amounts equal to regular cash dividends that would have been paid
on the common stock underlying these units 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 $1,765 million related to the restricted stock
units awarded on a discretionary basis 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 these restricted stock units are excluded from common
stock outstanding since future service is 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 shares outstanding using
the treasury stock method.
DISCRETIONARY OPTIONS. The options to purchase shares of common stock
awarded on a discretionary basis have been granted
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with an exercise price generally equal to the initial public offering price per
share in our common stock offering, although in certain non-U.S. jurisdictions
certain employees may have been granted discretionary options with a lower
exercise price. These discretionary options will generally be exercisable in
equal installments commencing on or about the third, fourth and fifth
anniversaries of the date of the consummation of our common stock offering 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. These discretionary options will thereafter generally remain
exercisable, subject to satisfaction of certain conditions, until the tenth
anniversary of the date of the consummation of our common stock offering or, if
earlier, upon expiration of a period, as specified in the award agreement,
following termination of employment.
These 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 had no intrinsic
value on the date of grant, no compensation expense will be recognized.
CONTRIBUTION TO THE DEFINED CONTRIBUTION PLAN. On the date of the
consummation of our common stock offering, Goldman Sachs made an initial
irrevocable contribution of 12,555,866 shares of common stock to the defined
contribution plan. Certain senior employees, principally managing directors who
were not profit participating limited partners, have been selected to
participate in the defined contribution plan. The right to receive shares will
vest, and the underlying common stock will be distributable to participants in
the defined contribution plan, in equal installments on or about the third,
fourth and fifth anniversaries of the initial contribution if the participant
has satisfied 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 recorded non-cash compensation expense of $666 million related to the
initial irrevocable contribution of shares of common stock to the defined
contribution plan. This non-cash expense has been recognized on the date it was
funded in accordance with Statement of Financial Accounting Standards No. 87.
CHANGE IN CONTROL
The restricted stock units awarded based on a formula, the restricted stock
units awarded on a discretionary basis, the options to purchase shares of common
stock awarded on a discretionary basis and the defined contribution plan 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 restricted stock units awarded
based on a formula will be delivered;
- - any outstanding restricted stock units awarded on a discretionary basis will
vest and the common stock underlying these restricted stock units will be
delivered;
- - any outstanding unexercised options to purchase shares of common stock awarded
on a discretionary basis 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 date of the consummation of our common
stock offering) and thereafter terminate; and
- - under the defined contribution plan, any unvested portion of the common stock
attributable to the initial contribution by Goldman Sachs to the defined
contribution plan will vest and be distributed.
"Change in control" means the consummation of a merger, consolidation,
statutory
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share exchange or similar form of corporate
transaction involving The Goldman Sachs Group, Inc. or sale or other disposition
of all or substantially all of the assets of The Goldman Sachs Group, Inc. to an
entity that is not an affiliate of The Goldman Sachs Group, Inc. that, in each
case, requires shareholder approval under the law of The Goldman Sachs Group,
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 securities of The Goldman Sachs
Group, Inc. 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) of The Goldman Sachs Group, Inc. 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 STOCK INCENTIVE PLAN
The following is a description of the material terms of the stock incentive
plan. You should, however, refer to the exhibits that are a part of the
registration statement for a copy of the stock incentive plan. See "Available
Information".
TYPES OF AWARDS. The stock incentive plan provides for grants of incentive
stock options (within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended), nonqualified stock options, stock appreciation rights,
dividend equivalent rights, restricted stock, restricted stock units and other
awards. The stock incentive plan also permits the making of loans to purchase
shares of common stock.
SHARES SUBJECT TO THE STOCK INCENTIVE PLAN; OTHER LIMITATIONS ON
AWARDS. Subject to adjustment as described below, the total number of shares of
common stock of The Goldman Sachs Group, Inc. that may be issued under the stock
incentive plan 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 stock incentive plan. 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 stock incentive
plan. No more than 200,000,000 shares of common stock may be available for
delivery in connection with the exercise of incentive stock options. The maximum
number of shares of common stock with respect to which options or stock
appreciation rights may be granted to an individual grantee in 1999 is 3,500,000
shares of common stock and, in each fiscal year that follows, is 110% of the
maximum number of shares of common stock applicable for the preceding year.
Our Stock Incentive Plan Committee has the authority to adjust the terms of
any
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outstanding awards and the number of shares of common stock issuable under the
stock incentive plan 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 Stock Incentive Plan 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 Stock Incentive Plan Committee.
ADMINISTRATION. The stock incentive plan may be administered by our board
of directors or by the Stock Incentive Plan Committee, a committee to be
appointed by our board of directors.
The Stock Incentive Plan Committee will have the authority to construe,
interpret and implement the stock incentive plan, and prescribe, amend and
rescind rules and regulations relating to the stock incentive plan. The
determination of the Stock Incentive Plan Committee on all matters relating to
the stock incentive plan or any award agreement will be final and binding.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The Stock Incentive Plan
Committee may grant incentive stock options and nonqualified stock options to
purchase shares of common stock from Goldman Sachs (at the price set forth in
the award agreement), and stock appreciation rights in such amounts, and subject
to such terms and conditions, as the Stock Incentive Plan Committee may
determine. No grantee of an option or stock appreciation right will have any of
the rights of a shareholder of The Goldman Sachs Group, Inc. with respect to
shares subject to their award until the issuance of the shares.
RESTRICTED STOCK. The Stock Incentive Plan Committee may grant restricted
shares of common stock in amounts, and subject to terms and conditions, as the
Stock Incentive Plan 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 Stock Incentive Plan Committee may include in
the award agreement.
RESTRICTED STOCK UNITS. The Stock Incentive Plan Committee may grant
restricted stock units in amounts, and subject to terms and conditions, as the
Stock Incentive Plan Committee may determine. Recipients of restricted stock
units have only the rights of a general unsecured creditor of Goldman Sachs and
no rights as a shareholder of The Goldman Sachs Group, Inc. until the common
stock underlying the restricted stock units is delivered.
OTHER EQUITY-BASED AWARDS. The Stock Incentive Plan 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 Stock Incentive Plan
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 of certain benefits of, the local laws of non-U.S.
jurisdictions.
CHANGE IN CONTROL. The Stock Incentive Plan Committee may provide in any
award agreement for provisions relating to a change in control of The Goldman
Sachs Group, Inc. 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 Stock Incentive Plan 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 Stock Incentive Plan Committee, no award or right
granted to any person under the stock incentive plan will be
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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 stock incentive plan and the Stock Incentive Plan Committee
may amend the terms of any award in any respect.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE STOCK INCENTIVE PLAN. 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 stock appreciation right will create no tax
consequences for the participant or Goldman Sachs. Upon exercising an option,
other than an incentive stock option, 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 incentive stock
option and Goldman Sachs will not be entitled to any tax deduction with respect
to an incentive stock option if the participant holds the shares for the
applicable periods specified in the Internal Revenue Code of 1986, as amended.
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
restricted stock units), 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 defined contribution plan is not intended to be qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended, 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 defined
contribution plan. You should, however, refer to the exhibits that are a part of
the registration statement for a copy of the defined contribution plan. See
"Available Information".
ELIGIBILITY AND PARTICIPATION. Our board of directors or the Defined
Contribution Plan Committee, a committee to be appointed by our board of
directors, may select the employees to participate in the defined contribution
plan.
CONTRIBUTIONS. Goldman Sachs has made an initial irrevocable contribution
to the Defined Contribution Plan Trust, the trust underlying the defined
contribution plan, of 12,555,866 shares of common stock simultaneously with the
consummation of our common stock offering. Goldman Sachs may contribute
additional shares of common stock or cash to the Defined Contribution Plan Trust
from time to time in its sole discretion. We currently intend to make ongoing
contributions to the defined contribution plan and to reallocate forfeitures
under the defined contribution plan to participants.
ALLOCATION OF CONTRIBUTIONS. There will be established an account in the
name of each participant and a separate, unallocated account to which any
forfeitures of common stock will be credited pending reallocation to
participants. The Defined Contribution Plan 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
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year, or on such other formulaic basis as the Defined Contribution Plan
Committee may determine.
VOTING AND TENDERING OF COMMON STOCK. Shares of common stock allocated to
participants who are parties to the shareholders' agreement referred to below
will be voted in accordance with the shareholders' agreement and will be
tendered by the trustee of the Defined Contribution Plan 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 Defined Contribution Plan Trust in accordance
with confidential instructions provided by the participant. Shares held in
participants' accounts with respect to which the trustee of the Defined
Contribution Plan 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 or
tendered by the trustee in the same proportion as the shares of common stock
allocated to participants' accounts with respect to which voting or tendering
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 defined contribution plan, 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 defined contribution plan (other than
the initial contribution), the Defined Contribution Plan 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 DEFINED CONTRIBUTION PLAN. The defined contribution
plan will be administered by the Defined Contribution Plan Committee. Our board
of directors may, however, determine allocations of contributions or resolve to
otherwise administer the defined contribution plan.
AMENDMENTS. Subject to limitations with respect to contributions
previously made to the defined contribution plan, our board of directors
reserves the right to modify, alter, amend or terminate the defined contribution
plan or the Defined Contribution Plan Trust. No modification or amendment of the
defined contribution plan may be made which would cause or permit any part of
the assets of the Defined Contribution Plan 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 Defined
Contribution Plan Trust to revert to or become the property of Goldman Sachs.
LIMIT ON LIABILITY. All distributions under the defined contribution plan
will be paid or provided solely from the assets of the Defined Contribution Plan
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
Defined Contribution Plan Trust. The agreement establishing the Defined
Contribution Plan Trust provides that no creditor of Goldman Sachs will have any
rights to the assets of the Defined Contribution Plan 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 defined contribution plan. A participant in the
defined contribution plan
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will recognize ordinary income upon the vesting of shares of common stock
allocated 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 defined contribution plan 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, our board of directors has adopted a partner compensation plan for
the purpose of compensating senior professionals. The partner compensation plan
may be administered by our board of directors or the Partner Compensation Plan
Committee, a committee to be appointed by our board of directors.
Individuals will be selected to participate in the partner compensation
plan for a one-or two-fiscal year cycle. 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 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 cycle will be through the end of fiscal 2000. It is expected that the
participants in the initial cycle will consist of the continuing managing
directors who were profit participating limited partners. Prior to the one- or
two-fiscal year cycle commencing with fiscal 2001, and on or before each
succeeding cycle, 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 annual or 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 one- or
two-fiscal year cycle, and prior to the consummation of our common stock
offering in the case of the initial cycle, 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
percentage allocated to any particular participant is expected
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to be applicable for each fiscal year within the applicable cycle. 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 stock incentive plan, as determined by the Partner
Compensation Plan Committee and recommended to the Stock Incentive Plan
Committee.
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PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this prospectus certain
information regarding the beneficial ownership of our common stock by:
- - each person who is known to Goldman Sachs to be the beneficial owner of more
than 5% of our common stock;
- - each director and named executive officer of Goldman Sachs; and
- - all directors and executive officers of Goldman Sachs as a group.
This information gives effect to our common stock offering, and to the
incorporation transactions and the related transactions that are described and
defined under "Certain Relationships and Related Transactions -- Incorporation
and Related Transactions".
Except as otherwise indicated, the persons or entities listed below have
sole voting and investment power with respect to the shares beneficially owned
by them. None of our employees sold shares of common stock in our common stock
offering.
For purposes of this table, information as to the shares of common stock is
calculated based on 437,245,963 shares of common stock outstanding upon the
closing of our common stock offering. 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 below, 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
OWNED
----------------------
NAME NUMBER PERCENT
- ---- ------ -------
<S> <C> <C>
5% Shareholder:
Kamehameha Activities Association(1)...................... 21,975,421 5.0%
Directors and named executive officers:
Henry M. Paulson, Jr.(2).................................. 4,132,235 *
Robert J. Hurst(2)........................................ 3,835,124 *
John A. Thain(2).......................................... 3,101,426 *
John L. Thornton(2)....................................... 3,012,541 *
Sir John Browne(2)........................................ 0 --
James A. Johnson(2)....................................... 0 --
John L. Weinberg(2)....................................... 444,444 *
Jon S. Corzine(3)......................................... 4,414,198 1.0
Roy J. Zuckerberg(4)...................................... 3,026,974 *
All directors and continuing executive officers as a group
(13 persons)(5)........................................... 26,152,648 6.0
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) 567 South King Street, Suite 150, Honolulu, Hawaii 96813. Kamehameha
Activities Association in the ordinary course of business is an investor in
a number of Goldman Sachs' merchant banking funds and from time to time is a
party to other transactions with Goldman Sachs. These investments and
transactions are negotiated on an arm's-length basis and contain customary
terms and conditions.
(2) 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 referred to below that are owned by
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other parties to the shareholders' agreement. While each of Messrs. Paulson,
Hurst, Thain and Thornton is a party to the shareholders' agreement and 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, and each
disclaims beneficial ownership of the shares of common stock subject to the
voting agreements between Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association, respectively, on the one hand, and Goldman Sachs, on
the other hand. See "Certain Relationships and Related Transactions --
Shareholders' Agreement" for a discussion of the shareholders' agreement and
the voting agreements.
(3) Mr. Corzine, who resigned from Goldman Sachs prior to the consummation of
our common stock offering, served as Chairman or Co-Chairman and Chief
Executive Officer or Co-Chief Executive Officer of The Goldman Sachs Group,
L.P. during fiscal 1998.
(4) Mr. Zuckerberg, who retired in November 1998, served as Vice Chairman of The
Goldman Sachs Group, L.P. during fiscal 1998.
(5) Total excludes the shares of common stock beneficially owned by Messrs.
Corzine and Zuckerberg, former executive officers of The Goldman Sachs
Group, L.P. Each continuing 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, and each disclaims beneficial ownership of the shares
of common stock subject to the voting agreements between Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, respectively,
on the one hand, and Goldman Sachs, on the other hand. See "Certain
Relationships and Related Transactions -- Shareholders' Agreement" for a
discussion of the shareholders' agreement and the voting agreements.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following are descriptions of the material provisions of the 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 our common stock offering, we
completed a number of transactions in order to have The Goldman Sachs Group,
Inc. succeed to the business of The Goldman Sachs Group, L.P.
The principal incorporation transactions and related transactions are
summarized below.
INCORPORATION TRANSACTIONS
Pursuant to our plan of incorporation:
- - The Goldman Sachs Corporation, which was the general partner of The Goldman
Sachs Group, L.P., merged into The Goldman Sachs Group, Inc. In this
transaction, the managing directors who were profit participating limited
partners and who were shareholders of The Goldman Sachs Corporation received
common stock and the other shareholders of The Goldman Sachs Corporation
received common stock;
- - The managing directors who were profit participating limited partners
exchanged their interests in The Goldman Sachs Group, L.P. and certain
affiliates for 265,019,073 shares of common stock (these amounts include
shares issued in the merger of The Goldman Sachs Corporation into The Goldman
Sachs Group, Inc.);
- - The retired limited partners of Goldman Sachs exchanged their interests in The
Goldman Sachs Group, L.P. and certain affiliates for cash, junior subordinated
debentures or common stock (or a combination thereof). These transactions
resulted 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 shares of common
stock and cash issued to the retired limited partners in the merger of The
Goldman Sachs Corporation into The Goldman Sachs Group, Inc.);
- - Sumitomo Bank Capital Markets, Inc. exchanged its interests in The Goldman
Sachs Group, L.P. and Goldman, Sachs & Co. for 30,425,052 shares of common
stock and 7,440,362 shares of nonvoting common stock;
- - Kamehameha Activities Association exchanged its interests in The Goldman Sachs
Group, L.P. for 30,975,421 shares of common stock; and
- - After all the interests of The Goldman Sachs Group, L.P. were transferred to
The Goldman Sachs Group, Inc., The Goldman Sachs Group, L.P. was merged into
The Goldman Sachs Group, Inc.
RELATED TRANSACTIONS
- - The restricted stock units awarded to employees based on a formula or on a
discretionary basis as well as options to purchase shares of common stock
awarded on a discretionary basis were granted, the initial irrevocable
contribution of shares of common stock to the defined contribution plan was
made and certain senior employees, principally managing directors who were not
profit participating limited partners, were selected to participate in the
defined contribution plan; and
- - In connection with our common stock offering, we will make a $200 million cash
contribution to the Goldman Sachs Fund, a charitable foundation. The Goldman
Sachs Fund, which has been in existence for over 30 years, is the entity that
has historically conducted charitable initiatives for Goldman Sachs. The
Goldman Sachs Fund is subject to United States federal tax rules that prohibit
it from engaging in any act of self-dealing or any activities that result in
an impermissible benefit to private persons. While the Goldman Sachs Fund has
no specific intention to contribute to organizations with which Goldman Sachs'
executive officers or directors are affiliated, the Goldman Sachs Fund may in
the future
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make contributions to educational and other organizations with which Goldman
Sachs' directors or executive officers are involved.
SHAREHOLDERS' AGREEMENT
PERSONS AND SHARES COVERED
Each former profit participating limited partner, other than Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, and each other
person who was a managing director on the date of the consummation of our common
stock offering became a party to the shareholders' agreement. In addition, each
person who becomes a managing director in the future will become a party to the
shareholders' agreement. Not less than 281,000,000 shares of common stock are
subject to the shareholders' agreement.
The shares covered by the shareholders' agreement include generally all
shares of common stock acquired from Goldman Sachs by a party to the
shareholders' agreement, including:
- - any shares of common stock received by the managing directors who were profit
participating limited partners pursuant to the incorporation transactions,
except for certain shares that aggregate less than 140,000 shares;
- - any shares of common stock received from the defined contribution plan;
- - any shares of common stock received pursuant to the restricted stock units
awarded to employees based on a formula, the restricted stock units awarded on
a discretionary basis or the options to purchase shares of common stock
awarded on a discretionary basis; and
- - unless otherwise determined by our board of directors and the Shareholders'
Committee referred to below, any shares of common stock received from Goldman
Sachs through any other employee compensation, benefit or similar plan.
Shares of common stock purchased in the open market or in a subsequent
underwritten public offering will not be subject to the shareholders' agreement.
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 managing director who is a new employee of Goldman Sachs.
TRANSFER RESTRICTIONS
Each party to the shareholders' agreement agrees, among other things, to:
- - have beneficial ownership while he or she is a managing director of at least
25% of the cumulative number of his or her shares that are beneficially owned
or acquired, and are or become subject to the shareholders' agreement; and
- - comply with the underwriters' 180-day lock-up arrangement in connection with
our common stock offering.
The former profit participating limited partners, other than Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, are subject to
additional restrictions on their ability to transfer shares received in
connection with the incorporation transactions described under "-- Incorporation
and Related Transactions -- Incorporation Transactions". Under these additional
restrictions, each of these persons has agreed that he or she will not transfer
any of these shares, other than up to 140,000 shares in the aggregate that will
be excluded from these restrictions, until the third anniversary of the date of
the consummation of our common stock offering. These restrictions will lapse in
equal installments on each of the third, fourth and fifth anniversaries of the
date of the consummation of our common stock offering.
All transfer restrictions applicable to a party to the shareholders'
agreement, except for the underwriters' 180-day lock-up, terminate upon death.
WAIVERS
Except in the case of a third-party tender or exchange offer, the
additional transfer restrictions applicable to profit participating limited
partners, other than Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association, may be waived or terminated at any time by the
Shareholders' Committee. The Shareholders' Committee also has the power to waive
the other transfer restrictions
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to permit parties to the shareholders' agreement to:
- - participate as sellers in underwritten public offerings of common stock and
tender and exchange offers and share repurchase programs by Goldman Sachs;
- - transfer shares to charities, including charitable foundations;
- - transfer shares held in employee benefit plans; and
- - transfer 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, all transfer
restrictions may be waived or terminated:
- - if our 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 referred to below; or
- - if our board of directors is recommending rejection of the tender or exchange
offer, by 66 2/3% of the outstanding voting interests referred to below.
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.
In any event, the underwriters' 180-day lock-up may not be waived without
the consent of the underwriters.
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. Each share
subject to the shareholders' agreement will be voted in accordance with the
majority of the votes cast by the voting interests in the preliminary vote. In
elections of directors, each share subject to the shareholders' agreement 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. Prior to January
1, 2001, "voting interests" means all shares that are subject to the
shareholders' agreement. Thereafter, "voting interests" means all shares subject
to the shareholders' agreement held by all managing directors.
OTHER RESTRICTIONS
The shareholders' agreement also prevents the persons subject to the
shareholders' agreement from engaging in the following activities relating to
any securities of Goldman Sachs with any person who is not a person subject to
the shareholders' agreement or a director or employee of Goldman Sachs:
- - participating in a proxy solicitation;
- - depositing any shares subject to the shareholders' agreement in a voting trust
or subjecting any of these shares to any voting agreement or arrangement;
- - forming, joining or in any way participating in a "group"; or
- - proposing certain transactions with Goldman Sachs or seeking the removal of
any of our directors or any change in the composition of our 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 referred to above. The additional transfer
restrictions applicable to profit participating limited partners, other than
Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, will
not terminate upon the expiration or termination of the shareholders' agreement
unless previously waived or terminated or unless subsequently waived or
terminated by our board of directors. The shareholders' agreement may generally
be amended at any time by a majority of the outstanding voting interests
referred to above.
Unless otherwise terminated, in the event of any transaction in which a
third party succeeds to the business of Goldman Sachs and in which persons
subject to the shareholders' agreement 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 obliga-
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tions of Goldman Sachs under the shareholders' agreement.
INFORMATION REGARDING THE SHAREHOLDERS' COMMITTEE
The terms and provisions of the shareholders' agreement are administered by
the Shareholders' Committee. The Shareholders' Committee initially consists of
the persons subject to the shareholders' agreement who are both employees of
Goldman Sachs and members of our 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 our board of directors.
Members of the Shareholders' Committee are entitled to indemnification from
Goldman Sachs in their capacities as members of the Shareholders' Committee.
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 agreements are
enforceable by The Goldman Sachs Group, Inc. The managing directors have no
right to enforce the voting agreements.
INSTRUMENT OF INDEMNIFICATION
In connection with our common stock offering, Goldman Sachs entered into an
instrument of indemnification. The instrument of indemnification covers certain
former partners of Goldman Sachs, including the managing directors who were
profit participating limited partners, each current director and executive
officer of Goldman Sachs, the retired limited partners, Sumitomo Bank Capital
Markets, Inc. and Kamehameha Activities Association. Under the instrument of
indemnification, in the event any indemnitee is, or is threatened to be, made a
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 of The Goldman Sachs Group, L.P. or certain of its
affiliates or subsidiaries or is serving or served, at the request of The
Goldman Sachs Group, L.P. or certain of its affiliates or subsidiaries, in any
of these capacities 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 The
Goldman Sachs Group, 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 The Goldman Sachs Group, L.P. may have had or which Goldman
Sachs, as a successor to The Goldman Sachs Group, L.P., may have arising out of
an indemnitee's partnership or other interest in The Goldman Sachs Group, L.P.
or certain of its affiliates or subsidiaries or arising out of the conduct of
such indemnitee while engaged in the conduct of the business of The Goldman
Sachs Group, L.P. or its affiliates or subsidiaries.
DIRECTOR AND OFFICER INDEMNIFICATION
We have entered into an agreement that provides indemnification to our
directors and officers and to the directors and certain officers of the general
partner of The Goldman Sachs Group, L.P., members of our Management Committee or
our Partnership Committee or the former Executive Committee of The Goldman Sachs
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 The Goldman Sachs
Group, L.P. to take actions on behalf of us, The Goldman Sachs Group, L.P. or
the general partner of The Goldman Sachs Group, L.P. in connection with the plan
of incorporation, the registration statement and certain
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other registration statements for all losses, damages, costs and expenses
incurred by the indemnified person arising out of the relevant registration
statements or the transactions contemplated by the plan of incorporation. This
agreement is in addition to our indemnification obligations under our by-laws.
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 former partners of The Goldman Sachs
Group, L.P., rather than Goldman Sachs, generally will be liable for adjustments
to taxes (including U.S. federal and state income taxes) attributable to the
operations of The Goldman Sachs Group, L.P. and its affiliates prior to our
common stock offering. In connection with our common stock offering, we entered
into a tax indemnification agreement to indemnify certain former limited
partners of The Goldman Sachs Group, L.P., including the managing directors who
were profit participating limited partners, each current director and executive
officer of The Goldman Sachs Group, Inc., the retired limited partners, Sumitomo
Bank Capital Markets, Inc. and Kamehameha Activities Association, against
certain increases in each tax indemnitee's taxes that relate to activities of
The Goldman Sachs Group, L.P. or certain of its affiliates in respect of periods
prior to our common stock offering. 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 such payment of
additional 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 described under "-- Incorporation and
Related Transactions -- Incorporation Transactions" were structured in a manner
that is not expected to result in a significantly disproportionate tax or other
burden to any former partner of The Goldman Sachs Group, L.P. If the
incorporation transactions 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 NOTES WE ARE OFFERING
Please note that in this section entitled "Description of Notes We Are
Offering", references to The Goldman Sachs Group, Inc., we, our and us refer
only to The Goldman Sachs Group, Inc. and not to its consolidated subsidiaries.
Also, in this section, references to Holders mean those who have notes
registered in their own names, on the books that we or the trustee maintain for
this purpose, and not those who own beneficial interests in notes issued in
book-entry form through The Depository Trust Company or in notes registered in
street name. Owners of beneficial interests in the notes should read the
subsection entitled "-- Legal Ownership of Notes".
FINANCIAL TERMS OF THE NOTES
The specific financial terms of the notes we are offering are as follows:
- - TITLE OF THE NOTES: % Notes due 2009
- - ISSUER OF THE NOTES: The Goldman Sachs Group, Inc.
- - TOTAL PRINCIPAL AMOUNT BEING ISSUED: $1,500,000,000
- - DUE DATE FOR PRINCIPAL: May 15, 2009
- - INTEREST RATE: % annually
- - DATE INTEREST STARTS ACCRUING:
- - DUE DATES FOR INTEREST: every May 15 and November 15
- - FIRST DUE DATE FOR INTEREST: November 15, 1999
- - REGULAR RECORD DATES FOR INTEREST: every May 1 and November 1
- - ADDITIONAL AMOUNTS: We intend to pay principal and interest without deducting
U.S. withholding taxes. If we are required to deduct from payments to non-U.S.
investors, however, we will pay additional amounts on those payments, but only
to the extent described below under "-- Payment of Additional Amounts".
- - REDEMPTION: We will not have the option to redeem the notes before they
mature, unless we become obligated to pay additional amounts because of
changes in U.S. withholding tax requirements.
- - FORM OF NOTES: We will issue the notes only in global form, and you will not
be permitted to withdraw the notes from The Depository Trust Company except in
the limited situations we describe below under "-- We Will Issue the Notes in
Global Form".
ADDITIONAL INFORMATION
ABOUT YOUR NOTE
THE NOTES WILL BE ISSUED UNDER THE INDENTURE
As required by U.S. federal law for all bonds and notes of companies that
are publicly offered, the notes we are offering are governed by a document
called the indenture. The indenture is a contract between us and The Bank of New
York, which acts as trustee. The trustee has two main roles:
- - First, the trustee can enforce your rights against us if we default. There are
limitations on the extent to which the trustee acts on your behalf, which we
describe below under "-- Default, Remedies and Waiver of Default".
- - Second, the trustee performs administrative duties for us, such as sending you
interest payments and notices.
WE MAY ISSUE OTHER SERIES OF DEBT SECURITIES
The indenture permits us to issue different series of debt securities from
time to time. The notes we are offering will be a single, distinct series of
debt securities. The specific terms of each other series may differ from those
of the notes we are offering. The indenture does not limit the aggregate amount
of debt securities that we may issue, nor
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does it limit the number of other series or the aggregate amount of any
particular series.
The indenture and the notes do not limit our ability to incur other debt or
to issue other securities. Also, we are not subject to financial or similar
restrictions by the terms of the notes, except as we describe below under
"-- Restrictive Covenant and Defeasance".
When we refer to a series of debt securities, we mean a series, such as the
notes we are offering, issued under the indenture.
HOW THE NOTES RANK AGAINST OTHER DEBT
The notes will not be secured by any property or assets of The Goldman
Sachs Group, Inc. or its subsidiaries. Thus, by owning these notes, you are one
of our unsecured creditors. These notes will not be subordinated to any of our
other debt obligations. This means that, in a bankruptcy or liquidation
proceeding against us, these notes would rank equally in right of payment with
all other unsecured and unsubordinated debt of The Goldman Sachs Group, Inc. The
specific terms of other debt, including those of other series we may issue under
the indenture, however, will differ from those of the notes we are offering. For
example, other debt will have different due dates for principal and interest and
may permit holders to accelerate the maturity in different circumstances.
An investment in the notes involves risks because we are a holding company
and because our principal U.S. subsidiary, Goldman, Sachs & Co., is a
partnership in which we are a general partner. We summarize these risks above
under "Risk Factors -- Investors in the Notes Face Additional Risk Because The
Goldman Sachs Group, Inc. Is a Holding Company", "-- The Value of the Notes May
Be Impaired Because We Depend on Funds from Our Regulated Subsidiaries" and
"-- We May Be Liable to Creditors of Our Partnership Subsidiaries".
STATED MATURITY AND MATURITY
The day on which the principal amount of the notes is scheduled to become
due is called the stated maturity of the principal. The principal may become due
sooner, by reason of redemption or acceleration after a default. The day on
which the principal actually becomes due, whether at the stated maturity or
earlier, is called the maturity of the principal.
We also use the terms stated maturity and maturity to refer to the dates
when interest payments become due. For example, we may refer to a regular
interest payment date when an installment of interest is scheduled to become due
as the "stated maturity" of that installment. When we refer to the "stated
maturity" or the "maturity" of the notes without specifying a particular
payment, we mean the stated maturity or maturity, as the case may be, of the
principal.
THIS SECTION IS ONLY A SUMMARY
The indenture and its associated documents, including the notes we are
offering, contain the full legal text of the matters described in this section.
The indenture and the notes are governed by New York law. A copy of the
indenture has been filed with the SEC as part of our registration statement. See
"Available Information" below for information on how to obtain a copy.
While this section provides only a summary, it summarizes all of the
material terms of what is being described in this section. It does not, however,
describe every aspect of the indenture and the notes we are offering. For
example, in this section, we use terms that have been given special meaning in
the indenture. In this section, however, we describe the meaning for only the
more important of those terms.
LEGAL OWNERSHIP OF NOTES
We refer to those who have notes we are offering registered in their own
names, on the books that we or the trustee maintain for this purpose, as the
"Holders" of those notes. Those persons are the legal holders of those notes. We
refer to those who, indirectly through others, own beneficial interests in notes
that are not registered in their own names as indirect holders of those notes.
As we discuss below, indirect holders are not legal holders, and investors in
notes issued in
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book-entry form or in street name will be indirect holders.
BOOK-ENTRY HOLDERS
We will issue these notes in book-entry form. This means the notes will be
represented by one or more global notes registered in the name of a financial
institution that holds them as depositary on behalf of other financial
institutions that participate in the depositary's book-entry system. These
participating institutions, in turn, hold beneficial interests in the notes on
behalf of themselves or their customers.
Under the indenture, only the person in whose name a note is registered is
recognized as the Holder of that note. Consequently, for notes issued in global
form, we will recognize only the depositary as the Holder of the notes and we
will make all payments on the notes to the depositary. The depositary passes
along the payments it receives to its participants, which in turn pass the
payments along to their customers who are the beneficial owners. The depositary
and its participants do so under agreements they have made with one another or
with their customers; they are not obligated to do so under the terms of the
notes.
As a result, investors will not own notes directly. Instead, they will own
beneficial interests in a global note, through a bank, broker or other financial
institution that participates in the depositary's book-entry system or holds an
interest through a participant. As long as the notes are issued in global form,
investors will be indirect holders, and not Holders, of the notes.
STREET NAME HOLDERS
If in the future we terminate the global notes, investors may choose to
hold their notes in their own names or in street name. notes held by an investor
in street name would be registered in the name of a bank, broker or other
financial institution that the investor chooses, and the investor would hold
only a beneficial interest in those notes through an account he or she maintains
at that institution.
For notes held in street name, we will recognize only the intermediary
banks, brokers and other financial institutions in whose names the notes are
registered as the Holders of those notes and we will make all payments on those
notes to them. These institutions pass along the payments they receive to their
customers who are the beneficial owners, but only because they agree to do so in
their customer agreements or because they are legally required to do so.
Investors who hold notes in street name will be indirect holders, not Holders,
of those notes.
LEGAL HOLDERS
Our obligations, as well as the obligations of the trustee and those of any
third parties employed by us or the trustee, run only to the Holders of the
notes we are offering. We do not have obligations to investors who hold
beneficial interests in global notes, in street name or by any other indirect
means. This will be the case whether an investor chooses to be an indirect
holder of a note or has no choice because we are issuing the notes only in
global form.
For example, once we make a payment or give a notice to the Holder, we have
no further responsibility for the payment or notice even if that Holder is
required, under agreements with depositary participants or customers or by law,
to pass it along to the indirect holders but does not do so. Similarly, if we
want to obtain the approval of the Holders for any purpose -- e.g., to amend the
indenture or to relieve us of the consequences of a default or of our obligation
to comply with a particular provision of the indenture -- we would seek the
approval only from the Holders, and not the indirect holders, of the notes.
Whether and how the Holders contact the indirect holders is up to the Holders.
When we refer to you, we mean those who invest in the notes being offered
by this prospectus, whether they are the Holders or only indirect holders of
those notes. When we refer to your notes, we mean the notes we are offering in
which you hold a direct or indirect interest.
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SPECIAL CONSIDERATIONS FOR INDIRECT HOLDERS
If you hold notes through a bank, broker or other financial institution,
either in book-entry form or in street name, you should check with your own
institution to find out:
- - how it handles securities payments and notices;
- - whether it imposes fees or charges;
- - how it would handle a request for the Holders' consent, if ever required;
- - whether and how you can instruct it to send you notes registered in your own
name so you can be a Holder, if that is permitted in the future;
- - how it would exercise rights under the notes if there were a default or other
event triggering the need for Holders to act to protect their interests; and
- - if the notes are in book-entry form, how the depositary's rules and procedures
will affect these matters.
WE WILL ISSUE THE NOTES IN GLOBAL FORM
We have chosen to issue the notes in book-entry form. This means all the
notes will be represented, at least initially, by one or more global notes.
WHAT IS A GLOBAL NOTE?
A global note is a note that we deposit with and register in the name of a
financial institution, or its nominee, that we select. The financial institution
that we select for this purpose is called the depositary. We have selected The
Depository Trust Company of New York, New York, known as DTC, to be the
depositary for the notes, at least initially.
A global note may not be transferred to or registered in the name of anyone
other than the depositary or its nominee, unless special termination situations
arise. We describe those situations below under "-- Special Situations When a
Global Note Will Be Terminated". As a result of these arrangements, the
depositary, or its nominee, will be the sole registered owner and Holder of all
the notes, and investors will be permitted to own only beneficial interests in a
global note. Beneficial interests must be held by means of an account with a
broker, bank or other financial institution that in turn has an account with the
depositary or with another institution that does. Thus, an investor whose note
is represented by a global note will not be a Holder of the note, but only an
indirect holder of a beneficial interest in the global note.
The notes we are offering will be represented by one or more global notes
at all times unless and until the global notes are terminated. We describe the
situations in which this can occur below under "-- Special Situations When a
Global Note Will Be Terminated". If termination occurs, we may issue the notes
through another book-entry clearing system or decide that the notes may no
longer be held through any book-entry clearing system.
SPECIAL CONSIDERATIONS FOR GLOBAL NOTES
As an indirect holder, an investor's rights relating to a global note will
be governed by the account rules of the investor's financial institution and of
the depositary, as well as general laws relating to securities transfers. We do
not recognize this type of investor as a Holder of notes and instead deal only
with the depositary that holds the global note.
Because the notes will be issued only in the form of global notes, an
investor should be aware of the following:
- - An investor cannot get notes registered in his or her own name, and cannot get
non-global certificates for his or her interest in the notes, except in the
special situations we describe below.
- - An investor will be an indirect holder and must look to his or her own bank or
broker for payments on the notes and protection of his or her legal rights
relating to the notes, as we describe above under "-- Legal Ownership of
Notes".
- - An investor may not be able to sell interests in the notes to some insurance
companies and other institutions that are required by law to own their
securities in non-book-entry form.
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- - An investor may not be able to pledge his or her interest in a global note in
circumstances where certificates representing the notes must be delivered to
the lender or other beneficiary of the pledge in order for the pledge to be
effective.
- - The depositary's policies, which may change from time to time, will govern
payments, transfers, exchanges and other matters relating to an investor's
interest in a global note. We and the trustee have no responsibility for any
aspect of the depositary's actions or for its records of ownership interests
in a global note. We and the trustee also do not supervise the depositary in
any way.
- - The depositary will require that those who purchase and sell interests in a
global note within its book-entry system use immediately available funds.
- - Financial institutions that participate in the depositary's book-entry system,
and through which investors hold their interests in the global notes, may also
have their own policies affecting payments, notices and other matters relating
to the notes. There may be more than one financial intermediary in the chain
of ownership for an investor. We do not monitor and are not responsible for
the actions of any of those intermediaries.
SPECIAL SITUATIONS WHEN A GLOBAL NOTE WILL BE TERMINATED
In a few special situations described below, a global note will be
terminated and interests in it will be exchanged for certificates in non-global
form representing the notes it represented. After that exchange, the choice of
whether to hold the notes directly or in street name will be up to the investor.
Investors must consult their own banks or brokers to find out how to have their
interests in a global note transferred on termination to their own names, so
that they will be Holders. We have described the rights of Holders and street
name investors above under "-- Legal Ownership of Notes".
The special situations for termination of the global notes are as follows:
- - if the depositary notifies us that it is unwilling, unable or no longer
qualified to continue as depositary, and we do not appoint another institution
to act as depositary within 60 days;
- - if we notify the trustee that we wish to terminate the global notes; or
- - if an event of default has occurred and has not been cured or waived; we
discuss defaults later under "-- Default, Remedies and Waiver of Default".
If a global note is terminated, only the depositary, and not we or the trustee,
is responsible for deciding the names of the institutions in whose names the
notes represented by the global note will be registered and, therefore, who will
be the Holders of those notes.
YOU CAN HOLD INTERESTS IN GLOBAL NOTES
THROUGH CEDEL AND EUROCLEAR, AS
INDIRECT PARTICIPANTS IN DTC
As long as DTC is the depositary for the global notes, you may hold an
interest in a global note through any organization that participates, directly
or indirectly, in the DTC system. Those organizations include Cedelbank S.A. in
Luxembourg, known as Cedel, and Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear system known as Euroclear. If you
are a participant in either of those systems, you may hold your interest
directly in that system. If you are not a participant, you may hold your
interest indirectly through organizations that are participants in that system.
If you hold your interest indirectly, you should note that DTC, Cedel and
Euroclear will have no record of you or your relationship with the direct
participant in their systems.
Cedel and Euroclear are securities clearance systems in Europe, and they
participate indirectly in DTC. Cedel and Euroclear will hold interests in the
global notes on behalf of the participants in their systems, through securities
accounts they maintain in their own names for their customers on their own
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books or on the books of their depositaries. Those depositaries, in turn, are
participants in DTC and hold those interests in securities accounts they
maintain in their own names on the books of DTC. Citibank, N.A. acts as
depositary for Cedel and The Chase Manhattan Bank acts as depositary for
Euroclear. Cedel and Euroclear clear and settle securities transactions between
their participants through electronic, book-entry delivery of securities against
payment.
DTC RULES WILL ALSO APPLY TO NOTES HELD THROUGH CEDEL AND EUROCLEAR
If you hold an interest in a global note through Cedel or Euroclear, that
system will credit the payments we make on your note to the account of your
Cedel or Euroclear participant in accordance with that system's rules and
procedures. The participant's account will be credited only to the extent that
the system's depositary receives these payments through the DTC system.
Payments, notices and other communications or deliveries relating to the notes,
if made through Cedel or Euroclear, must comply not only with the rules and
procedures of those systems, but also with the rules and procedures of DTC,
except as described below.
If you hold an interest in a global note through Cedel or Euroclear, you
will not be entitled to exchange your interest for a certificate representing a
non-global note, unless and until the global note is terminated at DTC, as
described in the prior subsection.
Trading in the notes between Cedel participants or between Euroclear
participants will by governed only by the rules and procedures of that system.
We understand that, at present, those systems' rules and procedures applicable
to trades in conventional eurobonds will apply to trades in the notes, with
settlement in immediately available funds.
SPECIAL CONSIDERATIONS FOR CROSS-MARKET TRANSFERS
Cross-market transfers of the notes -- i.e., transfers between investors
who hold or will hold their interests through Cedel or Euroclear, on the one
hand, and investors who hold or will hold their interests through DTC but not
through Cedel or Euroclear, on the other hand -- will be governed by DTC's rules
and procedures in addition to those of Cedel or Euroclear. If you hold your note
through Cedel or Euroclear and you wish to complete a cross-market transfer, you
will need to deliver transfer instructions and payment, if applicable, to Cedel
or Euroclear, through your participant, and that system in turn will need to
deliver them to DTC, through that system's depositary.
Because of time-zone differences between the United States and Europe, any
notes you purchase through Cedel or Euroclear in a cross-market transfer will
not be credited to your account at your Cedel or Euroclear participant until the
business day after the DTC settlement date. For the same reason, if you sell the
notes through Cedel or Euroclear in a cross-market transfer, your cash proceeds
will be received by the depositary for that system on the DTC settlement date
but will not be credited to your participant's account until the business day
following the DTC settlement date. In this context, "business day" means a
business day for Cedel or Euroclear.
The description of the clearing and settlement systems in this section
reflects our understanding of the rules and procedures of DTC, Cedel and
Euroclear as currently in effect. Those systems could change their rules and
procedures at any time. We have no control over those systems and we take no
responsibility for their activities.
PAYMENT OF ADDITIONAL AMOUNTS
We intend to make all payments on the notes without deducting U.S.
withholding taxes. If we are required by law to do so on payments to non-U.S.
investors, however, we will pay additional amounts on those payments to the
extent described in this section.
We will pay additional amounts only to the beneficial owners of the notes
we are offering who are United States aliens. The term United States alien means
any person who, for U.S. federal income tax purposes, is:
- - a nonresident alien individual;
- - a foreign corporation;
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- - a foreign partnership; or
- - an estate or trust that is not subject to U.S. federal income tax on a net
income basis on income or gain from a note.
If the beneficial owner of a note is a United States alien, we will pay to
that beneficial owner all additional amounts that may be necessary so that every
net payment of interest or principal on that note will not be less than the
amount provided for in that note. By net payment we mean the amount we or our
paying agent pay the beneficial owner after deducting or withholding an amount
for or on account of any present or future tax, assessment or other governmental
charge imposed with respect to that payment by a U.S. taxing authority.
Our obligation to pay additional amounts is subject to several important
exceptions, however. We will NOT pay additional amounts to any beneficial owner
of a note for or on account of any of the following:
- - any tax, assessment or other governmental charge imposed solely because at any
time there is or was a connection between the beneficial owner -- or between a
fiduciary, settlor, beneficiary or member of the beneficial owner, if the
beneficial owner is an estate, trust or partnership -- and the United States
(other than the mere receipt of a payment or the ownership or holding of a
note), including because the beneficial owner -- or the fiduciary, settlor,
beneficiary or member -- at any time, for U.S. federal income tax purposes:
-- is or was a citizen or resident or is or was treated as a resident of the
United States;
-- is or was present in the United States;
-- is or was engaged in a trade or business in the United States;
-- has or had a permanent establishment in the United States;
-- is or was a domestic or foreign personal holding company, a passive
foreign investment company or a controlled foreign corporation;
-- is or was a corporation that accumulates earnings to avoid U.S. federal
income tax; or
-- is or was a "ten percent shareholder" of The Goldman Sachs Group, Inc.;
- - any tax, assessment or other governmental charge imposed solely because of a
change in applicable law or regulation, or in any official interpretation or
application of applicable law or regulation, that becomes effective more than
15 days after the day on which the payment becomes due or is duly provided
for, whichever occurs later;
- - any estate, inheritance, gift, sales, excise, transfer, wealth or personal
property tax, or any similar tax, assessment or other governmental charge;
- - any tax, assessment or other governmental charge imposed solely because the
beneficial owner or any other person fails to comply with any certification,
identification or other reporting requirement concerning the nationality,
residence, identity or connection with the United States of the holder or any
beneficial owner of the note, if compliance is required by statute, by
regulation of the U.S. Treasury department or by an applicable income tax
treaty to which the United States is a party, as a precondition to exemption
from the tax, assessment or other governmental charge;
- - any tax, assessment or other governmental charge that can be paid other than
by deduction or withholding from a payment on the note;
- - any tax, assessment or other governmental charge imposed solely because the
payment is to be made by a particular paying agent (which term may include us)
and would not be imposed if made by another paying agent; or
- - any combination of the taxes, assessments or other governmental charges
described above.
In addition, we will not pay additional amounts with respect to any payment of
principal or interest to any United States alien who is a fiduciary or a
partnership, or who is not the sole beneficial owner of the payment, to the
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extent that we would not have to pay additional amounts to any beneficiary or
settlor of the fiduciary or any member of the partnership, or to any beneficial
owner of the payment, if that person or entity were treated as the beneficial
owner of the note for this purpose.
When we refer to a U.S. taxing authority, we mean the United States of
America or any state, other jurisdiction or taxing authority in the United
States. When we refer to the United States in the discussion of additional
amounts above and in the discussion of redemption for tax reasons below, we mean
the United States of America, including the states and the District of Columbia,
together with the territories, possessions and all other areas subject to the
jurisdiction of the United States of America.
When we refer to any payment of interest or principal on a note, this
includes any additional amount that may be payable in respect of that payment.
WHEN WE CAN REDEEM THE NOTES
We will not be permitted to redeem the notes we are offering before their
stated maturity, except as described below. The notes will not be entitled to
the benefit of any sinking fund -- that is, we will not deposit money on a
regular basis into any separate custodial account to repay your note. In
addition, you will not be entitled to require us to buy your note from you
before its stated maturity.
We will be entitled, at our option, to redeem the outstanding notes in
whole if at any time we become obligated to pay additional amounts on any notes
on the next interest payment date, but only if our obligation results from a
change in the laws or regulations of the United States of America, of any
jurisdiction in the United States or of any U.S. taxing authority, or from a
change in any official interpretation or application of those laws or
regulations, that becomes effective or is announced after the date of this
prospectus. If we redeem the notes, we will do so at a redemption price equal to
100% of the principal amount of the notes redeemed, plus accrued interest to the
redemption date.
If we become entitled to redeem the notes, we may do so at any time on a
redemption date of our choice. However, we must give the Holders of the notes
notice of the redemption not less than 30 days or more than 60 days before the
redemption date and not more than 90 days before the next date on which we would
be obligated to pay additional amounts. In addition, our obligation to pay
additional amounts must remain in effect when we give the notice of redemption.
We will give the notice in the manner described below in "-- Notices".
We or our affiliates may purchase notes from investors who are willing to
sell from time to time, either in the open market at prevailing prices or in
private transactions at negotiated prices. For example, we currently expect
Goldman, Sachs & Co. to make a market in the notes by purchasing and reselling
notes from time to time. Notes that we or our subsidiaries purchase may, at our
discretion, be held, resold or cancelled.
MERGERS AND SIMILAR TRANSACTIONS
We are generally permitted to merge or consolidate with another firm. We
are also permitted to sell substantially all our assets to another firm. We may
not take any of these actions, however, unless all the following conditions are
met:
- - If the successor firm in the transaction is not The Goldman Sachs Group, Inc.,
the successor firm must be organized as a corporation, partnership, trust,
limited liability company or other similar entity and must expressly assume
The Goldman Sachs Group, Inc.'s obligations under the notes and the indenture.
The successor firm may be organized under the laws of any jurisdiction,
whether in the United States or elsewhere.
- - Immediately after the transaction, no default under the notes has occurred and
is continuing. For this purpose, "default under the notes" means an event of
default or an event that would be an event of default if the requirements for
giving us default no-
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tice and for our default having to continue for a specific period of time were
disregarded. We describe these matters below under "-- Default, Remedies and
Waiver of Default".
If the conditions described above are satisfied, we will not need to obtain the
approval of the Holders in order to merge or consolidate or to sell all or
substantially all our assets. Also, these conditions will apply only if we wish
to merge or consolidate with another firm or sell all or substantially all our
assets. We will not need to satisfy these conditions if we enter into other
types of transactions, including any transaction in which we acquire the stock
or assets of another firm, any transaction that involves a change of control of
The Goldman Sachs Group, Inc. but in which we do not merge or consolidate and
any transaction in which we sell less than substantially all our assets.
Also, if we merge, consolidate or sell all or substantially all our assets
and the successor firm is a non-U.S. entity, neither we nor any successor would
have any obligation to compensate you for any resulting adverse tax consequences
relating to the notes, other than an obligation to pay additional amounts to
non-U.S. investors in respect of U.S. withholding tax requirements, to the
extent described above under "-- Payment of Additional Amounts".
RESTRICTIVE COVENANT AND DEFEASANCE
RESTRICTION ON LIENS
In the indenture, we promise not to create or guarantee any debt for
borrowed money that is secured by a lien on the voting or profit participating
equity ownership interests that we or any of our subsidiaries own in Goldman,
Sachs & Co. (or in any subsidiary that beneficially owns or holds, directly or
indirectly, those interests in Goldman, Sachs & Co.), unless we also secure the
notes on an equal or priority basis with the other secured debt. Our promise,
however, is subject to an important exception: we may secure debt for borrowed
money with liens on those interests without securing the notes if our board of
directors determines that the liens do not materially detract from or interfere
with the then-present value or control of those interests.
Except as noted above, the indenture does not restrict our ability to put
liens on our interests in our subsidiaries other than Goldman, Sachs & Co., nor
does it restrict our ability to sell or otherwise dispose of our interests in
any of our subsidiaries, including Goldman, Sachs & Co. In addition, the
restriction on liens applies only to liens that secure debt for borrowed money.
For example, liens imposed by operation of law, such as liens to secure
statutory obligations for taxes or workers' compensation benefits, or liens we
create to secure obligations to pay legal judgments or surety bonds, would not
be covered by this restriction.
DEFEASANCE AND COVENANT DEFEASANCE
FULL DEFEASANCE. If there is a change in U.S. federal tax law, as
described below, we can legally release ourselves from all payment and other
obligations on the notes. This is called full defeasance. To do so, each of the
following must occur:
- - We must deposit in trust for the benefit of all Holders a combination of money
and U.S. government or U.S. government agency notes or bonds that will
generate enough cash to make interest, principal and any other payments on the
notes we are offering on their various due dates.
- - There must be a change in current U.S. federal tax law or an Internal Revenue
Service ruling that lets us make the above deposit without causing you to be
taxed on your notes any differently than if we did not make the deposit and
just repaid the notes ourselves. Under current federal tax law, the deposit
and our legal release from the notes would be treated as though we took back
your notes and gave you your share of the cash and notes or bonds deposited in
trust. In that event, you could recognize gain or loss on your notes.
- - We must deliver to the trustee a legal opinion of our counsel confirming the
tax law change described above.
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If we ever did accomplish full defeasance, you would have to rely solely on
the trust deposit for payments on your notes. You could not look to us for
payment in the event of any shortfall.
COVENANT DEFEASANCE. Under current U.S. federal tax law, we can make the
same type of deposit described above and be released from certain restrictive
covenants relating to the notes. This is called covenant defeasance. In that
event, you would lose the protection of those restrictive covenants. In order to
achieve covenant defeasance, we must do both of the following:
- - We must deposit in trust for the benefit of the Holders a combination of money
and U.S. government or U.S. government agency notes or bonds that will
generate enough cash to make interest, principal and any other payments on the
notes we are offering on their various due dates.
- - We must deliver to the trustee a legal opinion of our counsel confirming that
under current U.S. federal income tax law we may make the above deposit
without causing you to be taxed on your notes any differently than if we did
not make the deposit and just repaid the notes ourselves.
If we accomplish covenant defeasance with regard to your note, the
following provisions of the indenture and the notes would no longer apply:
- - our promise not to create liens on our voting or profit participating equity
ownership interests in Goldman, Sachs & Co. described above under
"-- Restriction on Liens"; and
- - the event of default resulting from a breach of covenants, described below in
the third item under "-- Default, Remedies and Waiver of Default -- Events of
Default".
If we accomplish covenant defeasance, you can still look to us for
repayment of your notes in the event of any shortfall in the trust deposit. You
should note, however, that if one of the remaining events of default occurred,
such as our bankruptcy, and your notes became immediately due and payable, there
may be a shortfall. Depending on the event causing the default, you may not be
able to obtain payment of the shortfall.
DEFAULT, REMEDIES AND WAIVER OF DEFAULT
You will have special rights if an event of default with respect to the
notes occurs and is not cured, as described in this subsection.
EVENTS OF DEFAULT
When we refer to an event of default, we mean any of the following:
- - We do not pay the principal on any of these notes on its due date.
- - We do not pay interest on any of these notes within 30 days after its due
date.
- - We remain in breach of our covenant described under "-- Restrictive Covenant
and Defeasance -- Restriction on Liens" above, or any other covenant we make
in the indenture for the benefit of these notes, for 60 days after we receive
a notice of default stating that we are in breach. The notice must be sent by
the trustee or the Holders of not less than 10% in principal amount of these
notes.
- - We file for bankruptcy or other events of bankruptcy, insolvency or
reorganization relating to The Goldman Sachs Group, Inc. occur. Those events
must arise under U.S. federal or state law, unless we merge, consolidate or
sell our assets as described above and the successor firm is a non-U.S.
entity. If that happens, then those events must arise under U.S. federal or
state law or the law of the jurisdiction in which the successor firm is
legally organized.
REMEDIES IF AN EVENT OF DEFAULT OCCURS
If an event of default has occurred and has not been cured or waived, the
trustee or the Holders of not less than 25% in principal amount of the notes we
are offering may declare the entire principal amount of all these notes to be
due immediately. If an event of default occurs because of events in bankruptcy,
insolvency or reorganization relating to The Goldman Sachs Group, Inc., the
entire principal amount of all these notes will
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be automatically accelerated, without any action by the trustee or any Holder.
Each of the situations described above is called an acceleration of the
maturity of the notes. If the maturity of these notes is accelerated and a
judgment for payment has not yet been obtained, the Holders of a majority in
principal amount of these notes may cancel the acceleration for all these notes.
If an event of default occurs, the trustee will have special duties. In
that situation, the trustee will be obligated to use those of its rights and
powers under the indenture, and to use the same degree of care and skill in
doing so, that a prudent person would use in that situation in conducting his or
her own affairs.
Except as described in the prior paragraph, the trustee is not required to
take any action under the indenture at the request of any Holders unless the
Holders offer the trustee reasonable protection from expenses and liability.
This is called an indemnity. If the trustee receives an indemnity that is
reasonably satisfactory to it, the Holders of a majority in principal amount of
the notes we are offering may direct the time, method and place of conducting
any lawsuit or other formal legal action seeking any remedy available to the
trustee. These majority Holders may also direct the trustee in performing any
other action under the indenture with respect to these notes.
Before you bypass the trustee and bring your own lawsuit or other formal
legal action or take other steps to enforce your rights or protect your
interests relating to the notes, the following must occur:
- - The Holder of your note must give the trustee written notice that an event of
default has occurred and the event of default must not have been cured or
waived.
- - The Holders of not less than 25% in principal amount of these notes must make
a written request that the trustee take action because of the default and they
or other Holders must offer to the trustee indemnity reasonably satisfactory
to the trustee against the cost and other liabilities of taking that action.
- - The trustee must not have taken action for 60 days after the above steps have
been taken.
- - During those 60 days, the Holders of a majority in principal amount of these
notes must not have given the trustee directions that are inconsistent with
the written request of the Holders of not less than 25% in principal amount of
these notes.
You are entitled, however, at any time to bring a lawsuit for the payment of
money due on your note on or after its due date.
WAIVER OF DEFAULT
The Holders of not less than a majority in principal amount of the notes we
are offering may waive a default for all these notes. If this happens, the
default will be treated as if it has not occurred. No one can waive a payment
default on any note, however, without the approval of the particular Holder of
that note.
WE WILL GIVE THE TRUSTEE INFORMATION ABOUT DEFAULTS ANNUALLY
Each year, we will give the trustee a written statement of two of our
officers, certifying that to their knowledge we are in compliance with the
indenture and the notes, or else specifying any default known to them.
Book-entry and other indirect holders should consult their banks or
brokers for information on how to give notice or direction to or make a
request of the trustee and how to declare or cancel an acceleration of
the maturity.
MODIFICATION AND WAIVER OF COVENANTS
There are three types of changes we can make to the indenture and the notes
we are offering.
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CHANGES REQUIRING EACH HOLDER'S APPROVAL
First, there are changes that cannot be made without the approval of each
Holder of a note affected by the change. Here is a list of those types of
changes:
- - change the stated maturity for any principal or interest payment on a note;
- - reduce the principal amount, the interest rate or the redemption price for a
note;
- - permit redemption of a note if not previously permitted;
- - change the currency of any payment on a note other than as permitted by the
note;
- - change the place of any payment on a note;
- - impair the Holder's right to sue for payment of any amount due on its note;
- - reduce the percentage in principal amount of the notes we are offering and any
other affected series of debt securities, taken together, the approval of
whose Holders is needed to change the indenture or the notes;
- - reduce the percentage in principal amount of the notes and any other affected
series of debt securities, taken separately or together, as the case may be,
the approval of whose Holders is needed to waive our compliance with the
indenture or to waive defaults; and
- - change the provisions of the indenture dealing with modification and waiver in
any other respect, except to increase any required percentage referred to
above or to add to the provisions that cannot be changed or waived without
approval.
CHANGES NOT REQUIRING APPROVAL
The second type of change does not require any approval by Holders of the
notes we are offering. This type is limited to clarifications and changes that
would not adversely affect the notes in any material respect. Nor do we need any
approval to make changes that affect only debt securities to be issued under the
indenture after the changes take effect.
We may also make changes or obtain waivers that do not adversely affect a
particular note, even if they affect other notes or other debt securities. In
those cases, we do not need to obtain the approval of the Holder of that note;
we need only obtain any required approvals from the Holders of the affected
notes or other debt securities.
CHANGES REQUIRING MAJORITY APPROVAL
Any other change to the indenture and the notes we are offering would
require the following approval:
- - If the change affects only the notes we are offering, it must be approved by
the Holders of a majority in principal amount of the notes we are offering.
- - If the change affects the notes we are offering as well as one or more other
series of debt securities issued under the indenture, it must be approved by
the Holders of a majority in principal amount of the notes we are offering and
all other series affected by the change, with the notes we are offering and
the other series voting together as one class for this purpose.
In each case, the required approval must be given by written consent. Most
changes fall into this category.
The same majority approval would be required for us to obtain a waiver of
any of our covenants in the indenture. Our covenants include the promises we
make about merging and putting liens on our interests in Goldman, Sachs & Co.,
which we describe above under "-- Mergers and Similar Transactions" and
"-- Restrictive Covenant and Defeasance". If the Holders approve a waiver of a
covenant, we will not have to comply with it. The Holders, however, cannot
approve a waiver of any provision in a particular note, or in the indenture as
it affects that note, that we cannot change without the approval of the Holder
of that note as described above in "-- Changes Requiring Each Holder's
Approval", unless that Holder approves the waiver.
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Book-entry and other indirect holders should consult their banks or
brokers for information on how approval may be granted or denied if we
seek to change the indenture or the notes or request a waiver.
SPECIAL RULES FOR ACTION BY HOLDERS
When Holders take any action under the indenture, such as giving a notice
of default, declaring an acceleration, approving any change or waiver or giving
the trustee an instruction, we will apply the following rules. We may apply
similar rules to other series of debt securities issued under the indenture.
ONLY OUTSTANDING NOTES ARE ELIGIBLE
Only Holders of outstanding notes will be eligible to participate in any
action by Holders of these notes. Also, we will count only outstanding notes in
determining whether the various percentage requirements for taking action have
been met. For these purposes, a note will not be "outstanding":
- - if it has been surrendered for cancellation;
- - if we have deposited or set aside, in trust for its Holder, money for its
payment or redemption;
- - if we have fully defeased it as described above under "-- Restrictive Covenant
and Defeasance -- Defeasance and Covenant Defeasance -- Full Defeasance"; or
- - if we or one of our affiliates, such as Goldman, Sachs & Co., is the
beneficial owner.
In some situations, Holders of debt securities of other series may be eligible
to participate in an action by Holders of these notes. In that event, we may
follow special rules in calculating the principal amount of their debt
securities that is to be treated as outstanding for the purposes described
above. This may happen, for example, if the principal amount is payable in a
foreign currency, increases over time or is not to be fixed until maturity.
DETERMINING RECORD DATES FOR ACTION BY HOLDERS
We will generally be entitled to set any day as a record date for the
purpose of determining the Holders that are entitled to take action under the
indenture. In certain limited circumstances, only the trustee will be entitled
to set a record date for action by Holders. If we or the trustee set a record
date for an approval or other action to be taken by Holders, that vote or action
may be taken only by persons or entities who are Holders on the record date and
must be taken during the period that we specify for this purpose, or that the
trustee specifies if it sets the record date. We or the trustee, as applicable,
may shorten or lengthen this period from time to time. This period, however, may
not extend beyond the 180th day after the record date for the action. In
addition, record dates for any global note may be set in accordance with
procedures established by the depositary from time to time.
FORM, EXCHANGE AND TRANSFER
If any notes cease to be issued in global form, they will be issued:
- - only in fully registered form;
- - without interest coupons; and
- - in denominations of $1,000 and multiples of $1,000.
Holders may exchange their notes for notes of smaller denominations or
combined into fewer notes of larger denominations, as long as the total
principal amount is not changed.
Holders may exchange or transfer their notes at the office of the trustee.
We have appointed the trustee to act as our agent for registering notes in the
names of Holders and transferring notes. If the global notes are terminated and
we issue notes in non-global form, Holders of the non-global notes can transfer
those notes at the offices of Banque Internationale a Luxembourg or its
successor as our transfer agent in Luxembourg, but only for as long as the notes
are listed on the Luxembourg Stock Exchange. We may ap-
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point another entity to perform these functions or perform them ourselves.
Holders will not be required to pay a service charge to transfer or
exchange their notes, but they may be required to pay for any tax or other
governmental charge associated with the exchange or transfer. The transfer or
exchange will be made only if our transfer agent is satisfied with the Holder's
proof of legal ownership.
We may appoint additional transfer agents or cancel the appointment of any
particular transfer agent. We may also approve a change in the office through
which any transfer agent acts.
As long as the notes are issued in global form, only the depositary will be
entitled to transfer and exchange notes as described in this subsection, since
it will be the sole Holder of the notes.
PAYMENT MECHANICS
WHO RECEIVES PAYMENT?
We will pay interest on these notes on the interest payment dates stated
above under "-- Financial Terms of the Notes", and at maturity. Each payment of
interest due on an interest payment date or at maturity will include interest
accrued from and including the last date to which interest has been paid or made
available for payment, or from the issue date, if none has been paid or made
available for payment, to but excluding the relevant payment date. We will
compute interest on the notes on the basis of a 360-day year of twelve 30-day
months.
If interest is due on a note on an interest payment date, we will pay the
interest to the Holder in whose name the note is registered at the close of
business on the regular record date relating to the interest payment date. If
interest is due at maturity but on a day that is not an interest payment date,
we will pay the interest to the person or entity entitled to receive the
principal of the note. If principal is due on a note at maturity, we will pay
the amount to the Holder of the note against surrender of the note at the proper
place of payment.
REGULAR RECORD DATES FOR INTEREST
The regular record date relating to an interest payment date for any note
will be the May 1 or November 1 next preceding the interest payment date,
whether or not that preceding day is a business day. For the purpose of
determining the Holder at the close of business on a regular record date when
business is not being conducted, the close of business will mean 5:00 P.M., New
York City time, on that day.
HOW WE WILL MAKE PAYMENTS
PAYMENTS ON GLOBAL NOTES. As long as the notes are issued in global form,
we will make payments on the notes in accordance with the applicable policies of
the depositary as in effect from time to time. Under those policies, we will pay
directly to the depositary, or its nominee, and not to any indirect holders who
own beneficial interests in a global note. An indirect holder's right to receive
those payments will be governed by the rules and practices of the depositary and
its participants, as described above under "-- We Will Issue the Notes in Global
Form".
PAYMENTS ON NON-GLOBAL NOTES. If the global notes are terminated and we
issue notes in non-global form, we will make payments on the notes as follows.
We will pay interest that is due on an interest payment date by check mailed on
the interest payment date to the Holder at his or her address shown on the
trustee's records as of the close of business on the regular record date. We
will make all other payments by check at the paying agent described below,
against surrender of the note. All payments by check will be made in next day
funds -- i.e., funds that become available on the day after the check is cashed.
Alternatively, if a non-global note has a face amount of at least
$1,000,000 and the Holder asks us to do so, we will pay any amount that becomes
due on the note by wire transfer of immediately available funds to an account at
a bank in New York City, on the due date. To request wire payment, the Holder
must give the paying agent appropriate wire transfer instructions at least five
business days before the requested wire
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payment is due. In the case of any interest payment due on an interest payment
date, the instructions must be given by the person or entity who is the Holder
on the relevant regular record date. In the case of any other payment, payment
will be made only after the note is surrendered to the paying agent. Any wire
instructions, once properly given, will remain in effect unless and until new
instructions are given in the manner described above.
Book-entry and other indirect holders should consult their banks or
brokers for information on how they will receive payments on the notes.
PAYMENT WHEN OFFICES ARE CLOSED
If any payment is due on a note on a day that is not a business day, we
will make the payment on the next day that is a business day. Payments postponed
to the next business day in this situation will be treated under the indenture
as if they were made on the original due date. Postponement of this kind will
not result in a default under the notes or the indenture, and no interest will
accrue on the postponed amount from the original due date to the next day that
is a business day.
When we refer to a business day, we mean each Monday, Tuesday, Wednesday,
Thursday and Friday that is not a day on which banking institutions in New York
City or any other relevant location generally are authorized or obligated by
law, regulation or executive order to close. By other relevant location, we mean
Luxembourg, for as long as the notes are listed on the Luxembourg Stock Exchange
and that exchange so requires. If the notes cease to be held in global form, the
reference to other relevant location will also mean each office of a paying
agent, but only with respect to a payment to be made at that office, and each
office of a transfer agent, but only with respect to any actions to occur at
that office.
PAYING AGENT
If we issue the notes in non-global form, we may appoint one or more
financial institutions to act as our paying agents, and at whose designated
offices the notes may be surrendered for payment at their maturity. We call each
of those offices a paying agent. We may add, replace or terminate paying agents
from time to time. We may also choose to act as our own paying agent. Initially,
we have appointed the trustee, at its corporate trust office in New York City,
as a paying agent. We must notify you of changes in the paying agents.
For as long as these notes are listed on the Luxembourg Stock Exchange, we
will also maintain a paying agent in Luxembourg. We have initially appointed
Banque Internationale a Luxembourg, acting out of its corporate office in
Luxembourg, or its successor, as that paying agent. We will notify you of any
change in our Luxembourg paying agent by publication in Luxembourg.
UNCLAIMED PAYMENTS
Regardless of who acts as paying agent, all money paid by us to a paying
agent that remains unclaimed at the end of two years after the amount is due to
a Holder will be repaid to us. After that two-year period, the Holder may look
only to us for payment and not to the trustee, any other paying agent or anyone
else.
NOTICES
As long as we issue these notes in global form, notices to be given to
Holders will be given to the depositary, in accordance with its applicable
policies as in effect from time to time. If we issue the notes in non-global
form, notices to be given to Holders will be sent by mail to the respective
addresses of the Holders as they appear in the trustee's records, and will be
deemed given when mailed.
As long as the notes we are offering are listed on the Luxembourg Stock
Exchange and its rules require, we will also give notices to Holders by
publication in a daily newspaper of general circulation in Luxembourg. We expect
that newspaper to be, but it need not be, the Luxemburger Wort. If publication
in Luxembourg is not practical, we will make the publication elsewhere in
Western Europe. By
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"daily newspaper" we mean a newspaper that is published on each day, other than
a Saturday, Sunday or holiday, in Luxembourg or, when applicable, elsewhere in
Western Europe. You will be presumed to have received these notices on the date
we first publish them. If we are unable to give notice as described in this
paragraph because the publication of any newspaper is suspended or it is
otherwise impractical for us to publish the notice, then we or the trustee,
acting on our instructions, will give Holders notice in another form. That
alternate form of notice will be sufficient notice to you.
Neither the failure to give any notice to a particular Holder, nor any
defect in a notice given to a particular Holder, will affect the sufficiency of
any notice given to another Holder.
Book-entry and other indirect holders should consult their banks or
brokers for information on how they will receive notices.
OUR RELATIONSHIP WITH THE TRUSTEE
The Bank of New York is initially serving as the trustee, for these notes
and all other series of debt securities to be issued under the indenture. The
Bank of New York has provided commercial banking and other services for us and
our affiliates in the past and may do so in the future. Among other things, The
Bank of New York provides us with a line of credit, holds debt securities issued
by us and serves as trustee or agent with regard to other debt obligations of
The Goldman Sachs Group, Inc. or its subsidiaries.
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UNITED STATES TAXATION
This section describes the material United States federal income tax
consequences of owning the notes we are offering and is the opinion of Sullivan
& Cromwell, counsel to The Goldman Sachs Group, Inc. It applies to you only if
you hold your notes as capital assets for tax purposes. This section does not
apply to you if you are a member of a class of holders subject to special rules,
such as:
- - a dealer in securities or currencies;
- - a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings;
- - a bank;
- - a life insurance company;
- - a tax-exempt organization;
- - a person that holds notes that are a hedge or that are hedged against interest
rate or currency risks;
- - a person that holds notes as part of a straddle or conversion transaction for
tax purposes; or
- - a person whose functional currency for tax purposes is not the U.S. dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed regulations under the Internal
Revenue Code, published rulings and court decisions, all as currently in effect.
These laws are subject to change, possibly on a retroactive basis.
Please consult your own tax advisor concerning the consequences of owning
these notes in your particular circumstances under the Internal Revenue Code
and the laws of any other taxing jurisdiction.
UNITED STATES HOLDERS
This subsection describes the tax consequences to a United States holder.
You are a United States holder if you are a beneficial owner of a note and you
are:
- - a citizen or resident of the United States;
- - a domestic corporation;
- - an estate whose income is subject to United States federal income tax
regardless of its source; or
- - a trust if a United States court can exercise primary supervision over the
trust's administration and one or more United States persons are authorized to
control all substantial decisions of the trust.
If you are not a United States holder, this subsection does not apply to you and
you should refer to "-- United States Alien Holders" below.
PAYMENTS OF INTEREST. You will be taxed on any interest on your note as
ordinary income at the time you receive the interest or it accrues, depending on
your method of accounting for tax purposes. In addition, if you acquire your
note at a price other than the initial offering price, the rules relating to
market discount or amortizable bond premium may also apply to your note. This
may occur, for example, if you purchase your note in a market-making
transaction.
PURCHASE, SALE AND RETIREMENT OF NOTES. When you sell your note or your
note is retired, you will generally recognize gain or loss equal to the
difference between the amount you realize on the sale or retirement and the
amount that you paid for your note. This gain or loss will be capital gain or
loss, except to the extent attributable to accrued but unpaid interest or
described below under "-- Market Discount". Capital gain of a non-corporate
United States holder is generally taxed at a maximum rate of 20% where the
property is held for more than one year.
MARKET DISCOUNT. You will be treated as if you purchased your note at a
market discount, and your note will be a market discount note, if the note's
principal amount exceeds the price you paid for your note by at least 1/4 of 1%
of your note's principal
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<PAGE> 129
amount multiplied by the number of complete years to the note's maturity.
If your note's principal amount does not exceed the price you paid for the
note by 1/4 of 1% multiplied by the number of complete years to the note's
maturity, the excess constitutes de minimis market discount, and the rules
discussed below are not applicable to you.
You must treat any gain you recognize on the maturity or disposition of
your market discount note as ordinary income to the extent of the accrued market
discount on your note. Alternatively, you may elect to include market discount
in income currently over the life of your note. If you make this election, it
will apply to all debt instruments with market discount that you acquire on or
after the first day of the first taxable year to which the election applies. You
may not revoke this election without the consent of the Internal Revenue
Service. If you own a market discount note and do not make this election, you
will generally be required to defer deductions for interest on borrowings
allocable to your note in an amount not exceeding the accrued market discount on
your note until maturity or disposition of your note.
You will accrue market discount on your market discount note on a
straight-line basis unless you elect to accrue market discount using a
constant-yield method. If you make this election, it will apply only to the note
with respect to which it is made and you may not revoke it.
If you are an accrual-basis taxpayer, you should be aware that the Clinton
administration has recently proposed legislation that would require you to
include market discount in income currently over the life of your note, subject
to certain limitations. If enacted, this proposal would only be effective if you
acquire your market discount note on or after the date of enactment. We do not
yet know whether this proposal will be enacted or when it will become effective
if enacted.
NOTES PURCHASED AT A PREMIUM. If you purchase your note for an amount in
excess of its principal amount, you may elect to treat the excess as amortizable
bond premium. If you make this election, you will reduce the amount required to
be included in your income each year with respect to interest on your note by
the amount of amortizable bond premium allocable to that year, based on your
note's yield to maturity. If you make an election to amortize bond premium, it
will apply to all debt instruments, other than debt instruments the interest on
which is excludible from gross income, that you hold at the beginning of the
first taxable year to which the election applies or thereafter acquire, and you
may not revoke it without the consent of the Internal Revenue Service.
BACKUP WITHHOLDING AND INFORMATION REPORTING. In general, if you are a
non-corporate United States holder, we and other payors are required to report
to the Internal Revenue Service all payments of principal and interest on your
note. In addition, the proceeds of the sale of your note before maturity within
the United States will be reported to the Internal Revenue Service.
Additionally, backup withholding at a rate of 31% will apply to any payments if
you fail to provide an accurate certified taxpayer identification number, or you
are notified by the Internal Revenue Service that you have failed to report all
interest and dividends required to be shown on your federal income tax returns.
UNITED STATES ALIEN HOLDERS
This subsection describes the tax consequences to a United States alien
holder. You are a United States alien holder if you are the beneficial owner of
a note and are, for United States federal income tax purposes:
- - a nonresident alien individual;
- - a foreign corporation;
- - a foreign partnership; or
- - an estate or trust that is not subject to United States federal income tax on
a net income basis on income or gain from a note.
Under present United States federal income and estate tax law, and subject
to the discussion of backup withholding below, if
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<PAGE> 130
you are a United States alien holder of a note:
- - we and other payors will not be required to deduct United States withholding
tax from payments of principal and interest to you if, in the case of
interest:
1. you do not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of The Goldman Sachs Group, Inc.
entitled to vote,
2. you are not a controlled foreign corporation that is related to us through
stock ownership, and
a. you certify to us or a U.S. payor under penalties of perjury, that you
are not a United States holder and provide your name and address, or
b. a non-U.S. securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of
its trade or business and holds the note certifies to us or a U.S. payor
under penalties of perjury that a similar statement has been received
from you by it or by a similar financial institution between it and you
and furnishes the payor with a copy thereof; and
- - no deduction for any United States federal withholding tax will be made from
any gain that you realize on the sale or exchange of your note.
Further, a note held by an individual, who at death is not a citizen or resident
of the United States will not be includible in the individual's gross estate for
United States federal estate tax purposes if:
- - the decedent did not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of The Goldman Sachs Group, Inc.
entitled to vote at the time of death; and
- - the income on the note would not have been effectively connected with a United
States trade or business of the decedent at the same time.
If you receive a payment after December 31, 2000, recently finalized
Treasury regulations will apply. Under these final withholding regulations,
after December 31, 2000, you may use an alternative method to satisfy the
certification requirement described above. Additionally, if you are a partner in
a foreign partnership, after December 31, 2000, you, in addition to the foreign
partnership, must provide the certification described above, and the partnership
must provide certain information, including a United States taxpayer
identification number. The Internal Revenue Service will apply a look-through
rule in the case of tiered partnerships.
You are generally exempt from backup withholding and information reporting
on Internal Revenue Service Form 1099 with respect to any payments of principal
or interest made by us and other payors, provided that you provide the
certification described above, and provided further that the payor does not have
actual knowledge that you are a United States person. We and other payors,
however, may report payments of interest on your notes on Internal Revenue
Service Form 1042-S.
In general, payment of the proceeds from the sale of notes to or through a
United States office of a broker is subject to both United States backup
withholding and information reporting. If, however, you are a United States
alien holder, you will not be subject to information reporting and backup
withholding if you certify as to your non-United States status under penalties
of perjury or otherwise establish an exemption. Payments of the proceeds from
the sale by a United States alien holder of a note made to or through a foreign
office of a broker will not be subject to information reporting or backup
withholding. However, information reporting, but not backup withholding, may
apply to a payment made outside the United States of the proceeds of a sale of a
note through an office outside the United States if the broker is:
- - a United States person;
- - a controlled foreign corporation for United States tax purposes;
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<PAGE> 131
- - a foreign person 50% or more of whose gross income is effectively connected
with a United States trade or business for a specified three-year period; or
- - with respect to payments made after December 31, 2000, a foreign partnership,
if at any time during its tax year:
1. one or more of its partners are "U.S. persons" as defined in U.S. Treasury
regulations who in the aggregate hold more than 50% of the income or
capital interest in the partnership, or
2. the foreign partnership is engaged in a United States trade or business
unless the broker has documentary evidence in its records that you are a
non-U.S. person and does not have actual knowledge that you are a U.S. person,
or you otherwise establish an exemption.
129
<PAGE> 132
EMPLOYEE RETIREMENT INCOME SECURITY ACT
This section is only relevant to you if you are an insurance company or the
fiduciary of a pension plan or an employee benefit plan proposing to invest in
the notes.
The Goldman Sachs Group, Inc. and certain of its affiliates may each be
considered a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended, or a "disqualified person" within the
meaning of the Internal Revenue Code with respect to many employee benefit
plans. Prohibited transactions within the meaning of ERISA or the Internal
Revenue Code may arise, for example, if the notes we are offering are acquired
by or with the assets of a pension or other employee benefit plan for which The
Goldman Sachs Group, Inc. or any of its affiliates is a service provider, unless
those notes are acquired pursuant to an exemption for transactions effected on
behalf of that plan by a "qualified professional asset manager" or an "in-house
asset manager" or pursuant to any other available exemption. The assets of a
pension or other employee benefit plan may include assets held in the general
account of an insurance company that are deemed to be "plan assets" under ERISA.
If you are an insurance company or the fiduciary of a pension plan or an
employee benefit plan, and propose to invest in the notes, you should consult
your legal counsel.
VALIDITY OF THE NOTES
The validity of the notes offered and sold in this offering will be passed
upon for The Goldman Sachs Group, Inc. 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 The Goldman Sachs Group,
Inc. 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 PricewaterhouseCoopers 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.
With respect to the unaudited condensed consolidated financial statements
of Goldman Sachs as of and for the three months ended February 26, 1999 and for
the three months ended February 27, 1998, 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 report dated April 9, 1999 appearing herein states that
they did not audit and they do not express an opinion on the unaudited condensed
consolidated financial statements. Accordingly, the degree of
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<PAGE> 133
reliance on their report 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 report on the unaudited historical financial information
because this report is 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 Securities Act of 1933.
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
As a result of its common stock offering, The Goldman Sachs Group, Inc. is
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 NYSE, 20
Broad Street, New York, New York 10005. As long as the notes are listed on the
Luxembourg Stock Exchange, copies of our filings with the SEC will also be
available free of charge from our listing agent in Luxembourg, Banque
Internationale a Luxembourg, 69, route d'Esch, L-1470 Luxembourg.
We have filed with the SEC a registration statement on Form S-1 relating to
the notes we are offering. This prospectus is a part of the registration
statement and does not contain all the information in the registration
statement. Whenever a reference is made in this prospectus to a contract or
other document, please be aware that the reference is not necessarily complete
and that you should refer to the exhibits that are 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 noted above.
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<PAGE> 134
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> 135
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.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 22, 1999.
F-2
<PAGE> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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 its common stock offering.
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.
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
F-10
<PAGE> 144
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 145
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> 146
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> 147
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> 148
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> 149
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 $19,906
======= ====== ======= ======= ====== =======
</TABLE>
F-16
<PAGE> 150
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Firm enters into non-trading derivative contracts, such as interest
rate and currency swap agreements, to effectively convert a substantial portion
of its fixed rate long-term borrowings into U.S. dollar-based floating rate
obligations. Accordingly, the aggregate carrying value of these long-term
borrowings and related hedges approximates fair value. The effective weighted
average interest rates for long-term borrowings, after hedging activities, are
set forth below:
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER 1997 NOVEMBER 1998
--------------- ----------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
($ 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
F-17
<PAGE> 151
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commitments, net of minimum sublease rentals, under non-cancelable leases for
1999 and the 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
F-18
<PAGE> 152
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
primarily based on the employee's compensation and years of service. Pension
costs are 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> 153
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> 154
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> 155
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> 156
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> 157
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.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
April 9, 1999.
F-24
<PAGE> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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. 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>
F-30
<PAGE> 164
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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.
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
F-31
<PAGE> 165
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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.
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.
F-32
<PAGE> 166
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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> 167
UNDERWRITING
The Goldman Sachs Group, Inc. and the underwriters for this offering named
below have entered into an underwriting agreement with respect to the notes.
Subject to certain conditions, each underwriter has severally agreed to purchase
the number of notes indicated in the following table.
<TABLE>
<CAPTION>
Underwriters Principal Amount of Notes
------------ -------------------------
<S> <C>
Goldman, Sachs & Co......................................
Banc One Capital Markets, Inc. ..........................
Blaylock & Partners, L.P. ...............................
BT Alex. Brown Incorporated..............................
Chase Securities Inc. ...................................
Credit Suisse First Boston Corporation...................
Lehman Brothers Inc. ....................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......
J.P. Morgan Securities Inc. .............................
Morgan Stanley & Co. Incorporated........................
NationsBanc Montgomery Securities LLC....................
PaineWebber Incorporated.................................
Prudential Securities Incorporated.......................
Salomon Smith Barney Inc. ...............................
The Williams Capital Group, L.P. ........................
--------------
Total.......................................... $1,500,000,000
==============
</TABLE>
------------------------
Notes sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
notes sold by the underwriters to securities dealers may be sold at a discount
of up to $ per note from the initial public offering price. Any such
securities dealers may resell any notes purchased from the underwriters to other
brokers or dealers at a discount of up to $ per note from the initial public
offering price. If all the notes are not sold at the initial offering price, the
underwriters may change the offering price and the other selling terms.
The underwriters intend to offer the notes for sale primarily in the United
States. Goldman, Sachs & Co., acting through its affiliates as its selling
agents, may also offer the notes for sale outside the United States.
The notes are a new issue of securities with no established trading market.
The Goldman Sachs Group, Inc. cannot assure you that any trading market for the
notes will develop. The Goldman Sachs Group, Inc. has been advised by Goldman,
Sachs & Co. that Goldman, Sachs & Co. intends to make a market in the notes.
Other affiliates of The Goldman Sachs Group, Inc. may also do so. Neither
Goldman, Sachs & Co. nor any other affiliate, however, is obligated to do so and
any of them may discontinue market-making at any time without notice. No
assurance can be given as to the liquidity or the trading market for the notes.
In connection with this offering, the underwriters may purchase and sell
notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater principal
amount of notes than they are required to purchase in this offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline
U-1
<PAGE> 168
in the market price of the notes while this offering is 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 underwriters have repurchased notes sold by
or for the account of that underwriter in stabilizing or short-covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the notes. As a result, the price of the notes 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 occur in the over-the-counter market or otherwise.
Goldman, Sachs & Co. has also informed The Goldman Sachs Group, Inc. that
it does not expect sales made by the underwriters in this offering to accounts
over which the underwriters exercise discretionary authority to exceed five
percent of the aggregate initial offering price of the notes. No such sales will
be made without the prior written approval of the customer to which such account
relates.
The Goldman Sachs Group, Inc. estimates that its share of the total
expenses of this offering, excluding underwriting discounts and commissions,
whether paid to Goldman, Sachs & Co. or any other underwriter, will be
approximately $3 million.
The Goldman Sachs Group, Inc. has agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
Goldman, Sachs & Co. is a subsidiary of The Goldman Sachs Group, Inc. Rule
2720 of the Conduct Rules of the National Association of Securities Dealers,
Inc. imposes certain requirements when an NASD member such as Goldman, Sachs &
Co. distributes an affiliated company's debt securities. Goldman, Sachs & Co.
has advised The Goldman Sachs Group, Inc. that this offering will comply with
the applicable requirements of Rule 2720.
Certain of the underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, investment banking and general
financing and banking services to The Goldman Sachs Group, L.P., The Goldman
Sachs Group, Inc. and their affiliates, for which they have in the past
received, and may in the future receive, customary fees. The Goldman Sachs
Group, L.P., The Goldman Sachs Group, Inc. and their affiliates have in the past
provided, and may in the future from time to time provide, similar services to
the underwriters and their affiliates on customary terms and for customary fees.
This prospectus will be used by the underwriters and other dealers in
connection with offers and sales of notes to persons located in the United
States. These offers and sales may involve Notes initially sold by the
underwriters in this offering outside the United States.
U-2
<PAGE> 169
GENERAL INFORMATION
The board of directors of The Goldman Sachs Group, Inc. authorized the
issuance of the notes by a resolution dated March 29, 1999.
Euroclear and Cedel have accepted the notes for clearance through their
systems. The Common Code for the notes is 9761284, the International Security
Identification Number (ISIN) for the notes is US38141GAA22 and the CUSIP number
for the notes is 38141G AA 2.
The Goldman Sachs Group, Inc. has applied to list the notes on the
Luxembourg Stock Exchange. Prior to the listing, a legal notice relating to the
notes with The Goldman Sachs Group, Inc.'s certificate of incorporation and
by-laws will be registered with the Greffier en Chef du Tribunal
d'Arrondissement de et a Luxembourg, where copies may be obtained upon request.
As long as the notes are listed on the Luxembourg Stock Exchange, The
Goldman Sachs Group, Inc. will maintain a paying agent in Luxembourg. The
initial paying agent and listing agent in Luxembourg is Banque Internationale a
Luxembourg.
As long as any notes remain outstanding, you may obtain copies of our
certificate of incorporation, by-laws and most recent annual report on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K during
normal business hours on any weekday (except Saturdays, Sundays and public
holidays) at the specified office of, or upon written request to, the trustee
and, as long as the notes are listed on the Luxembourg Stock Exchange and its
rules require, free of charge at the office of the listing agent in Luxembourg.
In addition, a copy of the indenture will be available for inspection at those
offices during those hours.
The Goldman Sachs Group, Inc. has taken all reasonable care to ensure that
the information with regard to Goldman Sachs and the notes stated in this
prospectus is true and accurate in all material respects as of the date of this
prospectus and that there are no other material facts the omission of which
would make the information contained in this prospectus as of its date
misleading in any material respect, and The Goldman Sachs Group, Inc. accepts
responsibility accordingly.
Since February 26, 1999 to the date of this prospectus there has been no
material change in our capitalization as set forth above in the table under
"Capitalization", other than as indicated in or contemplated by this prospectus.
As of the date of this prospectus and except as indicated in or
contemplated by this prospectus, there has been no material adverse change in
the financial position of Goldman Sachs as set forth in its audited financial
statements included in this prospectus since the date of those audited financial
statements.
Various legal actions and proceedings involving Goldman Sachs are currently
pending. Management does not anticipate that any losses resulting from those
actions and proceedings would be material with respect to Goldman Sachs.
U-3
<PAGE> 170
PRINCIPAL EXECUTIVE OFFICE OF THE ISSUER
The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
TRUSTEE, REGISTRAR, TRANSFER AGENT AND PRINCIPAL PAYING AGENT
The Bank of New York
101 Barclay Street
New York, New York 10286
LISTING AGENT, TRANSFER AGENT AND PAYING AGENT IN LUXEMBOURG
Banque Internationale a Luxembourg
69, route d'Esch
L-1470 Luxembourg
LEGAL ADVISORS
<TABLE>
<CAPTION>
TO THE ISSUER TO THE UNDERWRITERS
<S> <C>
Sullivan & Cromwell Cleary, Gottlieb, Steen & Hamilton
125 Broad Street One Liberty Plaza
New York, New York 10004 New York, New York 10006
</TABLE>
INDEPENDENT AUDITORS
FOR THE ISSUER
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
<PAGE> 171
- -------------------------------------------------------
- -------------------------------------------------------
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 a solicitation of an offer to buy the securities it
describes, 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....................... 24
Pro Forma Consolidated Financial
Information......................... 25
Capitalization........................ 32
Selected Consolidated Financial
Data................................ 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 36
Industry and Economic Outlook......... 61
Business.............................. 64
Management............................ 89
Principal Shareholders................ 103
Certain Relationships and Related
Transactions........................ 105
Description of Notes We Are
Offering............................ 110
United States Taxation................ 126
Employee Retirement Income Security
Act................................. 130
Validity of the Notes................. 130
Experts............................... 130
Available Information................. 131
Index to Consolidated Financial
Statements.......................... F-1
Underwriting.......................... U-1
General Information................... U-3
</TABLE>
------------------
Through and including , 1999 (the 40th 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.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
$1,500,000,000
THE GOLDMAN SACHS
GROUP, INC.
% Notes due 2009
------------------
[GOLDMAN SACHS LOGO]
------------------
GOLDMAN, SACHS & CO.
BANC ONE CAPITAL MARKETS, INC.
BLAYLOCK & PARTNERS, L.P.
BT ALEX. BROWN
CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER
NATIONSBANC MONTGOMERY SECURITIES LLC
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
THE WILLIAMS CAPITAL GROUP, L.P.
-------------------------------------------------------
-------------------------------------------------------
<PAGE> 172
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.
[Alternate Front Cover Page for Market-Making Prospectus]
Subject to Completion. Dated May 10, 1999.
THE GOLDMAN SACHS GROUP, INC.
[GOLDMAN SACHS LOGO]
% Notes due 2009
------------------------
The Goldman Sachs Group, Inc. will pay interest on the notes on May 15 and
November 15 of each year, beginning on November 15, 1999. If Goldman Sachs
becomes obligated to pay additional amounts to non-U.S. investors due to changes
in U.S. withholding tax requirements, Goldman Sachs may redeem the notes before
their stated maturity at a price equal to 100% of the principal amount redeemed
plus accrued interest to the redemption date.
Goldman Sachs has filed an application to list the notes on the Luxembourg
Stock Exchange.
See "Risk Factors" beginning on page 11 to read about factors you should
consider before investing in the notes.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
Goldman, Sachs & Co., a subsidiary of Goldman Sachs, will use this
prospectus in connection with offers and sales of the notes in market-making
transactions.
GOLDMAN, SACHS & CO.
------------------------
Prospectus dated , 1999.
<PAGE> 173
[Alternate Page for Market-Making Prospectus]
PLAN OF DISTRIBUTION
Goldman, Sachs & Co., a subsidiary of The Goldman Sachs Group, Inc., will
use this prospectus in connection with offers and sales of the notes in
market-making transactions from time to time. These transactions may occur in
the open market or may be privately negotiated, at prices related to prevailing
market prices at the time of sale or at negotiated prices. In these
transactions, Goldman, Sachs & Co. may act as principal or agent, including as
agent for the counterparty in a transaction in which Goldman, Sachs & Co. acts
as principal or as agent for both counterparties in a transaction in which
Goldman, Sachs & Co. does not act as principal. Goldman, Sachs & Co. may receive
compensation in the form of discounts and commissions, including from both
counterparties in some transactions.
Other affiliates of The Goldman Sachs Group, Inc. may also engage in
transactions of this kind and may use this prospectus for this purpose. Neither
Goldman, Sachs & Co. nor any other affiliate of The Goldman Sachs Group, Inc.,
however, is obligated to make a market in the notes and may stop doing so at any
time without notice.
The Goldman Sachs Group, Inc. does not expect to receive the proceeds from
market-making transactions. The Goldman Sachs Group, Inc. does not expect
Goldman, Sachs & Co. or any other affiliate that engages in these transactions
to pay the proceeds from their market-making resales to The Goldman Sachs Group,
Inc.
Goldman, Sachs & Co. does not expect the amount of notes held, as a result
of market-making resales, by accounts over which it exercises discretionary
authority to exceed, at any time, five percent of the aggregate initial offering
price of the notes.
Goldman, Sachs & Co. acted as the lead underwriter in connection with the
original offering and sale of the notes and received underwriting compensation
in the form of a discount totaling approximately $ .
In this prospectus the term "offering" means the initial offering of the
notes, which occurred in connection with their original issuance on or about
, 1999. This term does not refer to any subsequent resale of the notes
by Goldman, Sachs & Co. or other affiliates in market-making transactions.
U-1
<PAGE> 174
- -------------------------------------------------------
- -------------------------------------------------------
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 a solicitation of an offer to buy the securities it
describes, 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....................... 24
Pro Forma Consolidated Financial
Information......................... 25
Capitalization........................ 32
Selected Consolidated Financial
Data................................ 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 36
Industry and Economic Outlook......... 61
Business.............................. 64
Management............................ 89
Principal Shareholders................ 103
Certain Relationships and Related
Transactions........................ 105
Description of Notes We Are
Offering............................ 110
United States Taxation................ 126
Employee Retirement Income Security
Act................................. 130
Validity of the Notes................. 130
Experts............................... 130
Available Information................. 131
Index to Consolidated Financial
Statements.......................... F-1
Plan of Distribution.................. U-1
General Information................... U-2
</TABLE>
------------------
Through and including , 1999 (the 40th 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.
- -------------------------------------------------------
- -------------------------------------------------------
[Alternate Back Cover Page
for Market-Making Prospectus]
- -------------------------------------------------------
- -------------------------------------------------------
THE GOLDMAN SACHS
GROUP, INC.
% Notes due 2009
------------------
[GOLDMAN SACHS LOGO]
------------------
GOLDMAN, SACHS & CO.
-------------------------------------------------------
-------------------------------------------------------
<PAGE> 175
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the expenses (all of which are estimated
other than the SEC registration fee and the NASD fees), 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......... $ 417,000
NASD fees................................................... 30,500
Legal fees and expenses..................................... 600,000
Listing fees................................................ 8,400
Fees and expenses of qualification under state securities
laws (including legal fees)............................... 10,000
Accounting fees and expenses................................ 650,000
Printing fees............................................... 800,000
Rating agency fees.......................................... 15,000
Trustee's fees and expenses................................. 10,000
Miscellaneous............................................... 459,100
----------
Total.................................................. $3,000,000
==========
</TABLE>
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
II-1
<PAGE> 176
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 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 entered into agreements with certain directors, officers
and employees who were asked to serve in specified capacities at subsidiaries
and other entities.
The registrant entered into an agreement that provides indemnification to
its directors and officers and to the directors and certain officers of the
general partner of The Goldman Sachs Group, L.P., members of its Management
Committee or its Partnership Committee or the former Executive Committee of The
Goldman Sachs 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 The Goldman Sachs Group, L.P. to take actions on behalf of the registrant,
The Goldman Sachs Group, L.P. or the general partner of The Goldman Sachs Group,
L.P. in connection with the plan of incorporation, this registration statement
and certain other registration statements for all losses, damages, costs and
expenses incurred by the indemnified person arising out of the relevant
registration statements 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 issued: (i)
shares of the registrant's common stock, par value $0.01 per share, to certain
managing directors who were profit participating limited partners of The Goldman
Sachs Group, L.P. in exchange for all of the managing directors' interests in
The Goldman Sachs Group, L.P. and certain other entities; (ii) shares of common
stock and 12% junior subordinated debentures of the registrant to certain
retired limited partners of The Goldman Sachs Group, L.P. in exchange for all of
such limited partners' interests in The Goldman Sachs 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, to Sumitomo Bank Capital
Markets, Inc.; and (iv) shares of common stock to Kamehameha Activities
Association. Also simultaneously with the registrant's common stock offering,
the registrant made awards of restricted stock units and/or options to
substantially all of its employees and made 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 managing directors who were profit participating limited
partners, retired limited partners, Sumitomo Bank Capital Markets, Inc. and
Kamehameha
II-2
<PAGE> 177
Activities Association were not registered under the Securities Act of 1933, as
amended, because the offering and sale (i) were made in reliance on the
exemption provided by Section 4(2) of the Securities Act of 1933 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 were issued in a transaction not registered under the
Securities Act of 1933) or (ii) were made outside the United States pursuant to
Regulation S under the Securities Act of 1933 to persons who were not citizens
or residents of the United States. The foregoing employee awards and
contribution of common stock were not registered under the Securities Act of
1933 because the awards and contribution either did not involve an offer or sale
for purposes of Section 2(a)(3) of the Securities Act of 1933, in reliance on
the fact that the awards were made to a relatively broad class of employees who
did not provide any consideration in exchange for their awards, or were offered
and sold in transactions not involving a public offering, exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) and in
compliance with Rule 506 thereunder.
On April 13, 1999, the registrant entered into an arrangement with a group
of 10 employees pursuant to which a portion of a performance-based bonus that is
payable to such employees in 2002 will be paid in shares of common stock of the
registrant valued at the initial public offering price per share in the
registrant's common stock offering. Under this arrangement, up to 386,500 shares
of common stock may be issued (based upon the midpoint of the range of initial
public offering prices set forth on the cover page of the prospectus included in
the registrant's registration statement on Form S-1 (No. 333-74449)). The
offering and sale of these 386,500 shares of common stock was made pursuant to
Rule 701 under the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Plan of Incorporation.*
2.2 Agreement and Plan of Merger of The Goldman Sachs
Corporation into The Goldman Sachs Group, Inc.
2.3 Agreement and Plan of Merger of The Goldman Sachs Group,
L.P. into The Goldman Sachs Group, Inc.
3.1 Amended and Restated Certificate of Incorporation of The
Goldman Sachs Group, Inc.
3.2 Amended and Restated By-Laws of The Goldman Sachs Group,
Inc.
4.1 Form of Indenture between The Goldman Sachs Group, Inc. and
The Bank of New York.**
4.2 Form of debt securities of The Goldman Sachs Group, Inc.
(included in Exhibit 4.1).**
5.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc.
8.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc., re tax matters.
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., as
amended.*
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and The Goldman Sachs Group, L.P.*
10.4 Lease, dated as of July 16, 1998, between TCC Acquisition
Corp. and The Goldman Sachs Group, L.P.*
</TABLE>
II-3
<PAGE> 178
<TABLE>
<C> <S>
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, (iii) Restamove Limited, (iv) The Goldman
Sachs 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)
Goldman Sachs International, (iii) Restamove Limited, (iv)
The Goldman Sachs 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) Goldman Sachs International and
(iii) The Goldman Sachs 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) The Goldman
Sachs Group, L.P.*
10.8 Agreement relating to One Carter Lane, London EC4, dated
March 25, 1998, among Britel Fund Trustees Limited, Goldman
Sachs International, The Goldman Sachs 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, Goldman Sachs International, Goldman Sachs Property
Management, The Goldman Sachs 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,
Goldman Sachs International and The Goldman Sachs 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 The Goldman Sachs 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 Letter Agreement with Mr. Weinberg.*
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 Form of Award Agreement (Formula RSUs).
10.23 Form of Award Agreement (Discretionary RSUs).
10.24 Form of Option Agreement (Discretionary Options).
10.25 Tax Indemnification Agreement, by and among The Goldman
Sachs Group, Inc. and various parties.
10.26 Form of Shareholders' Agreement among The Goldman Sachs
Group, Inc. and various parties.
</TABLE>
II-4
<PAGE> 179
<TABLE>
<C> <S>
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 The Goldman Sachs 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 The Goldman Sachs Group,
L.P.*
10.31 Letter Agreement, dated March 15, 1999, among Kamehameha Activities Association and The Goldman Sachs
Group, L.P. (the "Kamehameha Letter Agreement").*
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 The Goldman Sachs Group, L.P.*
10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo Bank, Limited, Sumitomo Bank Capital Markets,
Inc. and The Goldman Sachs Group, L.P. (the "Sumitomo Letter Agreement").*
10.34 Lease, dated September 24, 1992, from LDT Partners to Goldman Sachs International.*
10.35 Amendment to Kamehameha Letter Agreement (filed as Exhibit 10.31), dated April 30, 1999, among Kamehameha
Activities Association, the Trustees of the Estate of Bernice Pauahi Bishop, The Goldman Sachs Group, L.P.
and The Goldman Sachs Group, Inc.
10.36 Amendment to Sumitomo Letter Agreement (filed as Exhibit 10.33), dated April 30, 1999, among The Sumitomo
Bank, Limited, Sumitomo Bank Capital Markets, Inc., The Goldman Sachs Group, L.P., The Goldman Sachs
Group, Inc. and Goldman, Sachs & Co.
10.37 Voting Agreement, dated as of April 30, 1999, by and among The Goldman Sachs Group, Inc., on the one hand,
and The Trustees of the Estate of Bernice Pauahi Bishop and Kamehameha Activities Association, on the
other hand.
10.38 Voting Agreement, dated as of April 30, 1999, by and among The Goldman Sachs Group, Inc., on the one hand,
and The Sumitomo Bank, Limited, and Sumitomo Bank Capital Markets, Inc., on the other hand.
12.1 Statement re computation of ratios of earnings to fixed charges.**
15.1 Letter re Unaudited Interim Financial Information.
21.1 List of subsidiaries of The Goldman Sachs Group, L.P.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibits 5.1 and 8.1 above).
23.3 Consent of Securities Data Company.
24.1 Powers of Attorney.**
25.1 Statement of Eligibility of Trustee.**
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated herein by reference to the corresponding exhibit to the
registrant's registration statement on Form S-1 (No. 333-74449).
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Condensed financial information of The Goldman Sachs Group, L.P. and report
of PricewaterhouseCoopers LLP thereon.
II-5
<PAGE> 180
ITEM 17. UNDERTAKINGS
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, 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 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, 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.
(C) Insofar as indemnification for liabilities arising under the Securities
Act 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 SEC such indemnification is against
public policy as expressed in the Securities Act 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 and will be
governed by the final adjudication of such issue.
II-6
<PAGE> 181
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the registration statement (No.
333-75213) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, New York on the 7th day of May, 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. 2 to the registration statement (No. 333-75213) has been signed by the
following persons in the capacities indicated on the 7th day of May, 1999:
<TABLE>
<CAPTION>
TITLE SIGNATURE
----- ---------
<S> <C>
Director, 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
Director
----------------------------------------------
Sir John Browne
Director
----------------------------------------------
James A. Johnson
Director
----------------------------------------------
John L. Weinberg
</TABLE>
II-7
<PAGE> 182
<TABLE>
<CAPTION>
TITLE SIGNATURE
----- ---------
<S> <C>
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-8
<PAGE> 183
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.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 22, 1999.
S-1
<PAGE> 184
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> 185
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> 186
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 Plans............. -- -- (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> 187
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. 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> 188
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.*
2.2 Agreement and Plan of Merger of The Goldman Sachs
Corporation into The Goldman Sachs Group, Inc.
2.3 Agreement and Plan of Merger of The Goldman Sachs Group,
L.P. into The Goldman Sachs Group, Inc.
3.1 Amended and Restated Certificate of Incorporation of The
Goldman Sachs Group, Inc.
3.2 Amended and Restated By-Laws of The Goldman Sachs Group,
Inc.
4.1 Form of Indenture between The Goldman Sachs Group, Inc. and
The Bank of New York.**
4.2 Form of debt securities of The Goldman Sachs Group, Inc.
(included in Exhibit 4.1).**
5.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc.
8.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc., re tax matters.
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., as
amended.*
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and The Goldman Sachs Group, L.P.*
10.4 Lease, dated as of July 16, 1998, between TCC Acquisition
Corp. and The Goldman Sachs 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, (iii) Restamove Limited, (iv) The Goldman
Sachs 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)
Goldman Sachs International, (iii) Restamove Limited, (iv)
The Goldman Sachs 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) Goldman Sachs International and
(iii) The Goldman Sachs 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) The Goldman
Sachs Group, L.P.*
</TABLE>
<PAGE> 189
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.8 Agreement relating to One Carter Lane, London EC4, dated
March 25, 1998, among Britel Fund Trustees Limited, Goldman
Sachs International, The Goldman Sachs 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, Goldman Sachs International, Goldman Sachs Property
Management, The Goldman Sachs 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,
Goldman Sachs International and The Goldman Sachs 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 The Goldman Sachs 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 Letter Agreement with Mr. Weinberg.*
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 Form of Award Agreement (Formula RSUs).
10.23 Form of Award Agreement (Discretionary RSUs).
10.24 Form of Option Agreement (Discretionary Options).
10.25 Tax Indemnification Agreement, by and among The Goldman
Sachs Group, Inc. and various parties.
10.26 Form of Shareholders' Agreement among The Goldman Sachs
Group, 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 The Goldman Sachs 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 The Goldman Sachs Group, L.P.*
</TABLE>
<PAGE> 190
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.31 Letter Agreement, dated March 15, 1999, among Kamehameha
Activities Association and The Goldman Sachs Group, L.P.
(the "Kamehameha Letter Agreement").*
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 The
Goldman Sachs Group, L.P.*
10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo
Bank, Limited, Sumitomo Bank Capital Markets, Inc. and The
Goldman Sachs Group, L.P. (the "Sumitomo Letter
Agreement").*
10.34 Lease, dated September 24, 1992, from LDT Partners to
Goldman Sachs International.*
10.35 Amendment to Kamehameha Letter Agreement (filed as Exhibit
10.31), dated April 30, 1999, among Kamehameha Activities
Association, the Trustees of the Estate of Bernice Pauahi
Bishop, The Goldman Sachs Group, L.P. and The Goldman Sachs
Group, Inc.
10.36 Amendment to Sumitomo Letter Agreement (filed as Exhibit
10.33), dated April 30, 1999, among The Sumitomo Bank,
Limited, Sumitomo Bank Capital Markets, Inc., The Goldman
Sachs Group, L.P., The Goldman Sachs Group, Inc. and
Goldman, Sachs & Co.
10.37 Voting Agreement, dated as of April 30, 1999, by and among
The Goldman Sachs Group, Inc., on the one hand, and The
Trustees of the Estate of Bernice Pauahi Bishop and
Kamehameha Activities Association, on the other hand.
10.38 Voting Agreement, dated as of April 30, 1999, by and among
The Goldman Sachs Group, Inc., on the one hand, and The
Sumitomo Bank, Limited, and Sumitomo Bank Capital Markets,
Inc., on the other hand.
12.1 Statement re computation of ratios of earnings to fixed
charges.**
15.1 Letter re Unaudited Interim Financial Information.
21.1 List of subsidiaries of The Goldman Sachs Group, L.P.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibits 5.1 and
8.1 above).
23.3 Consent of Securities Data Company.
24.1 Powers of Attorney.**
25.1 Statement of Eligibility of Trustee.**
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated herein by reference to the corresponding exhibit to the
registrant's registration statement on Form S-1 (No. 333-74449).
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
The Goldman Sachs Group, Inc.
__% Notes due 2009
------------
Underwriting Agreement
May __, 1999
Goldman, Sachs & Co.,
Banc One Capital Markets, Inc.,
Blaylock & Partners, L.P.,
BT Alex. Brown Incorporated,
Chase Securities Inc.,
Credit Suisse First Boston Corporation,
Lehman Brothers Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
J.P. Morgan Securities Inc.,
Morgan Stanley & Co. Incorporated,
NationsBanc Montgomery Securities LLC,
PaineWebber Incorporated,
Prudential Securities Incorporated,
Salomon Smith Barney Inc.,
The Williams Capital Group, L.P.,
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 (the "Company"),
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 $1,500,000,000 principal amount of the Notes specified above (the
"Securities").
The Company succeeded to the business of The Goldman Sachs Group, L.P., a
Delaware limited partnership ("Group"), in a series of transactions described in
the Prospectuses (as defined in Section 1(a) hereof) under the captions "Certain
Relationships and Related Transactions--Incorporation and Related
Transactions--Incorporation Transactions". Those transactions, which are
hereinafter referred to as the "Incorporation Transactions", were consummated on
May 7, 1999. For purposes of the representations and warranties set forth in
Section 1(d) and the conditions set forth in Section 8(g),
<PAGE> 2
references to the Company with respect to any time before the consummation of
the Incorporation Transactions shall be deemed to be references to Group.
The Registration Statement (as defined in Section 1) contains two forms of
prospectus, one that relates to the initial distribution of the Securities by
the Underwriters in an underwritten public offering and another that relates to
offers and sales of Securities by Goldman, Sachs & Co. or any other affiliates
of the Company in secondary transactions. The Underwriters acknowledge and agree
that the Secondary Transactions Prospectus (as defined in Section 1) and any
amendment or supplement thereto will not be used by any Underwriter except
Goldman, Sachs & Co., and Goldman, Sachs & Co. and such other affiliates
acknowledge and agree that they will use the Initial Offering Prospectus (as
defined in Section 1) and any amendment or supplement thereto only in connection
with offers and sales of the kind contemplated therein to be made pursuant to
such prospectus and will use the Secondary Transactions Prospectus and any
amendment or supplement thereto only in connection with offers and sales of the
kind contemplated therein to be made pursuant to such prospectus. The Company
acknowledges and agrees that Goldman, Sachs & Co. are under no obligation to
commence any offers or sales of the kind contemplated by the Secondary
Transactions Prospectus or any amendment or supplement thereto and, if
commenced, Goldman, Sachs & Co. may discontinue such offers and sales at any
time without providing any notice to the Company. The term "Underwriter"
includes Goldman, Sachs & Co., whether acting in its capacity as an Underwriter
or acting as contemplated by the Secondary Transactions Prospectus.
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-75213) (the
"Initial Registration Statement") in respect of the Securities 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 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 but excluding Form T-1 and including the information
contained in the two forms of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Sections 5(a) and
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 the two forms of
final prospectus relating to the initial distribution of the Securities by
the Underwriters in an underwritten public offering and to offers and
sales of Securities by Goldman, Sachs & Co. or any other affiliates of the
Company in
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<PAGE> 3
secondary transactions, each in the form first filed pursuant to Rule
424(b) under the Act, are hereinafter called the "Initial Offering
Prospectus" and the "Secondary Transactions Prospectus", respectively, and
each is also called, individually, a "Prospectus" and, collectively, the
"Prospectuses");
(b) 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 Trust Indenture Act of
1939, as amended (the "Trust Indenture 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 the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and each Prospectus and any
further amendments or supplements to the Registration Statement or any
Prospectus will conform, in all material respects to the requirements of
the Act and the Trust Indenture 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 any 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 the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(d) 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 the Registration Statement (the "Significant
Subsidiaries") has sustained since the date of the latest audited
financial statements included in the Prospectuses 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
Prospectuses, 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
Prospectuses;
(e) 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 Prospectuses
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
3
<PAGE> 4
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;
(f) The Company 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 Prospectuses, and 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 and 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 (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 Prospectuses; and the Incorporation
Transactions have been consummated and the Company has succeeded to the
business of Group as described in the Prospectuses;
(g) The Company has an authorized capitalization as set forth in the
Prospectuses, all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued and are fully paid and
non-assessable; 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 and (B) interests in Goldman Sachs Holdings
L.L.C.) 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 interests in Goldman Sachs Mitsui Marine
Derivative Products, L.P.) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or claims;
(h) The Securities have been duly authorized and, when issued and
delivered pursuant to this Agreement, will have been duly executed,
authenticated, issued and delivered and will constitute valid and legally
binding obligations of the Company entitled to the benefits provided by
the indenture to be dated as of May _____, 1999 (the "Indenture") between
the Company and The Bank of New York, as Trustee (including any successor
trustee, the "Trustee"), under which they are to be issued, which will be
substantially in the form filed as an exhibit to the Registration
Statement; the Indenture has been duly authorized and duly qualified under
the Trust Indenture Act and, when executed and delivered by the Company
and the Trustee, will constitute a valid and legally binding instrument,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or
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<PAGE> 5
affecting creditors' rights and to general equity principles; and the
Securities and the Indenture will conform to the descriptions thereof in
the Prospectuses;
(i) The issue and sale of the Securities and the compliance by the
Company with all of the provisions of the Securities, the Indenture and
this Agreement 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 Amended and Restated Certificate of Incorporation or Amended and
Restated By-laws of the Company or the organizational documents of any of
its Significant Subsidiaries or any statute or any order, rule or
regulation of any court 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 Securities by the Company or the
consummation by the Company of the transactions contemplated by this
Agreement or the Indenture, except the registration under the Act of the
Securities, such as have been obtained under the Trust Indenture Act 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 Securities by the Underwriters;
(j) 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, 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;
(k) The statements set forth in each Prospectus under the caption
"Description of Notes We Are Offering", insofar as they purport to
constitute a summary of the terms of the Securities, and the statements
set forth in the Prospectuses under the caption "United States Taxation",
and in the Initial Offering 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;
(l) Other than as set forth in each 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 financial
position, stockholders' equity or partners' capital, 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;
(m) The Company is not and, after giving effect to the offering and
sale of the Securities, will not be an "investment company", as such term
is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
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<PAGE> 6
(n) The Company and its Significant Subsidiaries possess all
concessions, permits, licenses, consents, exemptions, franchises,
authorizations, orders, registrations, qualifications and other approvals
(each, an "Authorization") 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 each Prospectus;
(o) The statements set forth in the Prospectuses 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
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; and
(p) 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.
2. Subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price of .....% of the principal amount thereof, plus accrued
interest, if any, from May __, 1999 to the Time of Delivery hereunder, the
principal amount of Securities set forth opposite the name of such Underwriter
in Schedule I hereto.
3. Upon the authorization by you of the release of the Securities, the
several Underwriters propose to offer the Securities for sale upon the terms and
conditions set forth in the Initial Offering Prospectus.
4. (a) The Securities to be purchased by each Underwriter hereunder will
be represented by one or more definitive global Securities in book-entry form
which will be deposited by or on behalf of the Company with The Depository Trust
Company ("DTC") or its designated custodian. The Company will deliver the
Securities to Goldman, Sachs & Co., for the account of each 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 by the
Company to Goldman, Sachs & Co. at least forty-eight hours in advance, by
causing DTC to credit the Securities to the account of Goldman, Sachs & Co. at
DTC. The Company will cause the certificates representing the Securities to be
made available to Goldman, Sachs & Co. for checking at least twenty-four hours
prior to the Time of Delivery (as defined below) at the office of Sullivan &
Cromwell, 125 Broad Street, New York, New York 10004 or at the office of DTC or
its designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be 9:30 a.m., New York City time, on May __, 1999 or
such other time and date as Goldman, Sachs & Co. and the Company may agree upon
in writing. Such time and date are herein called the "Time of Delivery".
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<PAGE> 7
(b) The documents to be delivered at the Time of Delivery by or on behalf
of the parties hereto pursuant to Section 8 hereof, including the cross-receipt
for the Securities and any additional documents requested by the Underwriters
pursuant to Section 8(k) hereof, will be delivered at the offices of Sullivan &
Cromwell, 125 Broad Street, New York, New York 10004 (the "Closing Location"),
and the Securities will be delivered at the Designated Office, all at the 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 the 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 4, "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 City are generally authorized or obligated by
law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Initial Offering Prospectus in a form approved by
you and to file the Initial Offering 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 the Initial Offering Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to
advise you, 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 Initial Offering Prospectus or any
amended Initial Offering Prospectus has been filed and to furnish you with
copies thereof; to advise you, 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 Securities 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 Initial
Offering 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, to promptly 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 Securities 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 Securities, provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or
to file a general consent to service of process in any 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 with copies of the Initial Offering
Prospectus in New York City in such quantities as you 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
Initial Offering Prospectus in connection with the offering or sale of the
Securities (other than any offering or sale by Goldman, Sachs & Co. of the
kind contemplated in the Secondary Transactions Prospectus) and if at such
time any event shall have occurred as a result of which the Initial
Offering Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state
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<PAGE> 8
any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made when such Initial
Offering Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such same period to amend or
supplement the Initial Offering Prospectus in order to comply with the Act
or the Trust Indenture Act, to notify you and upon your request to prepare
and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably request
of an amended Initial Offering Prospectus or a supplement to the Initial
Offering 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 Securities at any time
nine months or more after the time of issue of the Initial Offering
Prospectus (other than any sales by Goldman, Sachs & Co. of the kind
contemplated in the Secondary Transactions 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 Initial Offering 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 Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company 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 the Company, Rule 158 under the Act);
(e) During the period beginning from the date hereof and continuing
to and including the later of the Time of Delivery and such earlier time
as you may notify the Company, not to offer, sell, contract to sell or
otherwise dispose of, except as provided hereunder, any securities of the
Company that are substantially similar to the Securities;
(f) To use the net proceeds received by it from the sale of the
Securities pursuant to this Agreement in the manner specified in the
Initial Offering Prospectus under the caption "Use of Proceeds";
(g) To use its best efforts to list, subject to notice of issuance,
the Securities on the Luxembourg Stock Exchange; and
(h) If the Company 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, either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act.
6. The Company agrees with Goldman, Sachs & Co.:
(a) (i) To prepare the Secondary Transactions Prospectus in a form
approved by Goldman, Sachs & Co. 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;
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<PAGE> 9
(ii) to make no further amendment or any supplement to the
Registration Statement or the Secondary Transactions Prospectus during the
Secondary Transactions Period (as defined in the last sentence of this
Section 6(a)) which shall be disapproved by Goldman, Sachs & Co. promptly
after reasonable notice thereof, it being understood that, when Form S-2
or S-3 under the Act is available to the Company, the Company may amend
the Registration Statement so as to be on such form or may file a new
registration statement on such form and have it declared effective by the
Commission, and thereafter any information required to be included in the
Registration Statement or the Secondary Transactions Prospectus may be
incorporated therein by reference as permitted by such form, provided
that:
(w) if a new registration statement is filed and becomes
effective, any reference herein to the Registration Statement or the
Secondary Transactions Prospectus (including as one of the
Prospectuses) shall thereafter include, respectively, such new
registration statement and the prospectus contained therein in the
form first filed pursuant to Rule 424(b) under the Act;
(x) if a new registration statement is filed and becomes
effective, the Company shall be deemed to have made the
representations and warranties in Sections 1(a) (excluding the last
parenthetical clause thereof) and 1(c) to Goldman, Sachs & Co. with
respect to such new registration statement, as of its effective
date, and such prospectus contained therein in such form, as of its
date;
(y) if a new registration statement is filed and becomes
effective, any reference in this Agreement to any Preliminary
Prospectus or the Secondary Transactions Prospectus (including as
one of the Prospectuses) shall thereafter be deemed to refer to and
include any documents filed after the date of such Preliminary
Prospectus or Prospectus, as the case may be, under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and
incorporated by reference in such Preliminary Prospectus or
Prospectus, as the case may be; and
(z) whether or not a new registration statement is filed and
becomes effective, any reference in this Agreement to any amendment
to the Registration Statement shall thereafter be deemed to refer to
and include any annual report of the Company filed pursuant to
Section 13(a) or 15(d) of the Exchange Act after the effective date
of the Registration Statement that is incorporated by reference in
the Registration Statement;
(iii) to advise Goldman, Sachs & Co., promptly after the Company
receives notice thereof, of the time when the Registration Statement, or
any amendment thereto, has been filed or becomes effective during the
Secondary Transactions Period, or any supplement to the Secondary
Transactions Prospectus or any amended Secondary Transactions Prospectus
has been filed during such period, and to furnish Goldman, Sachs & Co.
with copies thereof;
(iv) to advise Goldman, Sachs & Co., promptly after the Company
receives notice thereof during the Secondary Transactions Period, 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 Securities for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose or of any
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<PAGE> 10
request by the Commission for the amending or supplementing of the
Registration Statement or any Prospectus or for additional information;
and
(v) 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 during the Secondary
Transactions Period, to use promptly its reasonable efforts to obtain the
withdrawal of such order.
As used in this Agreement, the term "Secondary Transactions Period" means
the period beginning on the date hereof and continuing for as long as may
be required under applicable law, in the reasonable judgment of Goldman,
Sachs & Co. after consultation with the Company, in order to offer and
sell the Securities as contemplated by the Secondary Transactions
Prospectus.
(b) Promptly from time to time to take such action as Goldman, Sachs
& Co. may reasonably request to qualify the Securities for offering and
sale during the Secondary Transactions Period under the securities laws of
such jurisdictions as Goldman, Sachs & Co. may request and to comply with
such laws so as to permit the continuance of sale and dealings therein in
such jurisdictions during such period, provided that in connection
therewith the Company 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) To furnish Goldman, Sachs & Co. with copies of the Secondary
Transactions Prospectus in such quantities as Goldman, Sachs & Co. may
from time to time reasonably request during the Secondary Transactions
Period, and, if at any time during such period any event shall have
occurred as a result of which the Secondary Transactions 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 to be delivered during such period,
not misleading, or, if for any other reason it shall be necessary during
such period to amend or supplement the Secondary Transactions Prospectus
or to amend the Registration Statement in order to comply with the Act or
to file under the Exchange Act any document incorporated by reference in
such Prospectus in order to comply with the Act or the Exchange Act, to
notify Goldman, Sachs & Co. and upon its request to file such document and
to prepare and furnish without charge to Goldman, Sachs & Co. as many
copies as it may from time to time during such period reasonably request
of an amended Secondary Transactions Prospectus or a supplement to the
Secondary Transactions Prospectus which will correct such statement or
omission or effect such compliance;
(d) During the Secondary Transactions Period, to furnish to Goldman,
Sachs & Co. copies of all reports or other communications (financial or
other) furnished to stockholders generally, and to deliver to Goldman,
Sachs & Co. (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 the Securities or any class of
securities of the Company is listed; and (ii) such additional information
concerning the business and financial condition of the Company as Goldman,
Sachs & Co. may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission); and
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(e) Each time the Registration Statement or the Secondary
Transactions Prospectus shall be amended or supplemented during the
Secondary Transactions Period, to furnish or cause to be furnished to
Goldman, Sachs & Co., upon its request, written opinions of counsel for
the Company, a letter from the independent accountants who have certified
the financial statements included in the Registration Statement as then
amended and certificates of officers of the Company, in each case in form
and substance reasonably satisfactory to you, all to the effect specified
in subsections (c), (d), (e), (f) and (k), respectively, of Section 8
hereof (as modified to relate to the Registration Statement and the
Secondary Transactions Prospectus as then amended or supplemented).
Notwithstanding the foregoing provisions, if at any time the Company
determines that it is in possession of material, non-public information
that it would not be required to disclose publicly in the absence of
registration of the Securities under the Act, the Company may, upon notice
to Goldman, Sachs & Co., cease to comply with any of its obligations under
this Section 6, but only for a period or periods that the Company
reasonably determines are necessary in order to avoid such premature
disclosure and in any event not to exceed 90 days in the aggregate during
any period of 12 consecutive calendar months. Upon receipt of any such
notice, Goldman, Sachs & Co. shall cease using the Secondary Transactions
Prospectus or any amendment or supplement thereto until it receives notice
from the Company that it may resume using such document.
7. The Company covenants and agrees with the several Underwriters 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 Securities under the Act and all other expenses in
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus and the Prospectuses and amendments and
supplements thereto and the mailing and delivering of copies thereof to the
Underwriters, and dealers; (ii) the cost of printing or producing any Agreement
among Underwriters, this Agreement, the Indenture, closing documents (including
any compilations thereof) and any other documents in connection with the
offering, purchase, sale and delivery of the Securities; (iii) all expenses in
connection with the qualification of the Securities for offering and sale under
state securities laws as provided in Section 5(b) and Section 6(b) hereof,
including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky and legal
investment surveys; (iv) any fees charged by securities rating services for
rating the Securities; (v) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in connection with, any required
review by the National Association of Securities Dealers, Inc. of the terms of
the sale of the Securities by the Underwriters pursuant to the Initial Offering
Prospectus; (vi) the cost of preparing the Securities; (vii) the fees and
expenses of the Trustee and any agent of the Trustee and the fees and
disbursements of counsel for the Trustee in connection with the Indenture and
the Securities; (viii) all reasonable fees, disbursements and expenses incident
to the performance of its obligations under Section 6(e); 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. It is
understood, however, that, except as provided in this Section, and Sections 9
and 12 hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, transfer taxes on resale of any of the
Securities by them, and any advertising expenses connected with any offers they
may make.
8. The obligations of the several Underwriters hereunder shall be subject,
in their discretion, to the condition that all representations and warranties
and other statements of the Company herein are, at and as of the Time of
Delivery, true and correct, the condition that the Company shall have performed
all of its obligations hereunder theretofore to be performed and the following
additional conditions:
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(a) The Initial Offering 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 5(a) hereof; if the Company 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 your reasonable satisfaction;
(b) Cleary, Gottlieb, Steen & Hamilton, counsel for the
Underwriters, shall have furnished to you such written opinion and letter
(drafts of such opinion and letter are attached as Annex II(a) hereto),
dated the Time of Delivery, to the effect that the matters set forth in
the Prospectuses under the caption "United States Taxation", 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 covered in
paragraphs (i), (ii), (vi), (vii), (viii), (xi) 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 the Company, shall have
furnished to you their written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated the Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware;
(ii) All the shares of common stock of the Company that were
outstanding immediately after the closing of the Company's initial
public offering of common stock on May 7, 1999 have been duly
authorized and validly issued and are fully paid and non-assessable;
(iii) All regulatory consents, authorizations, approvals and
filings required to be obtained or made by the Company 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 Securities by the Company to you
have been obtained or made;
(iv) The issuance of the Securities in accordance with the
Indenture and the sale of the Securities by the Company to you
pursuant to this Agreement do not, and the performance by the
Company of its obligations under the Securities, the Indenture and
this Agreement will not, (a) violate the Amended and Restated
Certificate of Incorporation or Amended and Restated By-laws of the
Company, (b) result in a default under or breach of the agreements
listed in Part II, Item 16(a), as Exhibits 2.1 and 10.1 through
10.38 of the Registration Statement, (c) violate any court orders
listed in the certificate of Robert J. Katz, a General Counsel of
the Company, dated the Time of Delivery and delivered to you in
connection with the offering of the Securities or (d) violate any
Federal law of the United States or law of the State of New York
applicable to the Company; provided, however, that for the purposes
of this paragraph (iv), such counsel may state that they express no
opinion with respect to
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<PAGE> 13
Federal or state securities laws, fraudulent transfer laws, other
antifraud laws and the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and related laws; and provided, further,
that such counsel may also state that insofar as performance by the
Company of its obligations under this Agreement, the Indenture and
the Securities is concerned, they are expressing no opinion as to
bankruptcy, insolvency, reorganization, moratorium or similar laws
of general applicability relating to or affecting creditors' rights;
(v) This Agreement has been duly authorized, executed and
delivered by the Company;
(vi) The Indenture has been duly authorized, executed and
delivered by the Company and duly qualified under the Trust
Indenture Act; the Securities have been duly authorized, executed,
authenticated, issued and delivered; and the Indenture and the
Securities constitute valid and legally binding obligations of the
Company enforceable in accordance with their terms, subject to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to
general equity principles; and
(vii) The Company is not, and after giving effect to the
offering and sale of the Securities will not be, an "investment
company" as such term is defined in the Investment Company Act.
Such counsel shall also furnish you with a letter to the effect
that, as counsel to the Company, they reviewed the Registration Statement
and the Prospectuses, participated in discussions with your
representatives and those of the Company and its accountants and advised
the Company as to the requirements of the Act and the applicable rules and
regulations thereunder; between the date of the Prospectuses and the Time
of Delivery, such counsel participated in further discussions with your
representatives and those of the Company and its accountants in which the
contents of certain portions of the Prospectuses and related matters were
discussed and reviewed certain certificates of certain officers of the
Company, an opinion of a General Counsel of the Company and letters from
the Company's independent accountants delivered to you in connection with
the initial offering of the Securities; 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 that, in such
counsel's opinion, the Registration Statement and the Prospectuses, 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 Trust Indenture 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
Prospectuses, as of their date or as of the Time of Delivery, contained or
contain any untrue statement of a material fact or omitted 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, not
misleading; such counsel may state that the limitations inherent in the
independent verification of factual matters and the character of
determinations involved in the
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<PAGE> 14
registration process are such, however, that such counsel does not assume
any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectuses
except for those made under the captions "Description of Notes We Are
Offering" in the Prospectuses and "Underwriting" in the Initial Offering
Prospectus, in each case, insofar as they relate to provisions of
documents therein described, and except for those made under the caption
"United States Taxation" in the Prospectuses, insofar as they relate to
provisions of U.S. Federal income tax law therein described; 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 Prospectuses, or as to the statement of the
eligibility and qualification of the Trustee under the Indenture; and 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 Securities were sent or given to investors. In addition,
such counsel shall state that they do not know of any litigation
instituted or threatened against the Company that would be required to be
disclosed in the Prospectuses that is not so disclosed, provided that such
counsel may also state that they call to your attention that the Company
has an internal legal department and that, while such counsel represents
the Company 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 the Company 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; that, insofar as such opinion
involves factual matters, they have relied upon certificates of officers
of the Company and its subsidiaries and certificates of public officials
and other sources believed by such counsel to be responsible; and that
such counsel have assumed that the Indenture has been duly authorized,
executed and delivered by the Trustee, that the Securities conform to the
form thereof examined by them, that the Trustee's certificates of
authentication of the Securities have been manually signed by one of the
Trustee's authorized signatories and that the signatures on all documents
examined by them are genuine (assumptions that they have not independently
verified).
(d) Gregory K. Palm, Esq., a General Counsel for the Company, shall
have furnished to you his written opinion (a draft of such opinion is
attached as Annex II(c) hereto), dated the Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company 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
Prospectuses;
(ii) The Company has an authorized capitalization as set forth
in the Prospectuses, and all of the issued shares of capital stock
of the Company have been duly and validly authorized and issued and
are fully paid and non-assessable;
(iii) 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
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<PAGE> 15
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; provided, however, that for the purposes of
this paragraph (iii), such counsel may state that he expresses no
opinion as to the qualification of the Company as a foreign
corporation under the laws of the States of Texas or Illinois (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 the Company, 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 and limited
partnership interests in Goldman, Sachs & Co., and the general
partnership interests in J. Aron & Company, have been duly and
validly created and are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities and 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 the Company 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 Prospectuses, 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 that is reasonably likely, individually
or in the aggregate, to have a material adverse effect on the
current or future consolidated financial position, stockholders'
equity or results of operations of the Company 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 has been duly authorized, executed and
delivered by the Company;
(vii) The Securities have been duly authorized, executed,
authenticated, issued and delivered and constitute valid and legally
binding obligations of the Company entitled to the benefits provided
by the Indenture; and the Securities and the Indenture conform to
the descriptions thereof in the Prospectuses;
(viii) The Indenture has been duly authorized, executed and
delivered by the Company and constitutes a valid and legally binding
instrument enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other
laws of general applicability relating to or affecting creditors'
rights and to general equity principles; and the Indenture has been
duly qualified under the Trust Indenture Act.
(ix) The issue and sale of the Securities by the Company, the
compliance by the Company with all of the provisions of the
Securities, the Indenture and this Agreement and the consummation by
the Company 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 material
indenture, mortgage, deed of
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<PAGE> 16
trust, loan agreement or other agreement or instrument known to such
counsel 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 Amended and Restated Certificate
of Incorporation or Amended and Restated By-laws of the Company or
any statute or any order, rule or regulation known to such counsel
of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties;
provided, however, that, for the purposes of this paragraph (ix),
such counsel need not express any opinion with respect to Federal or
state securities laws, fraudulent transfer laws, other antifraud
laws and ERISA and related laws; and provided, further, that insofar
as the compliance by the Company with all of the provisions of the
Securities, the Indenture and this Agreement 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;
(x) 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 Securities or the consummation by the
Company of the transactions contemplated by this Agreement, the
Securities or the Indenture, except the registration of the
Securities under the Act and the qualification of the Indenture
under the Trust Indenture Act, 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
Securities by the Underwriters;
(xi) The statements set forth in the Prospectuses under the
caption "Description of Notes We Are Offering", insofar as they
purport to constitute a summary of the terms of the Securities
described therein, and in the Initial Offering Prospectus under the
caption "Underwriting", insofar as they purport to describe the
provisions of the documents referred to therein, are accurate,
complete and fair; and
(xii) The Registration Statement and the Prospectuses and any
further amendments and supplements thereto made by the Company prior
to the Time of Delivery (other than the financial statements and
related schedules therein, other financial data therein derived from
the Company's accounting records and the statement of the
eligibility and qualification of the Trustee under the Indenture, 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 Trust Indenture 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 Prospectuses, except for those
referred to in the opinion in paragraphs (ii) and (xi) of this
Section 8(d), he has no reason to believe (i) that, as of its
effective date, the Registration Statement or any further amendment
thereto made by the Company prior to the Time of Delivery (other
than the financial statements and related schedules therein, other
financial data therein derived from the Company's accounting records
and the statement of the eligibility and qualification of the
Trustee under the Indenture, 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
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<PAGE> 17
not misleading, (ii) that, as of their date, the Prospectuses or any
further amendment or supplement thereto made by the Company prior to
the Time of Delivery (other than the financial statements and
related schedules therein, other financial data therein derived from
the Company's accounting records and the statement of the
eligibility and qualification of the Trustee under the Indenture, 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 (iii)
that, as of the Time of Delivery, either the Registration Statement
or the Prospectuses or any further amendment or supplement thereto
made by the Company prior to the Time of Delivery (other than the
financial statements and related schedules therein, other financial
data therein derived from the Company's accounting records and the
statement of the eligibility and qualification of the Trustee under
the Indenture, 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 Prospectuses which are not filed or
described as required. Such counsel may state that he assumes 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
Securities were sent or given to investors.
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; that, insofar as such opinion
involves factual matters, he has relied upon certificates of officers of
the Company and its subsidiaries and certificates of public officials and
other sources believed by such counsel to be responsible; and that he has
assumed that the Indenture has been duly authorized, executed and
delivered by the Trustee, that the Securities conform to the form thereof
examined by him (or members of the Company's legal department acting under
his supervision), that the Trustee's certificates of authentication of the
Securities have been manually signed by one of the Trustee's authorized
signatories and that the signatures on all documents examined by him (or
members of the Company's legal department acting under his supervision)
are genuine (assumptions that he has not independently verified). In
addition, such counsel may state that he has examined, or has caused
members of the Company's legal department to examine, such corporate and
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 the Company,
shall have furnished to you their written opinion (a draft of such opinion
is attached as Annex II(d) hereto), dated the Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) Goldman Sachs International has been duly incorporated and
is validly existing as a private unlimited company, in good standing
under the laws of England; and
(ii) All of the issued shares of Goldman Sachs International
have been duly and validly authorized and issued, are fully paid and
are owned by Goldman Sachs Holdings (U.K.), Goldman Sachs
Investments Europe and Goldman Sachs (U.K.) L.L.C.,
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which are themselves indirectly owned by the Company, free and clear
from 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 the Company and certificates of public officials and other sources
believed by such counsel to be responsible;
(f) On the date of the Initial Offering 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 the
Time of Delivery, PricewaterhouseCoopers LLP shall have furnished to you 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);
(g) (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 Initial Offering 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 Initial Offering Prospectus, and (ii) since
the respective dates as of which information is given in the Initial
Offering Prospectus there shall not have been any change in the capital
stock or partners' capital, 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 Initial Offering 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 Securities on the terms and in the manner contemplated in
the Initial Offering Prospectus;
(h) 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;
(i) 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 the Company's securities on the New York
Stock Exchange; (iii) a general moratorium on 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
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delivery of the Securities on the terms and in the manner contemplated in
the Initial Offering Prospectus;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to
you at the Time of Delivery, certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of the Time of Delivery, as to
the performance by the Company of all of its obligations hereunder to be
performed at or prior to the Time of Delivery, as to the matters set forth
in subsections (a) and (g) of this Section and as to such other matters as
you may reasonably request.
9. (a) The Company 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 any 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 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 the Company 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 any Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company 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 any 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 any Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the 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
19
<PAGE> 20
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 (who 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.
(d) If the indemnification provided for in this Section 9 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) 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 the Company on the one hand and the Underwriters on the other from the
offering of the Securities contemplated by the Initial Offering Prospectus. 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 (c) 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 the Company 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 the Company 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 (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Initial Offering 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 the
Company 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. The Company and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this subsection
(d) 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 (d). 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 (d) 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 (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered
20
<PAGE> 21
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. 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 (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 9 shall be in
addition to any liability which the Company 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 the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
10. (a) If any Underwriter shall default in its obligation to purchase the
Securities which it has agreed to purchase hereunder, you may in your discretion
arrange for you or another party or other parties to purchase such Securities 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 Securities, then the
Company 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
Securities on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Securities, or the Company notifies you that it has so arranged for the
purchase of such Securities, you or the Company shall have the right to postpone
the 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 the
Company 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 Securities.
(b) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate principal amount of such
Securities which remains unpurchased does not exceed one-eleventh of the
aggregate principal amount of all the Securities, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the principal
amount of Securities which such Underwriter agreed to purchase hereunder and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the principal amount of Securities which such Underwriter agreed
to purchase hereunder) of the Securities 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.
(c) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate principal amount of Securities
which remains unpurchased exceeds one-eleventh of the aggregate principal amount
of all the Securities, or if the Company shall not exercise the right described
in subsection (b) above to require non-defaulting Underwriters to purchase
Securities of a defaulting
21
<PAGE> 22
Underwriter or Underwriters, then this Agreement shall thereupon terminate,
without liability on the part of any non-defaulting Underwriter or the Company,
except for the expenses to be borne by the Company and the Underwriters as
provided in Section 7 hereof and the indemnity and contribution agreement in
Section 9 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
11. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, 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 or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Securities.
Anything herein to the contrary notwithstanding, the indemnity agreement
of the Company in subsection (a) of Section 9 hereof, the representations and
warranties in subsections (b) and (c) of Section 1 hereof and any representation
or warranty as to the accuracy of the Registration Statement or any Prospectus
contained in any certificate furnished by the Company pursuant to Section 8
hereof, insofar as they may constitute a basis for indemnification for
liabilities (other than payment by the Company 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 of the Company who
signed the Registration Statement or a controlling person of the Company 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 the
Company, 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 the
Company the matter has been settled by controlling precedent, the Company will,
if a claim for such indemnification is asserted, submit to a court of
appropriate jurisdiction the question of whether such interest is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
12. If this Agreement shall be terminated pursuant to Section 10 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 7 and 9 hereof; but, if for any other reason, the
Securities are not delivered by or on behalf of the Company as provided herein,
the Company 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 Securities, but the Company shall then be
under no further liability to any Underwriter except as provided in Sections 7
and 9 hereof.
13. 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.
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 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention:
22
<PAGE> 23
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 9(c) 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 the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
14. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 9 and
11 hereof, the officers and directors of the Company and each person who
controls the Company 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
Securities from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
15. 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.
16. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
17. 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 respective counterparts shall together constitute one and
the same instrument.
23
<PAGE> 24
If the foregoing is in accordance with your understanding, please sign and
return to us_____ 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 and the Company.
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, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
The Goldman Sachs Group, Inc.
By:.....................................
Name:
Title:
Accepted as of the date hereof at ........,
Goldman, Sachs & Co.
Banc One Capital Markets, Inc.
Blaylock & Partners, L.P.
BT Alex. Brown Incorporated
Chase Securities Inc.
Credit Suisse First Boston Corporation
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
J.P. Morgan Securities Inc.
Morgan Stanley & Co. Incorporated
NationsBanc Montgomery Securities LLC
PaineWebber Incorporated
Prudential Securities Incorporated
Salomon Smith Barney Inc.
The Williams Capital Group, L.P.
By:...................................
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
24
<PAGE> 25
SCHEDULE I
PRINCIPAL
AMOUNT OF
SECURITIES
TO BE
UNDERWRITER PURCHASED
----------- ---------
$
Goldman, Sachs & Co.
Banc One Capital Markets, Inc.
Blaylock & Partners, L.P.
BT Alex. Brown Incorporated
Chase Securities Inc.
Credit Suisse First Boston Corporation
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
J.P. Morgan Securities Inc.
Morgan Stanley & Co. Incorporated
NationsBanc Montgomery Securities LLC
PaineWebber Incorporated
Prudential Securities Incorporated
Salomon Smith Barney Inc.
The Williams Capital Group, L.P.
[Names of other Underwriters]
--------------
$1,500,000,000
Total ==============
25
<PAGE> 26
ANNEX I
Pursuant to Section 8(f) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to Group and its subsidiaries and the Company 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 Regulation
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 Company 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 had
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 cause them to believe that the unaudited condensed consolidated
financial statements 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;
(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
<PAGE> 27
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, 302 and 402, 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 the Company 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 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) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements of
the Act and the published rules and regulations thereunder or the
pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
partners' capital or any increase in the consolidated long-term debt
of the Company and its subsidiaries, or any decreases in
consolidated net current assets or other items specified by the
Representatives, or any
2
<PAGE> 28
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
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in clause (E) 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 2.2
AGREEMENT AND PLAN OF MERGER
AGREEMENT OF MERGER, dated as of May 5, 1999, pursuant to Section
251 of the General Corporation Law of the State of Delaware (the "DGCL"),
between THE GOLDMAN SACHS GROUP, INC., a Delaware corporation ("GS Inc."), and
THE GOLDMAN SACHS CORPORATION, a Delaware corporation (the "Merging Entity").
WITNESSETH that:
WHEREAS, each of the parties hereto desires that the Merging Entity
merge (the "Merger") with and into GS Inc. as hereinafter specified with GS Inc.
being the surviving corporation; and
WHEREAS, certain redemptions of preferred stock of the Merging
Entity may be effected in contemplation of the Merger;
NOW, THEREFORE, the parties to this Agreement, in consideration of
the mutual covenants, agreements and provisions hereinafter contained, do hereby
prescribe the terms and conditions of the Merger and mode of carrying the same
into effect as follows:
FIRST: At the Effective Time (as hereinafter defined), the Merging
Entity shall be merged with and into GS Inc., with GS Inc. being the surviving
entity.
<PAGE> 2
SECOND: The Merger is intended to qualify as a "reorganization"
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended.
THIRD: The manner of converting the outstanding shares of capital
stock of the Merging Entity and GS Inc. shall be as follows:
(a) Each share of Class B Common Stock, par value $1.00 per share,
of the Merging Entity which shall be issued and outstanding immediately
prior to the effectiveness of this Agreement (the "Effective Time"), other
than any such as to which appraisal rights have been validly asserted,
shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into the right to receive 2,376 shares (the
"Class B Merger Consideration") of common stock, par value $0.01 per
share, of GS Inc. (the "GS Inc. Common Stock"), and such shares of Class B
Common Stock shall no longer be outstanding and shall be canceled and
retired and shall cease to exist, and each holder of any such shares of
Class B Common Stock as recorded in the books of the Merging Entity shall
thereafter cease to have any rights with respect to such shares of Class B
Common Stock, except the right to receive the Class B Merger Consideration
for such shares of Class B Common Stock upon the Effective Time. The
shares of GS Inc. Common Stock that are issued and outstanding immediately
prior to the Effective Time shall be unaffected by the Merger.
(b) The shares of each of the several series of Preferred Stock, par
value $1.00 per share, of the Merging Entity which shall be issued and
outstanding immediately prior to the Effective Time shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
converted into the right to receive the consideration set forth in the
attached Schedule A (the "Preferred Stock Merger Consideration"), and such
shares of Preferred Stock shall no longer be outstanding and shall be
canceled and retired and shall cease to exist, and each holder of any such
shares of Preferred Stock as recorded in the books of the Merging Entity
shall thereafter cease to have any rights with respect to such shares of
Preferred Stock, except the right to receive the Preferred Stock Merger
Consideration for such shares of Preferred Stock upon the Effective Time.
(c) The shares of GS Inc. Common Stock owned by the Merging Entity
prior to the Effective Time and owned by GS Inc. as a result of the Merger
shall be canceled.
FOURTH: The terms and conditions of the Merger are as follows:
-2-
<PAGE> 3
(a) the separate existence of the Merging Entity shall cease, and GS
Inc. shall possess all the rights, privileges, powers and franchises of
the Merging Entity, of a public as well as of a private nature, and shall
be subject to all of the restrictions, disabilities and duties of the
Merging Entity;
(b) all property of the Merging Entity, real, personal and mixed,
all debts due to the Merging Entity on whatever account and all other
things in action or belonging to the Merging Entity shall be vested in GS
Inc.;
(c) the title to any real estate vested by deed or otherwise in the
Merging Entity shall not revert or be in any way impaired, but all rights
of creditors therein and all liens thereon shall be preserved unimpaired;
(d) all debts, liabilities, duties and other obligations of the
Merging Entity under any and all indentures, loan agreements, revolving
credit agreements, liquidity agreements, letters of credit and
reimbursement agreements, notes, guarantees or other agreements or other
instruments to which the Merging Entity is a party or by which it is bound
shall attach to GS Inc. and may be enforced against GS Inc. to the same
extent as if said debts, liabilities and duties had been incurred or
contracted by GS Inc.;
(e) GS Inc. expressly assumes all debts, liabilities, duties and
other obligations of the Merging Entity under any and all indentures, loan
agreements, revolving credit agreements, liquidity agreements, letters of
credit and reimbursement agreements, notes, guarantees or other agreements
or other instruments to which the Merging Entity is a party or by which it
is bound; and
(f) any claim existing or action or proceeding pending by or against
the Merging Entity may be prosecuted as if the Merger had not taken place,
or GS Inc. may be proceeded against or substituted in place of the Merging
Entity.
FIFTH: The Merger shall become effective upon the filing of a
Certificate of Merger with the Secretary of State of Delaware or at such other
time as the parties may agree and as shall be stated in the Certificate of
Merger (the "Effective Time").
SIXTH: The certificate of incorporation and by-laws of GS Inc., as
in effect immediately prior to the Effective Time, shall be the certificate of
incorporation
-3-
<PAGE> 4
and by-laws of the surviving corporation. The directors of GS Inc. immediately
prior to the Effective Time shall be the directors of the surviving corporation.
SEVENTH: At any time prior to the Effective Time, this Agreement may
be amended, modified or terminated by the Board of Directors of GS Inc.
notwithstanding approval by the stockholders of all or any of the parties
hereto.
EIGHTH: All rights and obligations under this Agreement and Plan of
Merger shall be governed by and construed in accordance with the laws of the
State of Delaware, without regard to principles of conflicts of laws.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties to this Agreement, pursuant to the
approval and authority duly given by resolutions adopted by the Board of
Directors of the Merging Entity and the consent of all of its stockholders and
resolutions adopted by the Board of Directors of GS Inc., have caused these
presents to be executed by each party hereto as the respective act, deed and
agreement of each of said parties, as of the date first written above.
THE GOLDMAN SACHS
CORPORATION
By: /s/ Esta E. Stecher
_____________________________________
Name: Esta E. Stecher
Title: Executive Vice President
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Gregory K. Palm
_____________________________________
Name: Gregory K. Palm
Title: General Counsel
-5-
<PAGE> 6
By his signature below, the undersigned certifies that no shares of stock of The
Goldman Sachs Group, Inc. were issued prior to the adoption by the Board of
Directors of The Goldman Sachs Group, Inc. of the resolution approving this
Agreement and Plan of Merger.
/s/ James B. McHugh
________________________________________
Name: James B. McHugh
Title: Assistant Secretary
By his signature below, the undersigned certifies that this Agreement and Plan
of Merger was duly signed on behalf of The Goldman Sachs Corporation, was
authorized and approved by the Board of Directors thereof and thereafter was
duly approved and adopted by at least a majority of the outstanding stock
thereof entitled to vote thereon by unanimous written consent.
/s/ James B. McHugh
________________________________________
Name: James B. McHugh
Title: Assistant Secretary
-6-
<PAGE> 1
EXHIBIT 2.3
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 5, 1999, pursuant to
Section 263 of the General Corporation Law of the State of Delaware and Section
17-211 of the Delaware Revised Uniform Limited Partnership Act, between THE
GOLDMAN SACHS GROUP, INC., a Delaware corporation ("GS Inc."), and THE GOLDMAN
SACHS GROUP, L.P., a Delaware limited partnership (the "Merging Entity").
WITNESSETH that:
WHEREAS, prior to the effectiveness of the Merger, GS Inc. shall
have acquired all of the partnership interests in the Merging Entity including
all of the interests in profits and capital of the Merging Entity; and
WHEREAS, each of the parties hereto desires that the Merging Entity
merge (the "Merger") with and into GS Inc. as hereinafter specified with GS Inc.
being the surviving corporation;
NOW, THEREFORE, the parties to this Agreement, in consideration of
the mutual covenants, agreements and provisions hereinafter contained, do hereby
prescribe the terms and conditions of the Merger and mode of carrying the same
into effect as follows:
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FIRST: At the Effective Time (as hereinafter defined), the Merging
Entity shall be merged with and into GS Inc., with GS Inc. being the surviving
entity.
SECOND: At the Effective Time, GS Inc. shall own all of the
partnership interests in the Merging Entity and shall be the only partner in the
Merging Entity other than GS Transitory LLC (which shall be a limited partner in
the Merging Entity without any partnership interest in the Merging Entity
including no interest in profits or capital of the Merging Entity), all of the
limited liability company interests in which are owned by GS Inc. and which will
be simultaneously merged with and into GS Inc.
THIRD: At the Effective Time, all of the partnership interests of
the Merging Entity will be canceled. GS Transitory LLC shall receive no
consideration in connection with the Merger. The shares of common stock of GS
Inc., par value $0.01 per share ("GS Inc. Common Stock"), that are issued and
outstanding immediately prior to the Effective Time shall be unaffected by the
Merger, except that shares of GS Inc. Common Stock owned by the Merging Entity
immediately prior to the Effective Time shall be canceled.
FOURTH: The terms and conditions of the Merger are as follows:
(a) the separate existence of the Merging Entity shall cease, and GS
Inc. shall possess all the rights, privileges, powers and franchises of
the Merging Entity, of a public as well as of a private nature, and shall
be subject to all of the restrictions, disabilities and duties of the
Merging Entity;
(b) all property of the Merging Entity, real, personal and mixed,
all debts due to the Merging Entity on whatever account and all other
things in action or belonging to the Merging Entity shall be vested in GS
Inc.;
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(c) the title to any real estate vested by deed or otherwise in the
Merging Entity shall not revert or be in any way impaired, but all rights
of creditors therein and all liens thereon shall be preserved unimpaired;
(d) all debts, liabilities, duties and other obligations of the
Merging Entity under any and all indentures, loan agreements, revolving
credit agreements, liquidity agreements, letters of credit and
reimbursement agreements, notes, guarantees or other agreements or
instruments to which the Merging Entity is a party or by which it is bound
shall attach to GS Inc. and may be enforced against GS Inc. to the same
extent as if said debts, liabilities and duties had been incurred or
contracted by GS Inc.;
(e) GS Inc. expressly assumes all debts, liabilities, duties and
other obligations of the Merging Entity under any and all indentures, loan
agreements, revolving credit agreements, liquidity agreements, letters of
credit and reimbursement agreements, notes, guarantees or other agreements
or instruments to which the Merging Entity is a party or by which it is
bound; and
(f) any claim existing or action or proceeding pending by or against
the Merging Entity may be prosecuted as if the Merger had not taken place,
or GS Inc. may be proceeded against or substituted in place of the Merging
Entity.
FIFTH: The Merger shall become effective upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware or at
such other time as the parties may agree and as shall be stated in the
Certificate of Merger (the "Effective Time").
SIXTH: The certificate of incorporation and by-laws of GS Inc., as
in effect immediately prior to the Effective Time, shall be the certificate of
incorporation and by-laws of the surviving corporation. The directors of GS Inc.
immediately prior to the Effective Time shall be the directors of the surviving
corporation.
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SEVENTH: At any time prior to the Effective Time, this Agreement may
be amended, modified or terminated by the Board of Directors of GS Inc.
notwithstanding approval by the stockholders or partners of any of the parties
hereto.
EIGHTH: All rights and obligations under this Agreement and Plan of
Merger shall be governed by and construed in accordance with the laws of the
State of Delaware, without regard to principles of conflicts of laws.
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IN WITNESS WHEREOF, the parties to this Agreement, pursuant to the
approval and authority duly given by the general partner and the Schedule II
limited partners of the Merging Entity and resolutions adopted by the Board of
Directors of GS Inc., have caused these presents to be executed by each party
hereto as the respective act, deed and agreement of each of said parties, as of
the date first written above.
THE GOLDMAN SACHS GROUP, L.P.
By: The Goldman Sachs Group, Inc., as
General Partner
By: /s/ Gregory K. Palm
----------------------------------
Name: Gregory K. Palm
Title:General Counsel
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Gregory K. Palm
-----------------------------------
Name: Gregory K. Palm
Title:General Counsel
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By his signature below, the undersigned certifies that no shares of stock of The
Goldman Sachs Group, Inc. were issued prior to the adoption by the Board of
Directors of The Goldman Sachs Group, Inc. of the resolution approving the
Agreement and Plan of Merger.
/s/ James B. McHugh
--------------------------------
Name: James B. McHugh
Title:Assistant Secretary
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EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE GOLDMAN SACHS GROUP, INC.
THE GOLDMAN SACHS GROUP, INC., a corporation organized and existing
under the Delaware General Corporation Law (the "Corporation"), does hereby
certify:
1. The Corporation has not received any payment for any of its
stock.
2. The Corporation's original certificate of incorporation was filed
on July 21, 1998 with the Secretary of State of the State of Delaware under the
name The Goldman Sachs Group, Inc.
3. The following amendment and restatement of the Corporation's
Certificate of Incorporation was approved and duly adopted by a majority of the
Corporation's Board of Directors in accordance with the provisions of Sections
241 and 245 of the Delaware General Corporation Law:
FIRST. The name of the Corporation is The Goldman Sachs Group, Inc.
SECOND. The address of the Corporation's registered office in the
State of Delaware is Corporation
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Trust Center, 1209 Orange Street in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law. Without limiting the generality of the foregoing, the
Corporation shall have all of the powers conferred on corporations by the
Delaware General Corporation Law and other law, including the power and
authority to make an initial charitable contribution (as defined in Section
170(c) of the Internal Revenue Code of 1986, as currently in effect or as the
same may hereafter be amended) of up to an aggregate of $200,000,000 to one or
more entities (the "Contribution"), and to make other charitable contributions
from time to time thereafter, in such amounts, on such terms and conditions and
for such purposes as may be lawful.
FOURTH. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 4,350,000,000, of which
4,000,000,000 shares of the par value of $0.01 per share shall be a separate
class designated as Common Stock, 200,000,000 shares of the par value of $0.01
per share shall be a separate class designated as Nonvoting Common Stock and
150,000,000 shares
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of the par value of $0.01 per share shall be a separate class designated as
Preferred Stock.
COMMON STOCK AND NONVOTING COMMON STOCK
Except as set forth in this Article FOURTH, the Common Stock and the
Nonvoting Common Stock (together, the "Common Shares") shall have the same
rights and privileges and shall rank equally, share ratably and be identical in
all respects as to all matters.
(i) Voting. Except as may be provided in this Amended and Restated
Certificate of Incorporation or required by law, the Common Stock shall have
voting rights in the election of directors and on all other matters presented to
stockholders, with each holder of Common Stock being entitled to one vote for
each share of Common Stock held of record by such holder on such matters. The
Nonvoting Common Stock shall have no voting rights other than such rights as may
be required by the first sentence of Section 242(b)(2) of the Delaware General
Corporation Law or any similar provision hereafter enacted; provided that an
amendment of this Amended and Restated Certificate of Incorporation to increase
or decrease the number of authorized shares of Nonvoting Common Stock (but not
below the number of shares thereof then outstanding) may be adopted by
resolution adopted by the board of directors of
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the Corporation and approved by the affirmative vote of the holders of a
majority of the voting power of all outstanding shares of Common Stock of the
Corporation and all other outstanding shares of stock of the Corporation
entitled to vote thereon irrespective of the provisions of Section 242(b)(2) of
the Delaware General Corporation Law or any similar provision hereafter enacted,
with such outstanding shares of Common Stock and other stock considered for this
purpose as a single class, and no vote of the holders of any shares of Nonvoting
Common Stock, voting separately as a class, shall be required therefor.
(ii) Dividends. Subject to the rights of the holders of any series
of Preferred Stock, holders of Common Stock and holders of Nonvoting Common
Stock shall be entitled to receive such dividends and distributions (whether
payable in cash or otherwise) as may be declared on the Common Shares by the
board of directors of the Corporation from time to time out of assets or funds
of the Corporation legally available therefor; provided that the board of
directors of the Corporation shall declare no dividend, and no dividend shall be
paid, with respect to any outstanding share of Common Stock or Nonvoting Common
Stock, whether in cash or otherwise (including any dividend in shares of Common
Stock on or with respect to shares of
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Common Stock or any dividend in shares of Nonvoting Common Stock on or with
respect to shares of Nonvoting Common Stock (collectively, "Stock Dividends")),
unless, simultaneously, the same dividend is declared or paid with respect to
each share of Common Stock and Nonvoting Common Stock. If a Stock Dividend is
declared or paid with respect to one class, then a Stock Dividend shall likewise
be declared or paid with respect to the other class and shall consist of shares
of such other class in a number that bears the same relationship to the total
number of shares of such other class, issued and outstanding immediately prior
to the payment of such dividend, as the number of shares comprising the Stock
Dividend with respect to the first referenced class bears to the total number of
shares of such first referenced class, issued and outstanding immediately prior
to the payment of such dividend. Stock Dividends with respect to Common Stock
may be paid only with shares of Common Stock. Stock Dividends with respect to
Nonvoting Common Stock may be paid only with shares of Nonvoting Common Stock.
Notwithstanding the foregoing, in the case of any dividend in the form of
capital stock of a subsidiary of the Corporation, the capital stock of the
subsidiary distributed to holders of Common Stock shall be identical to the
capital stock of the subsidiary distributed to holders
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of Nonvoting Common Stock, except that the capital stock distributed to holders
of Common Stock may have full or any other voting rights and the capital stock
distributed to holders of Nonvoting Common Stock shall be non-voting to the same
extent as the Nonvoting Common Stock is non-voting.
(iii) Subdivisions, Combinations and Mergers. If the Corporation
shall in any manner split, subdivide or combine the outstanding shares of Common
Stock or the outstanding shares of Nonvoting Common Stock, the outstanding
shares of the other such class of the Common Shares shall likewise be split,
subdivided or combined in the same manner proportionately and on the same basis
per share. In the event of any merger, statutory share exchange, consolidation
or similar form of corporate transaction involving the Corporation (whether or
not the Corporation is the surviving entity), the holders of Common Stock and
the holders of Nonvoting Common Stock shall be entitled to receive the same per
share consideration, if any, except that any securities received by holders of
Common Stock in consideration of such stock may have full or any other voting
rights and any securities received by holders of Nonvoting Common Stock in
consideration of such stock shall be non-voting to the same extent as the
Nonvoting Common Stock is non-voting.
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(iv) Rights on Liquidation. Subject to the rights of the holders of
any series of Preferred Stock, in the event of any liquidation, dissolution or
winding-up of the Corporation (whether voluntary or involuntary), the assets of
the Corporation available for distribution to stockholders shall be distributed
in equal amounts per share to the holders of Common Stock and the holders of
Nonvoting Common Stock, as if such classes constituted a single class. For
purposes of this paragraph, a merger, statutory share exchange, consolidation or
similar corporate transaction involving the Corporation (whether or not the
Corporation is the surviving entity), or the sale, transfer or lease by the
Corporation of all or substantially all its assets, shall not constitute or be
deemed a liquidation, dissolution or winding-up of the Corporation.
PREFERRED STOCK
Shares of Preferred Stock may be issued in one or more series from
time to time as determined by the board of directors of the Corporation, and the
board of directors of the Corporation is authorized to fix by resolution or
resolutions the designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions thereof, of the shares of each
series of Preferred Stock, including the following:
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(i) the distinctive serial designation of such series which shall
distinguish it from other series;
(ii) the number of shares included in such series;
(iii) whether dividends shall be payable to the holders of the
shares of such series and, if so, the basis on which such holders shall be
entitled to receive dividends (which may include, without limitation, a
right to receive such dividends or distributions as may be declared on the
shares of such series by the board of directors of the Corporation, a
right to receive such dividends or distributions, or any portion or
multiple thereof, as may be declared on the Common Stock or any other
class of stock or, in addition to or in lieu of any other right to receive
dividends, a right to receive dividends at a particular rate or at a rate
determined by a particular method, in which case such rate or method of
determining such rate may be set forth), the form of such dividend, any
conditions on which such dividends shall be payable and the date or dates,
if any, on which such dividends shall be payable;
(iv) whether dividends on the shares of such series shall be
cumulative and, if so, the date or
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dates or method of determining the date or dates from which dividends on
the shares of such series shall be cumulative;
(v) the amount or amounts, if any, which shall be payable out of the
assets of the Corporation to the holders of the shares of such series upon
the voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation, and the relative rights of priority, if any, of payment of
the shares of such series;
(vi) the price or prices (in cash, securities or other property or a
combination thereof) at which, the period or periods within which and the
terms and conditions upon which the shares of such series may be redeemed,
in whole or in part, at the option of the Corporation or at the option of
the holder or holders thereof or upon the happening of a specified event
or events;
(vii) the obligation, if any, of the Corporation to purchase or
redeem shares of such series pursuant to a sinking fund or otherwise and
the price or prices (in cash, securities or other property or a
combination thereof) at which, the period or periods within which and the
terms and conditions upon which the shares of
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such series shall be redeemed or purchased, in whole or in part, pursuant
to such obligation;
(viii) whether or not the shares of such series shall be convertible
or exchangeable, at any time or times at the option of the holder or
holders thereof or at the option of the Corporation or upon the happening
of a specified event or events, into shares of any other class or classes
or any other series of the same or any other class or classes of stock of
the Corporation or any other securities or property of the Corporation or
any other entity, and the price or prices (in cash, securities or other
property or a combination thereof) or rate or rates of conversion or
exchange and any adjustments applicable thereto; and
(ix) whether or not the holders of the shares of such series shall
have voting rights, in addition to the voting rights provided by law, and
if so the terms of such voting rights, which may provide, among other
things and subject to the other provisions of this Amended and Restated
Certificate of Incorporation, that each share of such series shall carry
one vote or more or less than one vote per share, that the holders of such
series shall be entitled to vote on certain matters as a separate class
(which for such purpose may
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be comprised solely of such series or of such series and one or more other
series or classes of stock of the Corporation) and that all the shares of
such series entitled to vote on a particular matter shall be deemed to be
voted on such matter in the manner that a specified portion of the voting
power of the shares of such series or separate class are voted on such
matter.
For all purposes, this Amended and Restated Certificate of Incorporation shall
include each certificate of designations (if any) setting forth the terms of a
series of Preferred Stock.
Subject to the rights, if any, of the holders of any series of
Preferred Stock set forth in a certificate of designations, an amendment of this
Amended and Restated Certificate of Incorporation to increase or decrease the
number of authorized shares of any series of Preferred Stock (but not below the
number of shares thereof then outstanding) may be adopted by resolution adopted
by the board of directors of the Corporation and approved by the affirmative
vote of the holders of a majority of the voting power of all outstanding shares
of Common Stock of the Corporation and all other outstanding shares of stock of
the Corporation entitled to vote thereon irrespective of the provisions of
Section 242(b)(2) of the Delaware General
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Corporation Law or any similar provision hereafter enacted, with such
outstanding shares of Common Stock and other stock considered for this purpose
as a single class, and no vote of the holders of any series of Preferred Stock,
voting as a separate class, shall be required therefor.
Except as otherwise required by law or provided in the certificate
of designations for the relevant series, holders of Common Shares, as such,
shall not be entitled to vote on any amendment of this Amended and Restated
Certificate of Incorporation that alters or changes the powers, preferences,
rights or other terms of one or more outstanding series of Preferred Stock if
the holders of such affected series are entitled, either separately or together
with the holders of one or more other series of Preferred Stock, to vote thereon
as a separate class pursuant to this Amended and Restated Certificate of
Incorporation or pursuant to the Delaware General Corporation Law as then in
effect.
OPTIONS, WARRANTS AND OTHER RIGHTS
The board of directors of the Corporation is authorized to create
and issue options, warrants and other rights from time to time entitling the
holders thereof to purchase securities or other property of the Corporation or
any other entity, including any class or series of stock of
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the Corporation or any other entity and whether or not in connection with the
issuance or sale of any securities or other property of the Corporation, for
such consideration (if any), at such times and upon such other terms and
conditions as may be determined or authorized by the board of directors of the
Corporation and set forth in one or more agreements or instruments. Among other
things and without limitation, such terms and conditions may provide for the
following:
(i) adjusting the number or exercise price of such options, warrants
or other rights or the amount or nature of the securities or other
property receivable upon exercise thereof in the event of a subdivision or
combination of any securities, or a recapitalization, of the Corporation,
the acquisition by any person of beneficial ownership of securities
representing more than a designated percentage of the voting power of any
outstanding series, class or classes of securities, a change in ownership
of the Corporation's securities or a merger, statutory share exchange,
consolidation, reorganization, sale of assets or other occurrence relating
to the Corporation or any of its securities, and restricting the ability
of the Corporation to enter into an agreement with respect to any such
transaction
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absent an assumption by another party or parties thereto of the
obligations of the Corporation under such options, warrants or other
rights;
(ii) restricting, precluding or limiting the exercise, transfer or
receipt of such options, warrants or other rights by any person that
becomes the beneficial owner of a designated percentage of the voting
power of any outstanding series, class or classes of securities of the
Corporation or any direct or indirect transferee of such a person, or
invalidating or voiding such options, warrants or other rights held by any
such person or transferee; and
(iii) permitting the board of directors (or certain directors
specified or qualified by the terms of the governing instruments of such
options, warrants or other rights) to redeem, terminate or exchange such
options, warrants or other rights.
This paragraph shall not be construed in any way to limit the power of the board
of directors of the Corporation to create and issue options, warrants or other
rights.
FIFTH. The name and mailing address of the incorporator is Gregory
K. Palm, 85 Broad Street, New York, New York 10004.
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SIXTH. All corporate powers shall be exercised by the board of
directors of the Corporation, except as otherwise specifically required by law
or as otherwise provided in this Amended and Restated Certificate of
Incorporation. Any meeting of stockholders may be postponed by action of the
board of directors at any time in advance of such meeting. The board of
directors of the Corporation shall have the power to adopt such rules and
regulations for the conduct of the meetings and management of the affairs of the
Corporation as they may deem proper and the power to adjourn any meeting of
stockholders without a vote of the stockholders, which powers may be delegated
by the board of directors to the chairman of such meeting either in such rules
and regulations or pursuant to the by-laws of the Corporation.
Special meetings of stockholders of the Corporation may be called at
any time by, but only by, the board of directors of the Corporation, to be held
at such date, time and place either within or without the State of Delaware as
may be stated in the notice of the meeting.
The board of directors of the Corporation is authorized to adopt,
amend or repeal by-laws of the Corporation. No adoption, amendment or repeal of
a by-law by action of stockholders shall be effective unless approved
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by the affirmative vote of the holders of not less than 80% of the voting power
of all outstanding shares of Common Stock of the Corporation and all other
outstanding shares of stock of the Corporation entitled to vote on such matter,
with such outstanding shares of Common Stock and other stock considered for this
purpose as a single class. Any vote of stockholders required by this Article
SIXTH shall be in addition to any other vote of stockholders that may be
required by law, this Amended and Restated Certificate of Incorporation, the
by-laws of the Corporation, any agreement with a national securities exchange or
otherwise.
SEVENTH. Elections of directors need not be by written ballot except
and to the extent provided in the by-laws of the Corporation.
EIGHTH. The directors of the Corporation shall be divided into three
classes. The number of directors of the Corporation and the number of directors
in each class of directors shall be fixed only by resolution of the board of
directors of the Corporation from time to time. The initial term of office of
the first such class of directors shall expire at the annual meeting of
stockholders in 2000, the initial term of office of the second such class of
directors shall expire at the annual meeting of stockholders in 2001 and the
initial term of office of the third such class of
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directors shall expire at the annual meeting of stockholders in 2002, with each
such class of directors to hold office until their successors have been duly
elected and qualified. At each annual meeting of stockholders, directors elected
to succeed the directors whose terms expire at such annual meeting shall be
elected to hold office for a term expiring at the annual meeting of stockholders
in the third year following the year of their election and until their
successors have been duly elected and qualified. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes in such
manner as the board of directors of the Corporation shall determine, but no
decrease in the number of directors may shorten the term of any incumbent
director.
No director who is part of any such class of directors may be
removed except both for cause and with the affirmative vote of the holders of
not less than 80% of the voting power of all outstanding shares of stock of the
Corporation entitled to vote generally in the election of directors, considered
for this purpose as a single class.
Vacancies and newly created directorships resulting from any
increase in the authorized number of directors or from any other cause (other
than vacancies and newly created directorships which the holders of any class
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or classes of stock or series thereof are expressly entitled by this Amended and
Restated Certificate of Incorporation to fill) shall be filled by, and only by,
a majority of the directors then in office, although less than a quorum, or by
the sole remaining director. Any director appointed to fill a vacancy or a newly
created directorship shall hold office until the next election of the class of
directors of the director which such director replaced or the class of directors
to which such director was appointed, and until his or her successor is elected
and qualified or until his or her earlier resignation or removal.
Notwithstanding the foregoing, in the event that the holders of any
class or series of Preferred Stock of the Corporation shall be entitled, voting
separately as a class, to elect any directors of the Corporation, then the
number of directors that may be elected by such holders voting separately as a
class shall be in addition to the number fixed pursuant to a resolution of the
board of directors of the Corporation. Except as otherwise provided in the terms
of such class or series, (i) the terms of the directors elected by such holders
voting separately as a class shall expire at the annual meeting of stockholders
next succeeding their election without regard to the classification of other
directors and (ii) any director or directors elected by such
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holders voting separately as a class may be removed, with or without cause, by
the holders of a majority of the voting power of all outstanding shares of stock
of the Corporation entitled to vote separately as a class in an election of such
directors.
NINTH. In taking any action, including action that may involve or
relate to a change or potential change in the control of the Corporation, a
director of the Corporation may consider, among other things, both the long-term
and short-term interests of the Corporation and its stockholders and the effects
that the Corporation's actions may have in the short term or long term upon any
one or more of the following matters:
(i) the prospects for potential growth, development, productivity
and profitability of the Corporation;
(ii) the Corporation's current employees;
(iii) the retired former partners of The Goldman Sachs Group, L.P.
("GS Group") and the Corporation's employees and other beneficiaries
receiving or entitled to receive retirement, welfare or similar benefits
from or pursuant to any plan sponsored, or agreement entered into, by the
Corporation;
(iv) the Corporation's customers and creditors;
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(v) the ability of the Corporation to provide, as a going concern,
goods, services, employment opportunities and employment benefits and
otherwise to contribute to the communities in which it does business; and
(vi) such other additional factors as a director may consider
appropriate in such circumstances.
Nothing in this Article NINTH shall create any duty owed by any director of the
Corporation to any person or entity to consider, or afford any particular weight
to, any of the foregoing matters or to limit his or her consideration to the
foregoing matters. No such employee, retired former partner of GS Group, former
employee, beneficiary, customer, creditor or community or member thereof shall
have any rights against any director of the Corporation or the Corporation under
this Article NINTH.
TENTH. From and after the consummation of the initial public
offering of the shares of Common Stock of the Corporation, no action of
stockholders of the Corporation required or permitted to be taken at any annual
or special meeting of stockholders of the Corporation may be taken without a
meeting of stockholders, without prior notice and without a vote, and the power
of stockholders of the Corporation to consent in writing to the taking of any
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action without a meeting is specifically denied. Notwithstanding this Article
TENTH, the holders of any series of Preferred Stock of the Corporation shall be
entitled to take action by written consent to such extent, if any, as may be
provided in the terms of such series.
ELEVENTH. No provision of Article SIXTH, EIGHTH, NINTH, TENTH or
TWELFTH or of this Article ELEVENTH shall be amended, modified or repealed, and
no provision inconsistent with any such provision shall become part of this
Amended and Restated Certificate of Incorporation, unless such matter is
approved by the affirmative vote of the holders of not less than 80% of the
voting power of all outstanding shares of Common Stock of the Corporation and
all other outstanding shares of stock of the Corporation entitled to vote on
such matter, with such outstanding shares of Common Stock and other stock
considered for this purpose as a single class. Any vote of stockholders required
by this Article ELEVENTH shall be in addition to any other vote of the
stockholders that may be required by law, this Amended and Restated Certificate
of Incorporation, the by-laws of the Corporation, any agreement with a national
securities exchange or otherwise.
TWELFTH. A director of the Corporation shall not be liable to the
Corporation or its stockholders for
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monetary damages for breach of fiduciary duty as a director of the Corporation,
except to the extent that such exemption from liability or limitation thereof is
not permitted under the Delaware General Corporation Law as currently in effect
or as the same may hereafter be amended.
Pursuant to the Plan of Incorporation of GS Group, dated as of March
8, 1999, as currently in effect or as the same may hereafter be amended (the
"Plan"), the Corporation has the right, but not the obligation, to make special
arrangements with any person who was a partner of GS Group participating in the
Plan to ameliorate, in whole or in part, certain significantly disproportionate
tax or other burdens. The board of directors of the Corporation is authorized to
cause the Corporation to make such arrangements (which may include special
payments) as the board of directors of the Corporation may, in its sole
discretion, deem appropriate to effectuate the intent of the relevant provision
of the Plan and the Corporation and each stockholder of the Corporation shall,
to the fullest extent permitted by law, be deemed to have approved and ratified
any such determination and to have waived any claim or objection on behalf of
the Corporation or any such stockholder arising out of the making of such
arrangements.
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Pursuant to the Plan, the Corporation has the right, but not the
obligation, to register with the Securities and Exchange Commission the resale
of certain securities of the Corporation by directors, employees and former
directors and employees of the Corporation and its subsidiaries and affiliates
and former partners and employees of GS Group and its subsidiaries and
affiliates and to undertake various actions and to enter into agreements and
arrangements in connection therewith (collectively, the "Registration
Arrangements"). The board of directors of the Corporation is authorized to cause
the Corporation to undertake such Registration Arrangements as the board of
directors of the Corporation may, in its sole discretion, deem appropriate and
the Corporation and each stockholder of the Corporation shall, to the fullest
extent permitted by law, be deemed to have approved and ratified any such
determination and to have waived any claim or objection on behalf of the
Corporation or any such stockholder arising out of the undertaking of such
Registration Arrangements.
The Corporation and each stockholder of the Corporation shall, to
the fullest extent permitted by law, be deemed to have approved and ratified any
decision by the board of directors of the Corporation to make the
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Contribution referred to in Article THIRD, including the amount thereof (up to
the limit specified in Article THIRD) and to have waived any claim or objection
on behalf of the Corporation or any such stockholder arising out of any such
decision to make, or the making of, the Contribution.
The authorizations, approvals and ratifications contained in the
second, third and fourth paragraphs of this Article TWELFTH shall not be
construed to indicate that any other arrangements or contributions not
specifically referred to in such paragraphs are, by reason of such omission, not
within the power and authority of the board of directors of the Corporation or
that the determination of the board of directors of the Corporation with respect
thereto should be judged by any legal standard other than that which would have
applied but for the inclusion of the second, third and fourth paragraphs of this
Article TWELFTH.
No amendment, modification or repeal of this Article TWELFTH shall
adversely affect any right or protection of a director of the Corporation that
exists at the time of such amendment, modification or repeal.
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IN WITNESS WHEREOF, the Corporation has caused this certificate to
be signed and attested by its duly authorized officer on this 4th day of
May, 1999.
/s/ Gregory K. Palm
-------------------------------
Gregory K. Palm
General Counsel
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EXHIBIT 3.2
BY-LAWS
OF
THE GOLDMAN SACHS GROUP, INC.
ARTICLE I
Stockholders
Section 1.1. Annual Meetings. An annual meeting of stockholders shall be
held for the election of directors at such date, time and place either within or
without the State of Delaware as may be designated by the Board of Directors
from time to time. Any other business properly brought before the meeting may be
transacted at the annual meeting.
Section 1.2. Special Meetings. Special meetings of stockholders may be
called at any time by, and only by, the Board of Directors, to be held at such
date, time and place either within or without the State of Delaware as may be
stated in the notice of the meeting.
Section 1.3. Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise required by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the stockholder at such stockholder's address as it
appears on the records of the Corporation.
Section 1.4. Adjournments. Any meeting of stockholders, annual or special,
may be adjourned from time to time, to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if
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the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the Corporation may transact any business
which might have been transacted at the original meeting. If the adjournment is
for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
Section 1.5. Quorum. At each meeting of stockholders, except where
otherwise required by law, the certificate of incorporation or these by-laws,
the holders of a majority of the outstanding shares of stock entitled to vote on
a matter at the meeting, present in person or represented by proxy, shall
constitute a quorum. For purposes of the foregoing, where a separate vote by
class or classes is required for any matter, the holders of a majority of the
outstanding shares of such class or classes, present in person or represented by
proxy, shall constitute a quorum to take action with respect to that vote on
that matter. Two or more classes or series of stock shall be considered a single
class if the holders thereof are entitled to vote together as a single class at
the meeting. In the absence of a quorum of the holders of any class of stock
entitled to vote on a matter, the meeting of such class may be adjourned from
time to time in the manner provided by Sections 1.4 and 1.6 of these by-laws
until a quorum of such class shall be so present or represented. Shares of its
own capital stock belonging on the record date for the meeting to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes; provided, however, that the foregoing shall not limit the
right of the Corporation to vote stock, including but not limited to its own
stock, held by it in a fiduciary capacity.
Section 1.6. Organization. Meetings of stockholders shall be presided over
by a Chairman of the Board, if any, or in the absence of a Chairman of the Board
by a Vice Chairman of the Board, if any, or in the absence of a Vice Chairman of
the Board by a Chief Executive Officer, or in the absence of a Chief Executive
Officer by a President, or in the absence of a President by a Chief Operating
Officer, or in the absence of a Chief Operating
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Officer by a Vice President, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. A Secretary, or in the absence
of a Secretary an Assistant Secretary, shall act as secretary of the meeting,
but in the absence of a Secretary and any Assistant Secretary the chairman of
the meeting may appoint any person to act as secretary of the meeting.
The order of business at each such meeting shall be as determined by the
chairman of the meeting. The chairman of the meeting shall have the right and
authority to adjourn a meeting of stockholders without a vote of stockholders
and to prescribe such rules, regulations and procedures and to do all such acts
and things as are necessary or desirable for the proper conduct of the meeting
and are not inconsistent with any rules or regulations adopted by the Board of
Directors pursuant to the provisions of the certificate of incorporation,
including the establishment of procedures for the maintenance of order and
safety, limitations on the time allotted to questions or comments on the affairs
of the Corporation, restrictions on entry to such meeting after the time
prescribed for the commencement thereof and the opening and closing of the
voting polls for each item upon which a vote is to be taken.
Section 1.7. Inspectors. Prior to any meeting of stockholders, the Board
of Directors, a Chairman of the Board, a Vice Chairman of the Board, a Chief
Executive Officer, a President, a Chief Operating Officer, a Vice President or
any other officer designated by the Board shall appoint one or more inspectors
to act at such meeting and make a written report thereof and may designate one
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at the meeting of stockholders,
the person presiding at the meeting shall appoint one or more inspectors to act
at the meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall ascertain the number of shares outstanding and the
voting power of each, determine the shares represented at the meeting and the
validity of proxies and ballots, count all votes and ballots, determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors and
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certify their determination of the number of shares represented at the meeting
and their count of all votes and ballots. The inspectors may appoint or retain
other persons to assist them in the performance of their duties. The date and
time of the opening and closing of the polls for each matter upon which the
stockholders will vote at a meeting shall be announced at the meeting. No
ballot, proxy or vote, nor any revocation thereof or change thereto, shall be
accepted by the inspectors after the closing of the polls. In determining the
validity and counting of proxies and ballots, the inspectors shall be limited to
an examination of the proxies, any envelopes submitted therewith, any
information provided by a stockholder who submits a proxy by telegram, cablegram
or other electronic transmission from which it can be determined that the proxy
was authorized by the stockholder, ballots and the regular books and records of
the Corporation, and they may also consider other reliable information for the
limited purpose of reconciling proxies and ballots submitted by or on behalf of
banks, brokers, their nominees or similar persons which represent more votes
than the holder of a proxy is authorized by the record owner to cast or more
votes than the stockholder holds of record. If the inspectors consider other
reliable information for such purpose, they shall, at the time they make their
certification, specify the precise information considered by them, including the
person or persons from whom they obtained the information, when the information
was obtained, the means by which the information was obtained and the basis for
the inspectors' belief that such information is accurate and reliable.
Section 1.8. Voting; Proxies. Unless otherwise provided in the certificate
of incorporation, each stockholder entitled to vote at any meeting of
stockholders shall be entitled to one vote for each share of stock held by such
stockholder which has voting power upon the matter in question. If the
certificate of incorporation provides for more or less than one vote for any
share on any matter, every reference in these by-laws to a majority or other
proportion of shares of stock shall refer to such majority or other proportion
of the votes of such shares of stock. Each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for such
stockholder by proxy, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period. A duly
executed proxy shall be irrevocable if it states that it is
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irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power, regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally. A stockholder may revoke any proxy which
is not irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with a Secretary. Voting at meetings of stockholders need not be by
written ballot unless so directed by the chairman of the meeting or the Board of
Directors. Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors. In all other matters, unless otherwise required by
law, the certificate of incorporation or these by-laws, the affirmative vote of
the holders of a majority of the shares present in person or represented by
proxy at the meeting and entitled to vote on the subject matter shall be the act
of the stockholders. Where a separate vote by class or classes is required, the
affirmative vote of the holders of a majority (or, in the case of an election of
directors, a plurality) of the shares of such class or classes present in person
or represented by proxy at the meeting shall be the act of such class or
classes, except as otherwise required by law, the certificate of incorporation
or these by-laws.
Section 1.9. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than sixty nor less than ten
days before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the
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Board of Directors may fix a new record date for the adjourned meeting.
In order that the Corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to the action for
which a record date is being established. If no record date is fixed, the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
Section 1.10. List of Stockholders Entitled to Vote. A Secretary shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the municipality where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 1.11. Advance Notice of Stockholder Nominees for Director and
Other Stockholder Proposals. (a) The matters to be considered and brought before
any annual or special meeting of stockholders of the Corporation shall be
limited to only such matters, including the nomination and election of
directors, as shall be brought properly before such meeting in compliance with
the procedures set forth in this Section 1.11.
(b) For any matter to be properly brought before any annual meeting of
stockholders, the matter must be (i) specified in the notice of annual meeting
given by or at
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the direction of the Board of Directors, (ii) otherwise brought before the
annual meeting by or at the direction of the Board of Directors or (iii) brought
before the annual meeting in the manner specified in this Section 1.11(b)(x) by
a stockholder that holds of record stock of the Corporation entitled to vote at
the annual meeting on such matter (including any election of a director) or (y)
by a person (a "Nominee Holder") that holds such stock through a nominee or
"street name" holder of record of such stock and can demonstrate to the
Corporation such indirect ownership of, and such Nominee Holder's entitlement to
vote, such stock on such matter. In addition to any other requirements under
applicable law, the certificate of incorporation and these by-laws, persons
nominated by stockholders for election as directors of the Corporation and any
other proposals by stockholders shall be properly brought before an annual
meeting of stockholders only if notice of any such matter to be presented by a
stockholder at such meeting (a "Stockholder Notice") shall be delivered to a
Secretary at the principal executive office of the Corporation not less than
ninety nor more than one hundred and twenty days prior to the first anniversary
date of the annual meeting for the preceding year (or, in the case of the annual
meeting of stockholders to be held in 2000, not less than ninety nor more than
one hundred and twenty days prior to May 1, 2000); provided, however, that if
and only if the annual meeting is not scheduled to be held within a period that
commences thirty days before and ends thirty days after such anniversary date
(or May 1, 2000, in the case of the annual meeting of stockholders to be held in
2000) (an annual meeting date outside such period being referred to herein as an
"Other Meeting Date"), such Stockholder Notice shall be given in the manner
provided herein by the later of (i) the close of business on the date ninety
days prior to such Other Meeting Date or (ii) the close of business on the tenth
day following the date on which such Other Meeting Date is first publicly
announced or disclosed. Any stockholder desiring to nominate any person or
persons (as the case may be) for election as a director or directors of the
Corporation at an annual meeting of stockholders shall deliver, as part of such
Stockholder Notice, a statement in writing setting forth the name of the person
or persons to be nominated, the number and class of all shares of each class of
stock of the Corporation owned of record and beneficially by each such person,
as reported to such stockholder by such person, the information regarding each
such person required by paragraphs (a), (e) and (f) of Item
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401 of Regulation S-K adopted by the Securities and Exchange Commission, each
such person's signed consent to serve as a director of the Corporation if
elected, such stockholder's name and address, the number and class of all shares
of each class of stock of the Corporation owned of record and beneficially by
such stockholder and, in the case of a Nominee Holder, evidence establishing
such Nominee Holder's indirect ownership of stock and entitlement to vote such
stock for the election of directors at the annual meeting. Any stockholder who
gives a Stockholder Notice of any matter (other than a nomination for director)
proposed to be brought before an annual meeting of stockholders shall deliver,
as part of such Stockholder Notice, the text of the proposal to be presented and
a brief written statement of the reasons why such stockholder favors the
proposal and setting forth such stockholder's name and address, the number and
class of all shares of each class of stock of the Corporation owned of record
and beneficially by such stockholder, any material interest of such stockholder
in the matter proposed (other than as a stockholder), if applicable, and, in the
case of a Nominee Holder, evidence establishing such Nominee Holder's indirect
ownership of stock and entitlement to vote such stock on the matter proposed at
the annual meeting. As used in these by-laws, shares "beneficially owned" shall
mean all shares which such person is deemed to beneficially own pursuant to
Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 (the "Exchange
Act"). If a stockholder is entitled to vote only for a specific class or
category of directors at a meeting (annual or special), such stockholder's right
to nominate one or more individuals for election as a director at the meeting
shall be limited to such class or category of directors.
Notwithstanding any provision of this Section 1.11 to the contrary, in the
event that the number of directors to be elected to the Board of Directors of
the Corporation at the next annual meeting of stockholders is increased by
virtue of an increase in the size of the Board of Directors and either all of
the nominees for director at the next annual meeting of stockholders or the size
of the increased Board of Directors is not publicly announced or disclosed by
the Corporation at least one hundred days prior to the first anniversary of the
preceding year's annual meeting (or, in the case of the annual meeting of
stockholders to be held in 2000, at least one hundred days prior to May 1,
2000), a Stockholder Notice shall also be considered timely
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hereunder, but only with respect to nominees to stand for election at the next
annual meeting as the result of any new positions created by such increase, if
it shall be delivered to a Secretary at the principal executive office of the
Corporation not later than the close of business on the tenth day following the
first day on which all such nominees or the size of the increased Board of
Directors shall have been publicly announced or disclosed.
(c) Except as provided in the immediately following sentence, no matter
shall be properly brought before a special meeting of stockholders unless such
matter shall have been brought before the meeting pursuant to the Corporation's
notice of such meeting. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any stockholder entitled to vote for the election of such director(s)
at such meeting may nominate a person or persons (as the case may be) for
election to such position(s) as are specified in the Corporation's notice of
such meeting, but only if the Stockholder Notice required by Section 1.11(b)
hereof shall be delivered to a Secretary at the principal executive office of
the Corporation not later than the close of business on the tenth day following
the first day on which the date of the special meeting and either the names of
all nominees proposed by the Board of Directors to be elected at such meeting or
the number of directors to be elected shall have been publicly announced or
disclosed.
(d) For purposes of this Section 1.11, a matter shall be deemed to have
been "publicly announced or disclosed" if such matter is disclosed in a press
release reported by the Dow Jones News Service, the Associated Press or a
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission.
(e) In no event shall the adjournment of an annual meeting or a special
meeting, or any announcement thereof, commence a new period for the giving of
notice as provided in this Section 1.11. This Section 1.11 shall not apply to
(i) any stockholder proposal made pursuant to Rule 14a-8 under the Exchange Act
or (ii) any nomination of a director in an election in which only the holders of
one or more series of Preferred Stock of the Corporation issued pursuant to
Article FOURTH of the certificate of incorporation are
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entitled to vote (unless otherwise provided in the terms of such stock).
(f) The chairman of any meeting of stockholders, in addition to making any
other determinations that may be appropriate to the conduct of the meeting,
shall have the power and duty to determine whether notice of nominees and other
matters proposed to be brought before a meeting has been duly given in the
manner provided in this Section 1.11 and, if not so given, shall direct and
declare at the meeting that such nominees and other matters shall not be
considered.
Section 1.12. Approval of Stockholder Proposals. Except as otherwise
required by law, any matter (other than a nomination for director) that has been
properly brought before an annual or special meeting of stockholders of the
Corporation by a stockholder (including a Nominee Holder) in compliance with the
procedures set forth in Section 1.11 shall require for approval thereof the
affirmative vote of the holders of not less than a majority of all outstanding
shares of Common Stock of the Corporation and all other outstanding shares of
stock of the Corporation entitled to vote on such matter, with such outstanding
shares of Common Stock and other stock considered for this purpose as a single
class. Any vote of stockholders required by this Section 1.12 shall be in
addition to any other vote of stockholders of the Corporation that may be
required by law, the certificate of incorporation or these by-laws, by any
agreement with a national securities exchange or otherwise.
ARTICLE II
Board of Directors
Section 2.1. Powers; Number; Qualifications. The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors, except as may be otherwise required by law or provided in the
certificate of incorporation. The number of directors of the Corporation and the
number of directors in each class of directors shall be fixed only by resolution
of the Board of Directors from time to time. If the holders of any class or
classes of stock or series thereof are entitled by the certificate of
incorporation to elect one or more directors, the preceding sentence shall not
apply to such directors and
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the number of such directors shall be as provided in the terms of such stock.
Directors need not be stockholders.
Section 2.2. Election; Term of Office; Resignation; Removal; Vacancies.
Each director shall hold office until the next election of the class or category
for which such director shall have been chosen, and until his or her successor
is elected and qualified or until his or her earlier resignation or removal. Any
director may resign at any time upon written notice to the Board of Directors or
to a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive
Officer, a President, a Chief Operating Officer or a Secretary. Such resignation
shall take effect at the time specified therein, and unless otherwise specified
therein no acceptance of such resignation shall be necessary to make it
effective. No director may be removed except as provided in the certificate of
incorporation. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors (other than any directors elected
in the manner described in the next sentence) or from any other cause shall be
filled by, and only by, a majority of the directors then in office, although
less than a quorum, or by the sole remaining director. Whenever the holders of
any class or classes of stock or series thereof are entitled by the certificate
of incorporation to elect one or more directors, vacancies and newly created
directorships of such class or classes or series may be filled by, and only by,
a majority of the directors elected by such class or classes or series then in
office, or by the sole remaining director so elected. Any director elected or
appointed to fill a vacancy or a newly created directorship shall hold office
until the next election of the class of directors of the director which such
director replaced or the class of directors to which such director was
appointed, and until his or her successor is elected and qualified or until his
or her earlier resignation or removal.
Section 2.3. Regular Meetings. Regular meetings of the Board of Directors
may be held at such places within or without the State of Delaware and at such
times as the Board may from time to time determine, and if so determined notice
thereof need not be given.
Section 2.4. Special Meetings. Special meetings of the Board of Directors
may be held at any time or place within or without the State of Delaware
whenever called by a
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Chairman of the Board, if any, by a Vice Chairman of the Board, if any, by a
Chief Executive Officer, if any, by a President, if any, by a Chief Operating
Officer, if any, or by any two directors. Reasonable notice thereof shall be
given by the person or persons calling the meeting.
Section 2.5. Participation in Meetings by Conference Telephone Permitted.
Unless otherwise restricted by the certificate of incorporation or these
by-laws, members of the Board of Directors, or any committee designated by the
Board, may participate in a meeting of the Board or of such committee, as the
case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this by-law shall
constitute presence in person at such meeting.
Section 2.6. Quorum; Vote Required for Action. At each meeting of the
Board of Directors, one-half of the number of directors equal to (i) the total
number of directors fixed by resolution of the board of directors (including any
vacancies) plus (ii) the number of directors elected by a holder or holders of
Preferred Stock voting separately as a class, as described in the fourth
paragraph of Article EIGHTH of the certificate of incorporation (including any
vacancies), shall constitute a quorum for the transaction of business. The vote
of a majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board unless the certificate of incorporation or these
by-laws shall require a vote of a greater number. In case at any meeting of the
Board a quorum shall not be present, the members or a majority of the members of
the Board present may adjourn the meeting from time to time until a quorum shall
be present.
Section 2.7. Organization. Meetings of the Board of Directors shall be
presided over by a Chairman of the Board, if any, or in the absence of a
Chairman of the Board by a Vice Chairman of the Board, if any, or in the absence
of a Vice Chairman of the Board, by a Chief Executive Officer, or in the absence
of a Chief Executive Officer, by a President, or in the absence of a President,
by a Chief Operating Officer, or in the absence of a Chief Operating Officer, by
a chairman chosen at the meeting. A Secretary, or in the absence of a Secretary
an Assistant Secretary, shall act as secretary of the meeting, but in the
absence of
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a Secretary and any Assistant Secretary the chairman of the meeting may appoint
any person to act as secretary of the meeting.
Section 2.8. Action by Directors Without a Meeting. Unless otherwise
restricted by the certificate of incorporation or these by-laws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, then in office consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
Section 2.9. Compensation of Directors. Unless otherwise restricted by the
certificate of incorporation or these by-laws, the Board of Directors shall have
the authority to fix the compensation of directors.
ARTICLE III
Committees
Section 3.1. Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors or
in these by-laws, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to the following matters: (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by law
to be submitted to
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<PAGE> 14
stockholders for approval or (ii) adopting, amending or repealing these by-laws.
Section 3.2. Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board may adopt, amend and repeal
rules for the conduct of its business. In the absence of a provision by the
Board or a provision in the rules of such committee to the contrary, a majority
of the entire authorized number of members of such committee shall constitute a
quorum for the transaction of business, the vote of a majority of the members
present at a meeting at the time of such vote if a quorum is then present shall
be the act of such committee, and in other respects each committee shall conduct
its business in the same manner as the Board conducts its business pursuant to
Article II of these by-laws.
ARTICLE IV
Officers
Section 4.1. Officers; Election or Appointment. The Board of Directors
shall take such action as may be necessary from time to time to ensure that the
Corporation has such officers as are necessary, under Section 5.1 of these
by-laws and the Delaware General Corporation Law as currently in effect or as
the same may hereafter be amended, to enable it to sign stock certificates. In
addition, the Board of Directors at any time and from time to time may elect (i)
one or more Chairmen of the Board and/or one or more Vice Chairmen of the Board
from among its members, (ii) one or more Chief Executive Officers, one or more
Presidents and/or one or more Chief Operating Officers, (iii) one or more Vice
Presidents, one or more Treasurers and/or one or more Secretaries and/or (iv)
one or more other officers, in the case of each of (i), (ii), (iii) and (iv) if
and to the extent the Board deems desirable. The Board of Directors may give any
officer such further designations or alternate titles as it considers desirable.
In addition, the Board of Directors at any time and from time to time may
authorize any officer of the Corporation to appoint one or more officers of the
kind described in clauses (iii) and (iv) above. Any number of offices may be
held by the same person and directors may hold any office unless the certificate
of incorporation or these by-laws otherwise provide.
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<PAGE> 15
Section 4.2. Term of Office; Resignation; Removal; Vacancies. Unless
otherwise provided in the resolution of the Board of Directors electing or
authorizing the appointment of any officer, each officer shall hold office until
his or her successor is elected or appointed and qualified or until his or her
earlier resignation or removal. Any officer may resign at any time upon written
notice to the Board or to such person or persons as the Board may designate.
Such resignation shall take effect at the time specified therein, and unless
otherwise specified therein no acceptance of such resignation shall be necessary
to make it effective. The Board may remove any officer with or without cause at
any time. Any officer authorized by the Board to appoint a person to hold an
office of the Corporation may also remove such person from such office with or
without cause at any time, unless otherwise provided in the resolution of the
Board providing such authorization. Any such removal shall be without prejudice
to the contractual rights of such officer, if any, with the Corporation, but the
election or appointment of an officer shall not of itself create contractual
rights. Any vacancy occurring in any office of the Corporation by death,
resignation, removal or otherwise may be filled by the Board at any regular or
special meeting or by an officer authorized by the Board to appoint a person to
hold such office.
Section 4.3. Powers and Duties. The officers of the Corporation shall have
such powers and duties in the management of the Corporation as shall be stated
in these by-laws or in a resolution of the Board of Directors which is not
inconsistent with these by-laws and, to the extent not so stated, as generally
pertain to their respective offices, subject to the control of the Board. A
Secretary or such other officer appointed to do so by the Board shall have the
duty to record the proceedings of the meetings of the stockholders, the Board of
Directors and any committees in a book to be kept for that purpose. The Board
may require any officer, agent or employee to give security for the faithful
performance of his or her duties.
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<PAGE> 16
ARTICLE V
Stock
Section 5.1. Certificates; Uncertificated Shares. The shares of stock in
the Corporation shall be represented by certificates, provided that the Board of
Directors of the Corporation may provide by resolution or resolutions that some
or all of any or all classes or series of its stock shall be uncertificated
shares. Any such resolution shall not apply to any such shares represented by a
certificate theretofore issued until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution or resolutions by
the Board of Directors of the Corporation, every holder of stock represented by
certificates, and upon request every holder of uncertificated shares, shall be
entitled to have a certificate signed by or in the name of the Corporation by a
Chairman or Vice Chairman of the Board or a President or Vice President, and by
a Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, representing
the number of shares of stock in the Corporation owned by such holder. If such
certificate is manually signed by one officer or manually countersigned by a
transfer agent or by a registrar, any other signature on the certificate may be
a facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
Certificates representing shares of stock of the Corporation may bear such
legends regarding restrictions on transfer or other matters as any officer or
officers of the Corporation may determine to be appropriate and lawful.
If the Corporation is authorized to issue more than one class of stock or
more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications or restrictions of such preferences
and/or rights shall be set forth in full or summarized on the face or back of
the certificate which the Corporation shall issue to represent such class or
series of stock, provided that, except as otherwise required by law, in lieu of
the foregoing
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<PAGE> 17
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of such class or series of stock
and the qualifications, limitations or restrictions of such preferences and/or
rights. Within a reasonable time after the issuance or transfer of
uncertificated shares of any class or series of stock, the Corporation shall
send to the registered owner thereof a written notice containing the information
required by law to be set forth or stated on certificates representing shares of
such class or series or a statement that the Corporation will furnish without
charge to each stockholder who so requests the powers, designations, preferences
and relative, participating, optional or other special rights of such class or
series and the qualifications, limitations or restrictions of such preferences
and/or rights.
Except as otherwise expressly provided by law, the rights and obligations
of the holders of uncertificated shares and the rights and obligations of the
holders of certificates representing stock of the same class and series shall be
identical.
Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The Corporation may issue a new certificate of stock in the place
of any certificate theretofore issued by it, alleged to have been lost, stolen
or destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or such owner's legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
ARTICLE VI
Miscellaneous
Section 6.1. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
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<PAGE> 18
Section 6.2. Seal. The Corporation may have a corporate seal which shall
have the name of the Corporation inscribed thereon and shall be in such form as
may be approved from time to time by the Board of Directors. The corporate seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
in any other manner reproduced.
Section 6.3. Waiver of Notice of Meetings of Stockholders, Directors and
Committees. Whenever notice is required to be given by law or under any
provision of the certificate of incorporation or these by-laws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors or members of a committee of directors need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these by-laws.
Section 6.4. Indemnification. The Corporation shall indemnify to the full
extent permitted by law any person made or threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person or such person's testator
or intestate is or was a director or officer of the Corporation, is or was a
director, officer, trustee, member, stockholder, partner, incorporator or
liquidator of a Subsidiary of the Corporation, is or was a member of the
Shareholders' Committee acting pursuant to the Shareholders' Agreement, to be
entered into among the Corporation and certain of its Stockholders as
contemplated by the Plan of Incorporation of The Goldman Sachs Group, L.P.
adopted on March 8, 1999, as amended, or serves or served at the request of the
Corporation as a director, officer, trustee, member, stockholder, partner,
incorporator or liquidator of or in any other capacity for any other enterprise.
Expenses, including attorneys' fees, incurred by any such person in defending
any such action, suit or proceeding shall be paid or reimbursed by the
Corporation promptly upon demand by such person and, if any such demand
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<PAGE> 19
is made in advance of the final disposition of any such action, suit or
proceeding, promptly upon receipt by the Corporation of an undertaking of such
person to repay such expenses if it shall ultimately be determined that such
person is not entitled to be indemnified by the Corporation. The rights provided
to any person by this by-law shall be enforceable against the Corporation by
such person, who shall be presumed to have relied upon it in serving or
continuing to serve as a director or officer or in such other capacity as
provided above. In addition, the rights provided to any person by this by-law
shall survive the termination of such person as any such director, officer,
trustee, member, stockholder, partner, incorporator or liquidator and, insofar
as such person served at the request of the Corporation as a director, officer,
trustee, member, stockholder, partner, incorporator or liquidator of or in any
other capacity for any other enterprise, shall survive the termination of such
request as to service prior to termination of such request. No amendment of this
by-law shall impair the rights of any person arising at any time with respect to
events occurring prior to such amendment.
Notwithstanding anything contained in this Section 6.4, except for
proceedings to enforce rights provided in this Section 6.4, the Corporation
shall not be obligated under this Section 6.4 to provide any indemnification or
any payment or reimbursement of expenses to any director, officer or other
person in connection with a proceeding (or part thereof) initiated by such
person (which shall not include counterclaims or crossclaims initiated by
others) unless the Board of Directors has authorized or consented to such
proceeding (or part thereof) in a resolution adopted by the Board.
For purposes of this by-law, the term "Subsidiary" shall mean any
corporation, partnership, limited liability company or other entity in which the
Corporation owns, directly or indirectly, a majority of the economic or voting
ownership interest; the term "other enterprise" shall include any corporation,
partnership, limited liability company, joint venture, trust, association or
other unincorporated organization or other entity and any employee benefit plan;
the term "officer," when used with respect to the Corporation, shall refer to
any officer elected by or appointed pursuant to authority granted by the Board
of Directors of the Corporation pursuant to clauses (i), (ii), (iii) and (iv) of
Section 4.1 of these by-laws, when used
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<PAGE> 20
with respect to a Subsidiary or other enterprise that is a corporation, shall
refer to any person elected or appointed pursuant to the by-laws of such
Subsidiary or other enterprise or chosen in such manner as is prescribed by the
by-laws of such Subsidiary or other enterprise or determined by the Board of
Directors of such Subsidiary or other enterprise, and when used with respect to
a Subsidiary or other enterprise that is not a corporation or is organized in a
foreign jurisdiction, the term "officer" shall include in addition to any
officer of such entity, any person serving in a similar capacity or as the
manager of such entity; service "at the request of the Corporation" shall
include service as a director or officer of the Corporation which imposes duties
on, or involves services by, such director or officer with respect to an
employee benefit plan, its participants or beneficiaries; any excise taxes
assessed on a person with respect to an employee benefit plan shall be deemed to
be indemnifiable expenses; and action by a person with respect to an employee
benefit plan which such person reasonably believes to be in the interest of the
participants and beneficiaries of such plan shall be deemed to be action not
opposed to the best interests of the Corporation.
To the extent authorized from time to time by the Board of Directors, the
Corporation may provide to (i) any one or more employees and other agents of the
Corporation, (ii) any one or more officers, employees and other agents of any
Subsidiary and (iii) any 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 this Section 6.4 on directors and officers of the
Corporation or any Subsidiary or other enterprise. Any such rights shall have
the same force and effect as they would have if they were conferred in this
Section 6.4.
Nothing in this Section 6.4 shall limit the power of the Corporation or
the Board of Directors to provide rights of indemnification and to make payment
and reimbursement of expenses, including attorneys' fees, to directors,
officers, employees, agents and other persons otherwise than pursuant to this
Section 6.4.
Section 6.5. Interested Directors; Quorum. No contract or transaction
between the Corporation and one or
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<PAGE> 21
more of its directors or officers, or between the Corporation and any other
corporation, partnership, limited liability company, joint venture, trust,
association or other unincorporated organization or other entity in which one or
more of its directors or officers serve as directors, officers, trustees or in a
similar capacity or have a financial interest, shall be void or voidable solely
for this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or her or their
votes are counted for such purpose, if: (i) the material facts as to his or her
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board or the committee, and the Board or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; (ii) the material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by a vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board, a committee thereof or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
Section 6.6. Form of Records. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of account
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs or any other information storage device,
provided that the records so kept can be converted into clearly legible form
within a reasonable time. The Corporation shall so convert any records so kept
upon the request of any person entitled to inspect the same.
Section 6.7. Laws and Regulations; Close of Business. (a) For purposes of
these by-laws, any reference to a statute, rule or regulation of any
governmental body means such statute, rule or regulation (including any
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<PAGE> 22
successor thereto) as the same may be amended from time to time.
(b) Any reference in these by-laws to the close of business on any day
shall be deemed to mean 5:00 P.M. New York time on such day, whether or not such
day is a business day.
Section 6.8. Amendment of By-Laws. These by-laws may be amended, modified
or repealed, and new by-laws may be adopted at any time, by the Board of
Directors. Stockholders of the Corporation may adopt additional by-laws and
amend, modify or repeal any by-law whether or not adopted by them, but only in
accordance with Article SIXTH of the certificate of incorporation.
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<PAGE> 1
EXHIBIT 5.1
SULLIVAN & CROMWELL
NEW YORK TELEPHONE: (212) 558-4000
TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC)
CABLE ADDRESS: LADYCOURT, NEW YORK
FACSIMILE: (212) 558-3588
125 BROAD STREET, NEW YORK 10004-2498
-------
1701 PENNSYLVANIA AVE, N.W. WASHINGTON, D.C. 20006-5805
1888 CENTURY PARK EAST, LOS ANGELES 90067-1725
8, PLACE VENDOME, 75001 PARIS
ST. OLAVE'S HOUSE, 9a IRONMONGER LANE, LONDON EC2V 8EY
101 COLLINS STREET, MELBOURNE 3000
2-1, MARUNOUCHI I-CHOME, CHIYODA-KU, TOKYO 100
NINE QUEEN'S ROAD, CENTRAL, HONG KONG
OBERLINDAU 54-56, 60323 FRANKFURT AM MAIN
May 7, 1999
The Goldman Sachs Group, Inc.,
85 Broad Street,
New York, NY 10004.
Dear Sirs:
In connection with the registration under the Securities Act of 1933 (the
"Act") of $1,500,000,000 principal amount of --% Notes due 2009 (the
"Securities"), of The Goldman Sachs Group, Inc., a Delaware corporation (the
"Company"), we, as your counsel, have examined such corporate records,
certificates and other documents, and such questions of law, as we have
considered necessary or appropriate for the purposes of this opinion.
Upon the basis of such examination, we advise you that, in our opinion,
when the Registration Statement has become effective under the Act, the
Indenture relating to the Securities has been duly authorized, executed and
delivered, the terms of the Securities and of their issuance and sale have been
duly established in conformity with the Indenture so as not to violate any
applicable law or result
<PAGE> 2
The Goldman Sachs Group, Inc. -2-
in a default under or breach of any agreement or instrument binding upon the
Company and so as to comply with any requirement or restriction imposed by any
court or governmental body having jurisdiction over the Company, and the
Securities have been duly executed and authenticated in accordance with the
Indenture and issued and sold as contemplated in the Registration Statement,
the Securities will constitute valid and legally binding obligations of the
Company, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
The foregoing opinion is limited to 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 we are expressing no opinion as to the effect of the
laws of any other jurisdiction.
We have relied as to certain matters on information obtained from public
officials, officers of the Company and other sources believed by us to be
responsible.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the heading "Validity
of the Notes" in the Prospectus. In giving such consent, we do not thereby admit
<PAGE> 3
The Goldman Sachs Group, Inc. -3-
that we are in the category of persons whose consent is required under Section
7 of the Act.
Very truly yours,
/s/ Sullivan & Cromwell
<PAGE> 1
EXHIBIT 8.1
Sullivan & Cromwell
New York Telephone: (212) 558-4000
Telex: 62694 (International) 127816
(Domestic)
Cable Address: Ladycourt, New York
Facsimile: (212) 558-3588
125 Broad Street, New York 10004-2498
------------------------------
1701 Pennsylvania Ave, N.W. Washington, D.C. 20006-5805
1888 Century Park East, Los Angeles 90071-2901
8, Place Vendome, 75001 Paris
St. Olave's House, 9a Ironmonger Lane, London EC2V 8EY
101 Collins Street, Melbourne 3000
2-1, Marunouchi I-Chome, Chiyoda-Ku, Tokyo 100
Nine Queen's Road, Central, Hong Kong
Oberlindau 54-56, 60323 Frankfurt Am Main
May 7, 1999
The Goldman Sachs Group, Inc.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
As counsel to The Goldman Sachs Group, Inc. (the "Company") in connection
with the issuance of $1,500,000,000 aggregate principal amount of % Notes
due 2009, we hereby confirm to you that the discussion set forth under the
heading "United States Taxation" in the Prospectus which forms a part of the
Registration Statement of the Company to which this opinion is filed as an
exhibit is our opinion, subject to the limitations set forth therein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "United
States Taxation" in the Prospectus. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ SULLIVAN & CROMWELL
<PAGE> 1
EXHIBIT 10.15
THE GOLDMAN SACHS 1999 STOCK INCENTIVE PLAN
<PAGE> 2
Table of Contents
Page
----
ARTICLE I
GENERAL
1.1 Purpose..................................................... 1
1.2 Definitions of Certain Terms................................ 1
1.3 Administration.............................................. 2
1.4 Persons Eligible for Awards................................. 4
1.5 Types of Awards Under Plan.................................. 4
1.6 Shares Available for Awards................................. 4
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards................................ 6
2.2 No Rights as a Shareholder.................................. 6
2.3 Grant of Options and Stock Appreciation Rights.............. 6
2.4 Exercise of Options and Stock Appreciation Rights........... 6
2.5 Grant of Restricted Stock................................... 7
2.6 Grant of Restricted Stock Units............................. 7
2.7 Other Stock-Based Awards.................................... 7
2.8 Grant of Dividend Equivalent Rights..................... . 8
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan....................................... 8
3.2 Tax Withholding............................................. 8
3.3 Required Consents and Legends............................... 9
3.4 Nonassignability............................................ 10
3.5 Requirement of Consent and Notification of Election Under
Section 83(b) of the Code or Similar Provision............ 10
3.6 Requirement of Notification Upon Disqualifying Disposition
Under Section 421(b) of the Code.......................... 11
3.7 Change in Control .......................................... 11
i
<PAGE> 3
3.8 Right of Discharge Reserved................................. 11
3.9 Nature of Payments.......................................... 11
3.10 Non-Uniform Determinations.................................. 12
3.11 Other Payments or Awards.................................... 12
3.12 Plan Headings............................................... 12
3.13 Date of Adoption and Term of Plan........................... 12
3.14 Governing Law............................................... 13
3.15 Severability; Entire Agreement.............................. 13
3.16 Waiver of Claims............................................ 13
3.17 No Third Party Beneficiaries................................ 14
3.18 Successors and Assigns of GS Inc............................ 14
ii
<PAGE> 4
THE GOLDMAN SACHS 1999 STOCK INCENTIVE PLAN
ARTICLE I
GENERAL
1.1 Purpose
The purpose of The Goldman Sachs 1999 Stock Incentive Plan is to attract,
retain and motivate officers, directors, employees (including prospective
employees), consultants and others who may perform services for the Firm, to
compensate them for their contributions to the long-term growth and profits of
the Firm, and to encourage them to acquire a proprietary interest in the success
of the Firm.
1.2 Definitions of Certain Terms
1.2.1 "Award" means an award made pursuant to the Plan.
1.2.2 "Award Agreement" means the written document by which each
Award is evidenced.
1.2.3 "Board" means the Board of Directors of GS Inc.
1.2.4 "Certificate" means a stock certificate (or other appropriate
document or evidence of ownership) representing shares of Common Stock of GS
Inc.
1.2.5 "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and the applicable rulings and regulations thereunder.
1.2.6 "Committee" means the committee appointed by the Board to
administer the Plan pursuant to Section 1.3.
1.2.7 "Common Stock" means common stock of GS Inc., par value $0.01
per share.
1.2.8 "Employment" means a grantee's performance of services for the
Firm, as determined by the Committee. The terms "employ" and "employed" shall
have their correlative meanings.
1
<PAGE> 5
1.2.9 "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and the applicable rules and regulations thereunder.
1.2.10 "Fair Market Value" means, with respect to a share of Common
Stock on any day, the fair market value as determined in accordance with a
valuation methodology approved by the Committee.
1.2.11 "Firm" means GS Inc. and its subsidiaries and affiliates.
1.2.12 "GS Inc." means The Goldman Sachs Group, Inc., and any
successor thereto.
1.2.13 "Incentive Stock Option" means an Option that is intended to
qualify for special federal income tax treatment pursuant to Sections 421 and
422 of the Code, as now constituted or subsequently amended, or pursuant to a
successor provision of the Code, and which is so designated in the applicable
Award Agreement.
1.2.14 "Nonqualified Stock Option" means an Option that is not an
Incentive Stock Option.
1.2.15 "Option" means an Incentive Stock Option or a Nonqualified
Stock Option or both, as the context requires.
1.2.16 "Plan" means The Goldman Sachs 1999 Stock Incentive Plan, as
described herein and as hereafter amended from time to time.
1.3 Administration
1.3.1 Subject to Section 1.3.4, the Plan shall be administered by a
committee appointed by the Board whose members shall serve at the pleasure of
the Board. To the extent required for transactions under the Plan to qualify for
the exemptions available under Rule 16b-3 promulgated under the Exchange Act,
all actions relating to Awards to persons subject to Section 16 of the Exchange
Act may be taken by the Board or a committee or subcommittee of the Board
composed of two or more members, each of whom is a "non-employee director"
within the meaning of Exchange Act Rule 16b-3. To the extent required for
compensation realized from Awards under the Plan to be deductible by GS Inc.
pursuant to Section 162(m) of the Code, such Awards may be granted by a
committee or subcommittee of the Board composed of two or more members, each of
whom is an "outside director" within the meaning of Code Section 162(m).
1.3.2 The Committee shall have complete control over the
administration of the Plan and shall have the authority in its discretion to (a)
exercise all of the powers granted to it
2
<PAGE> 6
under the Plan, (b) construe, interpret and implement the Plan and any Award
Agreements, (c) prescribe, amend and rescind rules and regulations relating to
the Plan, including rules governing its own operations, (d) make all
determinations necessary or advisable in administering the Plan, (e) correct any
defect, supply any omission and reconcile any inconsistency in the Plan, (f)
amend the Plan to reflect changes in applicable law (whether or not the rights
of the grantee of any Award are adversely affected, unless otherwise provided in
such grantee's Award Agreement), (g) unless otherwise provided in an Award
Agreement, amend any outstanding Award Agree ment in any respect, whether or not
the rights of the grantee of such Award are adversely affected, including,
without limitation, to accelerate the time or times at which the Award becomes
vested, unrestricted or may be exercised, waive or amend any goals, restrictions
or conditions set forth in such Award Agreement, or impose new goals,
restrictions and conditions, or reflect a change in the grantee's circumstances
(e.g., a change to part-time employment status), or to permit GS Inc. to utilize
the pooling-of-interests accounting method and (h) determine whether, to what
extent and under what circumstances and method or methods (1) Awards may be (A)
settled in cash, shares of Common Stock, other securities, other Awards or other
property, (B) exercised or (C) canceled, forfeited or suspended, (2) shares of
Common Stock, other securities, other Awards or other property, and other
amounts payable with respect to an Award may be deferred either automatically or
at the election of the grantee thereof or of the Committee, (3) loans (whether
or not secured by Common Stock) may be extended by the Firm with respect to any
Awards and (4) Awards may be settled by GS Inc., any of its subsidiaries or
affiliates or any of its or their designees.
1.3.3 Actions of the Committee may be taken by the vote of a
majority of its members. Any action may be taken by a written instrument signed
by a majority of the Committee members, and action so taken shall be fully as
effective as if it had been taken by a vote at a meeting. The determination of
the Committee on all matters relating to the Plan or any Award Agreement shall
be final, binding and conclusive. The Committee may allocate among its members
and delegate to any person who is not a member of the Committee any of its
administrative responsibilities.
1.3.4 Notwithstanding anything to the contrary contained herein: (a)
until the Board shall appoint the members of the Committee, the Plan shall be
administered by the Board and (b) the Board may, in its sole discretion, at any
time and from time to time, grant Awards or administer the Plan. In either of
the foregoing events, the Board shall have all of the authority and
responsibility granted to the Committee herein.
1.3.5 No member of the Board or the Committee or any employee of the
Firm shall be liable for any action or determination made in good faith with
respect to the Plan or any Award thereunder. Each such person shall be
indemnified and held harmless by GS Inc. against and from any loss, cost,
liability, or expense that may be imposed upon or incurred by such person in
connection with or resulting from any action, suit or proceeding to which such
person may be a party or in which such person may be involved by reason of any
action taken or failure
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to act under the Plan or any Award Agreement and against and from any and all
amounts paid by such person, with GS Inc.'s approval, in settlement thereof, or
paid by such person in satisfaction of any judgment in any such action, suit or
proceeding against such person, provided that GS Inc. shall have the right, at
its own expense, to assume and defend the same. The foregoing right of
indemnification shall not be available to a person to the extent that a final
judgment or other final adjudication binding upon such person establishes that
the acts or omissions of such person giving rise to the indemnification claim
resulted from such person's bad faith, fraud or willful criminal act or
omission. The foregoing right of indemnification shall not be exclusive of any
other rights of indemnification to which such persons may be entitled under GS
Inc.'s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise,
or any other power that GS Inc. may have to indemnify such persons or hold them
harmless.
1.4 Persons Eligible for Awards
Awards under the Plan may be made to such officers, directors,
employees (including prospective employees), consultants and other individuals
who may perform services for the Firm, as the Committee may select.
1.5 Types of Awards Under Plan
Awards may be made under the Plan in the form of (a) Options, (b)
stock appreciation rights, (c) dividend equivalent rights, (d) restricted stock,
(e) restricted stock units and (f) other equity-based or equity-related Awards
which the Committee determines to be consistent with the purpose of the Plan and
the interests of the Firm. No Incentive Stock Option (other than an Incentive
Stock Option that may be assumed or issued by GS Inc. in connection with a
transaction to which Section 424(a) of the Code applies) may be granted to a
person who is not eligible to receive an Incentive Stock Option under the Code.
1.6 Shares Available for Awards
1.6.1 Total shares available. Subject to adjustment pursuant to
Section 1.6.2, the total number of shares of Common Stock which may be delivered
pursuant to Awards granted under the Plan through GS Inc.'s fiscal year ending
in 2002 shall not exceed three hundred million shares and pursuant to Awards
granted in each fiscal year thereafter shall 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. If, after the effective date of the Plan, any Award is forfeited
or otherwise terminates or is canceled without the delivery of shares of Common
Stock, shares of Common Stock are surrendered or withheld
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<PAGE> 8
from any Award to satisfy a grantee's income tax or other withholding
obligations, or shares of Common Stock owned by a grantee are tendered to pay
the exercise price of any Award granted under the Plan, then the shares covered
by such forfeited, terminated or canceled Award or which are equal to the number
of shares surrendered, withheld or tendered shall again become available for
transfer pursuant to Awards granted or to be granted under this Plan.
Notwithstanding the foregoing, but subject to adjustment as provided in Section
1.6.2., no more than two hundred million shares of Common Stock shall be
delivered pursuant to the exercise of Incentive Stock Options. The maximum
number of shares of Common Stock with respect to which Options or stock
appreciation rights may be granted to an individual grantee (i) in GS Inc.'s
fiscal year ending in 1999 shall equal 3,500,000 shares of Common Stock and (ii)
in each subsequent fiscal year shall equal 110% of the maximum number for the
preceding fiscal year. Any shares of Common Stock (a) delivered by GS Inc., (b)
with respect to which Awards are made by GS Inc. and (c) with respect to which
GS Inc. becomes obligated to make Awards, in each case through the assumption
of, or in substitution for, outstanding awards previously granted by an acquired
entity, shall not be counted against the shares of Common Stock available for
Awards under this Plan. Shares of Common Stock which may be delivered pursuant
to Awards may be authorized but unissued Common Stock or authorized and issued
Common Stock held in GS Inc.'s treasury or otherwise acquired for the purposes
of the Plan.
1.6.2 Adjustments. The Committee shall have the authority (but shall
not be required) to adjust the number of shares of Common Stock authorized
pursuant to Section 1.6.1 and to adjust equitably (including, without
limitation, by payment of cash) the terms of any outstanding Awards (including,
without limitation, the number of shares of Common Stock covered by each
outstanding Award, the type of property to which the Award is subject and the
exercise or strike price of any Award), in such manner as it deems appropriate
to preserve the benefits or potential benefits intended to be made available to
grantees of Awards, for any increase or decrease in the number of issued shares
of Common Stock resulting from a stock split, reverse stock split, stock
dividend, spinoff, splitup, combination or reclassification of the Common Stock,
or any other event the Committee determines in its sole discretion affects the
capitalization of GS Inc., including any extraordinary dividend or distribution.
After any adjustment made pursuant to this Section 1.6.2, the number of shares
of Common Stock subject to each outstanding Award shall be rounded to the
nearest whole number.
1.6.3 Except as provided in this Section 1.6 or under the terms of
any applicable Award Agreement, there shall be no limit on the number or the
value of shares of Common Stock that may be subject to Awards to any individual
under the Plan.
1.6.4 There shall be no limit on the amount of cash, securities
(other than shares of Common Stock as provided in this Section 1.6) or other
property that may be delivered pursuant to any Award.
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ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards
Each Award granted under the Plan shall be evidenced by a written
document which shall contain such provisions and conditions as the Committee
deems appropriate. The Committee may grant Awards in tandem with or in
substitution for any other Award or Awards granted under this Plan or any award
granted under any other plan of the Firm. By accepting an Award pursuant to the
Plan, a grantee thereby agrees that the Award shall be subject to all of the
terms and provisions of the Plan and the applicable Award Agreement.
2.2 No Rights as a Shareholder
No grantee of an Award shall have any of the rights of a shareholder
of GS Inc. with respect to shares subject to such Award until the delivery of
such shares. Except as otherwise provided in Section 1.6.2, no adjustments shall
be made for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, Common Stock, other securities or other
property) for which the record date is prior to the date such shares are
delivered.
2.3 Grant of Options and Stock Appreciation Rights
The Committee may grant (a) Options to purchase shares of Common
Stock from GS Inc. and (b) stock appreciation rights, in such amounts and
subject to such terms and conditions as the Committee may determine.
2.4 Exercise of Options and Stock Appreciation Rights
2.4.1 Any acceptance by the Committee of an optionee's written
notice of exercise of an Option shall be conditioned upon payment for the shares
being purchased. Such payment may be made in cash or by such other method as the
Committee may from time to time prescribe.
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2.4.2 After receiving payment from the optionee of the full Option
exercise price, or after receiving notice from the grantee of the exercise of a
stock appreciation right for which payment will be made by GS Inc. partly or
entirely in shares of Common Stock, GS Inc. shall, subject to the provisions of
the Plan or any Award Agreement, deliver the shares of Common Stock.
2.5 Grant of Restricted Stock
The Committee may grant or offer for sale restricted shares of
Common Stock in such amounts and subject to such terms and conditions as the
Committee shall determine. Upon the delivery of such shares, the grantee shall
have the rights of a shareholder with respect to the restricted stock, subject
to any restrictions and conditions as the Committee may include in the
applicable Award Agreement. In the event that a Certificate is issued in respect
of restricted shares of Common Stock, such Certificate may be registered in the
name of the grantee but shall be held by GS Inc. or its designated agent until
the time the restrictions lapse.
2.6 Grant of Restricted Stock Units
The Committee may grant Awards of restricted stock units in such
amounts and subject to such terms and conditions as the Committee shall
determine. A grantee of a restricted stock unit will have only the rights of a
general unsecured creditor of GS Inc. until delivery of shares of Common Stock,
cash or other securities or property is made as specified in the applicable
Award Agreement. On the delivery date, the grantee of each restricted stock unit
not previously forfeited shall receive one share of Common Stock, or cash,
securities or other property equal in value to a share of Common Stock or a
combination thereof, as specified by the Committee.
2.7 Other Stock-Based Awards
The Committee may grant other types of equity-based or
equity-related Awards (including the grant or offer for sale of unrestricted
shares of Common Stock) in such amounts and subject to such terms and
conditions, as the Committee shall determine. Such Awards may entail the
transfer of actual shares of Common Stock to Plan participants, or payment in
cash or otherwise of amounts based on the value of shares of Common Stock, and
may include, without
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limitation, Awards designed to comply with or take advantage of the applicable
local laws of jurisdictions other than the United States.
2.8 Grant of Dividend Equivalent Rights
The Committee may include in the Award Agreement with respect to any
Award a dividend equivalent right entitling the grantee to receive amounts equal
to all or any portion of the dividends that would be paid on the shares of
Common Stock covered by such Award if such shares had been delivered pursuant to
such Award. The grantee of a dividend equivalent right will have only the rights
of a general unsecured creditor of GS Inc. until payment of such amounts is made
as specified in the applicable Award Agreement. In the event such a provision is
included in an Award Agreement, the Committee shall determine whether such
payments shall be made in cash, in shares of Common Stock or in another form,
whether they shall be conditioned upon the exercise of the Award to which they
relate, the time or times at which they shall be made, and such other terms and
conditions as the Committee shall deem appropriate.
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan
3.1.1 Unless otherwise provided in an Award Agreement, the Board may
from time to time suspend, discontinue, revise or amend the Plan in any respect
whatsoever, including in any manner that adversely affects the rights, duties or
obligations of any grantee of an Award.
3.1.2 Unless otherwise determined by the Board, shareholder approval
of any suspension, discontinuance, revision or amendment shall be obtained only
to the extent necessary to comply with any applicable law, rule or regulation.
3.2 Tax Withholding
3.2.1 As a condition to the delivery of any shares of Common Stock
pursuant to any Award or the lifting or lapse of restrictions on any Award, or
in connection with any other event that gives rise to a federal or other
governmental tax withholding obligation on the part of GS Inc. or any of its
subsidiaries or affiliates relating to an Award (including, without limitation,
FICA tax), (a) GS Inc. may deduct or withhold (or cause to be deducted or
withheld) from any
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payment or distribution to a grantee whether or not pursuant to the Plan or (b)
the Committee shall be entitled to require that the grantee remit cash to GS
Inc. or any of its subsidiaries or affiliates (through payroll deduction or
otherwise), in each case in an amount sufficient in the opinion of GS Inc. to
satisfy such withholding obligation.
3.2.2 If the event giving rise to the withholding obligation
involves a transfer of shares of Common Stock, then, unless the applicable Award
Agreement provides otherwise, at the discretion of the Committee, the grantee
may satisfy the withholding obligation described under Section 3.2.1 by electing
to have GS Inc. withhold shares of Common Stock (which withholding, unless
otherwise provided in the applicable Award Agreement, will be at a rate not in
excess of the statutory minimum rate) or by tendering previously owned shares of
Common Stock, in each case having a Fair Market Value equal to the amount of tax
to be withheld (or by any other mechanism as may be required or appropriate to
conform with local tax and other rules). For this purpose, Fair Market Value
shall be determined as of the date on which the amount of tax to be withheld is
determined (and GS Inc. may cause any fractional share amount to be settled in
cash).
3.3 Required Consents and Legends
3.3.1 If the Committee shall at any time determine that any consent
(as hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any Award, the delivery of shares of Common
Stock or the delivery of any cash, securities or other property under the Plan,
or the taking of any other action thereunder (each such action being hereinafter
referred to as a "plan action"), then such plan action shall not be taken, in
whole or in part, unless and until such consent shall have been effected or
obtained to the full satisfaction of the Committee. The Committee may direct
that any Certificate evidencing shares delivered pursuant to the Plan shall bear
a legend setting forth such restrictions on transferability as the Committee may
determine to be necessary or desirable, and may advise the transfer agent to
place a stop order against any legended shares.
3.3.2 The term "consent" as used herein with respect to any plan
action includes (a) any and all listings, registrations or qualifications in
respect thereof upon any securities exchange or under any federal, state, or
local law, or law, rule or regulation of a jurisdiction outside the United
States, (b) any and all written agreements and representations by the grantee
with respect to the disposition of shares, or with respect to any other matter,
which the Committee may deem necessary or desirable to comply with the terms of
any such listing, registration or qualification or to obtain an exemption from
the requirement that any such listing, qualification or registration be made,
(c) any and all other consents, clearances and approvals in respect of a plan
action by any governmental or other regulatory body or any stock exchange or
self-regulatory agency and (d) any and all consents or authorizations required
to comply with, or
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required to be obtained under, applicable local law or otherwise required by the
Committee. Nothing herein shall require GS Inc. to list, register or qualify the
shares of Common Stock on any securities exchange.
3.4 Nonassignability
Except to the extent otherwise expressly provided in the applicable
Award Agreement, no Award (or any rights and obligations thereunder) granted to
any person under the Plan may be sold, exchanged, transferred, assigned,
pledged, hypothecated or otherwise disposed of (including through the use of any
cash-settled instrument), whether voluntarily or involuntarily, other than by
will or by the laws of descent and distribution, and all such Awards (and any
rights thereunder) shall be exercisable during the life of the grantee only by
the grantee or the grantee's legal representative. Notwithstanding the
immediately preceding sentence, the Committee may permit, under such terms and
conditions that it deems appropriate in its sole discretion, a grantee to
transfer any Award to any person or entity that the Committee so determines. Any
assignment in violation of the provisions of this Section 3.4 shall be void. All
of the terms and conditions of this Plan and the Award Agreements shall be
binding upon any such permitted successors and assigns.
3.5 Requirement of Consent and Notification of Election Under Section 83(b) of
the Code or Similar Provision
No election under Section 83(b) of the Code (to include in gross
income in the year of transfer the amounts specified in Code Section 83(b)) or
under a similar provision of the law of a jurisdiction outside the United States
may be made unless expressly permitted by the terms of the Award Agreement or by
action of the Committee in writing prior to the making of such election. If a
grantee of an Award, in connection with the acquisition of shares of Common
Stock under the Plan or otherwise, is expressly permitted under the terms of the
Award Agreement or by such Committee action to make any such election and the
grantee makes the election, the grantee shall notify the Committee of such
election within ten (10) days of filing notice of the election with the Internal
Revenue Service or other governmental authority, in addition to any filing and
notification required pursuant to regulations issued under Code Section 83(b) or
other applicable provision.
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3.6 Requirement of Notification Upon Disqualifying Disposition Under Section
421(b) of the Code
If any grantee shall make any disposition of shares of Common Stock
delivered pursuant to the exercise of an Incentive Stock Option under the
circumstances described in Section 421(b) of the Code (relating to certain
disqualifying dispositions), such grantee shall notify GS Inc. of such
disposition within 10 days thereof.
3.7 Change in Control
3.7.1 The Committee may provide in any Award Agreement for
provisions relating to a "change in control" of GS Inc. or any of its
subsidiaries or affiliates (as such term is defined by the Committee in any such
Award Agreement), including, without limitation, the acceleration of the
exercisability of, or the lapse of restrictions or deemed satisfaction of goals
with respect to, any outstanding Awards.
3.7.2 Unless otherwise provided in the applicable Award Agreement,
in the event of a merger, consolidation, mandatory share exchange or other
similar business combination of GS Inc. with or into any other entity
("successor entity") or any transaction in which another person or entity
acquires all of the issued and outstanding Common Stock of GS Inc., or all or
substantially all of the assets of GS Inc., outstanding Awards may be assumed or
an equivalent Award may be substituted by such successor entity or a parent or
subsidiary of such successor entity.
3.8 Right of Discharge Reserved
Nothing in the Plan or in any Award Agreement shall confer upon any
grantee the right to continued Employment by the Firm or affect any right which
the Firm may have to terminate such Employment.
3.9 Nature of Payments
3.9.1 Any and all grants of Awards and deliveries of Common Stock,
cash, securities or other property under the Plan shall be in consideration of
services performed or to be performed for the Firm by the grantee. Awards under
the Plan may, in the discretion of the Committee, be made in substitution in
whole or in part for cash or other compensation otherwise payable to an
Employee.
3.9.2 All such grants and deliveries shall constitute a special
discretionary
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incentive payment to the grantee and shall not be required to be taken into
account in computing the amount of salary or compensation of the grantee for the
purpose of determining any contributions to or any benefits under any pension,
retirement, profit-sharing, bonus, life insurance, severance or other benefit
plan of the Firm or under any agreement with the grantee, unless the Firm
specifically provides otherwise.
3.10 Non-Uniform Determinations
The Committee's determinations under the Plan and Award Agreements
need not be uniform and may be made by it selectively among persons who receive,
or are eligible to receive, Awards under the Plan (whether or not such persons
are similarly situated). Without limiting the generality of the foregoing, the
Committee shall be entitled, among other things, to make non-uniform and
selective determinations under Award Agreements, and to enter into nonuniform
and selective Award Agreements, as to (a) the persons to receive Awards, (b) the
terms and provisions of Awards and (c) whether a grantee's Employment has been
terminated for purposes of the Plan.
3.11 Other Payments or Awards
Nothing contained in the Plan shall be deemed in any way to limit or
restrict GS Inc. from making any award or payment to any person under any other
plan, arrangement or understanding, whether now existing or hereafter in effect.
3.12 Plan Headings
The headings in this Plan are for the purpose of convenience only
and are not intended to define or limit the construction of the provisions
hereof.
3.13 Date of Adoption and Term of Plan
The Plan was adopted by the Board on April 30, 1999. Unless sooner
terminated by the Board, the provisions of the Plan respecting the grant of
Incentive Stock Options shall terminate on the day before the tenth anniversary
of the adoption of the Plan by the Board, and no Incentive Stock Options shall
thereafter be granted under the Plan. The Board reserves the right to terminate
the Plan at any time; provided, however, that all Awards made under the Plan
prior
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to its termination shall remain in effect until such Awards have been satisfied
or terminated in accordance with the terms and provisions of the Plan and the
applicable Award Agreements.
3.14 Governing Law
ALL RIGHTS AND OBLIGATIONS UNDER THE PLAN AND EACH AWARD AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
3.15 Severability; Entire Agreement
If any of the provisions of this Plan or any Award Agreement is
finally held to be invalid, illegal or unenforceable (whether in whole or in
part), such provision shall be deemed modified to the extent, but only to the
extent, of such invalidity, illegality or unenforceability and the remaining
provisions shall not be affected thereby; provided, that if any of such
provisions is finally held to be invalid, illegal, or unenforceable because it
exceeds the maximum scope determined to be acceptable to permit such provision
to be enforceable, such provision shall be deemed to be modified to the minimum
extent necessary to modify such scope in order to make such provision
enforceable hereunder. The Plan and any Award Agreements contain the entire
agreement of the parties with respect to the subject matter thereof and
supersede all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter thereof.
3.16 Waiver of Claims
Each grantee of an Award recognizes and agrees that prior to being
selected by the Committee to receive an Award he or she has no right to any
benefits hereunder. Accordingly, in consideration of the grantee's receipt of
any Award hereunder, he or she expressly waives any right to contest the amount
of any Award, the terms of any Award Agreement, any determination, action or
omission hereunder or under any Award Agreement by the Committee, GS Inc. or the
Board, or any amendment to the Plan or any Award Agreement (other than an
amendment to this Plan or an Award Agreement to which his or her consent is
expressly required by the express terms of an Award Agreement).
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3.17 No Third Party Beneficiaries
Except as expressly provided therein, neither the Plan nor any Award
Agreement shall confer on any person other than the Firm and the grantee of any
Award any rights or remedies thereunder.
3.18 Successors and Assigns of GS Inc.
The terms of this Plan shall be binding upon and inure to the
benefit of GS Inc. and its successors and assigns.
IN WITNESS WHEREOF, and as evidence of the adoption of this Plan effective
as of May 7, 1999 by GS Inc., it has caused the same to be signed by
its duly authorized officer this 7th day of May, 1999.
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Robert J. Katz
------------------
Name: Robert J. Katz
Title: Executive Vice President
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EXHIBIT 10.16
The Goldman Sachs Defined Contribution Plan
Preamble
This Plan shall be known as The Goldman Sachs Defined Contribution Plan
(the "Plan"). The object of the Plan is to provide certain select management
employees of The Goldman Sachs Group, Inc. ("GS Inc.") and its subsidiaries and
affiliates (collectively, the "Firm") with an ownership interest in GS Inc. and
to align the interests of those employees with those of GS Inc.'s shareholders.
The Plan is not intended to be qualified under Section 401(a) of the
Internal Revenue Code, as amended, and is not subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
ARTICLE I
Definitions
Section 1.1 "Account" means a Participant's Stock Account or the
Unallocated Stock Account, or both, as the context requires.
Section 1.2 "Beneficiary" means the person or persons (including a trust
or estate) who are entitled to receive any benefit payable hereunder by reason
of the death of a Participant, as designated pursuant to Section 9.1.
Section 1.3 "Board" means the Board of Directors of GS Inc.
Section 1.4 "Cause" means any of the following: (i) the Participant's
conviction, whether following trial or by plea of guilty or nolo contendere (or
similar plea), in a criminal proceeding (A) on a misdemeanor charge involving
fraud, false statements or misleading omissions, wrongful taking, embezzlement,
bribery, forgery, counterfeiting or extortion, or (B) on a felony charge or (C)
on an equivalent charge to those in clauses (A) and (B) in jurisdictions which
do not use those designations; (ii) the Participant's engaging in any conduct
which constitutes an employment disqualification under applicable law (including
statutory disqualification as defined under the Exchange Act); (iii) the
Participant's willful or grossly negligent failure to perform duties to the
Firm; (iv) the Participant's violation of any securities or commodities laws,
any rules or regulations issued pursuant to such laws, or the rules and
regulations of any securities or commodities exchange or association of which GS
Inc. or any of its subsidiaries or affiliates is a member; (v) the Participant's
violation of any Firm policy concerning hedging or confidential or proprietary
information, or material violation of any other Firm policy as in effect from
time to time; (vi) the Participant's engaging in any act or making any statement
which impairs, impugns, denigrates, disparages or negatively reflects upon the
name, reputation or business interests of the Firm; or (vii) the Participant's
engaging in any conduct detrimental to the Firm. The determination as to whether
"Cause" has occurred shall be made by the Committee. The Committee shall also
have the authority to
<PAGE> 2
waive the consequences under the Plan of the existence or occurrence of any of
the events, acts or omissions constituting "Cause".
Section 1.5 "Change in Control" means the consummation of a merger,
consolidation, statutory share exchange or similar form of corporate transaction
involving GS Inc. (a "Reorganization") or sale or other disposition of all or
substantially all of GS Inc.'s assets to an entity that is not an affiliate of
GS Inc. (a "Sale"), that in each case requires the approval of GS Inc.'s
stockholders under the law of GS Inc.'s jurisdiction of organization, whether
for such Reorganization or Sale (or the issuance of securities of GS Inc. in
such Reorganization or Sale), unless immediately following such Reorganization
or Sale, either: (i) at least 50% of the total voting power (in respect of the
election of directors, or similar officials in the case of an entity other than
a corporation) of (A) the entity resulting from such Reorganization, or the
entity which has acquired all or substantially all of the assets of GS Inc. in a
Sale (in either case, the "Surviving Entity"), or (B) if applicable, the
ultimate parent entity that directly or indirectly has beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act, as such Rule is in
effect on the Effective Date) of 50% or more of the total voting power (in
respect of the election of directors, or similar officials in the case of an
entity other than a corporation) of the Surviving Entity (the "Parent Entity"),
is represented by GS Inc.'s securities (the "GS Inc. Securities") that were
outstanding immediately prior to such Reorganization or Sale (or, if applicable,
is represented by shares into which such GS Inc. Securities were converted
pursuant to such Reorganization or Sale) or (ii) at least 50% of the members of
the board of directors (or similar officials in the case of an entity other than
a corporation) of the Parent Entity (or, if there is no Parent Entity, the
Surviving Entity) following the consummation of the Reorganization or Sale were,
at the time of the Board's approval of the execution of the initial agreement
providing for such Reorganization or Sale, individuals (the "Incumbent
Directors") who either (1) were members of the Board on the Effective Date or
(2) became directors subsequent to the Effective Date and whose election or
nomination for election was approved by a vote of at least two-thirds of the
Incumbent Directors then on the Board (either by a specific vote or by approval
of GS Inc.'s proxy statement in which such persons are named as a nominee for
director).
Section 1.6 "Code" means the Internal Revenue Code of 1986, as amended,
from time to time.
Section 1.7 "Committee" means the committee appointed by the Board to
administer the Plan pursuant to Section 7.1.
Section 1.8 "Custody Account" means the custody account maintained by a
Participant with The Chase Manhattan Bank or such successor custodian designated
by GS Inc.
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Section 1.9 "Distribution Date" shall include (i) each IPO Distribution
Date and (ii) such other date on which a Participant becomes vested in all or
any portion of his or her Stock Account in accordance with the provisions of
Article V.
Section 1.10 "Effective Date" means May 7, 1999.
Section 1.11 "Employment" means a Participant's performance of services
for the Firm, as determined by the Committee. The terms "employ" and "employed"
shall have their correlative meanings.
Section 1.12 "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and the applicable rules and regulations thereunder.
Section 1.13 "Fair Market Value" means, with respect to a share of Stock
on any day, the fair market value as determined in accordance with a valuation
methodology approved by the Committee.
Section 1.14 "Good Reason" means (i) as determined by the Committee, a
materially adverse alteration in the Participant's position or in the nature or
status of such Participant's responsibilities from those in effect immediately
prior to the Change in Control, or (ii) the Firm's requiring such Participant's
principal place of Employment to be located more than seventy-five (75) miles
from the location where such Participant is principally employed at the time of
the Change in Control (except for required travel on the Firm's business to an
extent substantially consistent with the Participant's customary business travel
obligations in the ordinary course of business prior to the Change in Control).
Section 1.15 "IPO Contribution" means the initial 12,555,866 shares of
Stock contributed to the Plan on the date of the consummation of the initial
public offering of GS Inc.'s Stock.
Section 1.16 "IPO Distribution Date" means the first day of each Window
Period that begins on or immediately follows each of the third, fourth and fifth
anniversaries of the date of the consummation of the initial public offering of
GS Inc.'s Stock.
Section 1.17 "Participant" means an employee of the Firm who is designated
as a Participant by the Committee pursuant to Article II.
Section 1.18 "Plan" means The Goldman Sachs Defined Contribution Plan, as
described herein and as hereafter amended from time to time.
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Section 1.19 "Plan Year" means any calendar year or part thereof beginning
on the Effective Date.
Section 1.20 "Qualified Termination" means a Participant's termination of
Employment by the Firm without Cause or by the Participant for Good Reason, but
only in each case if such termination of Employment occurs within 18 months
following a Change in Control.
Section 1.21 "Shareholders' Agreement" means the Shareholders' Agreement,
dated as of ________, 1999, among The Goldman Sachs Group, Inc. and the
individuals listed on Appendix A thereto, as in effect from time to time.
Section 1.22 "Stock" means GS Inc.'s common stock, par value $0.01 per
share.
Section 1.23 "Stock Account" means the separate account established in the
name of each Participant under Section 4.1 to hold Stock that has been allocated
to such Participant and any distributions received with respect to such Stock.
Section 1.24 "Trust" means the legal entity created by the Trust
Agreement.
Section 1.25 "Trust Agreement" means the agreement, dated as of the
Effective Date, by and between GS Inc. and the Trustee, including any amendments
thereto, setting forth the rights and obligations of the parties thereto in
respect of the contributions to and distributions from the Trust, and the
establishment and administration of the Accounts pursuant to the Plan.
Section 1.26 "Trustee" means any corporation, individual or individuals
who shall accept the appointment as trustee to execute the duties of the trustee
pursuant to the Trust Agreement.
Section 1.27 "Unallocated Stock Account" means a separate account
established under Section 4.1 to hold Stock pending the allocation and
reallocation of such Stock to the Stock Accounts of Participants, and any
distributions received with respect to such Stock.
Section 1.28 "Window Period" means a period designated by the Committee
during which employees of the Firm generally are permitted to purchase or sell
shares of Stock.
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ARTICLE II
Eligibility and Participation
Each employee designated by the Committee shall become a Participant in
the Plan on the date he or she is so designated; provided, however, that if such
employee is or becomes a Managing Director, such employee's participation in the
Plan is conditioned upon his or her becoming a party to the Shareholders'
Agreement. A Participant shall remain a Participant until the date he or she
receives a distribution of the entire vested portion of his or her Stock Account
or, if earlier, the date such Participant's interest in his or her Stock Account
is forfeited in accordance with Article V.
ARTICLE III
Contributions
On the Effective Date, GS Inc. shall establish the Trust and irrevocably
contribute the IPO Contribution to the Trust. GS Inc. may contribute additional
shares of Stock or cash to the Trust from time to time at its sole discretion.
ARTICLE IV
Allocation of Contributions
Section 4.1 Establishment of Accounts. There shall be established a Stock
Account in the name of each Participant and a separate account (the Unallocated
Stock Account) to which any forfeitures occurring hereunder shall be credited
pending allocation to Participants. The Accounts shall also hold any
distributions with respect to any shares of Stock held therein until such
distributions are payable pursuant to the Plan.
Section 4.2 Allocations to Participants' Accounts. The Committee shall in
its sole discretion designate the number of shares of Stock allocable to the
Stock Account of each Participant with respect to the IPO Contribution. With
respect to each contribution other than the IPO Contribution, the Committee
shall designate the number of shares of Stock (or the amount of cash) allocable
to the Stock Account of each Participant on a formulaic basis as determined by
the Committee in its sole discretion. Any Stock and
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distributions in respect of Stock in the Unallocated Stock Account as of the
last day of each Plan Year shall be allocated among the Stock Accounts of each
Participant who is an employee on the last day of such Plan Year in the
proportion that each such Participant's allocation in respect of GS Inc.'s
contributions for such Plan Year bears to the allocations of such contributions
for all Participants who are employees on the last day of such Plan Year, or on
such other formulaic basis as determined by the Committee in its sole
discretion.
Section 4.3 Voting of Stock; Tender or Exchange Offers. With respect to
Stock allocated to Participants' Stock Accounts, each Participant shall be
entitled to instruct the Trustee, on a confidential basis (a) as to the manner
in which the Trustee's voting rights will be exercised with respect to any
matter which involves the voting of such Stock allocated to the Participant's
Stock Account, and (b) in the event of a tender or exchange offer for all or
substantially all of the Stock of GS Inc., whether such Stock shall be tendered
or exchanged by the Trustee. Notwithstanding the foregoing, all Stock allocated
to the Stock Accounts of Participants who are subject to the Shareholders'
Agreement shall be voted by the Trustee solely in accordance with the terms of
the Shareholders' Agreement, and may be tendered or exchanged only if so
permitted under the terms of the Shareholders' Agreement. Without limiting the
foregoing, the Trust Agreement shall provide that the Trustee shall have no
discretion and shall be required to vote, tender or exchange shares of Stock
held by the Trust as follows: (i) shares of Stock allocated to a Participant's
Stock Account shall be voted, tendered or exchanged, as applicable, in
accordance with any instructions received from such Participant or such
Participant's authorized representative pursuant to a duly executed power of
attorney or similar instrument, (ii) shares of Stock held in a Participant's
Stock Account with respect to which the Trustee does not receive instructions
shall not be voted, tendered or exchanged, as applicable, and (iii) shares of
Stock held in the Unallocated Stock Account shall be voted, tendered or
exchanged, as applicable, in the same proportion as the shares of Stock
allocated to Participants' Stock Accounts with respect to which instructions are
received by the Trustee are voted, tendered or exchanged.
ARTICLE V
Vesting
Section 5.1 Vesting of IPO Contribution. Except as otherwise provided in
this Article V, a Participant shall vest on each IPO Distribution Date in
one-third of his or her Stock Account attributable to the IPO Contribution
(subject to rounding in the discretion of the Committee to avoid the vesting of
fractional shares of Stock).
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Section 5.2 Special Rule for IPO Contribution. Notwithstanding any other
provision of this Plan, provided that a Participant's Stock Account has not
previously been forfeited, such Participant shall be 100% vested in the portion
of his or her Stock Account attributable to the IPO Contribution upon (i) the
death of such Participant or (ii) such Participant's Qualified Termination.
Section 5.3 Forfeiture and Reallocation of IPO Contribution. Unless the
Committee determines otherwise, and except under the circumstances specified in
Section 5.2(ii), a Participant's unvested Stock in his or her Stock Account
attributable to the IPO Contribution shall be forfeited and such Stock shall not
be distributable to such Participant if:
(i) prior to the relevant IPO Distribution Date:
(A) such Participant's Employment with the Firm is terminated for
any reason, or such Participant is no longer actively employed with the
Firm (except as provided in Section 5.2(i)); or
(B) with respect to such Participant, any of the events that
constitute Cause has occurred; or
(C) such Participant attempts to have any dispute under this Plan
resolved in any manner that is not provided for by Sections 9.5 and 9.6;
or
(ii) such Participant fails to certify to GS Inc., in accordance
with procedures established by the Committee, with respect to any relevant
IPO Distribution Date that such Participant has complied, or the Committee
determines that such Participant in fact as of such date has not complied,
with all the terms and conditions of the Plan. By accepting the
distribution of Stock (or cash) under the Plan, such Participant shall be
deemed to have represented and certified at such time that he or she has
complied with all the terms and conditions of the Plan.
In the event that Stock in a Participant's Stock Account attributable to the IPO
Contribution is forfeited by reason of this Section 5.3, such forfeited Stock
shall be reallocated to other Participants' Stock Accounts in accordance with
Section 4.2, and the Committee shall specify the terms and conditions (including
timing) under which each such Participant shall vest in such reallocated
amounts.
Section 5.4 Vesting of Ongoing Contributions. With respect to each Plan
contribution (other than the IPO Contribution), the Committee shall specify the
terms and conditions (including timing) under which a Participant shall vest in
any or all of his or her
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Account attributable to such contributions (or forfeitures of such contributions
reallocated to such Participant).
ARTICLE VI
Distributions
Section 6.1 General. (a) Except as provided below and in Section 9.10, all
amounts and all shares of Stock credited to the Stock Account in which a
Participant has vested under Article V shall be promptly distributable to such
Participant (or, if applicable, his or her Beneficiary), and shall be subject to
the provisions of Sections 9.8 and 9.9. Unless otherwise determined by the
Committee, or as otherwise provided in the Plan, the distribution of shares of
Stock shall be effected by book-entry credit to such Participant's Custody
Account. No distribution of shares of Stock shall be made to any Participant
unless such Participant has timely established a Custody Account. A Participant
shall be the beneficial owner of any shares of Stock properly credited to the
Custody Account.
(b) Any cash dividends on shares of Stock allocated to a
Participant's Stock Account on the record date for such dividend shall be
distributed to such Participant as soon as practicable following the end of the
calendar quarter in which such dividend is received without regard to whether
such Participant is vested in the Stock in respect of which such dividend is
received. No interest shall be payable on any dividends allocated to a
Participant's Stock Account but not yet distributed.
ARTICLE VII
Organization of Plan Committee;
Administration of Plan
Section 7.1 The Committee. Subject to Section 7.3, the Plan shall be
administered by a committee appointed by the Board whose members shall serve at
the pleasure of the Board. To the extent required for transactions under the
Plan to qualify for the exemptions available under Rule 16b-3 promulgated under
the Exchange Act, all actions relating to Participants who are subject to
Section 16 of the Exchange Act may be taken by the Board or a committee or
subcommittee of the Board composed of two or more members, each of whom is a
"non-employee director" within the meaning of Exchange Act Rule 16b-3.
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Section 7.2 Plan Administered by Committee. The Committee shall have
complete control over the administration of the Plan and shall have the
authority in its sole discretion to (a) exercise all of the powers granted to it
under the Plan, (b) construe, interpret and implement the Plan, (c) prescribe,
amend and rescind rules and regulations relating to the Plan, including rules
governing its own operations, (d) make all determina tions necessary or
advisable in administering the Plan, and (e) correct any defect, supply any
omission and reconcile any inconsistency in the Plan. Action by the Committee
may be taken by the vote of a majority of its members. Any action may be taken
by a written instrument signed by a majority of the members of the Committee and
action so taken shall be fully as effective as if it had been taken by a vote at
a meeting. The determinations of the Committee on all matters relating to the
Plan shall be final, binding and conclusive.
Section 7.3 Power of Delegation; Indemnification. Notwithstanding anything
to the contrary contained herein: (a) until the Board shall appoint the members
of the Committee, the Plan shall be administered by the Board and (b) the Board
may, in its sole discretion, at any time and from time to time, determine
allocations of contributions or otherwise administer the Plan. In either of the
foregoing events, the Board shall have all of the authority and responsibility
granted to the Committee herein. The Committee may allocate among its members or
delegate to any person who is not a member of the Committee any administrative
responsibility which the Committee has hereunder. No member of the Board or the
Committee or any employee of the Firm shall be liable for any action or
determination made in good faith with respect to the Plan. Each such person
shall be indemnified and held harmless by GS Inc. against and from any loss,
cost, liability, or expense that may be imposed upon or incurred by such person
in connection with or resulting from any action, suit or proceeding to which
such person may be a party or in which such person may be involved by reason of
any action taken or failure to act under the Plan and against and from any and
all amounts paid by such person, with GS Inc.'s approval, in settlement thereof,
or paid by such person in satisfaction of any judgment in any such action, suit
or proceeding against such person, provided that GS Inc. shall have the right,
at its own expense, to assume and defend the same. The foregoing right of
indemnification shall not be available to a person to the extent that a final
judgment or other final adjudication binding upon such person establishes that
the acts or omissions of such person giving rise to the indemnification claim
resulted from such person's bad faith, fraud or willful criminal act or
omission. The foregoing right of indemnification shall not be exclusive of any
other rights of indemnification to which such persons may be entitled under GS
Inc.'s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise,
or any other power that GS Inc. may have to indemnify such persons or hold them
harmless. The responsibility of the Committee with respect to the management or
control of the assets of the Trust may be delegated or allocated to the Trustee.
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Section 7.4 Communication by Committee. Decisions and directions of the
Committee may be communicated to the Trustee, a Participant, a Beneficiary, GS
Inc. or any other person who is to receive such decision or direction by a
document signed by any one or more members of the Committee (or persons other
than members) so authorized, and such decision or direction of the Committee may
be relied upon by the recipient as being the decision of the Committee. The
Committee may authorize one or more of its members, or a designee who is not a
member, to sign on behalf of the entire Committee.
ARTICLE VIII
Amendment, Termination, etc..
The Board reserves the right at any time and from time to time to modify,
alter, amend, suspend, discontinue and terminate the Plan or the Trust
Agreement; provided that, no such modification, alteration, amendment,
suspension, discontinuance or termination shall materially adversely affect,
without their consent, the rights of Participants under this Plan with respect
to contributions previously made except that the Board reserves the right to (a)
accelerate the vesting of Participants' Stock Accounts and in its discretion
provide that Stock distributed from such Stock Accounts may not be transferable
until the Distribution Dates as of which such Stock would have otherwise become
vested (and that in respect of such Stock the Participants may remain subject to
the repayment obligations of Section 9.11 in the circumstances under which the
Stock would not have been distributed pursuant to Section 5.3) and (b) make
distributions to Participants upon the termination of the Plan. Notwithstanding
the foregoing, no modification, alteration, amendment or termination of the Plan
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 the Firm. Any modification,
alteration or amendment to the Plan shall be in writing signed by the Chief
Executive Officer of GS Inc. or his designee.
ARTICLE IX
Miscellaneous
Section 9.1 Designation of Beneficiaries. A Participant may designate, in
accordance with procedures established by the Committee, a Beneficiary or
Beneficiaries to receive all or part of the amounts payable hereunder in the
event of such Participant's
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death. A designation of a Beneficiary may be replaced by a new designation or
may be revoked by a Participant at any time in accordance with procedures
established by the Committee. In the event of a Participant's death, the amounts
payable hereunder with respect to which a designation of Beneficiary has been
made shall be paid in accordance with the Plan to such designated Beneficiary or
Beneficiaries. Any amounts payable upon death and not subject to such
designation shall be distributed to the Participant's estate. If there is any
question as to the legal right of any Beneficiary to receive payment of amounts
hereunder, the amounts in question may be paid to the Participant's estate, in
which event the Firm shall have no further liability to anyone with respect to
such amounts. A Beneficiary shall have no rights under the Plan other than the
right, subject to the immediately preceding sentence, to receive such amounts,
if any, as may be payable under this Section 9.1.
Section 9.2 Nonassignability. No rights granted to any Participant or any
Beneficiary under the Plan (including any interest in the Accounts) may be sold,
exchanged, transferred, assigned, pledged, hypothecated or otherwise disposed of
(including through the use of any cash-settled instrument), whether voluntarily
or involuntarily, other than by will or by the laws of descent and distribution.
Any assignment in violation of the provisions of this Section 9.2 shall be void.
All the terms of this Plan shall be binding upon such permitted successors and
assigns.
Section 9.3 Plan Creates No Employment Rights. Nothing in the Plan shall
confer upon any Participant the right to continue in the employ of the Firm or
affect any right which the Firm may have to terminate such Employment.
Section 9.4 Limit on Liability. No person shall have any right or interest
in the Plan and/or the Trust other than as provided herein. The Trust assets
shall under no circumstances be available to the creditors of the Firm. All
distributions under the Plan shall be paid or provided solely from the Trust
assets, and the Firm shall have no responsibility or liability to any
Participant or Beneficiary relating to the Stock or other assets contributed to
the Trust. Any final distribution to any Participant or Beneficiary in
accordance with the provisions of the Plan shall be in full satisfaction of all
claims against the Trust, the Trustee, the Committee, the Board, GS Inc., the
Firm and its employees with respect to the Plan or Trust.
Section 9.5 Arbitration. Any dispute, controversy or claim between the
Firm and any Participant arising out of or relating to or concerning the
provisions of the Plan or the Trust shall be finally settled by arbitration in
New York City before, and in accordance with the rules then obtaining of, the
New York Stock Exchange, Inc. (the "NYSE") or, if the NYSE declines to arbitrate
the matter, the American Arbitration Association (the "AAA") in accordance with
the commercial arbitration rules of the AAA. Prior to arbitration, all claims
maintained by any Participant must first be submitted to the
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Committee in accordance with claim procedures determined by the Committee in its
sole discretion. This Section is subject to the provisions of Section 9.6.
Section 9.6 Choice of Forum. (a) THE FIRM AND EACH PARTICIPANT, AS A
CONDITION TO SUCH PARTICIPANT'S PARTICIPATION IN THE PLAN, HEREBY IRREVOCABLY
SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN
THE CITY OF NEW YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO OR CONCERNING THE PLAN THAT IS NOT OTHERWISE ARBITRATED OR RESOLVED
ACCORDING TO THE PROVISIONS OF SECTION 9.5. This includes any suit, action or
proceeding to compel arbitration or to enforce an arbitration award. The Firm
and each Participant, as a condition to such Participant's participation in the
Plan, acknowledge that the forum designated by this Section 9.6(a) has a
reasonable relation to the Plan, and to the relationship between such
Participant and the Firm. Notwithstanding the foregoing, nothing herein shall
preclude the Firm from bringing any action or proceeding in any other court for
the purpose of enforcing the provisions of Sections 9.5 and 9.6.
(b) The agreement by the Firm and each Participant as to forum is
independent of the law that may be applied in the action, and the Firm and each
Participant, as a condition to such Participant's participation in the Plan, (i)
agree to such forum even if the forum may under applicable law choose to apply
non-forum law, (ii) hereby waive, to the fullest extent permitted by applicable
law, any objection which the Firm or such Participant now or hereafter may have
to personal jurisdiction or to the laying of venue of any such suit, action or
proceeding in any court referred to in Section 9.6(a), (iii) undertake not to
commence any action arising out of or relating to or concerning the Plan in any
forum other than the forum described in this Section 9.6 and (iv) agree that, to
the fullest extent permitted by applicable law, a final and non-appealable
judgment in any such suit, action or proceeding in any such court shall be
conclusive and binding upon the Firm and each Participant.
(c) Each Participant, as a condition to such Participant's
participation in the Plan, hereby irrevocably appoints the General Counsel of GS
Inc. as such Participant's agent for service of process in connection with any
action or proceeding arising out of or relating to or concerning the Plan which
is not arbitrated pursuant to the provisions of Section 9.5, who shall promptly
advise such Participant of any such service of process.
(d) Each Participant hereby agrees, as a condition to such
Participant's participation in the Plan, to keep confidential the existence of,
and any information concerning, a dispute described in Section 9.5 or 9.6,
except that a Participant may disclose information concerning such dispute to
the arbitrator or court that is considering such dispute or to such
Participant's legal counsel (provided that such counsel agrees not
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to disclose any such information other than as necessary to the prosecution or
defense of the dispute).
(e) Each Participant recognizes and agrees that prior to being
selected by the Committee to participate in the Plan such Participant has no
right to any benefits hereunder. Accordingly, in consideration of a
Participant's selection to participate in the Plan, each Participant expressly
waives any right to contest the amount of any contribution to the Plan, the
terms of the Plan, any determination, action or omission hereunder by the
Committee, GS Inc. or the Board, or any amendment to the Plan (other than an
amendment to which such Participant's consent is expressly required by Article
VIII).
Section 9.7 Governing Law. ALL RIGHTS AND OBLIGATIONS UNDER THE PLAN SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
Section 9.8 Taxes and Withholding. (a) Upon a Participant's vesting in all
or any portion of his or her Stock Account, or in connection with any
distribution or other event that gives rise to a federal or other governmental
tax withholding obligation relating to the Plan (including, without limitation,
FICA tax), the Trustee shall be entitled to require that the Participant remit
cash in an amount sufficient in the opinion of the Trustee and the Committee to
satisfy such withholding obligation. Alternatively, if the event giving rise to
the withholding obligation involves a transfer of shares of Stock, then, at the
discretion of the Committee, the Participant may elect to satisfy the
withholding obligation described above by (i) remitting cash, (ii) instructing
the Trustee to withhold shares of Stock or tendering previously owned shares of
Stock (in each case having a Fair Market Value equal to the amount of tax to be
withheld) or (iii) any other mechanism as may be required or appropriate to
conform with local tax and other rules. For this purpose, Fair Market Value
shall be determined as of the date on which the amount of tax to be withheld is
determined (and any fractional share amount may be settled in cash). If the
Participant does not satisfy the withholding obligation in accordance with any
of the methods described above in this Section 9.8(a), the Trustee may cause
such withholding taxes to be deducted or withheld from the vested portion of the
Participant's Stock Account or any payment or distribution to the Participant
pursuant to the Plan, and the Firm may deduct or withhold (or cause to be
deducted or withheld) such taxes from any other payment or distribution by the
Firm to the Participant.
(b) The Trustee may transfer to the Firm any amounts (cash or shares
of Stock) withheld or received from the Participant pursuant to Section 9.8(a).
Any deduction of shares of Stock from the Participant's Stock Account by the
Trustee pursuant to this Section 9.8 shall be treated as a distribution from the
Trust to such Participant and
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an election by the Participant to have such shares of Stock applied to satisfy
the withholding obligation.
(c) No Participant may make an election pursuant to section 83(b) of
the Code with respect to his or her interest in the Trust, any shares of Stock
or any other property held by the Trust.
Section 9.9 Right of Offset. The Committee shall have the right to direct
the Trustee to withhold distribution of the vested portion of a Participant's
Stock Account until the Participant settles any outstanding amounts (including,
without limitation, travel and entertainment or advance account balances, loans,
or amounts repayable to the Firm pursuant to tax equalization, housing,
automobile or other employee programs) such Participant then owes to the Firm.
Section 9.10 Consents and Legends. The vesting and distribution to a
Participant of any shares of Stock may be conditioned on the receipt to the full
satisfaction of the Committee of (a) any and all listings, registrations or
qualifications in respect thereof upon any securities exchange or under any
federal, state or local law, or law, rule or regulation of a jurisdiction
outside the United States, (b) any and all written agreements and
representations by the grantee with respect to the disposition of shares, or
with respect to any other matter, which the Committee shall deem necessary or
desirable to comply with the terms of any such listing, registration or
qualification or to obtain an exemption from the requirement that any such
listing, qualification or registration be made, (c) any and all other consents,
clearances and approvals in respect of a plan action by any governmental or
other regulatory body or any stock exchange or self-regulatory agency that the
Committee may determine to be necessary or advisable and (d) any and all
consents or authorizations required to comply with, or required to be obtained
under, applicable local law or otherwise required by the Committee. Nothing
herein shall require GS Inc. to list, register or qualify the shares of Stock on
any securities exchange. GS Inc. may affix to any stock certificate (or other
document or evidence of ownership) representing shares of Stock distributed
under the Plan any legend that the Committee determines in its sole discretion
to be necessary or advisable (including to reflect any restrictions to which a
Participant may be subject under a separate agreement with GS Inc.). GS Inc. may
advise the transfer agent to place a stop order against any legended shares of
Stock.
Section 9.11 Forfeiture and Repayment after Erroneous Vesting. If,
following any date on which a Participant becomes vested in all or any portion
of his or her Stock Account (the "erroneously vested portion"), the Committee
determines that all terms and conditions of the Plan were not satisfied on the
relevant vesting date, such Participant or former Participant shall cease to be
vested in, and shall forfeit, such erroneously vested portion, and the Trust
shall be entitled to receive, and such Participant or former Participant shall
be obligated to pay the Trust immediately upon demand therefor the Fair
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Market Value of any Shares (determined as of the date of vesting) and the amount
of any cash delivered in respect of any distribution of the erroneously vested
portion, without reduction for any Shares (or cash) applied to satisfy
withholding tax or other obligations in respect of such erroneous vesting event.
Section 9.12 Severability; Entire Agreement. If any of the provisions of
this Plan is finally held to be invalid, illegal or unenforceable (whether in
whole or in part), such provision shall be deemed modified to the extent, but
only to the extent, of such invalidity, illegality or unenforceability and the
remaining provisions shall not be affected thereby; provided, that if any of the
provisions of this Plan is finally held to be invalid, illegal, or unenforceable
because it exceeds the maximum scope determined to be acceptable to permit such
provision to be enforceable, such provision shall be deemed to be modified to
the minimum extent necessary to modify such scope in order to make such
provision enforceable hereunder. The Plan contains the entire agreement of the
parties with respect to the subject matter hereof and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
and warranties between them, whether written or oral with respect to the subject
matter hereof.
Section 9.13 Expenses. All expenses incurred by the Committee and the
Trustee in connection with administering this Plan and the Trust shall be paid
by GS Inc. to the extent not paid from the cash dividends held in the
Unallocated Stock Account. All taxes imposed on the Trust related to income
credited to or attributable to Trust assets shall be paid from such assets and
charged against the Stock Account to which the income is allocated as though it
were payable directly to the Participant.
Section 9.14 No Third Party Beneficiaries. Except as expressly provided
herein, the Plan shall not confer on any person other than the Firm and any
Participant any rights or remedies thereunder.
Section 9.15 Participating Employers. Each subsidiary or affiliate of GS
Inc. which employs a Participant shall adopt this Plan by executing Schedule A.
Section 9.16 Successors and Assigns. The terms of this Plan shall be
binding upon and inure to the benefit of GS Inc., each of its subsidiaries and
affiliates that adopts the Plan and its and their successors and assigns.
Section 9.17 Plan Headings. The headings in this Plan are for the purpose
of convenience only and are not intended to define or limit the construction of
the provisions hereof.
Section 9.18 Construction. In the construction of this Plan, the singular
shall include the plural, and vice versa, in all cases where such meanings would
be appropriate.
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IN WITNESS WHEREOF, and as evidence of the adoption of this Plan effective
as of May 7, 1999 by GS Inc., it has caused the same to be signed by its
duly authorized officer this 7th day of May, 1999.
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Robert J. Katz
---------------------------------
Name: Robert J. Katz
Title: Executive Vice President
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EXHIBIT 10.18
THE GOLDMAN SACHS PARTNER COMPENSATION PLAN
Section 1. Purposes. The purposes of the Goldman Sachs Partner
Compensation Plan (the "Plan") are to attract, retain and motivate selected
employees of The Goldman Sachs Group, Inc. ("GS Inc.") and its subsidiaries and
affiliates (together with GS Inc., and their and its successors, the "Firm") in
order to promote the Firm's long-term growth and profitability.
Section 2. Administration.
(a) Subject to Section 2(d), the Plan shall be administered by a
committee (the "Committee") appointed by the Board of Directors of GS Inc. (the
"Board") whose members shall serve at the pleasure of the Board.
(b) The Committee shall have complete control over the
administration of the Plan and shall have the authority in its sole and absolute
discretion to (i) exercise all of the powers granted to it under the Plan, (ii)
construe, interpret and implement the Plan and each Contract Period Schedule
(hereinafter defined), (iii) prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations governing its own
operations, (iv) make all determinations necessary or advisable in administering
the Plan, (v) correct any defect, supply any omission and reconcile any
inconsistency in the Plan and any Contract Period Schedule, and (vi) amend the
Plan and any Contract Period Schedule to reflect changes in applicable law.
(c) The determination of the Committee on all matters relating to
the Plan or any amounts payable thereunder shall be final, binding and
conclusive. The Committee may allocate among its members and delegate to any
person who is not a member of the Committee any of its administrative
responsibilities.
(d) Notwithstanding anything to the contrary contained herein: (i)
until the Board shall appoint the members of the Committee, the Plan shall be
administered by the Board and (ii) the Board may, in its sole discretion, at any
time and from time to time, resolve to administer the Plan. In either of the
foregoing events, the Board shall have all of the authority and responsibility
granted to the Committee herein.
(e) No member of the Board or the Committee or any employee of the
Firm shall be liable for any action or determination made in good faith with
respect to the Plan or any amount payable thereunder. Each such person shall be
indemnified and held harmless by the Firm against and from any loss, cost,
liability, or expense that may be imposed upon or incurred by such person in
connection with or resulting from any action, suit or proceeding to which such
person may be a party or in which such person may be involved by reason of any
action taken or failure to act under the Plan or any Contract Period Schedule
and against and from any and all amounts paid by such person, with GS Inc.'s
approval, in settlement thereof, or paid by such person in satisfaction of any
judgment in any such action, suit or proceeding against such person, provided
that the Firm shall have the right, at its own expense, to assume and defend the
same. The foregoing right of indemnification shall not be available to a person
to the extent that a final judgment or other final adjudication binding upon
such person establishes that the acts or omissions of such person giving rise to
the indemnification claim resulted from such person's bad faith, fraud or
willful criminal act or omission. The foregoing right of indemnification shall
not be exclusive of any other rights of
<PAGE> 2
indemnification to which such persons may be entitled under GS Inc.'s
Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any
other power that GS Inc. may have to indemnify such persons or hold them
harmless.
Section 3. Contract Period. The Plan shall operate for successive periods
(each a "Contract Period"). The first Contract Period shall commence on the date
of consummation of the initial public offering of GS Inc. and shall terminate on
November 24, 2000. Thereafter, each Contract Period shall include one or two
fiscal years of GS Inc., as determined by the Committee.
Section 4. Participation; Contract Period Schedule.
(a) Prior to the commencement of each Contract Period, the Committee shall
designate those individuals who shall participate in the Plan for that Contract
Period (the "Participants"). The names of the Participants shall be set forth on
a schedule (the "Contract Period Schedule") which shall be made available to all
Participants. The Contract Period Schedule shall also set forth the duration of
the relevant Contract Period and contain such other terms or information and
such limitations on the Committee's authority or discretion under this Plan as
are required by the Plan or permitted by the Plan and determined by the
Committee.
(b) Unless otherwise provided in the Contract Period Schedule, the
Committee shall have the authority at any time during the Contract Period to add
Participants to or remove Participants from the Plan for that Contract Period.
The Committee shall amend the Contract Period Schedule to reflect an
individual's addition to or removal from the Plan.
Section 5. Base Salary. Unless otherwise determined by the Committee, for
each Contract Period the annual base salary of each Participant shall be set
forth in the Contract Period Schedule. A Participant's base salary shall be
payable in cash semi-monthly or monthly in arrears, as determined by the
Committee, in U.S. dollars or, if the Participant is located outside the United
States, in U.S. dollars or local currency (as determined by the Committee) based
upon such conversion rates as the Committee determines appropriate (and the
payments made under this Plan may, at the Committee's discretion, be subject to
tax equalization or similar policies). If a Participant's employment with the
Firm terminates during a Contract Period such Participant's right to his or her
base salary shall terminate on the date provided in such Participant's
employment agreement (or, if the Participant does not have an employment
agreement, on the date designated by the Committee).
Section 6. Determination of Bonus Amounts.
(a) At the end of each fiscal year of GS Inc., the Committee shall specify
an amount (the "Bonus Pool") equal to the aggregate amount of bonus compensation
payable by the Firm to Participants in respect of such fiscal year. In
determining the Bonus Pool, the Committee shall take into account such measures
of the Firm's financial performance as it deems appropriate including,
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<PAGE> 3
but not limited to, the Firm's ratio of compensation and benefits to net
revenues, earnings per share, return on average common equity, pre-tax income,
pre-tax operating income, net revenues, net income, profit before taxes, book
value per share, stock price and earnings available to common shareholders. The
Committee shall be required to allocate the entire amount of the Bonus Pool to
Participants.
(b) Prior to the commencement of each Contract Period, the Committee shall
allocate to each Participant a percentage interest in the Bonus Pool (the
"Allocation Percentage"); provided that the sum of the Allocation Percentages
shall not exceed 100%. Unless otherwise determined by the Committee, each
Participant's Allocation Percentage shall be set forth in the Contract Period
Schedule. Subject to Section 6(d) and the terms of the applicable Contract
Period Schedule, a Participant's minimum bonus for each fiscal year in a
Contract Period (the "Minimum Bonus") shall equal such Participant's Allocation
Percentage multiplied by the amount of the Bonus Pool for the fiscal year.
(c) If the sum of the Allocation Percentages does not equal 100%, the
remaining portion of the Bonus Pool (the "Holdback Amount") shall be allocated
to one or more of the Participants in such manner as the Committee determines in
its sole discretion. Unless otherwise determined by the Committee, the
allocation of the Holdback Amount (and any methodology therefor) shall not be
disclosed to Participants. The Minimum Bonus plus any amount allocated to a
Participant under this Section 6(c) shall constitute the Participant's bonus
("Bonus") for the fiscal year.
(d) If a Participant's employment with the Firm terminates for any reason
before the end of a fiscal year of GS Inc., unless otherwise provided in the
Contract Period Schedule, the Committee shall have the discretion to determine
whether (i) such Participant's Minimum Bonus shall be forfeited, (ii) such
Participant's Minimum Bonus shall be reduced on a pro-rata basis to reflect the
portion of such Fiscal Year the Participant was employed by the Firm or (iii) to
make such other arrangements as the Committee deems appropriate in connection
with the termination of such Participant's employment. Unless otherwise provided
in the Contract Period Schedule, any forfeited Minimum Bonus shall be
reallocated to other Participants or added to the Holdback Amount as determined
by the Committee.
(e) If, pursuant to Section 4(b) and the Contract Period Schedule, the
Committee adds Participants for a Contract Period, the Committee shall allocate
an Allocation Percentage to each such additional Participant which, unless
otherwise determined by the Committee, shall first reduce the Holdback Amount,
if any, and shall thereafter proportionately dilute the Allocation Percentages
of the other Participants. Unless otherwise determined by the Committee, the
Committee shall disclose to each Participant the base salary and Allocation
Percentage of any Participant added during a Contract Period.
Section 7. Payment of Bonus Amount; Voluntary Deferral. Unless otherwise
provided in the Contract Period Schedule, each Participant's Bonus shall be
payable by such Participant's
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<PAGE> 4
Participating Employer (as defined in Section 8(k)), or in the case of a
Participant employed by more than one Participating Employer, by each such
employer as determined by the Committee, in cash and/or an equity-based award of
equivalent value (as determined by the Committee) with the cash portion paid at
such time as bonuses are generally paid by the Participating Employer(s) for the
relevant fiscal year. The cash portion shall be payable to a Participant in U.S.
dollars or, if the Participant is located outside the United States, in U.S.
dollars or local currency (as determined by the Committee) based upon such
conversion rates as the Committee determines appropriate (and the payments made
under this Plan may, at the Committee's discretion, be subject to tax
equalization or similar policies). Subject to approval by the Committee and to
any requirements imposed by the Committee in connection with such approval, each
Participant may be entitled to defer receipt, under the terms and conditions of
any applicable deferred compensation plan of the Firm, of part or all of any
payments otherwise due under this Plan. Any equity-based award shall be subject
to such terms and conditions (including vesting requirements) as the Committee
may determine.
Section 8. General Provisions.
(a) Amendment, Termination, etc. Unless otherwise provided in the Contract
Period Schedule, (i) the Board reserves the right at any time and from time to
time to modify, alter, amend, suspend, discontinue or terminate the Plan and any
Contract Period Schedule in any respect whatsoever, including in any manner that
adversely affects the rights of Participants, and (ii) the Committee may amend
the Contract Period Schedule in any manner it determines.
(b) Nonassignability; Designation of Beneficiaries. No rights of any
Participant (or of any beneficiary pursuant to this Section 8(b)) under the Plan
may be sold, exchanged, transferred, assigned, pledged, hypothecated or
otherwise disposed of (including through the use of any cash-settled instrument)
other than by will or by the laws of descent and distribution. Any assignment in
violation of the provisions of this Section 8(b) shall be void. A Participant
may designate, in accordance with procedures established by the Committee, a
beneficiary or beneficiaries to receive all or part of the amounts, if any,
payable hereunder in the event of such Participant's death. A designation of a
beneficiary may be replaced by a new designation or may be revoked by a
Participant at any time in accordance with procedures established by the
Committee. In the event of a Participant's death, any amounts payable under the
Plan and any Contract Period Schedule with respect to which a designation of
beneficiary has been made shall be paid in accordance with the Plan and the
Contract Period Schedule to such designated beneficiary or beneficiaries. Any
amounts payable upon death and not subject to such designation shall be
distributed to such Participant's estate. If there is any question as to the
legal right of any beneficiary to receive payment of amounts under the Plan and
any Contract Period Schedule, the amounts in question may be paid to a
Participant's estate, in which event the Firm shall have no further liability to
anyone with respect to such amounts. A beneficiary or estate shall have no
rights under the Plan or any Contract Period Schedule other than the right,
subject to the immediately preceding sentence, to receive such amounts, if any,
as may be payable under this Section 8(b), and all of the terms of this Plan and
the Contract Period Schedule shall be binding upon any such beneficiary or
estate.
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<PAGE> 5
(c) Plan Creates No Employment Rights. Nothing in the Plan or any Contract
Period Schedule shall confer upon any Participant the right to continue in the
employ of the Firm for the Contract Period or thereafter or affect any right
which the Firm may have to terminate such employment.
(d) Arbitration. Any dispute, controversy or claim between the Firm and
any Participant arising out of or relating to or concerning the provisions of
the Plan or any Contract Period Schedule shall be finally settled by arbitration
in New York City before, and in accordance with the rules then obtaining of, the
New York Stock Exchange, Inc. ("NYSE") or, if the NYSE declines to arbitrate the
matter, the American Arbitration Association (the "AAA") in accordance with the
commercial arbitration rules of the AAA. Prior to arbitration, all claims
maintained by any Participant must first be submitted to the Committee in
accordance with claim procedures determined by the Committee in its sole
discretion. This Section is subject to the provisions of Section 8(e).
(e) Choice of Forum.
(1) THE FIRM AND EACH PARTICIPANT, AS A CONDITION TO SUCH
PARTICIPANT'S PARTICIPATION IN THE PLAN, HEREBY IRREVOCABLY SUBMIT TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE CITY OF NEW
YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO OR
CONCERNING THE PLAN OR ANY CONTRACT PERIOD SCHEDULE THAT IS NOT OTHERWISE
ARBITRATED OR RESOLVED ACCORDING TO THE PROVISIONS OF SECTION 8(d). This
includes any suit, action or proceeding to compel arbitration or to enforce an
arbitration award. The Firm and each Participant, as a condition to such
Participant's participation in the Plan, acknowledge that the forum designated
by this Section 8(e) has a reasonable relation to the Plan, the Contract Period
Schedule and to the relationship between such Participant and the Firm.
Notwithstanding the foregoing, nothing herein shall preclude the Firm from
bringing any action or proceeding in any other court for the purpose of
enforcing the provisions of Sections 8(d) and 8(e).
(2) The agreement by the Firm and each Participant as to forum is
independent of the law that may be applied in the action, and the Firm and each
Participant, as a condition to such Participant's participation in the Plan (i)
agree to such forum even if the forum may under applicable law choose to apply
non-forum law, (ii) hereby waive, to the fullest extent permitted by applicable
law, any objection which the Firm or such Participant now or hereafter may have
to personal jurisdiction or to the laying of venue of any such suit, action or
proceeding in any court referred to in Section 8(e)(1), (iii) undertake not to
commence any action arising out of or relating to or concerning this Plan or any
Contract Period Schedule in any forum other than the forum described in this
Section 8(e) and (iv) agree that, to the fullest extent permitted by applicable
law, a final and non-appealable judgment in any such suit, action or proceeding
in any such court shall be conclusive and binding upon the Firm and each
Participant.
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<PAGE> 6
(3) Each Participant, as a condition to such Participant's
participation in the Plan, hereby irrevocably appoints the General Counsel of GS
Inc. as such Participant's agent for service of process in connection with any
action or proceeding arising out of or relating to or concerning the Plan or any
Contract Period Schedule which is not arbitrated pursuant to the provisions of
Section 8(d), who shall promptly advise such Participant of any such service of
process.
(4) Each Participant hereby agrees, as a condition to such
Participant's participation in the Plan, to keep confidential the existence of,
and any information concerning, a dispute described in Sections 8(d) or 8(e),
except that a Participant may disclose information concerning such dispute to
the arbitrator or court that is considering such dispute or to such
Participant's legal counsel (provided that such counsel agrees not to disclose
any such information other than as necessary to the prosecution or defense of
the dispute).
(5) Each Participant recognizes and agrees that prior to being
selected by the Committee to participate in the Plan such Participant has no
rights hereunder. Accordingly, in consideration of a Participant's selection to
participate in the Plan, each Participant expressly waives any right to contest
the amount of any base salary or Bonus payable hereunder, the terms of the Plan
or any Contract Period Schedule, the amount of the Bonus Pool, the Holdback
Amount, such Participant's Allocation Percentage, any determination, action or
omission hereunder by the Committee, GS Inc. or the Board, or any amendment to
the Plan or Contract Period Schedule. By accepting the payment of base salary or
Bonus, each Participant agrees to be bound by the terms of this Plan and any
Contract Period Schedule.
(f) Governing Law. ALL RIGHTS AND OBLIGATIONS UNDER THE PLAN AND ANY
CONTRACT PERIOD SCHEDULE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF
LAWS.
(g) Tax Withholding. In connection with any payments to a Participant or
other event under the Plan that gives rise to a federal or other governmental
tax withholding obligation relating to the Plan (including, without limitation,
FICA tax), (i) the Firm may deduct or withhold (or cause to be deducted or
withheld) from any payment or distribution to such Participant whether or not
pursuant to the Plan or (ii) the Committee shall be entitled to require that
such Participant remit cash (through payroll deduction or otherwise), in each
case in an amount sufficient in the opinion of the Firm to satisfy such
withholding obligation.
(h) Right of Offset. The Firm shall have the right to offset, against the
obligation to pay amounts to any Participant under the Plan, any outstanding
amounts (including, without limitation, travel and entertainment or advance
account balances, loans, or amounts repayable to the Firm pursuant to tax
equalization, housing, automobile or other employee programs) such Participant
then owes to the Firm and any amounts the Committee otherwise deems appropriate
pursuant to any tax equalization policy or agreement.
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<PAGE> 7
(i) Severability; Entire Agreement. If any of the provisions of this Plan
or any Contract Period Schedule is finally held to be invalid, illegal or
unenforceable (whether in whole or in part), such provision shall be deemed
modified to the extent, but only to the extent, of such invalidity, illegality
or unenforceability and the remaining provisions shall not be affected thereby.
Neither this Plan nor any Contract Period Schedule shall supersede any other
agreement, written or oral, pertaining to the matters covered herein, except to
the extent of any inconsistency between this Plan (or a Contract Period
Schedule) and any prior agreement, in which case this Plan (and the Contract
Period Schedule) shall prevail.
(j) No Third Party Beneficiaries. Except as expressly provided herein,
neither the Plan nor any Contract Period Schedule shall confer on any person
other than the Firm and any Participant any rights or remedies hereunder.
(k) Participating Employers. Each subsidiary or affiliate of GS Inc. which
employs a Participant shall adopt this Plan by executing Schedule A (a
"Participating Employer"). Except for purposes of determining the amount of the
Bonus Pool and the amount of each Participant's Bonus, this Plan shall be
treated as a separate plan maintained by each Participating Employer and the
obligation to pay the base salary and Bonus to each Participant shall be the
sole liability of the Participating Employer(s) by which the Participant is
employed and neither GS Inc. nor any other Participating Employer shall have any
liability with respect to such amounts.
(l) Successors and Assigns. The terms of this Plan and each Contract
Period Schedule shall be binding upon and inure to the benefit of GS Inc., each
Participating Employer and their successors and assigns.
(m) Plan Headings. The headings in this Plan are for the purpose of
convenience only and are not intended to define or limit the construction of the
provisions hereof.
(n) Construction. In the construction of this Plan, the singular shall
include the plural, and vice versa, in all cases where such meanings would be
appropriate.
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<PAGE> 8
IN WITNESS WHEREOF, and as evidence of the adoption of this Plan
effective as of May 7, 1999, by GS Inc., it has caused the same to be signed by
its duly authorized officer this 7th day of May, 1999.
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Robert J. Katz
----------------------------------
Name: Robert J. Katz
Title: Executive Vice President
-8-
<PAGE> 1
EXHIBIT 10.19
THE GOLDMAN SACHS GROUP, INC.
May 7, 1999
We are pleased that you will be continuing your employment as a
Managing Director of The Goldman Sachs Group, Inc., a Delaware corporation ("GS
Inc."), or one or more of its subsidiaries or affiliates (collectively with GS
Inc., and its and their predecessors and successors, the "Firm"), and are
writing to set forth the terms and conditions of such employment. Certain
capitalized terms are defined in Section 2 hereof.
1. Employment
You will be employed by GS Inc., or one or more of its
subsidiaries or affiliates, subject to the terms and conditions of this
Agreement for the period commencing on the date hereof and ending on November
24, 2000 (the "Initial Employment Period"). After the Initial Employment Period
(unless otherwise agreed by you and the Firm in writing), there will be no set
term of employment. You or the Firm may terminate your employment at any time
during or after the Initial Employment Period for any reason, or for no reason,
by giving not less than ninety (90) days' prior written notice of termination;
provided, however, that the Firm may elect to place you on paid leave for all or
any part of such 90-day period; and provided further that no advance notice need
be given by the Firm to you in connection with a termination of your employment
for Cause or on account of Extended Absence.
During the Employment Period: (i) you will have such duties and
responsibilities as the Firm may from time to time determine; (ii) you will
devote your entire working time, labor, skill and energies to the business and
affairs of the Firm; and (iii) you will be paid the base salary separately
communicated to you and, so long as you are a participant in The Goldman Sachs
Partner Compensation Plan, any bonuses payable under the Plan, or if you are not
a participant in the Plan, such bonuses as the Firm may determine in its sole
discretion.
During the Employment Period, you will duly and accurately file
all required income tax returns and, if requested to do so, will certify to that
effect to the Firm annually, on a form specified by the Firm.
2. Certain Definitions
As used herein, the following terms have the following meanings:
"Cause" means (i) your breach of this Agreement, the
Noncompetition Agreement, the Pledge Agreement, the Shareholders' Agreement or
any other written agreement
<PAGE> 2
between you and the Firm, or (ii) your violation of any Firm policy (including
in respect of hedging or confidential information) as in effect from time to
time.
"Date of Termination" means (i) if your employment is terminated
by the Firm for Cause or on account of Extended Absence, the date of the Firm's
delivery of written notice of termination, (ii) if your employment is terminated
by the Firm other than for Cause or on account of Extended Absence, the date
that is ninety (90) days after the Firm's delivery of written notice of
termination, or (iii) if your employment is terminated by you, the date that is
ninety (90) days after your delivery of written notice of termination, or such
earlier date as may be determined by the Firm in its sole discretion.
"Employment Period" means the period commencing on the date
hereof and ending on your Date of Termination, and includes the Initial
Employment Period.
"Extended Absence" means your absence from employment for at
least 180 days in any 12-month period as a result of your incapacity due to
mental or physical illness, as determined by the Firm.
"Noncompetition Agreement" means the Agreement Relating to
Noncompetition and Other Covenants, dated as of the date hereof, between you and
GS Inc., as in effect from time to time.
"Pledge Agreement" means the Pledge Agreement, dated as of the
date hereof, between you and GS Inc., attached as Exhibit A to the
Noncompetition Agreement, as in effect from time to time.
"Shareholders' Agreement" means the Shareholders' Agreement,
dated as of the date hereof, among GS Inc. and the individuals listed on
Appendix A thereto, as in effect from time to time.
3. Dispute Resolution
Any dispute, controversy or claim between you and the Firm,
arising out of or relating to or concerning the provisions of this Agreement,
your employment with the Firm or otherwise concerning any rights, obligations or
other aspects of your employment relationship in respect of the Firm, shall be
finally resolved in accordance with the provisions of Sections 9, 10 and 11 of
the Noncompetition Agreement. Without limiting the foregoing, you acknowledge
that a violation on your part of this Agreement would cause irreparable damage
to the Firm. Accordingly, you agree that the Firm will be entitled to injunctive
relief for any actual or threatened violation of this Agreement in addition to
any other remedies it may have.
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<PAGE> 3
4. Governing Law
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS.
5. Miscellaneous
This Agreement shall not supersede any other agreement, written
or oral, pertaining to the matters covered herein, except to the extent of any
inconsistency between this Agreement and any prior agreement, in which case this
Agreement shall prevail. Notices hereunder shall be delivered to the Firm at its
principal executive office directed to the attention of GS Inc.'s General
Counsel, and to you at your last address appearing in the Firm's employment
records.
You may not, directly or indirectly (including by operation of
law), assign your rights or obligations hereunder without the prior written
consent of the Chief Executive Officer of GS Inc. or its successors, or such
individual's designee, and any such assignment by you in violation of this
Agreement shall be void. This Agreement shall be binding upon your permitted
successors and assigns. Without impairing your obligations hereunder, GS Inc.
may at any time and from time to time assign its rights and obligations
hereunder to any of its subsidiaries or affiliates (and have such rights and
obligations reassigned to it or to any other subsidiary or affiliate). This
Agreement shall inure to the benefit of and be binding upon the Firm and its
assigns. This Agreement may not be amended or modified other than by a written
agreement executed by you and GS Inc. or its successors, nor may any provision
hereof be waived other than by a writing executed by you or GS Inc. or its
successors; provided, that any waiver, amendment or modification of any of the
provisions of this Agreement shall not be effective against the Firm without the
written consent of the Chief Executive Officer of GS Inc. or such individual's
designee.
If any provision of this Agreement is finally held to be
invalid, illegal or unenforceable (whether in whole or in part), such provision
shall be deemed modified to the extent, but only to the extent, of such
invalidity, illegality or unenforceability and the remaining provisions shall
not be affected thereby. Except as expressly provided herein, this Agreement
shall not confer on any person other than you and the Firm any rights or
remedies hereunder. The captions in this Agreement are for convenience of
reference only and shall not define or limit the provisions hereof.
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<PAGE> 4
If the foregoing is in accordance with your understanding,
kindly confirm your acceptance and agreement by signing and returning the
enclosed duplicate of this letter which will thereupon constitute an agreement
between you and GS Inc., on its behalf and on behalf of its subsidiaries and
affiliates.
Very truly yours,
THE GOLDMAN SACHS GROUP, INC.
(on its behalf, and on behalf of its subsidiaries
and affiliates)
By: _____________________________________
Agreed to and accepted as of
the date of this letter
By:________________________
<PAGE> 1
EXHIBIT 10.20
AGREEMENT RELATING TO
NONCOMPETITION AND OTHER COVENANTS
AGREEMENT, dated as of May 7, 1999 (this "Agreement"), by and
between The Goldman Sachs Group, Inc., a Delaware corporation ("GS Inc."), on
its behalf and on behalf of its subsidiaries and affiliates (collectively with
GS Inc., and its and their predecessors and successors, the "Firm"), and the
individual whose name appears at the end of this Agreement (the "Executive").
WHEREAS, prior to the completion of the transactions contemplated
by the Plan of Incorporation (the "Plan") of The Goldman Sachs Group, L.P.
("Group"), Executive was a Schedule II Limited Partner of Group; and
WHEREAS, as a Schedule II Limited Partner, Executive was subject
to certain requirements relating to competition, confidentiality, solicitation
and cooperation pursuant to the Memorandum of Agreement of Group; and
WHEREAS, in connection with Executive's participation in the
Plan, Executive has agreed to enter into an agreement with GS Inc., on its
behalf and on behalf of its subsidiaries and affiliates, in respect of certain
obligations, inter alia, to keep information concerning the Firm confidential,
not to engage in competitive activities, not to solicit the Firm's clients or
employees and to cooperate with the Firm in maintaining certain relationships
following the termination of Executive's employment.
NOW, THEREFORE, in consideration of the premises contained herein
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, Executive and the Firm agree as follows:
1. Confidential Information. In the course of involvement in the
Firm's activities or otherwise, Executive has obtained or may obtain
confidential information concerning the Firm's businesses, strategies,
operations, financial affairs, organizational and personnel matters (including
information regarding any aspect of the Executive's tenure as a partner or an
employee of the Firm or of the termination of such partnership or employment),
policies, procedures and other non-public matters, or concerning those of third
parties. Such information ("Confidential Information") may have been or be
provided in written or electronic form or orally. In consideration of, and as a
condition to, continued access to Confidential Information, and without
prejudice to or limitation on any other confidentiality obligations imposed by
agreement or by law, Executive hereby undertakes to use and protect Confidential
Information in accordance with any restrictions placed on its use or disclosure.
Without limiting the foregoing, except as authorized by the Firm or as required
by law, Executive may not disclose or allow
<PAGE> 2
disclosure of any Confidential Information, or of any information derived
therefrom, in whatever form, to any person unless such person is a director,
officer, partner, employee, attorney or agent of the Firm and, in Executive's
reasonable good faith judgment, has a need to know the Confidential Information
or information derived therefrom in furtherance of the business of the Firm. The
foregoing obligations will survive, and remain binding and enforceable
notwithstanding, any termination of Executive's employment and any settlement of
the financial rights and obligations arising from Executive's employment.
Without limiting the foregoing, the existence of, and any information
concerning, any dispute between Executive and the Firm shall constitute
Confidential Information except that Executive may disclose information
concerning such dispute to the arbitrator or court that is considering such
dispute, or to Executive's legal counsel (provided that such counsel agrees not
to disclose any such information other than as necessary to the prosecution or
defense of the dispute).
2. Noncompetition. (a) In view of Executive's importance to the
Firm, Executive hereby agrees that the Firm would likely suffer significant harm
from Executive's competing with the Firm during Executive's Employment Period
(as defined in the employment agreement between Executive and GS Inc., dated the
date hereof (the "Employment Agreement")) and for some period of time thereafter
or, if Executive has separated from the Firm on or prior to the date of
consummation of the initial public offering of the common stock of GS Inc. (the
"IPO Date"), for some time after the IPO Date. Accordingly, Executive hereby
agrees that Executive will not, without the written consent of GS Inc., during
the Employment Period, if any, and for twelve months following the Date of
Termination:
(1) form, or acquire a 5% or greater equity ownership, voting or
profit participation interest in, any Competitive Enterprise; or
(2) associate (including, but not limited to, association as an
officer, employee, partner, director, consultant, agent or advisor) with
any Competitive Enterprise and in connection with such association
engage in, or directly or indirectly manage or supervise personnel
engaged in, any activity
(i) which is similar or substantially related to any
activity in which Executive was engaged, in whole or in part, at
the Firm,
(ii) for which Executive had direct or indirect
managerial or supervisory responsibility at the Firm, or
(iii) which calls for the application of the same or
similar specialized knowledge or skills as those utilized by
Executive in Executive's activities with the Firm,
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<PAGE> 3
at any time during the one-year period immediately prior to the Date of
Termination (or, in the case of an action taken during the Employment
Period, during the one-year period immediately prior to such action),
and, in any such case, irrespective of the purpose of the activity or
whether the activity is or was in furtherance of advisory, agency,
proprietary or fiduciary business of either the Firm or the Competitive
Enterprise.
(By way of example only, this provision precludes an "advisory"
investment banker from joining a leveraged-buyout firm or a research
analyst from becoming a proprietary trader or joining a hedge fund, in
each case without the written consent of GS Inc.)
(b) For purposes of this Agreement, a "Competitive Enterprise" is
a business enterprise that (1) engages in any activity, or (2) owns or controls
a significant interest in any entity that engages in any activity, that, in
either case, competes anywhere with any activity in which the Firm is engaged.
The activities covered by the previous sentence include, without limitation,
financial services such as investment banking, public or private finance,
lending, financial advisory services, private investing (for anyone other than
Executive and members of Executive's family), merchant banking, asset or hedge
fund management, insurance or reinsurance underwriting or brokerage, property
management, or securities, futures, commodities, energy, derivatives or currency
brokerage, sales, lending, custody, clearance, settlement or trading.
(c) For purposes of this Agreement, "Date of Termination" means
Executive's Date of Termination (as defined in the Employment Agreement) or, if
the Executive is not a party to an Employment Agreement, the IPO Date.
3. Nonsolicitation of Clients. (a) Executive hereby agrees that
during the Employment Period, if any, and for eighteen months following the Date
of Termination, Executive will not, in any manner, directly or indirectly, (1)
Solicit a Client to transact business with a Competitive Enterprise or to reduce
or refrain from doing any business with the Firm, or (2) interfere with or
damage (or attempt to interfere with or damage) any relationship between the
Firm and a Client.
(b) For purposes of this Agreement, the term "Solicit" means any
direct or indirect communication of any kind whatsoever, regardless of by whom
initiated, inviting, advising, encouraging or requesting any person or entity,
in any manner, to take or refrain from taking any action.
(c) For purposes of this Agreement, the term "Client" means any
client or prospective client of the Firm to whom Executive provided services, or
for whom
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Executive transacted business, or whose identity became known to Executive in
connection with Executive's relationship with or employment by the Firm.
4. Nonsolicitation of Employees. Executive hereby agrees that
during the Employment Period, if any, and for eighteen months following the Date
of Termination, Executive will not, in any manner, directly or indirectly,
Solicit any person who is an employee of the Firm to resign from the Firm or to
apply for or accept employment with any Competitive Enterprise.
5. Transfer of Client Relationships. (a) During the Coverage
Period, Executive hereby agrees to take all actions and do all such things as
may be reasonably requested by the Firm from time to time to maintain for the
Firm the business, goodwill, and business relationships with any of the Firm's
Clients with whom Executive worked during the term of Executive's employment.
(b) For purposes of this Agreement, the term "Coverage Period"
means, (1) if Executive is a party to an Employment Agreement, the 90-day period
beginning on the date on which notice of Executive's termination of employment
is delivered to or by the Firm, or in the case of termination for Cause or on
account of Extended Absence (each as defined in the Employment Agreement), the
90-day period beginning on the Date of Termination or (2) if Executive is not a
party to an Employment Agreement, the 90-day period beginning on the IPO Date.
6. Prior Notice Required. Executive hereby agrees that prior to
accepting employment with any other person or entity during the Employment
Period, if any, or during the eighteen months following the Date of Termination,
Executive will provide such prospective employer with written notice of the
provisions of this Agreement, with a copy of such notice delivered
simultaneously to the General Counsel of GS Inc.
7. Covenants Generally. (a) Executive's covenants as set forth in
the preceding paragraphs of this Agreement are from time to time referred to
herein as the "Covenants." If any of the Covenants is finally held to be
invalid, illegal or unenforceable (whether in whole or in part), such Covenant
shall be deemed modified to the extent, but only to the extent, of such
invalidity, illegality or unenforceability and the remaining such Covenants
shall not be affected thereby; provided, however, that if any of such Covenants
is finally held to be invalid, illegal or unenforceable because it exceeds the
maximum scope determined to be acceptable to permit such provision to be
enforceable, such Covenant will be deemed to be modified to the minimum extent
necessary to modify such scope in order to make such provision enforceable
hereunder.
(b) Executive understands that the provisions of the Covenants
may limit Executive's ability to earn a livelihood in a business similar to the
business of the Firm.
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(c) Executive acknowledges that a violation on Executive's part
of any of the Covenants would cause irreparable damage to the Firm. Accordingly,
Executive agrees that the Firm will be entitled to injunctive relief for any
actual or threatened violation of any of the Covenants in addition to any other
remedies it may have.
8. Damages. (a) Executive acknowledges that Executive's
compliance with the Covenants is an important factor to the continued success of
the Firm's operations and its future prospects. Executive and GS Inc. agree that
if at any time prior to the fifth anniversary of the date of this Agreement,
Executive were to breach any of the Covenants set forth in Sections 2, 3 and 4
hereof, the damages to the Firm would be material, but that the amount of such
damages would be uncertain and not readily ascertainable. Accordingly, Executive
and GS Inc. agree that, if, prior to the fifth anniversary of the date of this
Agreement, Executive breaches any of such Covenants, as determined by the Board
of Directors of GS Inc. (the "Board") in its good faith judgment, GS Inc. will
be entitled to receive immediately following such determination and written
demand therefor, and Executive will make, a cash payment as and for liquidated
damages (the "Liquidated Damages") as follows:
(1) if, on April 12, 1999, Executive was a member of the Board
and/or a management committee (as defined below) of the Firm (and
whether or not such membership continues), the Liquidated Damages shall
be $15,000,000; and
(2) if, on April 12, 1999, Executive was not a member of either
the Board or a management committee of the Firm (and whether or not
Executive later has any such membership), the Liquidated Damages shall
be $10,000,000.
A "management committee" means each of the Management Committee and the
Partnership Committee. The payment of any amount as liquidated damages will not
be construed as a release or waiver by the Firm of the right to prevent the
continuation of any such violation of such Covenants in equity or otherwise. In
addition, Executive and GS Inc. agree that it would be too speculative to
attempt to determine any amount of liquidated damages that would be applicable
following the fifth anniversary of the date of this Agreement, and that any
damages payable as a result of any breach following such date shall be
determined without regard to this Section 8.
(b) Executive and GS Inc. agree that the Liquidated Damages are
reasonable in proportion to the probable damages likely to be sustained by the
Firm if Executive breaches at any time prior to the fifth anniversary of this
Agreement any of the Covenants set forth in Sections 2, 3 and 4 hereof, that the
amount of actual damages to be sustained by the Firm in the event of such breach
is incapable of precise estimation and that such cash payments are not intended
to constitute a penalty or punitive damages for any purposes.
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(c) Executive acknowledges and agrees that Executive's payment
obligations under this Section 8 will be full recourse obligations and will be
secured pursuant to a Pledge Agreement, in substantially the form set forth as
Exhibit A hereto (the "Pledge Agreement").
(d) Executive acknowledges and agrees that any cash payment of
Liquidated Damages pursuant to this Section 8 shall be in addition to, and not
in lieu of, any forfeitures of awards (required pursuant to the terms of any
such awards) that may be granted to Executive in the future under one or more of
the Firm's compensation and benefit plans.
9. Arbitration. Subject to the provisions of Sections 10 and 11
hereof, any dispute, controversy or claim between Executive and the Firm arising
out of or relating to or concerning the provisions of this Agreement, the Pledge
Agreement, any agreement between Executive and the Firm relating to or arising
out of Executive's employment with the Firm or otherwise concerning any rights,
obligations or other aspects of Executive's employment relationship in respect
of the Firm ("Employment Related Matters"), shall be finally settled by
arbitration in New York City before, and in accordance with the rules then
obtaining of, the New York Stock Exchange, Inc. (the "NYSE") or, if the NYSE
declines to arbitrate the matter, the American Arbitration Association (the
"AAA") in accordance with the commercial arbitration rules of the AAA.
10. Injunctive Relief; Submission to Jurisdiction.
Notwithstanding the provisions of Section 9, and in addition to its right to
submit any dispute or controversy to arbitration, the Firm may bring an action
or special proceeding in a state or federal court of competent jurisdiction
sitting in the City of New York, whether or not an arbitration proceeding has
theretofore been or is ever initiated, for the purpose of temporarily,
preliminarily, or permanently enforcing the provisions of the Covenants, the
Employment Agreement or the Pledge Agreement, or to enforce an arbitration
award, and, for the purposes of this Section 10, Executive (i) expressly
consents to the application of Section 11 to any such action or proceeding, (ii)
agrees that proof will not be required that monetary damages for breach of the
provisions of the Covenants, the Employment Agreement or the Pledge Agreement
would be difficult to calculate and that remedies at law would be inadequate and
(iii) irrevocably appoints the General Counsel of GS Inc. as Executive's agent
for service of process in connection with any such action or proceeding, who
shall promptly advise Executive of any such service of process.
11. Choice of Forum. (a) EXECUTIVE AND THE FIRM HEREBY
IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
LOCATED IN THE CITY OF NEW YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO OR CONCERNING THIS AGREEMENT, THE EMPLOYMENT AGREEMENT, THE
PLEDGE AGREEMENT, OR ANY EMPLOYMENT
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RELATED MATTERS THAT IS NOT OTHERWISE ARBITRATED OR RESOLVED ACCORDING TO THE
PROVISIONS OF SECTION 9 HEREOF. This includes any suit, action or proceeding to
compel arbitration or to enforce an arbitration award. This also includes any
suit, action, or proceeding arising out of or relating to any post-employment
Employment Related Matters. Executive and the Firm acknowledge that the forum
designated by this Section 11 has a reasonable relation to this Agreement, and
to Executive's relationship to the Firm. Notwithstanding the foregoing, nothing
herein shall preclude the Firm from bringing any action or proceeding in any
other court for the purpose of enforcing the provisions of Sections 9, 10 or 11.
(b) The agreement of Executive and the Firm as to forum is
independent of the law that may be applied in the action, and Executive and the
Firm agree to such forum even if the forum may under applicable law choose to
apply non-forum law. Executive and the Firm hereby waive, to the fullest extent
permitted by applicable law, any objection which Executive or the Firm now or
hereafter may have to personal jurisdiction or to the laying of venue of any
such suit, action or proceeding in any court referred to in Section 11(a).
Executive and the Firm undertake not to commence any action arising out of or
relating to or concerning this Agreement in any forum other than a forum
described in this Section 11. Executive and the Firm agree that, to the fullest
extent permitted by applicable law, a final and non-appealable judgment in any
such suit, action or proceeding in any such court shall be conclusive and
binding upon Executive and the Firm.
12. Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS.
13. Miscellaneous. (a) This Agreement shall not supersede any
other agreement, written or oral, pertaining to the matters covered herein,
except to the extent of any inconsistency between this Agreement and any prior
agreement, in which case this Agreement shall prevail.
(b) Notices hereunder shall be delivered to GS Inc. at its
principal executive office directed to the attention of its General Counsel, and
to Executive at Executive's last address appearing in the Firm's employment
records.
(c) This Agreement may not be amended or modified, other than by
a written agreement executed by Executive and GS Inc. or its successors, nor may
any provision hereof be waived other than by a writing executed by Executive or
GS Inc. or its successors; provided, that any waiver, consent, amendment or
modification of any of the provisions of this Agreement will not be effective
against the Firm without the written consent of the Chief Executive Officer of
GS Inc. or its successors, or such individual's
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<PAGE> 8
designee. Executive may not, directly or indirectly (including by operation of
law), assign Executive's rights or obligations hereunder without the prior
written consent of the Chief Executive Officer of GS Inc. or its successors, or
such individual's designee, and any such assignment by Executive in violation of
this Agreement shall be void. This Agreement shall be binding upon Executive's
permitted successors and assigns. Without impairing Executive's obligations
hereunder, GS Inc. may at any time and from time to time assign its rights and
obligations hereunder to any of its subsidiaries or affiliates (and have such
rights and obligations reassigned to it or to any other subsidiary or
affiliate). This Agreement shall be binding upon and inure to the benefit of the
Firm and its assigns.
(d) Without limiting the provisions of Section 7(a) hereof, if
any provision of this Agreement is finally held to be invalid, illegal or
unenforceable (whether in whole or in part), such provision shall be deemed
modified to the extent, but only to the extent, of such invalidity, illegality
or unenforceability and the remaining provisions shall not be affected thereby.
(e) Except as expressly provided herein, this Agreement shall not
confer on any person other than the Firm and the Executive any rights or
remedies hereunder.
(f) The captions in this Agreement are for convenience of
reference only and shall not define or limit the provisions hereof.
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IN WITNESS WHEREOF, Executive and the Firm hereto have caused
this Agreement to be executed and delivered on the date first above written.
THE GOLDMAN SACHS GROUP, INC.
(on its behalf, and on behalf of its
subsidiaries and affiliates)
By:________________________________
[Executive]
By:________________________________
<PAGE> 1
EXHIBIT 10.21
PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of May 7, 1999 (the "Agreement"), by and
between The Goldman Sachs Group, Inc., a Delaware corporation ("GS Inc."), on
its behalf and on behalf of its subsidiaries and affiliates (collectively with
GS Inc., and its and their predecessors and successors, the "Firm"), and the
individual whose name appears at the end of this Agreement ("Pledgor").
RECITALS
A. Covenants. In connection with Pledgor's participation in the Plan of
Incorporation (the "Plan") of The Goldman Sachs Group, L.P., Pledgor and GS Inc.
have entered into an Agreement Relating to Noncompetition and Other Covenants
(the "Noncompetition Agreement"), dated as of the date hereof, in respect of,
inter alia, Pledgor's obligations (the "Obligations") to keep information
concerning the Firm confidential, not to engage in competitive activities, not
to solicit the Firm's clients or employees, and to cooperate with the Firm in
maintaining certain relationships following the termination of Pledgor's
employment. In addition, Pledgor has agreed under the Plan and the
Noncompetition Agreement to certain provisions regarding arbitration, choice of
law and choice of forum, injunctive relief and submission to jurisdiction with
respect to the enforcement of the Obligations.
B. The Pledge. Pursuant to the Noncompetition Agreement, Pledgor has
agreed to pay a certain amount of liquidated damages (the "Liquidated Damages")
to GS Inc. in respect of any breach by Pledgor of certain of the Obligations set
forth in the Noncompetition Agreement. As security for the timely payment of the
Liquidated Damages, Pledgor has agreed to pledge to the Firm shares (the
"Pledged Shares") of common stock of GS Inc. (the "Common Stock"), or other
collateral described below, all as set forth herein.
NOW, THEREFORE, in consideration of the premises contained herein and
for other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Pledge.
(a) Unless otherwise requested by Pledgor pursuant to the last sentence
of Section 1(b), as collateral security for the full and timely payment of
Liquidated Damages, Pledgor hereby delivers, deposits, pledges, transfers and
assigns to
<PAGE> 2
GS Inc., in form transferable by delivery, and creates for the benefit of GS
Inc. a perfected first priority security interest in, Pledged Shares with a Fair
Market Value (as defined in Section 1(d)) on the date hereof equal to the amount
of Liquidated Damages (and all certificates or other instruments or documents
evidencing the Pledged Shares) and, except as set forth in Section 2(a), all
proceeds thereof (together with any securities or property to be delivered to GS
Inc. pursuant to Section 2(b) and, upon substitution or delivery in accordance
with Section 1(b), any Substitute Collateral (as defined in Section 1(b)),
"Pledged Securities"). Pledgor herewith delivers to GS Inc. appropriate undated
security transfer powers duly executed in blank (or other documents deemed
necessary or appropriate by GS Inc. to give GS Inc. control (as defined in
Article 8 of the Uniform Commercial Code of the State of New York (the "UCC")))
(such transfer powers and other appropriate documents, the "Control Documents")
in respect of Pledged Securities, and will deliver Control Documents for all
Pledged Securities to be pledged hereunder from time to time.
(b) During the term of this Agreement, Pledgor may substitute for
Pledged Securities readily marketable direct obligations of the United States,
any agency thereof, or any triple-A rated sovereign, shares of Common Stock, or
other collateral acceptable to the Board of Directors of GS Inc. in its sole and
absolute discretion (collateral other than Pledged Shares, the "Substitute
Collateral") with a Fair Market Value on the date of substitution equal to or
greater than the Fair Market Value on such date of the Pledged Securities to be
released in exchange therefor. Upon such substitution, the Pledged Securities
replaced by such Substitute Collateral shall be released from the pledge
hereunder. If requested by Pledgor, Pledgor shall be permitted to deliver on the
date hereof Substitute Collateral in lieu of shares of Common Stock.
(c) If Pledgor is not prohibited from doing so by the terms of the
Plan, the Shareholders' Agreement, dated as of the date hereof, among GS Inc.
and the individuals listed on Appendix A thereto, as in effect from time to time
(the "Shareholders' Agreement"), any other written agreement with GS Inc. or the
Firm, or any law or regulation or Firm policy (collectively, the
"Restrictions"), this Agreement shall not prohibit Pledgor from disposing of
Pledged Shares; provided, that such disposition shall be made expressly subject
to all of GS Inc.'s rights hereunder, that the provisions of this Agreement
shall (as described in Section 1(a)) apply to all proceeds of such disposition,
and that such disposition shall be permitted only if GS Inc. shall have
determined that such disposition will not result in the loss for any period by
GS Inc. of the perfection of its first priority security interest in such
proceeds; provided, further, that the proceeds of such disposition are cash,
Substitute Collateral, Tender or Exchange Offer Consideration or a combination
thereof, with an aggregate Fair Market Value on the date of such disposition
equal to or greater than the Fair Market Value on such date of the Pledged
Shares so disposed. Pledgor shall give GS Inc. prior written notice of any
proposed transaction under this Section 1(c). For purposes of this Agreement,
"Tender or
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Exchange Offer Consideration" means the consideration issuable for Pledged
Shares pursuant to any tender or exchange offer in which the Pledgor is not
prohibited from participating by the Restrictions.
(d) For purposes of this Agreement, the "Fair Market Value" of any
Pledged Security means, as of any date (1) in the case of a Pledged Security
that is a share of Common Stock, the average of the daily closing prices for a
share of Common Stock on the principal securities exchange or market on which
the Common Stock is traded for the 20 consecutive business days before the date
in question (the "Average Closing Price"); provided, however, that the Fair
Market Value of a share of Common Stock for purposes of determining the initial
amount to be pledged as of the date of this Agreement shall be deemed to be the
initial public offering price in the initial public offering by GS Inc. of its
Common Stock; and provided, further, that in connection with any taking of
ownership by GS Inc. of Pledged Securities under Section 3 hereof, the Average
Closing Price shall be determined as the average of the daily closing prices for
a share of Common Stock on the principal securities exchange or market on which
the Common Stock is traded for the 20 consecutive business days before the date
the Enforcement Notice (as hereafter defined) was given, and (2) otherwise, the
fair market value thereof as determined in good faith by GS Inc. Any good faith
determination by GS Inc. of the Fair Market Value of any Pledged Security will
be binding on Pledgor.
2. Administration of Security. The following provisions shall govern
the administration of Pledged Securities:
(a) So long as no Payment Event (as defined below) has occurred and is
continuing, Pledgor shall (subject to any restrictions imposed under the
Shareholders' Agreement) be entitled to vote Pledged Securities and to exercise
all of Pledgor's rights under the Shareholders' Agreement in respect of the
Pledged Shares, and to receive and retain all regular quarterly cash dividends
and distributions and, except as set forth in Section 2(b) below, other
distributions thereon and to give consents, waivers and ratifications in respect
thereof. As used herein, a "Payment Event" shall mean the failure by Pledgor to
make any payment of Liquidated Damages upon demand by GS Inc. therefor as
provided in the Noncompetition Agreement.
(b) If Pledgor becomes entitled to receive, or receives, any
certificate representing Pledged Securities (or other security that may succeed
Pledged Securities or any security issued as a dividend or distribution in
respect of Pledged Securities) in respect of any stock split, reverse stock
split, stock dividend, spinoff, splitup, merger or other combination, exchange
or distribution in connection with any reclassification, increase or reduction
of capital, in each case, with respect to Pledged Securities, Pledgor agrees to
accept the same as GS Inc.'s agent and to hold the same in trust on behalf of
and for the benefit of GS Inc. and to deliver the same forthwith to GS Inc. in
the exact form
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received, with the endorsement of Pledgor when deemed necessary or appropriate
by GS Inc. of undated security transfer powers duly executed in blank, to be
held by GS Inc., subject to the terms of this Agreement, as additional
collateral security for Liquidated Damages.
(c) Pledgor hereby agrees that GS Inc. is authorized to hold Pledged
Securities through one or more custodians. GS Inc. and its agents (and its and
their assigns) shall have no obligation in respect of Pledged Securities, except
to hold and dispose of the same in accordance with the terms of this Agreement.
In the event that Pledgor substitutes cash for Pledged Securities as provided in
Section 1(b) or 1(c), GS Inc. shall determine in its sole discretion the manner
in which such cash shall be invested during the term of this Agreement.
(d) Pledgor agrees with GS Inc. that: (i) Pledgor will not, and will
not purport to, grant or suffer liens or encumbrances against (excluding for
such purpose the Shareholders' Agreement), or except as provided in Section
1(c), sell, transfer or dispose of, any Pledged Securities other than to or in
favor of GS Inc.; (ii) GS Inc. is authorized, at any time and from time to time,
to file financing statements and give notice to third parties regarding Pledged
Securities without Pledgor's signature to the extent permitted by applicable
law, to transfer all or any part of Pledged Securities to GS Inc.'s name or that
of its nominee, and, subject to the provisions of Section 2(a), to exercise all
rights as if the absolute owner thereof; and (iii) Pledgor has provided GS Inc.
with Pledgor's true legal name and principal residence, and Pledgor will not
change Pledgor's name without 30 days' prior written notice to GS Inc.
(e) Subject to the earlier disposition and application of Pledged
Securities pursuant to this Agreement following a Payment Event, Pledged
Securities shall be released from the pledge hereunder, and the lien hereby
created in such Pledged Securities shall simultaneously be released, upon the
earliest to occur of (i) Pledgor's death, (ii) the expiration of the twenty-four
(24) month period following Pledgor's Date of Termination (as defined in the
Noncompetition Agreement), (iii) payment in cash or other satisfaction by
Pledgor of all Liquidated Damages, or (iv) the fifth anniversary of the date
hereof, and all remaining Pledged Securities shall be thereupon released from
the pledge hereunder and this Agreement shall terminate. Notwithstanding the
foregoing, no Pledged Securities shall be released from the pledge hereunder
pursuant to this Section 2(e), if there are one or more pending disputes between
Pledgor and GS Inc. as to the occurrence of a Payment Event or as to the right
of GS Inc. or the Firm to exercise its remedies under this Agreement or the
Noncompetition Agreement, including realization against Pledged Securities in
accordance with Section 3 hereof, and this Agreement shall not terminate until
the resolution of all such disputes.
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<PAGE> 5
(f) GS Inc. shall immediately upon request by Pledgor execute and
deliver to Pledgor such instruments, deeds, transfers, assurances and
agreements, in form and substance as Pledgor shall reasonably request, including
the withdrawal or termination of any financing statements and amendments
thereto, or the filing, withdrawal, termination or amendment of any other
document required under applicable law to evidence the termination of the
security interest created hereunder with respect to any securities that are
released from the pledge hereunder in accordance with the provisions of this
Agreement.
3. Remedies in Case of a Payment Event. If a Payment Event has occurred
and is continuing, GS Inc. shall have the rights and remedies of a secured party
under Article 9 of the UCC. To the extent required and permitted by applicable
law, GS Inc. will give Pledgor notice of the time and place of any public sale
or of the time after which any private sale or other disposition of Pledged
Securities is to be made, by sending notice at least three days before the time
of sale or disposition, which Pledgor hereby agrees is reasonable. GS Inc. need
not give such notice if not required by the UCC. Pledgor acknowledges the
possibility that the public sale of some or all Pledged Securities by GS Inc.
may not be made without a then existing and effective registration statement
under the Securities Act of 1933, as amended. Pledgor acknowledges and agrees
with GS Inc. that GS Inc. has no affirmative obligation to prepare or keep
effective any such registration statement and agrees that at any private sale
Pledged Securities may be sold at a price that is less than the price which
might have been obtained at a public sale or that is less than the aggregate
outstanding amount of Liquidated Damages. For so long as Pledged Securities
consist of securities of a type customarily sold in a recognized market or which
are the subject of widely distributed standard price quotations, GS Inc. may, as
its remedy hereunder, purchase such number of Pledged Securities as are
necessary (based upon the Fair Market Value thereof) to satisfy the then unpaid
portion of Liquidated Damages (by reducing the then unpaid Liquidated Damages by
an amount equal to the Fair Market Value of the Pledged Securities purchased and
without payment of any cash consideration) by giving written notice to such
effect to Pledgor (the "Enforcement Notice"). Effective upon the giving of the
Enforcement Notice, and without further action on the part of the parties to
this Agreement, GS Inc. shall be deemed to have (1) purchased the lesser of (A)
all Pledged Securities or (B) such whole number of Pledged Securities as has a
Fair Market Value at least equal to the then unpaid Liquidated Damages; and (2)
received proceeds in the amount of the Fair Market Value of such Pledged
Securities and applied such proceeds to the payment of any then unpaid
Liquidated Damages. Any excess net proceeds from the deemed sale of such Pledged
Securities will continue to be held as Pledged Securities under this Agreement
until returned in accordance with Section 2(e). Nothing in this Agreement,
however, shall require the Firm to purchase Pledged Securities in accordance
with this Section 3 in order to satisfy Pledgor's obligation to pay Liquidated
Damages.
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4. Pledgor's Obligations Not Affected. Except as provided in Section
9(b), the obligations of Pledgor under this Agreement shall remain in full force
and effect without regard to, and shall not be impaired or affected by (a) any
subordination, amendment or modification of or addition or supplement to this
Agreement, the Noncompetition Agreement, the Plan or any assignment or transfer
thereof; (b) any exercise or non-exercise by GS Inc. of any right, remedy, power
or privilege under or in respect of this Agreement, the Noncompetition
Agreement, the Plan or any waiver of any such right, remedy, power or privilege;
(c) any waiver, consent, extension, indulgence or other action or inaction in
respect of this Agreement, the Noncompetition Agreement, the Plan or any
assignment or transfer of any thereof; (d) any bankruptcy, insolvency,
reorganization, arrangement, readjustment, composition, liquidation or the like,
of GS Inc., whether or not Pledgor shall have notice or knowledge of any of the
foregoing; (e) any substitution of collateral pursuant to Sections 1(b) or 1(c);
or (f) any other act or omission to act or delay of any kind by Pledgor, GS Inc.
or any other person or any other circumstance whatsoever which might, but for
the provisions of this clause (f), constitute a legal and equitable discharge of
Pledgor's obligations hereunder.
5. Attorneys-in-Fact. Each of GS Inc. and the General Counsel of GS
Inc. from time to time, acting separately, are hereby appointed the
attorneys-in-fact of Pledgor for the purpose of carrying out the provisions of
this Agreement and taking any action and executing any instrument that GS Inc.
reasonably may deem necessary or advisable to accomplish the purposes hereof,
which appointments as attorneys-in-fact are irrevocable as ones coupled with an
interest.
6. Termination. Upon the earliest to occur of the events set forth in
Section 2(e) hereof, this Agreement shall terminate and GS Inc. shall return to
Pledgor the remaining Pledged Securities, except as otherwise provided in such
Section.
7. Notices. All notices or other communications required or permitted
to be given hereunder shall be delivered as provided in the Noncompetition
Agreement.
8. No Third Party Beneficiaries. Except as expressly provided herein,
this Agreement shall not confer on any person other than the Firm and Pledgor
any rights or remedies hereunder.
9. Miscellaneous.
(a) This Agreement and Section 8 of the Noncompetition Agreement
contain the entire understanding and agreement between Pledgor and GS Inc. with
respect to the matters expressly covered therein and supersede any other
agreement, written or oral, pertaining to such matters.
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<PAGE> 7
(b) This Agreement may not be amended or modified other than by a
written agreement executed by Pledgor and GS Inc. or its successors, nor may any
provision hereof be waived other than by a writing executed by Pledgor or GS
Inc. or its successors; provided, that any waiver, amendment or modification of
any of the provisions of this Agreement will not be effective against the Firm
without the written consent of the Chief Executive Officer of GS Inc. or its
successors, or such individual's designee. Pledgor may not, directly or
indirectly (including by operation of law), assign Pledgor's rights or
obligations hereunder without the prior written consent of the Chief Executive
Officer of GS Inc. or its successors, or such individual's designee, and any
such assignment by Pledgor in violation of this Agreement shall be void. This
Agreement shall be binding upon Pledgor's permitted successors and assigns.
Without impairing Pledgor's obligations hereunder, GS Inc. may at any time and
from time to time assign its rights and obligations hereunder to any of its
subsidiaries or affiliates (and have such rights and obligations reassigned to
it or to any other subsidiary or affiliate). This Agreement shall be binding
upon and inure to the benefit of the Firm and its assigns.
(c) If any provision of this Agreement is finally held to be invalid,
illegal or unenforceable (whether in whole or in part), such provision shall be
deemed modified to the extent, but only to the extent, of such invalidity,
illegality or unenforceability and the remaining provisions shall not be
affected thereby.
(d) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS, AND SHALL BE SUBJECT TO THE PROVISIONS OF SECTIONS 9, 10 AND
11 OF THE NONCOMPETITION AGREEMENT.
(e) The captions in this Agreement are for convenience of reference
only and shall not define or limit the provisions hereof.
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<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered on the date first above written.
THE GOLDMAN SACHS GROUP, INC.
By:________________________________
[PLEDGOR]
By:________________________________
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<PAGE> 1
EXHIBIT 10.22
THE GOLDMAN SACHS 1999 STOCK INCENTIVE PLAN
1999 FORMULA RSU AWARD
This Award Agreement sets forth the terms and conditions of an
Award of restricted stock units ("RSUs") granted to you under The Goldman Sachs
1999 Stock Incentive Plan (the "Plan").
1. The Plan. This Award is made pursuant to the Plan,
the terms of which are incorporated in this Award Agreement. Capitalized terms
used in this Award Agreement which are not defined in this Award Agreement, or
in the attached Glossary of Terms, have the meanings as used or defined in the
Plan.
2. Award. The number of RSUs subject to this Award is
set forth in a statement separately delivered to you. An RSU constitutes an
unfunded and unsecured promise of GS Inc. to deliver (or cause to be delivered)
to you, subject to the terms of this Award Agreement, a share of Common Stock
(the "Share") (or cash equal to the Fair Market Value thereof) on a Delivery
Date as provided herein. Until such delivery, you have only the rights of a
general unsecured creditor and no rights as a shareholder of GS Inc. THIS AWARD
IS SUBJECT TO ALL TERMS AND PROVISIONS OF THE PLAN AND THIS AWARD AGREEMENT,
INCLUDING, WITHOUT LIMITATION, THE ARBITRATION AND CHOICE OF FORUM PROVISIONS
SET FORTH IN PARAGRAPH 15. BY OPENING THE CUSTODY ACCOUNT REFERRED TO IN
PARAGRAPH 3(a), YOU WILL HAVE CONFIRMED YOUR ACCEPTANCE OF THE TERMS AND
CONDITIONS OF THIS AWARD AGREEMENT.
3. Delivery.
(a) In General. Except as provided below in this Paragraph 3
and in Paragraphs 4, 6, 9 and 10, Shares shall be delivered in equal
installments (subject to rounding in the discretion of the Committee to avoid
the delivery of fractional Shares) on each Delivery Date. The Firm may deliver
cash in lieu of all or any portion of the Shares otherwise deliverable on each
such Delivery Date. Unless otherwise determined by the Committee, or as
otherwise provided in this Award Agreement, delivery of Shares shall be effected
by book-entry credit to a custody account (the "Custody Account") maintained by
you with The Chase Manhattan Bank or such successor custodian as may be
designated by GS Inc. No delivery of Shares shall be made unless you have timely
established the Custody Account. You shall be the beneficial owner of any Shares
properly credited to the Custody Account. You shall have no right to any
dividend or distribution with respect to such Shares if the record date for such
dividend or distribution is prior to the date the Custody Account is properly
credited with such Shares.
(b) Death. Notwithstanding any other provision of this Award
Agreement, if you die prior to the last Delivery Date, and provided your rights
in respect of any outstanding RSUs have not previously terminated, the Shares
(or cash in lieu of all or any portion thereof) corresponding to your
outstanding RSUs shall be delivered as soon as practicable thereafter to your
designated beneficiary (or, if none, your estate).
<PAGE> 2
4. Termination of RSUs and Non-Delivery Upon Certain
Other Events.
(a) Unless the Committee determines otherwise, and except as
provided in Paragraph 6, your rights in respect of any outstanding RSUs shall
immediately terminate and no Shares (or cash) shall be delivered in respect of
such RSUs (i) if (A) prior to the relevant Delivery Date, your Employment with
the Firm is terminated for Cause, (B) you engage in conduct specified in
Paragraph 4(b), or (C) you fail to provide the representations and
certifications required under Paragraph 4(c) or (ii) at the time specified in
Paragraph 4(d).
(b) You will have engaged in conduct specified in this
Paragraph 4(b) if, as determined by the Committee, at any time prior to the
relevant Delivery Date:
(i) any of the events that constitute Cause has occurred; or
(ii) in the event you are categorized by the Firm as an exempt
employee (or the equivalent outside the United States) on the relevant
Delivery Date or were so characterized on the date of termination of
your Employment, you (A) form, or acquire a 5% or greater equity
ownership, voting or profit participation interest in, any Competitive
Enterprise, or (B) associate (including, but not limited to,
association as an officer, employee, partner, director, consultant,
agent or advisor) with any Competitive Enterprise and in connection
with such association engage in, or directly or indirectly manage or
supervise personnel engaged in, any activity (1) which is similar or
substantially related to any activity in which you were engaged, in
whole or in part, at the Firm, (2) for which you had direct or indirect
managerial or supervisory responsibility at the Firm or (3) which calls
for the application of the same or similar specialized knowledge or
skills as those utilized by you in your activities with the Firm, at
any time during the one-year period immediately prior to termination of
your Employment (or, in the case of an action taken prior to
termination of your Employment, during the one-year period immediately
prior to such action), and, in any such case, irrespective of the
purpose of the activity or whether the activity is or was in
furtherance of advisory, agency, proprietary or fiduciary business of
either the Firm or the Competitive Enterprise. (By way of example only,
this provision would preclude an "advisory" investment banker from
joining a leveraged-buyout firm, a research analyst from becoming a
proprietary trader or joining a hedge fund, or an information systems
professional from joining a management or other consulting firm and
providing information technology consulting services or advice to any
Competitive Enterprise.); or
(iii) in the event you are categorized by the Firm as an
exempt employee (or the equivalent outside the United States) on the
relevant Delivery Date or were so characterized on the date of
termination of your Employment, you in any manner, directly or
indirectly, (A) Solicit any Client to transact business with a
Competitive Enterprise or to reduce or refrain from doing any business
with the Firm or (B) interfere with or damage (or attempt to interfere
with or damage) any relationship between the Firm and any such Client
or (C) Solicit any person who is an employee of the Firm to resign from
the Firm or to apply for or accept employment with any Competitive
Enterprise; or
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<PAGE> 3
(iv) you attempt to have any dispute under this Award
Agreement resolved in any manner that is not provided for by Paragraph
15.
(c) You must certify to GS Inc., in accordance with procedures
established by the Committee, with respect to each relevant Delivery Date that
you have complied, and as of the relevant Delivery Date will have complied, with
all the terms and conditions of this Award Agreement. By accepting the delivery
of Shares (or cash) under this Award Agreement, you shall be deemed to have
represented and certified at such time that you have complied with all the terms
and conditions of this Award Agreement.
(d) Unless the Committee determines otherwise, if the Delivery
Date in respect of any outstanding RSUs occurs, and Shares (or cash) with
respect to such RSUs would be deliverable under the terms and conditions of this
Award Agreement, except that you have not complied with the conditions or your
obligations under Paragraphs 3(a) and 4(c), all of your rights with respect to
such RSUs shall terminate, and no Shares (or cash) shall be delivered, upon the
expiration of the fiscal year of GS Inc. in which such Delivery Date occurs.
5. Repayment. If, following the delivery of Shares (or cash)
with respect to any Delivery Date, the Committee determines that all terms and
conditions of this Award Agreement in respect of such delivery were not
satisfied, the Firm shall be entitled to receive, and you shall be obligated to
pay the Firm immediately upon demand therefor, the Fair Market Value of the
Shares (determined as of the relevant Delivery Date) and the amount of cash (to
the extent that cash was delivered in lieu of Shares) that were delivered with
respect to such Delivery Date and without reduction for any Shares (or cash
delivered in lieu of all or any portion thereof) applied to satisfy withholding
tax or other obligations in respect of such Shares (or cash).
6. Change in Control. Notwithstanding anything to the contrary
in this Award Agreement, in the event a Change in Control shall occur and within
18 months thereafter the Firm terminates your Employment without Cause or you
terminate Employment with the Firm for Good Reason, all Shares underlying
outstanding RSUs with respect to which your rights have not terminated (or the
Fair Market Value of such Shares in cash) shall be delivered.
7. Dividend Equivalents. Prior to the delivery of Shares (or
cash in lieu thereof) pursuant to this Award Agreement, at or after the time of
distribution of any regular cash dividend paid by GS Inc. in respect of the
Common Stock, you shall be entitled to receive an amount in cash (less
applicable withholding) equal to such regular dividend payment that would have
been made in respect of the Shares not yet delivered, as if the Shares had been
actually delivered; provided, that no payment in respect of RSUs shall be made
if, prior to the time such payment is due, your rights with respect to such RSUs
have previously terminated under this Agreement.
8. Non-transferability; Beneficiary Designation. Except as may
otherwise be provided by the Committee, the limitations set forth in Section 3.4
of the Plan shall apply. Any assignment in violation of the provisions of this
Paragraph 8 shall be void. You may designate, in accordance with procedures
established by the Committee, a beneficiary or beneficiaries to receive all or
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<PAGE> 4
part of the amounts to be paid under this Award Agreement in the event of your
death. A designation of a beneficiary may be replaced by a new designation or
may be revoked by you at any time in accordance with procedures established by
the Committee. If you die without having properly designated a beneficiary, any
amounts payable upon your death shall be distributed to your estate. If there is
any question as to the legal right of any beneficiary to receive payment of
amounts under this Award Agreement, the amounts in question may be paid to your
estate, in which event the Firm shall have no further liability to anyone with
respect to such amounts. A beneficiary or estate shall have no rights under this
Award Agreement other than the right, subject to the immediately preceding
sentence, to receive such amounts, if any, as may be payable under this
Paragraph 8.
9. Withholding, Consents and Legends.
(a) The delivery of Shares is conditioned on your satisfaction
of any applicable withholding taxes (in accordance with Section 3.2 of the Plan,
provided that the Committee may determine not to apply the minimum withholding
rate specified in Section 3.2.2 of the Plan).
(b) Your rights in respect of the RSUs are conditioned on the
receipt to the full satisfaction of the Committee of any required consents (as
defined in Section 3.3 of the Plan) that the Committee may determine to be
necessary or advisable (including, without limitation, your consenting (i) to
the Firm's supplying to any third party recordkeeper of the Plan such personal
information as the Committee deems advisable to administer the Plan and (ii) to
deductions from your wages, or other arrangement satisfactory to the Committee,
to reimburse the Firm for advances made on your behalf to satisfy certain
withholding and other tax obligations in connection with this Award).
(c) If you are or become a Managing Director, your rights in
respect of the RSUs are conditioned on your becoming a party to any
shareholders' agreement to which other similarly situated employees of the Firm
are a party.
(d) GS Inc. may affix to Certificates representing Shares
issued pursuant to this Award Agreement any legend that the Committee determines
to be necessary or advisable (including to reflect any restrictions to which you
may be subject under a separate agreement with GS Inc.). GS Inc. may advise the
transfer agent to place a stop order against any legended Shares.
10. Right of Offset. GS Inc. (and any of its affiliates
and subsidiaries) shall have the right to offset against the obligation to
deliver Shares (or cash) under this Award Agreement any outstanding amounts
(including, without limitation, travel and entertainment or advance account
balances, loans, or amounts repayable to the Firm pursuant to tax equalization,
housing, automobile or other employee programs) you then owe to the Firm and any
amounts the Committee otherwise deems appropriate pursuant to any tax
equalization policy or agreement.
11. No Rights to Continued Employment. Nothing in this
Award Agreement or the Plan shall be construed as giving you any right to
continued Employment by the Firm or affect any right which the Firm may have to
terminate or alter the terms and conditions of your Employment.
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<PAGE> 5
12. Successors and Assigns of GS Inc. The terms and
conditions of this Award Agreement shall be binding upon and shall inure to the
benefit of GS Inc. and its successors and assigns.
13. Committee Discretion. The Committee shall have full
discretion with respect to any actions to be taken or determinations to be made
in connection with this Award Agreement, and its determinations shall be final,
binding and conclusive.
14. Amendment. The Committee reserves the right at any
time to amend the terms and conditions set forth in this Award Agreement, and
the Board may amend the Plan in any respect; provided that, notwithstanding the
foregoing and Sections 1.3.2(f), 1.3.2(g) and 3.1 of the Plan, no such amendment
shall materially adversely affect your rights and obligations under this Award
Agreement without your consent (or the consent of your beneficiary or estate, if
such consent is obtained after your death), except that the Committee reserves
the right to accelerate the delivery of the Shares and in its discretion provide
that such Shares may not be transferable until the relevant Delivery Dates (and
that in respect of such Shares you may remain subject to the repayment
obligations of Paragraph 5 in the circumstances under which the Shares would not
have been delivered pursuant to Section 4). Any amendment of this Award
Agreement shall be in writing signed by the Chief Executive Officer of GS Inc.
or his or her designee.
15. Arbitration; Choice of Forum. (a) Any dispute,
controversy or claim between the Firm and you, arising out of or relating to or
concerning the Plan or this Award Agreement, shall be finally settled by
arbitration in New York City before, and in accordance with the rules then
obtaining of, the New York Stock Exchange, Inc. (the "NYSE") or, if the NYSE
declines to arbitrate the matter, the American Arbitration Association (the
"AAA") in accordance with the commercial arbitration rules of the AAA. Prior to
arbitration, all claims maintained by you must first be submitted to the
Committee in accordance with claims procedures determined by the Committee. This
paragraph is subject to the provisions of clauses (b) and (c) below.
(b) THE FIRM AND YOU HEREBY IRREVOCABLY SUBMIT TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE CITY OF NEW
YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO OR
CONCERNING THE PLAN OR THIS AWARD AGREEMENT THAT IS NOT OTHERWISE ARBITRATED OR
RESOLVED ACCORDING TO PARAGRAPH 15(a) OF THIS AWARD AGREEMENT. This includes any
suit, action or proceeding to compel arbitration or to enforce an arbitration
award. The Firm and you acknowledge that the forum designated by this
Paragraph 15(b) has a reasonable relation to the Plan, this Award Agreement, and
to your relationship with the Firm. Notwithstanding the foregoing, nothing
herein shall preclude the Firm from bringing any action or proceeding in any
other court for the purpose of enforcing the provisions of this Paragraph 15.
(c) The agreement by you and the Firm as to forum is
independent of the law that may be applied in the action, and you and the Firm
agree to such forum even if the forum may under applicable law choose to apply
non-forum law. You and the Firm hereby waive, to the fullest extent permitted by
applicable law, any objection which you or the Firm now or hereafter may have to
personal jurisdiction or to the laying of venue of any such suit, action or
proceeding in any court referred to in
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<PAGE> 6
Paragraph 15(b). You and the Firm undertake not to commence any action arising
out of or relating to or concerning this Award Agreement in any forum other than
a forum described in this Paragraph 15. You and the Firm agree that, to the
fullest extent permitted by applicable law, a final and non-appealable judgment
in any such suit, action or proceeding in any such court shall be conclusive and
binding upon you and the Firm.
(d) You irrevocably appoint the General Counsel of GS Inc. as
your agent for service of process in connection with any action or proceeding
arising out of or relating to or concerning this Award Agreement which is not
arbitrated pursuant to the provisions of Paragraph 15(a), who shall promptly
advise you of any such service of process.
(e) You hereby agree to keep confidential the existence of,
and any information concerning, a dispute described in this Paragraph 15, except
that you may disclose information concerning such dispute to the arbitrator or
court that is considering such dispute or to your legal counsel (provided that
such counsel agrees not to disclose any such information other than as necessary
to the prosecution or defense of the dispute).
(f) You recognize and agree that prior to the grant of this
Award you have no right to any benefits hereunder. Accordingly, in consideration
of the receipt of this Award, you expressly waive any right to contest the
amount of this Award, terms of this Award Agreement, any determination, action
or omission hereunder or under the Plan by the Committee, GS Inc. or the Board,
or any amendment to the Plan or this Award Agreement (other than an amendment to
which your consent is expressly required by Paragraph 14).
16. Governing Law. THIS AWARD SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS.
17. Headings. The headings in this Award Agreement are
for the purpose of convenience only and are not intended to define or limit the
construction of the provisions hereof.
IN WITNESS WHEREOF, GS Inc. has caused this Award Agreement to
be duly executed and delivered as of _____, 1999.
THE GOLDMAN SACHS GROUP, INC.
By: ____________________________
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<PAGE> 7
GLOSSARY OF TERMS
Solely for purposes of the 1999 Formula RSU Award Agreement granted
under the Goldman Sachs 1999 Stock Incentive Plan (the "Plan"), the
following terms shall have the meanings set forth below. Capitalized
terms not defined in this Glossary of Terms shall have the meanings as
used or defined in the applicable Award Agreement or the Plan.
"CAUSE" means (i) your conviction, whether following trial or
by plea of guilty or nolo contendere (or similar plea), in a criminal
proceeding (A) on a misdemeanor charge involving fraud, false
statements or misleading omissions, wrongful taking, embezzlement,
bribery, forgery, counterfeiting or extortion, or (B) on a felony
charge or (C) on an equivalent charge to those in clauses (A) and (B)
in jurisdictions which do not use those designations; (ii) your
engaging in any conduct which constitutes an employment
disqualification under applicable law (including statutory
disqualification as defined under the Exchange Act); (iii) your willful
failure to perform your duties to the Firm; (iv) your violation of any
securities or commodities laws, any rules or regulations issued
pursuant to such laws, or the rules and regulations of any securities
or commodities exchange or association of which GS Inc. or any of its
subsidiaries or affiliates is a member; (v) your violation of any Firm
policy concerning hedging or confidential or proprietary information,
or your material violation of any other Firm policy as in effect from
time to time; (vi) your engaging in any act or making any statement
which impairs, impugns, denigrates, disparages or negatively reflects
upon the name, reputation or business interests of the Firm; or (vii)
your engaging in any conduct detrimental to the Firm. The determination
as to whether "Cause" has occurred shall be made by the Committee in
its sole discretion. The Committee shall also have the authority in its
sole discretion to waive the consequences under the Plan or any Award
Agreement of the existence or occurrence of any of the events, acts or
omissions constituting "Cause".
"CHANGE IN CONTROL" means the consummation of a merger,
consolidation, statutory share exchange or similar form of corporate
transaction involving GS Inc. (a "Reorganization") or sale or other
disposition of all or substantially all of GS Inc.'s assets to an
entity that is not an affiliate of GS Inc. (a "Sale"), that in each
case requires the approval of GS Inc.'s stockholders under the law of
GS Inc.'s jurisdiction of organization, whether for such Reorganization
or Sale (or the issuance of securities of GS Inc. in such
Reorganization or Sale), unless immediately following such
Reorganization or Sale, either: (i) at least 50% of the total voting
power (in respect of the election of directors, or similar officials in
the case of an entity other than a corporation) of (A) the entity
resulting from such Reorganization, or the entity which has acquired
all or substantially all of the assets of GS Inc. in a Sale (in either
case, the "Surviving Entity"), or (B) if applicable, the ultimate
parent entity that directly or indirectly has beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act, as such Rule
is in effect on the date of adoption of the Plan) of 50% or more of the
total voting power (in respect of the election of directors, or similar
officials in the case of an entity other than a corporation) of the
Surviving Entity (the "Parent Entity"), is represented by GS Inc.'s
securities (the "GS Inc.
<PAGE> 8
Securities") that were outstanding immediately prior to such
Reorganization or Sale (or, if applicable, is represented by shares
into which such GS Inc. Securities were converted pursuant to such
Reorganization or Sale) or (ii) at least 50% of the members of the
board of directors (or similar officials in the case of an entity other
than a corporation) of the Parent Entity (or, if there is no Parent
Entity, the Surviving Entity) following the consummation of the
Reorganization or Sale were, at the time of the Board's approval of the
execution of the initial agreement providing for such Reorganization or
Sale, individuals (the "Incumbent Directors") who either (1) were
members of the Board on the date of the Award or (2) became directors
subsequent to the date of the Award and whose election or nomination
for election was approved by a vote of at least two-thirds of the
Incumbent Directors then on the Board (either by a specific vote or by
approval of GS Inc.'s proxy statement in which such persons are named
as a nominee for director).
"CLIENT" means any client or prospective client of the Firm to
whom you provided services, or for whom you transacted business, or
whose identity became known to you in connection with your relationship
with or employment by the Firm.
"COMPETITIVE ENTERPRISE" means a business enterprise that (i)
engages in any activity, or (ii) owns or controls a significant
interest in any entity that engages in any activity, that, in either
case, competes anywhere with any activity in which the Firm is engaged.
The activities covered by the previous sentence include, without
limitation, financial services such as investment banking, public or
private finance, lending, financial advisory services, private
investing (for anyone other than you and members of your family),
merchant banking, asset or hedge fund management, insurance or
reinsurance underwriting or brokerage, property management, or
securities, futures, commodities, energy, derivatives or currency
brokerage, sales, lending, custody, clearance, settlement or trading.
"DELIVERY DATE" means the first day of each Window Period that
begins on or immediately follows each of the first, second and third
anniversaries of the consummation of the initial public offering of
Shares.
"GOOD REASON" means (i) as determined by the Committee, a
materially adverse alteration in the your position or in the nature or
status of your responsibilities from those in effect immediately prior
to the Change in Control, or (ii) the Firm's requiring your principal
place of Employment to be located more than seventy-five (75) miles
from the location where you are principally Employed at the time of the
Change in Control (except for required travel on the Firm's business to
an extent substantially consistent with your customary business travel
obligations in the ordinary course of business prior to the Change in
Control).
"SOLICIT" means any direct or indirect communication of any
kind whatsoever, regardless of by whom initiated, inviting, advising,
encouraging or requesting any person or entity, in any manner, to take
or refrain from taking any action.
"WINDOW PERIOD" means a period designated by the Committee
during which employees of the Firm generally are permitted to purchase
or sell Shares.
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<PAGE> 1
EXHIBIT 10.23
THE GOLDMAN SACHS 1999 STOCK INCENTIVE PLAN
1999 DISCRETIONARY RSU AWARD
This Award Agreement sets forth the terms and conditions of an
Award of restricted stock units ("RSUs") granted to you under The Goldman Sachs
1999 Stock Incentive Plan (the "Plan").
1. The Plan. This Award is made pursuant to the Plan,
the terms of which are incorporated in this Award Agreement. Capitalized terms
used in this Award Agreement which are not defined in this Award Agreement, or
in the attached Glossary of Terms, have the meanings as used or defined in the
Plan.
2. Award. The number of RSUs subject to this Award is
set forth in a statement separately delivered to you. An RSU constitutes an
unfunded and unsecured promise of GS Inc. to deliver (or cause to be delivered)
to you, subject to the terms of this Award Agreement, a share of Common Stock
(the "Share") (or cash equal to the Fair Market Value thereof) on a Vesting Date
as provided herein. Until such delivery, you have only the rights of a general
unsecured creditor and no rights as a shareholder of GS Inc. THIS AWARD IS
SUBJECT TO ALL TERMS AND PROVISIONS OF THE PLAN AND THIS AWARD AGREEMENT,
INCLUDING, WITHOUT LIMITATION, THE ARBITRATION AND CHOICE OF FORUM PROVISIONS
SET FORTH IN PARAGRAPH 16. BY OPENING THE CUSTODY ACCOUNT REFERRED TO IN
PARAGRAPH 3(a), YOU WILL HAVE CONFIRMED YOUR ACCEPTANCE OF THE TERMS AND
CONDITIONS OF THIS AWARD AGREEMENT.
3. Vesting and Delivery.
(a) In General. Except as provided below in this Paragraph 3
and in Paragraphs 4, 6, 7, 10 and 11, you shall vest in the RSUs and Shares
shall be delivered in equal installments (subject to rounding in the discretion
of the Committee to avoid the delivery of fractional Shares) on each Vesting
Date. The Firm may deliver cash in lieu of all or any portion of the Shares
otherwise deliverable on each such Vesting Date. Unless otherwise determined by
the Committee, or as otherwise provided in this Award Agreement, delivery of
Shares shall be effected by book-entry credit to a custody account (the "Custody
Account") maintained by you with The Chase Manhattan Bank or such successor
custodian as may be designated by GS Inc. No delivery of Shares shall be made
unless you have timely established the Custody Account. You shall be the
beneficial owner of any Shares properly credited to the Custody Account. You
shall have no right to any dividend or distribution with respect to such Shares
if the record date for such dividend or distribution is prior to the date the
Custody Account is properly credited with such Shares. Notwithstanding the
foregoing, if a Vesting Date occurs at a time when you are considered by GS Inc.
to be one of its "covered employees" within the meaning of Section 162(m) of the
Code, then, unless the Committee determines otherwise, delivery of Shares (or
cash) in respect of such Vesting Date shall automatically be deferred until the
first day of the first Window Period after you have ceased to be such a covered
employee.
<PAGE> 2
(b) Death. Notwithstanding any other provision of this Award
Agreement, if you die prior to the last Vesting Date, and provided your rights
in respect of any outstanding RSUs have not previously terminated, the Shares
(or cash in lieu of all or any portion thereof) corresponding to your
outstanding RSUs shall be delivered as soon as practicable thereafter to your
designated beneficiary (or, if none, your estate).
4. Termination of RSUs and Non-Delivery of Shares.
(a) Unless the Committee determines otherwise, and except as
provided in Paragraphs 6 and 7, your rights in respect of any outstanding RSUs
shall immediately terminate and no Shares (or cash) shall be delivered in
respect of such RSUs, if:
(i) at any time prior to the relevant Vesting Date:
(A) your Employment with the Firm is terminated for any
reason, or you are otherwise no longer actively employed with the Firm
(except as provided in Paragraphs 3(b) or 6); or
(B) any of the events that constitute Cause has occurred; or
(C) you attempt to have any dispute under this Award Agreement
resolved in any manner that is not provided for by Paragraph 16; or
(ii) you fail to certify to GS Inc., in accordance with
procedures established by the Committee, with respect to each relevant
Vesting Date that you have complied, or the Committee determines that
you in fact have failed as of the relevant Vesting Date to comply, with
all the terms and conditions of this Award Agreement. By accepting the
delivery of Shares (or cash) under this Award Agreement, you shall be
deemed to have represented and certified at such time that you have
complied with all the terms and conditions of this Award Agreement.
(b) Unless the Committee determines otherwise, if the Vesting
Date in respect of any outstanding RSUs occurs, and Shares (or cash) with
respect to such RSUs would be deliverable under the terms and conditions of this
Award Agreement, except that you have not complied with the conditions or your
obligations under Paragraphs 3(a) and 4(a)(ii), all of your rights with respect
to such RSUs shall terminate, and no Shares (or cash) shall be delivered, upon
the expiration of the fiscal year of GS Inc. in which such Vesting Date occurs.
5. Repayment. If, following the delivery of Shares (or
cash) with respect to any Vesting Date, the Committee determines that all terms
and conditions of this Award Agreement in respect of such delivery were not
satisfied, the Firm shall be entitled to receive, and you shall be obligated to
pay the Firm immediately upon demand therefor, the Fair Market Value of the
Shares (determined as of the relevant Vesting Date) and the amount of cash (to
the extent that cash was delivered in lieu of Shares) that were delivered with
respect to such Vesting
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<PAGE> 3
Date and without reduction for any Shares (or cash delivered in lieu of all or
any portion thereof) applied to satisfy withholding tax or other obligations in
respect of such Shares (or cash).
6. Extended Absence and Retirement.
(a) Notwithstanding any other provision of this Award
Agreement, if your Employment with the Firm is terminated by reason of Extended
Absence or Retirement, and provided your rights with respect to any outstanding
RSUs have not previously terminated, the condition set forth in Paragraph
4(a)(i)(A) shall be waived but all other conditions of this Award Agreement
shall continue to apply.
(b) Without limiting the application of Paragraphs 4(a)(i)(B)
and (C), Paragraph 4(a)(ii) and Paragraph 4(b), unless the Committee determines
otherwise, your rights in respect of any outstanding RSUs shall immediately
terminate and no Shares (or cash) shall be delivered in respect of such RSUs if,
following the termination of your Employment with the Firm by reason of Extended
Absence or Retirement:
(i) you (A) form, or acquire a 5% or greater equity ownership,
voting or profit participation interest in, any Competitive Enterprise,
or (B) associate (including, but not limited to, association as an
officer, employee, partner, director, consultant, agent or advisor)
with any Competitive Enterprise and in connection with such association
engage in, or directly or indirectly manage or supervise personnel
engaged in, any activity (1) which is similar or substantially related
to any activity in which you were engaged, in whole or in part, at the
Firm, (2) for which you had direct or indirect managerial or
supervisory responsibility at the Firm or (3) which calls for the
application of the same or similar specialized knowledge or skills as
those utilized by you in your activities with the Firm, at any time
during the one-year period immediately prior to termination of your
Employment (or, in the case of an action taken prior to termination of
your Employment, during the one-year period immediately prior to such
action), and, in any such case, irrespective of the purpose of the
activity or whether the activity is or was in furtherance of advisory,
agency, proprietary or fiduciary business of either the Firm or the
Competitive Enterprise. (By way of example only, this provision would
preclude an "advisory" investment banker from joining a
leveraged-buyout firm, a research analyst from becoming a proprietary
trader or joining a hedge fund, or an information systems professional
from joining a management or other consulting firm and providing
information technology consulting services or advice to any Competitive
Enterprise.); or
(ii) you in any manner, directly or indirectly, (A) Solicit
any Client to transact business with a Competitive Enterprise or to
reduce or refrain from doing any business with the Firm or (B)
interfere with or damage (or attempt to interfere with or damage) any
relationship between the Firm and any such Client or (C) Solicit any
person who is an employee of the Firm to resign from the Firm or to
apply for or accept employment with any Competitive Enterprise.
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<PAGE> 4
7. Change in Control. Notwithstanding anything to the
contrary in this Award Agreement, in the event a Change in Control shall occur
and within 18 months thereafter the Firm terminates your Employment without
Cause or you terminate Employment with the Firm for Good Reason, any outstanding
RSUs with respect to which your rights have not terminated shall vest and all
Shares (or the Fair Market Value thereof in cash) shall be delivered.
8. Dividend Equivalents. Prior to the delivery of Shares
(or cash in lieu thereof) pursuant to this Award Agreement, at or after the time
of distribution of any regular cash dividend paid by GS Inc. in respect of the
Common Stock, you shall be entitled to receive an amount in cash (less
applicable withholding) equal to such regular cash dividend payment that would
have been made in respect of the Shares not yet delivered, as if the Shares had
been actually delivered; provided, that no payment in respect of RSUs shall be
made if, prior to the time such payment is due, your rights with respect to such
RSUs have previously terminated under this Agreement.
9. Non-transferability; Beneficiary Designation. Except
as may otherwise be provided by the Committee, the limitations set forth in
Section 3.4 of the Plan shall apply. Any assignment in violation of the
provisions of this Paragraph 9 shall be void. You may designate, in accordance
with procedures established by the Committee, a beneficiary or beneficiaries to
receive all or part of the amounts to be paid under this Award Agreement in the
event of your death. A designation of a beneficiary may be replaced by a new
designation or may be revoked by you at any time in accordance with procedures
established by the Committee. If you die without having properly designated a
beneficiary, any amounts payable upon your death shall be distributed to your
estate. If there is any question as to the legal right of any beneficiary to
receive payment of amounts under this Award Agreement, the amounts in question
may be paid to your estate, in which event the Firm shall have no further
liability to anyone with respect to such amounts. A beneficiary or estate shall
have no rights under this Award Agreement other than the right, subject to the
immediately preceding sentence, to receive such amounts, if any, as may be
payable under this Paragraph 9.
10. Withholding, Consents and Legends.
(a) The delivery of Shares is conditioned on your satisfaction
of any applicable withholding taxes (in accordance with Section 3.2 of the Plan,
provided that the Committee may determine not to apply the minimum withholding
rate specified in Section 3.2.2 of the Plan).
(b) Your rights in respect of the RSUs are conditioned on the
receipt to the full satisfaction of the Committee of any required consents (as
defined in Section 3.3 of the Plan) that the Committee may determine to be
necessary or advisable (including, without limitation, your consenting (i) to
the Firm's supplying to any third party recordkeeper of the Plan such personal
information as the Committee deems advisable to administer the Plan and (ii) to
deductions from your wages, or other arrangements satisfactory to the Committee,
to reimburse
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<PAGE> 5
the Firm for advances made on your behalf to satisfy certain withholding and
other tax obligations in connection with this Award).
(c) If you are or become a Managing Director, your rights in
respect of the RSUs are conditioned on your becoming a party to any
shareholders' agreement to which other similarly situated employees of the Firm
are a party.
(d) GS Inc. may affix to Certificates representing Shares
issued pursuant to this Award Agreement any legend that the Committee determines
to be necessary or advisable (including to reflect any restrictions to which you
may be subject under a separate agreement with GS Inc.). GS Inc. may advise the
transfer agent to place a stop order against any legended Shares.
11. Right of Offset. GS Inc. (and any of its affiliates
or subsidiaries) shall have the right to offset against the obligation to
deliver Shares (or cash) under this Award Agreement any outstanding amounts
(including, without limitation, travel and entertainment or advance account
balances, loans, or amounts repayable to the Firm pursuant to tax equalization,
housing, automobile or other employee programs) you then owe to the Firm and any
amounts the Committee otherwise deems appropriate pursuant to any tax
equalization policy or agreement.
12. No Rights to Continued Employment. Nothing in this
Award Agreement or the Plan shall be construed as giving you any right to
continued Employment by the Firm or affect any right which the Firm may have to
terminate or alter the terms and conditions of your Employment.
13. Successors and Assigns of GS Inc. The terms and
conditions of this Award Agreement shall be binding upon and shall inure to the
benefit of GS Inc. and its successors and assigns.
14. Committee Discretion. The Committee shall have full
discretion with respect to any actions to be taken or determinations to be made
in connection with this Award Agreement, and its determinations shall be final,
binding and conclusive.
15. Amendment. The Committee reserves the right at any
time to amend the terms and conditions set forth in this Award Agreement, and
the Board may amend the Plan in any respect; provided that, notwithstanding the
foregoing and Sections 1.3.2(f), 1.3.2(g) and Section 3.1 of the Plan, no such
amendment shall materially adversely affect your rights and obligations under
this Award Agreement without your consent (or the consent of your beneficiary or
estate, if such consent is obtained after your death), except that the Committee
reserves the right to accelerate the vesting and delivery of the Shares and in
its discretion provide that such Shares may not be transferable until the
relevant Vesting Dates (and that in respect of such Shares you may remain
subject to the repayment obligations of Paragraph 5 in the circumstances under
which the Shares would not have been delivered pursuant to Section 4 or 6).
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<PAGE> 6
Any amendment of this Award Agreement shall be in writing signed by the Chief
Executive Officer of GS Inc. or his or her designee.
16. Arbitration; Choice of Forum. (a) Any dispute,
controversy or claim between the Firm and you, arising out of or relating to or
concerning the Plan or this Award Agreement, shall be finally settled by
arbitration in New York City before, and in accordance with the rules then
obtaining of, the New York Stock Exchange, Inc. (the "NYSE") or, if the NYSE
declines to arbitrate the matter, the American Arbitration Association (the
"AAA") in accordance with the commercial arbitration rules of the AAA. Prior to
arbitration, all claims maintained by you must first be submitted to the
Committee in accordance with claims procedures determined by the Committee. This
paragraph is subject to the provisions of clauses (b) and (c) below.
(b) THE FIRM AND YOU HEREBY IRREVOCABLY SUBMIT TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE CITY OF NEW
YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO OR
CONCERNING THE PLAN OR THIS AWARD AGREEMENT THAT IS NOT OTHERWISE ARBITRATED OR
RESOLVED ACCORDING TO PARAGRAPH 16(a) OF THIS AWARD AGREEMENT. This includes
any suit, action or proceeding to compel arbitration or to enforce an
arbitration award. The Firm and you acknowledge that the forum designated by
this Paragraph 16(b) has a reasonable relation to the Plan, this Award
Agreement, and to your relationship with the Firm. Notwithstanding the
foregoing, nothing herein shall preclude the Firm from bringing any action or
proceeding in any other court for the purpose of enforcing the provisions of
this Paragraph 16.
(c) The agreement by you and the Firm as to forum is
independent of the law that may be applied in the action, and you and the Firm
agree to such forum even if the forum may under applicable law choose to apply
non-forum law. You and the Firm hereby waive, to the fullest extent permitted by
applicable law, any objection which you or the Firm now or hereafter may have to
personal jurisdiction or to the laying of venue of any such suit, action or
proceeding in any court referred to in Paragraph 16(b). You and the Firm
undertake not to commence any action arising out of or relating to or concerning
this Award Agreement in any forum other than a forum described in this Paragraph
16. You and the Firm agree that, to the fullest extent permitted by applicable
law, a final and non-appealable judgment in any such suit, action or proceeding
in any such court shall be conclusive and binding upon you and the Firm.
(d) You irrevocably appoint the General Counsel of GS Inc. as
your agent for service of process in connection with any action or proceeding
arising out of or relating to or concerning this Award Agreement which is not
arbitrated pursuant to the provisions of Paragraph 16(a), who shall promptly
advise you of any such service of process.
(e) You hereby agree to keep confidential the existence of,
and any information concerning, a dispute described in this Paragraph 16, except
that you may disclose information concerning such dispute to the arbitrator or
court that is considering such dispute or
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<PAGE> 7
to your legal counsel (provided that such counsel agrees not to disclose any
such information other than as necessary to the prosecution or defense of the
dispute).
(f) You recognize and agree that prior to the grant of this
Award you have no right to any benefits hereunder. Accordingly, in consideration
of the receipt of this Award, you expressly waive any right to contest the
amount of this Award, terms of this Award Agreement, any determination, action
or omission hereunder or under the Plan by the Committee, GS Inc. or the Board,
or any amendment to the Plan or this Award Agreement (other than an amendment to
which your consent is expressly required by Paragraph 15).
17. Governing Law. THIS AWARD SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS.
18. Headings. The headings in this Award Agreement are
for the purpose of convenience only and are not intended to define or limit the
construction of the provisions hereof.
IN WITNESS WHEREOF, GS Inc. has caused this Award Agreement to
be duly executed and delivered as of _____, 1999.
THE GOLDMAN SACHS GROUP, INC.
By: ____________________________
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<PAGE> 8
GLOSSARY OF TERMS
Solely for purposes of the 1999 Discretionary RSU Award Agreement and
the 1999 Discretionary Option Award Agreement, granted under the
Goldman Sachs 1999 Stock Incentive Plan (the "Plan"), the following
terms shall have the meanings set forth below. Capitalized terms not
defined in this Glossary of Terms shall have the meanings as used or
defined in the applicable Award
Agreement or the Plan.
"CAUSE" means (i) your conviction, whether following trial or
by plea of guilty or nolo contendere (or similar plea), in a criminal
proceeding (A) on a misdemeanor charge involving fraud, false
statements or misleading omissions, wrongful taking, embezzlement,
bribery, forgery, counterfeiting or extortion, or (B) on a felony
charge or (C) on an equivalent charge to those in clauses (A) and (B)
in jurisdictions which do not use those designations; (ii) your
engaging in any conduct which constitutes an employment
disqualification under applicable law (including statutory
disqualification as defined under the Exchange Act); (iii) your willful
or grossly negligent failure to perform your duties to the Firm; (iv)
your violation of any securities or commodities laws, any rules or
regulations issued pursuant to such laws, or the rules and regulations
of any securities or commodities exchange or association of which GS
Inc. or any of its subsidiaries or affiliates is a member; (v) your
violation of any Firm policy concerning hedging or confidential or
proprietary information, or your material violation of any other Firm
policy as in effect from time to time; (vi) your engaging in any act or
making any statement which impairs, impugns, denigrates, disparages or
negatively reflects upon the name, reputation or business interests of
the Firm; or (vii) your engaging in any conduct detrimental to the
Firm. The determination as to whether "Cause" has occurred shall be
made by the Committee in its sole discretion. The Committee shall also
have the authority in its sole discretion to waive the consequences
under the Plan or any Award Agreement of the existence or occurrence of
any of the events, acts or omissions constituting "Cause".
"CHANGE IN CONTROL" means the consummation of a merger,
consolidation, statutory share exchange or similar form of corporate
transaction involving GS Inc. (a "Reorganization") or sale or other
disposition of all or substantially all of GS Inc.'s assets to an
entity that is not an affiliate of GS Inc. (a "Sale"), that in each
case requires the approval of GS Inc.'s stockholders under the law of
GS Inc.'s jurisdiction of organization, whether for such Reorganization
or Sale (or the issuance of securities of GS Inc. in such
Reorganization or Sale), unless immediately following such
Reorganization or Sale, either: (i) at least 50% of the total voting
power (in respect of the election of directors, or similar officials in
the case of an entity other than a corporation) of (A) the entity
resulting from such Reorganization, or the entity which has acquired
all or substantially all of the assets of GS Inc. in a Sale (in either
case, the "Surviving Entity"), or (B) if applicable, the ultimate
parent entity that directly or
<PAGE> 9
indirectly has beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act, as such Rule is in effect on the date of the
adoption of the Plan) of 50% or more of the total voting power (in
respect of the election of directors, or similar officials in the case
of an entity other than a corporation) of the Surviving Entity (the
"Parent Entity"), is represented by GS Inc.'s securities (the "GS Inc.
Securities") that were outstanding immediately prior to such
Reorganization or Sale (or, if applicable, is represented by shares
into which such GS Inc. Securities were converted pursuant to such
Reorganization or Sale) or (ii) at least 50% of the members of the
board of directors (or similar officials in the case of an entity other
than a corporation) of the Parent Entity (or, if there is no Parent
Entity, the Surviving Entity) following the consummation of the
Reorganization or Sale were, at the time of the Board's approval of the
execution of the initial agreement providing for such Reorganization or
Sale, individuals (the "Incumbent Directors") who either (1) were
members of the Board on the date of the Award or (2) became directors
subsequent to the date of the Award and whose election or nomination
for election was approved by a vote of at least two-thirds of the
Incumbent Directors then on the Board (either by a specific vote or by
approval of GS Inc.'s proxy statement in which such persons are named
as a nominee for director).
"CLIENT" means any client or prospective client of the Firm to
whom you provided services, or for whom you transacted business, or
whose identity became known to you in connection with your relationship
with or employment by the Firm.
"COMPETITIVE ENTERPRISE" means a business enterprise that (i)
engages in any activity, or (ii) owns or controls a significant
interest in any entity that engages in any activity, that, in either
case, competes anywhere with any activity in which the Firm is engaged.
The activities covered by the previous sentence include, without
limitation, financial services such as investment banking, public or
private finance, lending, financial advisory services, private
investing (for anyone other than you and members of your family),
merchant banking, asset or hedge fund management, insurance or
reinsurance underwriting or brokerage, property management, or
securities, futures, commodities, energy, derivatives or currency
brokerage, sales, lending, custody, clearance, settlement or trading.
"EXTENDED ABSENCE" means you are unable to perform for six
continuous months, due to illness, injury or pregnancy-related
complications, substantially all the essential duties of your
occupation, as determined by the Committee.
"GOOD REASON" means (i) as determined by the Committee, a
materially adverse alteration in the your position or in the nature or
status of your responsibilities from those in effect immediately prior
to the Change in Control, or (ii) the Firm's requiring your principal
place of Employment to be located more than seventy-five (75) miles
from the location where you are principally Employed at the time of the
Change in Control (except for required travel on the Firm's business to
an extent substantially
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<PAGE> 10
consistent with your customary business travel obligations in the
ordinary course of business prior to the Change in Control).
"RETIREMENT" means termination of your Employment on or after
the date on which (i) you have attained age 55 with 5 years of service
with the Firm, or (ii) the sum of (I) your age and (II) 1.5 times your
years of service with the Firm, is equal to or greater than 80.
"SOLICIT" means any direct or indirect communication of any
kind whatsoever, regardless of by whom initiated, inviting, advising,
encouraging or requesting any person or entity, in any manner, to take
or refrain from taking any action.
"VESTING DATE" means the first day of each Window Period that
begins on or immediately follows each of the third, fourth and fifth
anniversaries of the consummation of the initial public offering of
Shares.
"WINDOW PERIOD" means a period designated by the Committee
during which employees of the Firm generally are permitted to purchase
or sell Shares.
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<PAGE> 1
EXHIBIT 10.24
THE GOLDMAN SACHS 1999 STOCK INCENTIVE PLAN
1999 DISCRETIONARY OPTION AWARD
This Award Agreement sets forth the terms and conditions of an
Award granted to you under The Goldman Sachs 1999 Stock Incentive Plan (the
"Plan"), of options ("Options") to purchase shares of Common Stock ("Shares").
1. The Plan. This Award is made pursuant to the Plan, the
terms of which are incorporated in this Award Agreement. Capitalized terms used
in this Award Agreement which are not defined in this Award Agreement, or in the
attached Glossary of Terms, have the meanings as used or defined in the Plan.
2. Award. A statement separately delivered to you sets forth
(i) the date of grant of the Options (the "Date of Grant"), (ii) the number of
Shares underlying the Options, and (iii) the exercise price of each Option (the
"Exercise Price"). Until the Shares are delivered to you pursuant to Paragraph
6, you have no rights as a shareholder of GS Inc. THIS AWARD IS SUBJECT TO ALL
TERMS AND PROVISIONS OF THE PLAN AND THIS AWARD AGREEMENT, INCLUDING, WITHOUT
LIMITATION, THE ARBITRATION AND CHOICE OF FORUM PROVISIONS SET FORTH IN
PARAGRAPH 15. BY OPENING THE CUSTODY ACCOUNT REFERRED TO IN PARAGRAPH 6, YOU
WILL HAVE CONFIRMED YOUR ACCEPTANCE OF THE TERMS AND CONDITIONS OF THIS AWARD
AGREEMENT.
3. Expiration Date. Notwithstanding anything to the contrary
in this Award Agreement, the Options shall expire and no longer be exercisable
on the tenth anniversary of the Date of Grant (the "Expiration Date"), subject
to earlier termination as provided in this Award Agreement, or otherwise in
accordance with the Plan.
4. Vesting.
(a) In General. Except as provided below in Paragraphs 4(b)
and 4(c), the Options shall vest in equal installments (subject to rounding in
the discretion of the Committee to avoid the vesting of fractional options) on
each Vesting Date.
(b) Death. Notwithstanding any other provision of this Award
Agreement, if you die prior to the last Vesting Date, and provided your rights
in respect of the outstanding Options have not previously terminated, any
Options that have not vested shall immediately vest.
(c) Termination of Options Upon Certain Events. Unless the
Committee determines otherwise, and except as provided in Paragraph 5(f), your
rights in respect of any outstanding unvested Options shall immediately
terminate if:
(i) at any time prior to the relevant Vesting Date:
<PAGE> 2
(A) your Employment with the Firm is terminated for any
reason, or you are otherwise no longer actively employed with the Firm
(except as provided in Paragraphs 4(b) or 4(d)); or
(B) any of the items that constitute Cause have occurred; or
(C) you attempt to have any dispute under this Award Agreement
resolved in any manner that is not provided for by Paragraph 15; or
(ii) you fail to certify to GS Inc., in accordance with
procedures established by the Committee, with respect to each relevant
Vesting Date that you have complied, or the Committee determines that
you in fact have failed as of the relevant Vesting Date to comply, with
all the terms and conditions of this Award Agreement.
(d) Extended Absence and Retirement.
(i) If your Employment with the Firm is terminated by reason
of Extended Absence or Retirement, and provided your rights with respect to any
outstanding unvested Options have not previously terminated, the condition set
forth in Paragraph 4(c)(i)(A) shall be waived but all other conditions of this
Award Agreement shall continue to apply.
(ii) Without limiting the application of Paragraphs 4(c)(i)(B)
and (C) and Paragraph 4(c)(ii), unless the Committee determines otherwise, your
rights in respect of any outstanding unvested Options shall immediately
terminate if, following the termination of your Employment with the Firm by
reason of Extended Absence or Retirement:
(A) you (1) form, or acquire a 5% or greater equity ownership,
voting or profit participation interest in, any Competitive Enterprise,
or (2) associate (including, but not limited to, association as an
officer, employee, partner, director, consultant, agent or advisor)
with any Competitive Enterprise and in connection with such association
engage in, or directly or indirectly manage or supervise personnel
engaged in, any activity (x) which is similar or substantially related
to any activity in which you were engaged, in whole or in part, at the
Firm, (y) for which you had direct or indirect managerial or
supervisory responsibility at the Firm or (z) which calls for the
application of the same or similar specialized knowledge or skills as
those utilized by you in your activities with the Firm, at any time
during the one-year period immediately prior to termination of your
Employment (or, in the case of an action taken prior to termination of
your Employment, during the one-year period immediately prior to such
action), and, in any such case, irrespective of the purpose of the
activity or whether the activity is or was in furtherance of advisory,
agency, proprietary or fiduciary business of either the Firm or the
Competitive Enterprise. (By way of example only, this provision would
preclude an "advisory" investment banker from joining a
leveraged-buyout firm, a research analyst from becoming a proprietary
trader or joining a hedge fund, or an information systems professional
from joining a management or other consulting firm and providing
information technology consulting services or advice to any Competitive
Enterprise.); or
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<PAGE> 3
(B) you in any manner, directly or indirectly, (1) Solicit any
Client to transact business with a Competitive Enterprise or to reduce
or refrain from doing any business with the Firm or (2) interfere with
or damage (or attempt to interfere with or damage) any relationship
between the Firm and any such Client or (3) Solicit any person who is
an employee of the Firm to resign from the Firm or to apply for or
accept employment with any Competitive Enterprise.
5. Exercisability of Vested Options.
(a) Options that are not vested may not be exercised. Vested
Options may be exercised in accordance with procedures established by the
Committee. The Committee may from time to time prescribe periods during which
the vested Options shall not be exercisable.
(b) Unless the Committee determines otherwise, and except as
provided in Paragraph 5(f), any outstanding vested Options shall cease to be
exercisable, and your rights in respect of such Options shall immediately
terminate, if prior to the exercise of such Options:
(i) any of the events specified in Paragraph 4(c)(i)(B) or
(C), or Paragraph 4(d)(ii)(A) or (B), have occurred; or
(ii) you fail to certify to GS Inc., in accordance with
procedures established by the Committee, with respect to each Option
exercise date that you have complied, or the Committee determines that
you in fact have failed as of such Option exercise date to comply, with
all the terms and conditions of this Award Agreement. By accepting the
delivery of Shares upon exercise of any Options, you shall be deemed to
have represented and certified at such time that you have complied with
all the terms and conditions of this Award Agreement.
(c) Death. If you die, provided your rights in respect of the
vested Options have not previously terminated, any outstanding vested Options
shall be exercisable by your designated beneficiary, or, if none, the persons
determined by the Committee in accordance with Paragraph 8, for a period of one
year following the date of your death, but in no event later than the Expiration
Date, and shall thereafter terminate.
(d) Extended Absence and Retirement. If your Employment with
the Firm is terminated by reason of Extended Absence or Retirement, and provided
your rights in respect of any outstanding Options have not previously
terminated, then the Options, to the extent such Options are or become vested,
shall be exercisable (subject to the satisfaction of all terms and conditions of
this Award Agreement, including Paragraph 5(b)) until the later of (i) the
expiration of the one-year period following the last Vesting Date, or (ii) the
expiration of the one-year period following the date of your termination of
Employment, but in no event later than the Expiration Date, and shall thereafter
terminate.
(e) Other Terminations. Except as provided in Paragraph 5(f),
upon the termination of your Employment for any reason other than death, Cause,
Extended Absence or Retirement, any vested Options shall remain exercisable
(subject to the satisfaction of all terms and conditions of this Award
Agreement, including Paragraph 5(b)) for 90 days following such termination of
Employment (or
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<PAGE> 4
if you die within such 90-day period, for one year from your date of death), but
in no event later than the Expiration Date, and shall thereafter terminate.
(f) Change in Control. Notwithstanding anything to the
contrary in this Award Agreement, in the event a Change in Control shall occur
and within 18 months thereafter the Firm terminates your Employment without
Cause or you terminate Employment with the Firm for Good Reason, any unvested
Options with respect to which your rights have not terminated shall vest and all
unexercised outstanding Options shall be exercisable for a period of one year
following such termination of Employment, but in no event later than the
Expiration Date, and shall thereafter terminate.
6. Delivery. Unless otherwise determined by the Committee, or
as otherwise provided in this Award Agreement, and except as provided in
Paragraphs 9 and 10, upon receipt of payment of the Exercise Price for Shares
subject to Options, delivery of Shares shall be effected by book-entry credit to
a custody account (the "Custody Account") maintained by you with The Chase
Manhattan Bank or such successor custodian as may be designated by GS Inc. No
delivery of Shares shall be made unless you have timely established the Custody
Account. You shall be the beneficial owner of any Shares properly credited to
the Custody Account. You shall have no right to any dividend or distribution
with respect to such Shares if the record date for such dividend or distribution
is prior to the date the Custody Account is properly credited with such Shares.
The Firm may deliver cash in lieu of all or any portion of the Shares otherwise
deliverable in accordance with this Paragraph 6.
7. Repayment. If, following the exercise of any Options, the
Committee determines that all terms and conditions of this Award Agreement in
respect of such exercise were not satisfied, the Firm shall be entitled to
receive, and you shall be obligated to pay the Firm immediately upon demand
therefor, an amount equal to the excess of the Fair Market Value (determined at
the time of exercise) of the Shares that were delivered in respect of such
exercised Options over the Exercise Price paid therefor and without reduction
for any Shares applied to satisfy withholding tax or other obligations in
respect of such Shares.
8. Non-transferability; Beneficiary Designation. Except as may
otherwise be provided by the Committee, the limitations set forth in Section 3.4
of the Plan shall apply. Any assignment in violation of the provisions of this
Paragraph 8 shall be void. You may designate, in accordance with procedures
established by the Committee, a beneficiary or beneficiaries to receive all or
part of the amounts to be paid under this Award Agreement in the event of your
death. A designation of a beneficiary may be replaced by a new designation or
may be revoked by you at any time in accordance with procedures established by
the Committee. In the event of your death, such beneficiary or, if no
designation of beneficiary has been made, the legal representative of your
estate, or those persons succeeding to the rights of such legal representative,
may exercise, in accordance with the terms of this Award Agreement, any
outstanding Options which are vested (including those which have become vested
under Paragraph 4(b)), exercisable and have not expired or otherwise terminated.
The determination by the Committee of the persons entitled to exercise any
Options following your death shall be binding and conclusive on all persons. A
beneficiary or estate shall have no rights under this Award Agreement other than
the right, subject to the immediately preceding sentence, to exercise Options in
accordance with this Paragraph 8.
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<PAGE> 5
9. Withholding, Consents and Legends.
(a) The delivery of Shares upon exercise of Options is
conditioned on your satisfaction of any applicable withholding taxes (in
accordance with Section 3.2 of the Plan, provided that the Committee may
determine not to apply the minimum withholding rate specified in Section 3.2.2
of the Plan).
(b) Your rights in respect of the Options are conditioned on
the receipt to the full satisfaction of the Committee of any required consents
(as defined in Section 3.3 of the Plan) that the Committee may determine to be
necessary or advisable (including, without limitation, your consenting (i) to
the Firm's supplying to any third party recordkeeper of the Plan such personal
information as the Committee deems advisable to administer the Plan and (ii) to
deductions from your wages, or other arrangements satisfactory to the Committee,
to reimburse the Firm for advances made on your behalf to satisfy certain
withholding and other tax obligations in connection with this Award).
(c) If you are or become a Managing Director, your rights in
respect of the Options are conditioned on your becoming a party to any
shareholders' agreement to which other similarly situated employees of the Firm
are a party.
(d) GS Inc. may affix to Certificates representing Shares
issued pursuant to this Award Agreement any legend that the Committee determines
to be necessary or advisable (including to reflect any restrictions to which you
may be subject under a separate agreement with GS Inc.). GS Inc. may advise the
transfer agent to place a stop order against any legended Shares.
10. Right of Offset. GS Inc. (and any of its affiliates or
subsidiaries) shall have the right to offset against the obligation to deliver
Shares (or cash) under this Award Agreement any outstanding amounts (including,
without limitation, travel and entertainment or advance account balances, loans,
or amounts repayable to the Firm pursuant to tax equalization, housing,
automobile or other employee programs) you then owe to the Firm and any amounts
the Committee otherwise deems appropriate pursuant to any tax equalization
policy or agreement.
11. No Rights to Continued Employment. Nothing in this Award
Agreement or the Plan shall be construed as giving you any right to continued
Employment by the Firm or affect any right which the Firm may have to terminate
or alter the terms and conditions of your Employment.
12. Successors and Assigns of GS Inc. The terms and conditions
of this Award Agreement shall be binding upon and shall inure to the benefit of
GS Inc. and its successors and assigns.
13. Committee Discretion. The Committee shall have full
discretion with respect to any actions to be taken or determinations to be made
in connection with this Award Agreement, and its determinations shall be final,
binding and conclusive.
14. Amendment. The Committee reserves the right at any time to
amend the terms and conditions set forth in this Award Agreement, and the Board
may amend the Plan in any respect;
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<PAGE> 6
provided that, notwithstanding the foregoing and Sections 1.3.2(f), 1.3.2(g) and
Section 3.1 of the Plan, no such amendment shall materially adversely affect
your rights and obligations under this Award Agreement without your consent (or
the consent of your beneficiary or estate, if applicable), except that the
Committee reserves the right to accelerate the vesting of the Options and in its
discretion provide that Shares acquired pursuant to the exercise of Options may
not be transferable until the relevant Vesting Dates (and that in respect of
such Shares you may remain subject to the repayment obligations of Paragraph 7
in the circumstances under which the Option would not have vested or become
exercisable pursuant to Sections 4 or 5). Any amendment of this Award Agreement
shall be in writing signed by the Chief Executive Officer of GS Inc. or his or
her designee.
15. Arbitration; Choice of Forum. (a) Any dispute, controversy
or claim between the Firm and you, arising out of or relating to or concerning
the Plan or this Award Agreement, shall be finally settled by arbitration in New
York City before, and in accordance with the rules then obtaining of, the New
York Stock Exchange, Inc. (the "NYSE") or, if the NYSE declines to arbitrate the
matter, the American Arbitration Association (the "AAA") in accordance with the
commercial arbitration rules of the AAA. Prior to arbitration, all claims
maintained by you must first be submitted to the Committee in accordance with
claims procedures determined by the Committee. This paragraph is subject to the
provisions of clauses (b) and (c) below.
(b) THE FIRM AND YOU HEREBY IRREVOCABLY SUBMIT TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE CITY OF NEW
YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO OR
CONCERNING THE PLAN OR THIS AWARD AGREEMENT THAT IS NOT OTHERWISE ARBITRATED OR
RESOLVED ACCORDING TO PARAGRAPH 15(a) OF THIS AWARD AGREEMENT. This includes any
suit, action or proceeding to compel arbitration or to enforce an arbitration
award. The Firm and you acknowledge that the forum designated by this
Paragraph 15(b) has a reasonable relation to the Plan, this Award Agreement, and
to your relationship with the Firm. Notwithstanding the foregoing, nothing
herein shall preclude the Firm from bringing any action or proceeding in any
other court for the purpose of enforcing the provisions of this Paragraph 15.
(c) The agreement by you and the Firm as to forum is
independent of the law that may be applied in the action, and you and the Firm
agree to such forum even if the forum may under applicable law choose to apply
non-forum law. You and the Firm hereby waive, to the fullest extent permitted by
applicable law, any objection which you or the Firm now or hereafter may have to
personal jurisdiction or to the laying of venue of any such suit, action or
proceeding in any court referred to in Paragraph 15(b). You and the Firm
undertake not to commence any action arising out of or relating to or concerning
this Award Agreement in any forum other than a forum described in this Paragraph
15. You and the Firm agree that, to the fullest extent permitted by applicable
law, a final and non-appealable judgment in any such suit, action or proceeding
in any such court shall be conclusive and binding upon you and the Firm.
(d) You irrevocably appoint the General Counsel of GS Inc. as
your agent for service of process in connection with any action or proceeding
arising out of or relating to or concerning
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<PAGE> 7
this Award Agreement which is not arbitrated pursuant to the provisions of
Paragraph 15(a), who shall promptly advise you of any such service of process.
(e) You hereby agree to keep confidential the existence of,
and any information concerning, a dispute described in this Paragraph 15, except
that you may disclose information concerning such dispute to the arbitrator or
court that is considering such dispute or to your legal counsel (provided that
such counsel agrees not to disclose any such information other than as necessary
to the prosecution or defense of the dispute).
(f) You recognize and agree that prior to the grant of this
Award you have no right to any benefits hereunder. Accordingly, in consideration
of the receipt of this Award, you expressly waive any right to contest the
amount of this Award, terms of this Award Agreement, any determination, action
or omission hereunder or under the Plan by the Committee, GS Inc. or the Board,
or any amendment to the Plan or this Award Agreement (other than an amendment to
which your consent is expressly required by Paragraph 14).
16. Governing Law. THIS AWARD SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS.
17. Headings. The headings in this Award Agreement are for the
purpose of convenience only and are not intended to define or limit the
construction of the provisions hereof.
IN WITNESS WHEREOF, GS Inc. has caused this Award Agreement to
be duly executed and delivered as of __________, 1999.
THE GOLDMAN SACHS GROUP, INC.
By: ____________________________
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<PAGE> 8
GLOSSARY OF TERMS
Solely for purposes of the 1999 Discretionary RSU Award Agreement and
the 1999 Discretionary Option Award Agreement, granted under the
Goldman Sachs 1999 Stock Incentive Plan (the "Plan"), the following
terms shall have the meanings set forth below. Capitalized terms not
defined in this Glossary of Terms shall have the meanings as used or
defined in the applicable Award Agreement or the Plan.
"CAUSE" means (i) your conviction, whether following trial or
by plea of guilty or nolo contendere (or similar plea), in a criminal
proceeding (A) on a misdemeanor charge involving fraud, false
statements or misleading omissions, wrongful taking, embezzlement,
bribery, forgery, counterfeiting or extortion, or (B) on a felony
charge or (C) on an equivalent charge to those in clauses (A) and (B)
in jurisdictions which do not use those designations; (ii) your
engaging in any conduct which constitutes an employment
disqualification under applicable law (including statutory
disqualification as defined under the Exchange Act); (iii) your willful
or grossly negligent failure to perform your duties to the Firm; (iv)
your violation of any securities or commodities laws, any rules or
regulations issued pursuant to such laws, or the rules and regulations
of any securities or commodities exchange or association of which GS
Inc. or any of its subsidiaries or affiliates is a member; (v) your
violation of any Firm policy concerning hedging or confidential or
proprietary information, or your material violation of any other Firm
policy as in effect from time to time; (vi) your engaging in any act or
making any statement which impairs, impugns, denigrates, disparages or
negatively reflects upon the name, reputation or business interests of
the Firm; or (vii) your engaging in any conduct detrimental to the
Firm. The determination as to whether "Cause" has occurred shall be
made by the Committee in its sole discretion. The Committee shall also
have the authority in its sole discretion to waive the consequences
under the Plan or any Award Agreement of the existence or occurrence of
any of the events, acts or omissions constituting "Cause".
"CHANGE IN CONTROL" means the consummation of a merger,
consolidation, statutory share exchange or similar form of corporate
transaction involving GS Inc. (a "Reorganization") or sale or other
disposition of all or substantially all of GS Inc.'s assets to an
entity that is not an affiliate of GS Inc. (a "Sale"), that in each
case requires the approval of GS Inc.'s stockholders under the law of
GS Inc.'s jurisdiction of organization, whether for such Reorganization
or Sale (or the issuance of securities of GS Inc. in such
Reorganization or Sale), unless immediately following such
Reorganization or Sale, either: (i) at least 50% of the total voting
power (in respect of the election of directors, or similar officials in
the case of an entity other than a corporation) of (A) the entity
resulting from such Reorganization, or the entity which has acquired
all or substantially all of the assets of GS Inc. in a Sale (in either
case, the "Surviving Entity"), or (B) if applicable, the ultimate
parent entity that directly or indirectly has beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act, as such Rule
is in effect on the date of the adoption of the Plan) of 50% or more of
the total voting power (in respect of the election of directors, or
similar officials in the case of an entity other than a corporation) of
the Surviving Entity (the "Parent Entity"), is represented by GS Inc.'s
securities (the "GS Inc.
<PAGE> 9
Securities") that were outstanding immediately prior to such
Reorganization or Sale (or, if applicable, is represented by shares
into which such GS Inc. Securities were converted pursuant to such
Reorganization or Sale) or (ii) at least 50% of the members of the
board of directors (or similar officials in the case of an entity other
than a corporation) of the Parent Entity (or, if there is no Parent
Entity, the Surviving Entity) following the consummation of the
Reorganization or Sale were, at the time of the Board's approval of the
execution of the initial agreement providing for such Reorganization or
Sale, individuals (the "Incumbent Directors") who either (1) were
members of the Board on the date of the Award or (2) became directors
subsequent to the date of the Award and whose election or nomination
for election was approved by a vote of at least two-thirds of the
Incumbent Directors then on the Board (either by a specific vote or by
approval of GS Inc.'s proxy statement in which such persons are named
as a nominee for director).
"CLIENT" means any client or prospective client of the Firm to
whom you provided services, or for whom you transacted business, or
whose identity became known to you in connection with your relationship
with or employment by the Firm.
"COMPETITIVE ENTERPRISE" means a business enterprise that (i)
engages in any activity, or (ii) owns or controls a significant
interest in any entity that engages in any activity, that, in either
case, competes anywhere with any activity in which the Firm is engaged.
The activities covered by the previous sentence include, without
limitation, financial services such as investment banking, public or
private finance, lending, financial advisory services, private
investing (for anyone other than you and members of your family),
merchant banking, asset or hedge fund management, insurance or
reinsurance underwriting or brokerage, property management, or
securities, futures, commodities, energy, derivatives or currency
brokerage, sales, lending, custody, clearance, settlement or trading.
"EXTENDED ABSENCE" means you are unable to perform for six
continuous months, due to illness, injury or pregnancy-related
complications, substantially all the essential duties of your
occupation, as determined by the Committee.
"GOOD REASON" means (i) as determined by the Committee, a
materially adverse alteration in the your position or in the nature or
status of your responsibilities from those in effect immediately prior
to the Change in Control, or (ii) the Firm's requiring your principal
place of Employment to be located more than seventy-five (75) miles
from the location where you are principally Employed at the time of the
Change in Control (except for required travel on the Firm's business to
an extent substantially consistent with your customary business travel
obligations in the ordinary course of business prior to the Change in
Control).
"RETIREMENT" means termination of your Employment on or after
the date on which (i) you have attained age 55 with 5 years of service
with the Firm, or (ii) the sum of (I) your age and (II) 1.5 times your
years of service with the Firm, is equal to or greater than 80.
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<PAGE> 10
"SOLICIT" means any direct or indirect communication of any
kind whatsoever, regardless of by whom initiated, inviting, advising,
encouraging or requesting any person or entity, in any manner, to take
or refrain from taking any action.
"VESTING DATE" means the first day of each Window Period that
begins on or immediately follows each of the third, fourth and fifth
anniversaries of the consummation of the initial public offering of
Shares.
"WINDOW PERIOD" means a period designated by the Committee
during which employees of the Firm generally are permitted to purchase
or sell Shares.
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<PAGE> 1
EXHIBIT 10.25
TAX INDEMNIFICATION AGREEMENT, dated as of May 7, 1999, among The
Goldman Sachs Group, Inc. (the "Company"), the Schedule I and Schedule II
Limited Partners (each as defined in the Memorandum of Agreement) and other
former partners of The Goldman Sachs Group, L.P. (the "Partnership") or an
Affiliate identified on the signature page hereof (each such former partner, a
"CAS Indemnitee"), Sumitomo Bank Capital Markets, Inc. ("SBCM"), and Kamehameha
Activities Association ("KAA") (such Schedule I Limited Partners, Schedule II
Limited Partners, CAS Indemnitees, SBCM, and KAA, collectively, the
"Indemnitees").
WHEREAS, each of the Indemnitees is currently or was formerly a
partner of the Partnership or one or more of its Affiliates;
NOW, THEREFORE, the parties agree as follows:
1. Definitions.
(a) "Affiliate" means Stone Street Contract Partners, any entity
that at any time prior to the date hereof was consolidated with the Partnership
or Goldman, Sachs & Co. for financial reporting purposes, and any other entity
specified by the Company, in its sole discretion.
(b) "Covered Period" means, with respect to an Indemnitee, any
taxable year of the Indemnitee for which, as of the date hereof, a taxing
authority is not precluded by the applicable statute of limitations from
assessing a liability for Tax with respect to a Partnership Item.
(c) "Increased Taxes" means, with respect to each Indemnitee, an
amount, determined by the Company in its sole discretion, equal to the excess of
(i) the excess of Taxes payable by the Indemnitee in respect of Partnership
Items for all Covered Periods over the Taxes in respect of Partnership Items
shown as payable on Returns for all such periods as originally filed (or as
amended prior to the date hereof) over (ii) the amount of any Tax benefits
(including deductions, credits or refunds) estimated by the Company, in its sole
discretion, to be available to such Indemnitee in any period as a result of the
increase in Taxes described in clause (i) of this definition; provided, however,
that, unless otherwise determined by the Company, in its sole discretion, any
adjustments arising from (I) the Internal Revenue Service examination of the
Returns of the Partnership (including the Returns of its Affiliates) for its
1991, 1992 and 1993 taxable years and any resulting correlative adjustments,
whether in the same or other periods (including state and local tax
adjustments), (II) an Indemnitee's individual circumstances and (III)
correlative adjustments resulting from Returns as originally filed, shall not be
taken into account in determining Increased Taxes.
(d) "Memorandum of Agreement" means the Memorandum of Agreement of
the Partnership, amended and restated as of November 28, 1998.
<PAGE> 2
(e) "Partnership Item" means, with respect to an Indemnitee, any
item of income, gain, loss, deduction, credit or credit recapture directly
relating to any activity of the Partnership or any Affiliate and required to be
reflected in a Return filed by the Partnership or any Affiliate, but only if (i)
the item is required to be reflected in a U.S. federal, state or local or other
Return filed by such Indemnitee or (ii) such Indemnitee is required to make a
Tax payment to any taxing authority in respect of such item.
(f) "Plan of Incorporation" means the Plan of Incorporation proposed
in March 1999 by the general partner of the Partnership and approved by the
Schedule II Limited Partners having 51% of the interests in the profits of the
Partnership, as amended from time to time.
(g) "Return" means any report, information statement or return
relating to, or required to be filed in connection with, any Tax.
(h) "Tax" means any tax, including any interest, penalty or addition
to tax, imposed by any U.S. federal, state, local or other government, or any
agency or political subdivision thereof.
(i) "Tax Rate" means, with respect to U.S. citizens and resident
individuals, 35% or such other rate as the Company shall determine in its sole
discretion as being the effective rate at which a plurality of the Indemnitees
who are U.S. citizen and resident individuals will be subject to U.S. federal,
state and local income tax on the amounts paid by the Company pursuant to this
Agreement. The same Tax Rate shall apply to all such Indemnitees. The Company
shall determine, in its sole discretion, the Tax Rate applicable to other
Indemnitees, based on an estimation of the effective rate at which the
Indemnitee will be subject to income tax on the amounts paid by the Company
pursuant to this Agreement.
(j) "Trigger Amount" means with respect to an Indemnitee the amount
specified by the Company in writing to such Indemnitee.
2. Indemnity Obligation. (a) The Company hereby agrees to indemnify
each Indemnitee against and to pay to, or on behalf of, each Indemnitee an
amount equal to such Indemnitee's Increased Taxes.
(b) If the Company determines, in its sole discretion, that the
initial determination of Increased Taxes was incorrect (whether by reason of a
subsequent examination by a Taxing authority or otherwise), the Company shall
make an additional payment to the Indemnitee or the Indemnitee shall make a
payment to the Company equal to the difference between (i) the payment
previously made pursuant to Section 2(a) hereof and (ii) the payment that would
have been made had such original determination been correct. If more than one
payment is to be made pursuant to this Section 2(b), the later payments shall
take into account the effect of any prior payments.
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<PAGE> 3
(c) After the Company has made payments (as adjusted pursuant to
Section 2(b) hereof) to, or on behalf of, an Indemnitee in respect of Increased
Taxes that equal the Trigger Amount for such Indemnitee, any payments made by
the Company pursuant to this Agreement in respect of any additional Increased
Taxes shall equal the product of (i) such additional Increased Taxes and (ii) a
fraction, the numerator of which is one and the denominator of which is one
minus the Tax Rate.
(d) Notwithstanding anything to the contrary contained herein, the
Company shall be permitted, but not required, to advance the full amount of
Taxes immediately payable by an Indemnitee in circumstances in which the
Increased Taxes are less than the initial Tax payment (e.g. because the Tax
payment gives rise to a tax benefit in the same or subsequent years). The
Company shall be permitted, if it so elects, to charge interest on any advance
made pursuant to this Section 2(d) at the applicable U.S. federal rate described
in Section 7872(f)(2)(B) of the Internal Revenue Code.
3. Procedural Matters. (a) Any Indemnitee who was a Schedule II
Limited Partner on January 1, 1999 hereby agrees to permit the Company's
internal tax department (or, if the Company elects, the Company's designee) to
prepare and file such Indemnitee's personal income tax Returns (including any
amended Returns) for all Covered Periods. The Indemnitee shall, if requested by
the Company, pay to the Company the reasonable costs (including allocable
internal costs) of preparing such Returns. Nothing in this Agreement shall
require the Company to prepare personal income tax Returns for any Indemnitee.
(b) The Company (or its designee) shall, at the Company's expense,
represent the Partnership, each Affiliate and each Indemnitee in any examination
of (or other proceeding relating to) the Partnership's or Affiliate's Returns
for all taxable years and, in the case of an Indemnitee, in any examination of
(or other proceeding relating to) the Indemnitee's Returns for any Covered
Period to the extent the examination relates to a Partnership Item with respect
to which the Company is required to indemnify the Indemnitee. Each Indemnitee
shall, to the extent reasonably requested, promptly cooperate with the Company
(or its designee) in such matters including, without limitation, by providing a
duly executed Internal Revenue Service Form 2848 (or successor form) or similar
form applicable for state, local or other Tax purposes.
(c) To the extent permitted by law, the Company may make all Tax
payments required to be made pursuant to this Agreement directly to the relevant
taxing authority on behalf of the Indemnitee. To the extent the Company does not
elect to make such Tax payments directly to the taxing authority, the Company
shall either make any required payments to the Indemnitee or deliver to the
Indemnitee a check made out in the amount of the required payments payable to
the applicable taxing authority, in either case within thirty (30) days of
receiving notice that the Indemnitee has paid Increased Taxes.
(d) To the extent permitted by law, each Indemnitee shall direct the
relevant taxing authority to pay any refund in respect of Taxes for any Covered
Period directly to the
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<PAGE> 4
Company and these refunds shall be credited against the Indemnitee's obligation
to make payments to the Company under Sections 2(b), 2(d) and 3(e) (or returned
to the Indemnitee if the Indemnitee does not owe any amounts to the Company).
The Indemnitee shall notify the Company within thirty (30) days of the receipt
by such Indemnitee of a refund of Taxes in respect of any Partnership Item for
any Covered Period.
(e) Any Indemnitee will forfeit any right to receive any payments
under this Tax Indemnification Agreement (and promptly refund to the Company any
amounts previously paid by the Company to, or on behalf of, such Indemnitee
under this Agreement) if such Indemnitee (i) takes any action independent of the
Tax Matters Partner (as defined in Section 6231(a)(7) of the Internal Revenue
Code) or the Company on any examination or other proceeding in respect of the
Partnership's or any Affiliate's Returns, (ii) takes any position in any Return
or other Tax filing inconsistent with the position taken by the Partnership, the
Company or any Affiliate, (iii) fails to cooperate fully with the Company or the
Tax Matters Partner in pursuing any contest or other proceeding in respect of
Taxes or fails to permit the Company or the Tax Matters Partner to file amended
returns on behalf of such Indemnitee, if so requested by the Company, (iv) fails
to provide the Company or its designee upon request with a duly executed
Internal Revenue Service Form 2848 (or successor form) or similar form
applicable for state, local or other Tax purposes or (v) fails to notify the
Company of the receipt of a refund of Taxes as required by Section 3(d) hereof.
(f) Each Indemnitee agrees to promptly and timely file Returns which
are required to be filed by such Indemnitee and which include any Partnership
Item, and to timely pay the Taxes shown as due on such Returns. To the extent
permitted by law, each Indemnitee agrees to report any item on such Returns, and
to take positions in any other Tax filings, in a manner consistent with the
positions taken by the Partnership, the Company or an Affiliate.
4. Character of Payment. Any payments made by the Company pursuant
to this Agreement to an Indemnitee other than a CAS Indemnitee who is not
participating in the Plan of Incorporation shall be treated as additional
payments made by the Company to the Indemnitee pursuant to the Plan of
Incorporation. Any payments made by the Company pursuant to this Agreement to a
CAS Indemnitee who is not participating in the Plan of Incorporation shall be
treated as additional payments made by the Company to the CAS Indemnitee.
5. Determinations. The Company shall make all determinations
necessary to administer this Agreement including, without limitation,
determinations of (i) eligibility for payment, (ii) the amount of any payment to
be made by the Company and (iii) the amount of any refund to be paid to the
Company by an Indemnitee. Any such determinations by the Company shall, absent
manifest error, be final, binding and conclusive on the Indemnitee.
6. Arbitration. (a) Without diminishing the finality and conclusive
effect of any determination by the Company of any matter under this Agreement
which is provided herein to be determined by the Company, and subject to the
provisions of paragraphs (b) and (c) below,
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<PAGE> 5
any dispute, controversy or claim arising out of or relating to or concerning
the provisions of this Agreement shall be finally settled by arbitration in New
York City before, and in accordance with the rules then obtaining of, the New
York Stock Exchange, Inc. (the "NYSE") or, if the NYSE declines to arbitrate the
matter, the American Arbitration Association (the "AAA") in accordance with the
commercial arbitration rules of the AAA.
(b) Notwithstanding the provisions of Section 6(a), and in addition
to its right to submit any dispute or controversy to arbitration, the Company
may bring an action or special proceeding in a state or federal court of
competent jurisdiction sitting in the City of New York, whether or not an
arbitration proceeding has theretofore been or is ever initiated, for the
purpose of temporarily, preliminarily, or permanently enforcing the provisions
of this Agreement, or to enforce an arbitration award, and, for the purposes of
this Section 6(b), each Indemnitee (i) expressly consents to the application of
Section 6(c) to any such action or proceeding, (ii) agrees that proof will not
be required that monetary damages for breach of the provisions of this Agreement
would be difficult to calculate and that remedies at law would be inadequate and
(iii) irrevocably appoints the General Counsel of GS Inc. as the Indemnitee's
agent for service of process in connection with any such action or proceeding,
who shall promptly advise the Indemnitee of any such service of process.
(c) (i) THE INDEMNITEE AND THE COMPANY HEREBY IRREVOCABLY SUBMIT TO
THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE CITY OF
NEW YORK OVER ANY SUIT, ACTION, OR PROCEEDING ARISING OUT OF OR RELATING TO OR
CONCERNING THIS AGREEMENT THAT IS NOT OTHERWISE ARBITRATED OR RESOLVED ACCORDING
TO SECTION 6(a) HEREOF. This includes any suit, action or proceeding to compel
arbitration or to enforce an arbitration award. The Indemnitee and the Company
acknowledge that the forum designated by this Section 6(c) has a reasonable
relation to this Agreement, and to the Indemnitee's relationship to the Company.
Notwithstanding the foregoing, nothing herein shall preclude the Company from
bringing any action or proceeding in any other court for the purpose of
enforcing the provisions of this Section 6.
(ii) The agreement of the Indemnitee and the Company as to forum is
independent of the law that may be applied in the action, and the Indemnitee and
the Company agree to such forum even if the forum may under applicable law
choose to apply non-forum law. The Indemnitee and the Company hereby waive, to
the fullest extent permitted by applicable law, any objection which the
Indemnitee or the Company now or hereafter may have to personal jurisdiction or
to the laying of venue of any such suit, action or proceeding brought in any
court referred to in Section 6(c)(i). The Indemnitee and the Company undertake
not to commence any action arising out of or relating to or concerning this
Agreement in any forum other than a forum described in this Section 6(c). The
Indemnitee and the Company agree that, to the fullest extent permitted by
applicable law, a final and non-appealable judgment in any such suit, action, or
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<PAGE> 6
proceeding in any such court shall be conclusive and binding upon the Indemnitee
and the Company.
7. Notices. Any notice under this Agreement shall be in writing and
shall be deemed to have been given upon the delivery or mailing thereof, as the
case may be, if delivered personally or sent by certified mail, return receipt
requested, postage prepaid, to the following address:
Notice to the Company:
The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
Attn.: Director of Taxation
Notice to an Indemnitee:
At the last address appearing on the Company's business records.
8. Indemnitee Addresses. Each Indemnitee hereby agrees to provide
prompt notice to the Company of any change in the address and telephone and
telecopy numbers of such Indemnitee.
9. Entire Agreement. This Agreement represents the entire
understanding between the Company and each Indemnitee with respect to the
subject matter hereof and supersedes all prior negotiations among the parties
hereto with respect to such subject matter.
10. Amendments. The Company will be permitted to amend this
Agreement in any respect, so long as such amendment does not materially
adversely affect the amount which an Indemnitee is entitled to receive from the
Company pursuant to this Agreement.
11. Miscellaneous. (a) This Agreement shall inure solely to the
benefit of GS Inc. and its successors and assigns and the Indemnitees and their
respective heirs, executors, administrators and successors, and no other person
shall acquire or have any right under or by virtue of this Agreement.
(b) This Agreement will be governed by and construed in accordance
with the laws of the State of New York, without regard to principles of
conflicts of laws.
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(c) If any provision of this Agreement is finally held to be
invalid, illegal or unenforceable (whether in whole or in part), such provision
shall be deemed modified to the extent, but only to the extent, of such
invalidity, illegality or unenforceability and the remaining provisions shall
not be affected thereby.
(d) With respect to KAA, such Indemnitee's Increased Taxes shall
include Increased Taxes of Royal Hawaiian Shopping Center, Inc. attributable to
periods during which Royal Hawaiian Shopping Center, Inc. was a partner in the
Partnership. With respect to an Indemnitee that is treated as a partnership or
other flow-through entity for United States tax purposes, such Indemnitee's
Increased Taxes shall, to the extent determined by the Company in its sole
discretion, include Increased Taxes payable by direct or indirect holders of
interests in such Indemnitee, and the other provisions of this Agreement shall
apply, where relevant, to such direct or indirect holders of interests in the
Indemnitee.
12. Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute but one and the same instrument.
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In witness whereof, the Company and each Indemnitee have executed
this Agreement as of the day and year first above written.
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Robert J. Katz
-------------------------------
Name: Robert J. Katz
Title: Executive Vice President
SUMITOMO BANK CAPITAL MARKETS, INC.
By: /s/ Natsuo Okada
-------------------------------
Name: Natsuo Okada
Title: President
KAMEHAMEHA ACTIVITIES ASSOCIATION
By: /s/ Wallace G. K. Chin
-------------------------------
Name: Wallace G. K. Chin
Title: President
<PAGE> 1
EXHIBIT 10.26
SHAREHOLDERS' AGREEMENT
This Shareholders' Agreement (this "Agreement"), among The
Goldman Sachs Group, Inc., a Delaware corporation ("GS Inc."), and the Covered
Persons listed on Appendix A hereto, as such Appendix A may be amended from time
to time pursuant to the provisions hereof.
WITNESSETH:
WHEREAS, the Covered Persons are beneficial owners of shares
of Common Stock, par value $0.01 per share, of GS Inc. (the "Common Stock").
WHEREAS, the Covered Persons desire to address herein certain
relationships among themselves with respect to the voting and disposition of
their shares of Common Stock and various other matters and desire to give to the
Shareholders' Committee (hereinafter defined) the power to enforce their
agreements with respect thereto.
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements, covenants and provisions herein contained, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS AND OTHER MATTERS
Section 1.1 Definitions. The following words and phrases as
used herein shall have the following meanings, except as otherwise expressly
provided or unless the context otherwise requires:
(a) A Covered Person "acquires" Covered Shares when such
Covered Person first acquires beneficial ownership over such Covered
Shares.
(b) This "Agreement" shall have the meaning ascribed to such
term in the Recitals.
(c) A "beneficial owner" of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares: (i) voting
power, which includes the power to vote, or to direct the voting of,
such security and/or (ii) investment power, which includes the power to
dispose, or to direct the disposition of, such security, but for
purposes of this Agreement a person shall not be deemed a beneficial
owner of
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(A) Common Stock solely by virtue of the application of Exchange Act
Rule 13d-3(d) or Exchange Act Rule 13d-5 as in effect on the date
hereof (B) Common Stock solely by virtue of the possession of the legal
right to vote securities under applicable state or other law (such as
by proxy or power of attorney) or (C) Common Stock held of record by a
"private foundation" subject to the requirements of Section 509 of the
Code. "Beneficially own" and "beneficial ownership" shall have
correlative meanings.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and the applicable rulings and regulations
thereunder.
(e) "Common Stock" shall have the meaning ascribed to such
term in the Recitals.
(f) "Company" shall mean GS Inc., together with its
Subsidiaries.
(g) "Continuing Provisions" shall have the meaning ascribed to
such term in Section 7.1(b).
(h) "Covered Persons" shall mean those persons from time to
time listed on Appendix A hereto, and all persons who may become
parties to this Agreement and whose name is required to be listed on
Appendix A hereto, in each case in accordance with the terms hereof.
(i) A Covered Person's "Covered Shares" shall mean any shares
of Common Stock acquired from the Company by such Covered Person and
beneficially owned by such Covered Person at the time in question, but
shall not include (i) Common Stock beneficially owned as a result of
(A) an acquisition, directly or indirectly, from the Company in an
underwritten public offering or (B) conversion of securities
convertible into Common Stock, where beneficial ownership of the
convertible securities was acquired in a transaction described in
clause (A) above, (ii) Excluded Shares (as defined in the Plan of
Incorporation), (iii) any other Common Stock excluded from the
definition of Covered Shares by action of the Board of Directors of GS
Inc. prior to the IPO Date or (iv) any other Common Stock acquired
under a deferred compensation or employee benefit plan and excluded
from the definition of Covered Shares by action of the Board of
Directors of GS Inc. and the Shareholders' Committee after the IPO
Date. "Covered Shares" shall also include the securities that are
defined to be "Covered Shares" in Section 6.4.
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(j) The term "employee" shall mean any person employed by the
Company who receives compensation, other than a person receiving
compensation in the nature of a consulting fee, a pension or a
retainer.
(k) "Employee Covered Person" shall mean a Covered Person who
is an employee of the Company at the time in question.
(l) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended to date and as further amended from time to time.
(m) A reference to an "Exchange Act Rule" shall mean such rule
or regulation of the Securities and Exchange Commission under the
Exchange Act, as in effect from time to time or as replaced by a
successor rule thereto.
(n) "General Transfer Restrictions" shall have the meaning
ascribed to such term in Section 2.2 hereof.
(o) "GS Inc." shall have the meaning ascribed to such term in
the Recitals.
(p) "IPO Date" shall mean the closing date of the initial
public offering of the Common Stock.
(q) "Permitted Basket Transaction" shall mean the purchase or
sale of, or the establishment of a long or short position in, a basket
or index of securities (or of a derivative financial instrument with
respect to a basket or index of securities) that includes securities of
GS Inc., in each case if such purchase, sale or establishment is
permitted under the Company's policy on hedging with respect to
securities of GS Inc. as announced from time to time.
(r) A "person" shall include, as applicable, any individual,
estate, trust, corporation, partnership, limited liability company,
unlimited liability company, foundation, association or other entity.
(s) "Plan of Incorporation" shall mean the plan for the
incorporation and reorganization of the business of The Goldman Sachs
Group, L.P. approved by the Schedule II Limited Partners thereof on
March 8, 1999, as amended from time to time.
(t) "PLP Transfer Restrictions" shall have the meaning
ascribed to such term in Section 2.1 hereof.
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(u) "Preliminary Vote" shall have the meaning ascribed to such
term in Section 4.1 hereof.
(v) "Restricted Person" shall mean any person that is not (i)
a Covered Person or (ii) a director, officer or employee of the Company
acting in such person's capacity as a director, officer or employee;
provided, however, that for purposes of Section 6.1(c) only, the term
"Restricted Person" shall not include Sumitomo Bank Capital Markets,
Inc. and/or Kamehameha Activities Association to the extent that either
or both of such parties are included in such group solely by virtue of
their being parties to Voting Agreements, each dated as of April 30,
1999, with GS Inc., as amended from time to time.
(w) "Shareholders' Committee" shall mean the body constituted
to administer the terms and provisions of this Agreement pursuant to
Article V hereof.
(x) "Sole Beneficial Owner" shall mean a person who is the
beneficial owner of Covered Shares, who does not share beneficial
ownership of such Covered Shares with any other person (other than
pursuant to this Agreement or applicable community property laws) and
who is the only person (other than pursuant to applicable community
property laws) with a direct economic interest in the Covered Shares.
An economic interest of the Company as pledgee shall be disregarded for
this purpose.
(y) "Subsidiary" shall mean any person in which GS Inc. owns,
directly or indirectly, a majority of the equity economic or voting
ownership interest.
(z) "The Goldman Sachs Defined Contribution Plan" shall mean
The Goldman Sachs Defined Contribution Plan adopted by the Board of
Directors of GS Inc. on May 7, 1999, as amended or supplemented from
time to time, and any successors to such Plan.
(aa) "Transfer" shall mean any sale, transfer, pledge,
hypothecation or other disposition, whether direct or indirect, whether
or not for value, and shall include any disposition of the economic or
other risks of ownership of Common Stock, including short sales of
securities of GS Inc., option transactions (whether physical or cash
settled) with respect to securities of GS Inc., use of equity or other
derivative financial instruments relating to securities of GS Inc. and
other hedging arrangements with respect to securities of GS Inc., in
each such case other than Permitted Basket Transactions.
Notwithstanding the foregoing, bona fide pledges of Common Stock
approved by GS Inc. and foreclosures pursuant thereto shall not
constitute Transfers within the meaning of this definition.
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(ab) "Transfer Restrictions" shall mean the General Transfer
Restrictions and the PLP Transfer Restrictions.
(ac) "vote" shall include actions taken or proposed to be
taken by written consent.
(ad) "Voted Covered Shares" shall have the meaning ascribed to
such term in Section 4.2(a).
(ae) "Voting Interests" shall have the meaning ascribed to
such term in Section 4.1 hereof.
Section 1.2 Gender. For the purposes of this Agreement, the
words "he," "his" or "himself" shall be interpreted to include the masculine,
feminine and corporate, other entity or trust form.
ARTICLE II
LIMITATIONS ON TRANSFER OF SHARES
Section 2.1 General. Each Covered Person agrees that such
Covered Person shall not Transfer any Covered Shares beneficially owned by such
Covered Person, except in accordance with all of the following: (a) the terms of
this Agreement, (b) the restrictions on transferability of Common Stock
contained in the Plan of Incorporation (the "PLP Transfer Restrictions"), if
applicable, and (c) the terms of any other contract or agreement with the
Company or other undertaking by which such Covered Person is bound and to which
such Covered Shares are subject.
Section 2.2 General Transfer Restrictions. Each Covered Person
agrees that for so long as such Covered Person is an Employee Covered Person
such Covered Person shall at all times be the Sole Beneficial Owner of at least
that number of Covered Shares which equals 25% of the aggregate number of
Covered Shares (a) beneficially owned by such Covered Person at the time such
Covered Person became a Covered Person and (b) beneficial ownership of which is
acquired by such Covered Person thereafter, with no reduction in such aggregate
number for Covered Shares disposed of by such Covered Person (the "General
Transfer Restrictions"). For purposes of this Section 2.2 only, Covered Shares
held by the trust underlying The Goldman Sachs Defined Contribution Plan and
allocated to a Covered Person shall not be deemed to be beneficially owned by
such Covered Person until such Covered Shares are distributed to such Covered
Person in accordance with the terms of The Goldman Sachs Defined Contribution
Plan. For purposes of this Section 2.2 only, when a delivery of Covered Shares
is made by GS Inc. or by the trustee of the trust underlying The Goldman Sachs
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Defined Contribution Plan to a Covered Person net of Covered Shares to be
withheld for tax purposes or to be paid for the receipt of such delivered
Covered Shares, the recipient of such delivered number of Covered Shares shall
be treated as if such Covered Person acquired the total (gross) number of
Covered Shares to be delivered before giving effect to any such withholding or
payment.
Section 2.3 Compliance with Certain Restrictions.
(a) Each Covered Person agrees that, with respect to all
Common Stock beneficially owned by such Covered Person, such Covered
Person shall comply with the restrictions on transfer imposed by
Section 6(e) of the Underwriting Agreement, dated as of May 3, 1999,
among GS Inc. and the several underwriters named therein, whether or
not said Section refers to such Covered Person by name.
(b) Each Employee Covered Person agrees that, with respect to
all Common Stock beneficially owned by such Employee Covered Person,
and each Covered Person who is not an Employee Covered Person agrees
that, with respect to all Covered Shares beneficially owned by such
Covered Person which could not then be Transferred without contravening
the PLP Transfer Restrictions, at the request of GS Inc. such Covered
Person shall comply with any future restrictions on transfer imposed by
or with the consent of GS Inc. from time to time in connection with any
future offerings of securities of GS Inc., whether by GS Inc. or by any
securityholder of GS Inc. and whether or not such restrictions on
transfer refer to such Covered Person by name.
(c) Each Employee Covered Person agrees that, with respect to
all Common Stock beneficially owned by such Employee Covered Person,
such Employee Covered Person will comply with any restrictions imposed
by the Company from time to time to enable the Company or any party to
an agreement with the Company to account for a business combination by
the pooling of interests method.
Section 2.4 Holding of Covered Shares in Custody and in
Nominee Name; Legend on Certificates; Entry of Stop Transfer Orders.
(a) Each Covered Person understands and agrees that all
Covered Shares beneficially owned by each Employee Covered Person and
all Covered Shares which could not then be Transferred without
contravening the PLP Transfer Restrictions beneficially owned by each
Covered Person who is not an Employee Covered Person (in each case
other than Covered Shares held of record by a trustee in a compensation
or benefit plan administered by the Company and other
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Covered Shares that have been pledged to the Company to secure the
performance of such Covered Person's obligations under any agreement
with the Company) shall be registered in the name of a nominee for such
Covered Person and shall be held in the custody of a custodian until
otherwise determined by the Shareholders' Committee or the Board of
Directors of GS Inc. or until such time as such Covered Shares are
released pursuant to Section 2.4(e) or Section 2.4(f) hereof (whichever
occurs first), and each Covered Person agrees to assign, endorse and
register for transfer into such nominee name or deliver to such
custodian any such Covered Shares which are not so registered or so
held, as the case may be. The form of the custody agreement and the
identity of the custodian and nominee must be satisfactory in form and
substance to the Shareholders' Committee and GS Inc.
(b) Whenever the nominee holder shall receive any dividend or
other distribution upon any Covered Shares other than in Covered
Shares, the Shareholders' Committee will give or cause to be given
notice or direction to the applicable nominee and/or custodian referred
to in paragraph (a) to permit the prompt distribution of such dividend
or distribution to the beneficial owner of such Covered Shares, net of
any tax withholding amounts required to be withheld by the nominee,
unless the distribution of such dividend or distribution is restricted
by the terms of another agreement between the Covered Person and the
Company known to the Shareholders' Committee.
(c) Each Covered Person understands and agrees that any
outstanding certificate representing Covered Shares beneficially owned
by an Employee Covered Person or representing Covered Shares which
could not then be Transferred without contravening the PLP Transfer
Restrictions beneficially owned by a Covered Person who is not an
Employee Covered Person, and any agreement or other instrument
evidencing restricted stock units, options or other rights to receive
or acquire Covered Shares beneficially owned by such Covered Person,
may bear a legend noted conspicuously on each such certificate,
agreement or other instrument reading substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE PROVISIONS OF EITHER OR BOTH OF A SHAREHOLDERS' AGREEMENT
AMONG THE GOLDMAN SACHS GROUP, INC. ("GS INC.") AND THE
PERSONS NAMED THEREIN AND A PLAN OF INCORPORATION OF THE
GOLDMAN SACHS GROUP, L.P., COPIES OF WHICH ARE ON FILE AT THE
PRINCIPAL EXECUTIVE OFFICE OF GS INC. AND WHICH, AMONG OTHER
MATTERS, PLACE RESTRICTIONS ON THE DISPOSITION AND VOTING OF
SUCH SECURITIES. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE MAY BE
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SOLD, EXCHANGED, TRANSFERRED, ASSIGNED, PLEDGED, PARTICIPATED,
HYPOTHECATED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE
THEREWITH."
(d) Each Covered Person agrees and consents to the entry of
stop transfer orders against the transfer of Covered Shares subject to
Transfer Restrictions except in compliance with this Agreement.
(e) The Shareholders' Committee shall develop procedures for
releasing all Covered Shares of each Covered Person who is not an
Employee Covered Person which could then be Transferred without
contravening any Transfer Restrictions to or at the direction of such
Covered Person free and clear of all restrictions and legends described
in this Section 2.4.
(f) The Shareholders' Committee shall also develop procedures
for releasing (free and clear of all restrictions and legends described
in this Section 2.4) a specified number of Covered Shares of an
Employee Covered Person upon the request of any Covered Person and to
or at the direction of such Employee Covered Person, provided that such
request is accompanied by a certificate of such requesting Covered
Person (i) indicating such requesting Covered Person's intention to
Transfer promptly such specified number of Covered Shares and (ii)
establishing that such specified number of Covered Shares are then
permitted to be Transferred without contravening any Transfer
Restrictions (which evidence must be satisfactory to the Shareholders'
Committee).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
Each Covered Person severally represents and warrants for
himself that:
(a) Such Covered Person has (and with respect to Covered
Shares to be acquired, will have) good, valid and marketable title to
the Covered Shares, free and clear of any pledge, lien, security
interest, charge, claim, equity or encumbrance of any kind, other than
pursuant to this Agreement, the Plan of Incorporation or another
agreement with the Company by which such Covered Person is bound and to
which the Covered Shares are subject; and
(b) (if the Covered Person is other than a natural person,
with respect to subsections (i) through (x), and if the Covered Person
is a natural person, with respect to subsections (iv) through (x)
only): (i) such Covered Person is duly organized and validly existing
in good standing under the laws of the jurisdiction
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of such Covered Person's formation; (ii) such Covered Person has full
right, power and authority to enter into and perform this Agreement;
(iii) the execution and delivery of this Agreement and the performance
of the transactions contemplated herein have been duly authorized, and
no further proceedings on the part of such Covered Person are necessary
to authorize the execution, delivery and performance of this Agreement;
and this Agreement has been duly executed by such Covered Person; (iv)
the person signing this Agreement on behalf of such Covered Person has
been duly authorized by such Covered Person to do so; (v) this
Agreement constitutes the legal, valid and binding obligation of such
Covered Person, enforceable against such Covered Person in accordance
with its terms (subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles); (vi) neither the execution and delivery of this Agreement
by such Covered Person nor the consummation of the transactions
contemplated herein conflicts with or results in a breach of any of the
terms, conditions or provisions of any agreement or instrument to which
such Covered Person is a party or by which the assets of such Covered
Person are bound (including without limitation the organizational
documents of such Covered Person, if such Covered Person is other than
a natural person), or constitutes a default under any of the foregoing,
or violates any law or regulation; (vii) such Covered Person has
obtained all authorizations, consents, approvals and clearances of all
courts, governmental agencies and authorities, and any other person, if
any (including the spouse of such Covered Person with respect to the
interest of such spouse in the Covered Shares of such Covered Person if
the consent of such spouse is required), required to permit such
Covered Person to enter into this Agreement and to consummate the
transactions contemplated herein; (viii) there are no actions, suits or
proceedings pending, or, to the knowledge of such Covered Person,
threatened against or affecting such Covered Person or such Covered
Person's assets in any court or before or by any federal, state,
municipal or other governmental department, commission, board, bureau,
agency or instrumentality which, if adversely determined, would impair
the ability of such Covered Person to perform this Agreement; (ix) the
performance of this Agreement will not violate any order, writ,
injunction, decree or demand of any court or federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality to which such Covered Person is subject; and (x) no
statement, representation or warranty made by such Covered Person in
this Agreement, nor any information provided by such Covered Person for
inclusion in a report filed pursuant to Section 6.3 hereof or in a
registration statement filed by GS Inc. contains or will contain any
untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements,
representations or warranties contained herein or information provided
therein not misleading.
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Each Covered Person severally agrees for himself that the
foregoing provision of this Article III shall be a continuing representation and
covenant of such Covered Person during the period that such person shall be a
Covered Person and shares of Common Stock of such person shall be Covered
Shares, and such Covered Person shall take all actions as shall from time to
time be necessary to cure any breach or violation and to obtain any
authorizations, consents, approvals and clearances in order that such
representations shall be true and correct during the foregoing period.
ARTICLE IV
VOTING AGREEMENT
Section 4.1 Preliminary Vote of Covered Persons. Prior to any
vote of the stockholders of GS Inc. there shall be a separate, preliminary vote,
on each matter upon which a stockholder vote is proposed to be taken (each, a
"Preliminary Vote"), of the Covered Shares beneficially owned by (a) through
December 31, 2000, all Covered Persons, and (b) on and after January 1, 2001,
the Employee Covered Persons (including in both clause (a) and (b) and for the
purpose of this Article IV shares of Common Stock held by the trust underlying
The Goldman Sachs Defined Contribution Plan and allocated to Covered Persons (in
the case of clause (a)) and Employee Covered Persons (in the case of clause (b))
who are participants therein) (such Covered Shares at any such time, the "Voting
Interests"). The Preliminary Vote shall be conducted pursuant to procedures
established by the Shareholders' Committee.
Section 4.2 Voting of the Voting Interests.
(a) Other than in elections of directors, every Covered Share
beneficially owned by an Employee Covered Person, every Covered Share
which could not then be Transferred without contravening the PLP
Transfer Restrictions beneficially owned by any Covered Person who is
not an Employee Covered Person and every Covered Share held by the
trust underlying The Goldman Sachs Defined Contribution Plan and
allocated to a Covered Person (collectively, the "Voted Covered
Shares") shall be voted in accordance with the vote of the majority of
the votes cast on the matter in question by the Voting Interests in the
Preliminary Vote.
(b) In elections of directors, every Voted Covered Share shall
be voted in favor of the election of those persons, equal in number to
the number of such positions to be filled, receiving the highest
numbers of votes cast by the Voting Interests in the Preliminary Vote.
Section 4.3 Irrevocable Proxy and Power of Attorney.
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(a) By his signature hereto, each Covered Person hereby gives
the Shareholders' Committee, with full power of substitution and
resubstitution, an irrevocable proxy to vote or otherwise act with
respect to all of the Covered Person's Voted Covered Shares, as fully,
to the same extent and with the same effect as such Covered Person
might or could do under any applicable laws or regulations governing
the rights and powers of stockholders of a Delaware corporation and (i)
directs that such proxy shall be voted in connection with such matters
as are the subject of a Preliminary Vote as provided in this Agreement
--in accordance with such Preliminary Vote, (ii) authorizes the holder
of such proxy to vote on such other matters as may come before a
meeting of stockholders of GS Inc. or any adjournment thereof and as
are related, directly or indirectly, to the matter which was the
subject of the Preliminary Vote -- as the aforementioned persons see
fit in their discretion but in a manner consistent with the Preliminary
Vote, and (iii) authorizes the holder of such proxy to vote on such
other matters as may come before a meeting of stockholders of GS Inc.
or any adjournment thereof (including matters related to adjournment
thereof) -- as the aforementioned persons see fit in their discretion
but not to cast any vote under this clause (iii) which is inconsistent
with the Preliminary Vote or which would achieve an outcome that would
frustrate the intent of the Preliminary Vote. Each such Covered Person
hereby affirms that this proxy is given as a term of this Agreement and
as such is coupled with an interest and is irrevocable. It is further
understood and agreed by each such Covered Person that this proxy may
be exercised by the aforementioned persons with respect to all Voted
Covered Shares of such Covered Person for the period beginning on the
date hereof and ending on the date this Agreement shall have been
terminated pursuant to Section 7.1(a) hereof.
(b) By his signature hereto, each Covered Person appoints the
Shareholders' Committee, with full power of substitution and
resubstitution, his true and lawful attorney-in-fact to direct, in
accordance with the provisions of this Article IV, the voting of any
Voted Covered Shares held of record by any other person but
beneficially owned by such Covered Person (including Voted Covered
Shares held by the trust underlying The Goldman Sachs Defined
Contribution Plan and allocated to such Covered Person), granting to
such attorneys, and each of them, full power and authority to do and
perform each and every act and thing whatsoever that such attorney or
attorneys may deem necessary, advisable or appropriate to carry out
fully the intent of Section 4.2 and Section 4.3(a) as such Covered
Person might or could do personally, hereby ratifying and confirming
all acts and things that such attorney or attorneys may do or cause to
be done by virtue of this power of attorney. It is understood and
agreed by each such Covered Person that this appointment, empowerment
and authorization may be exercised by the aforementioned persons with
respect to all Voted Covered Shares of such Covered Person, and held of
record by another person, for the period beginning on
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the date hereof and ending on the date this Agreement shall have been
terminated pursuant to Section 7.1(a) hereof.
ARTICLE V
SHAREHOLDERS' COMMITTEE
Section 5.1 Constituency. The Shareholders' Committee shall at
any time consist of each of those individuals who are both Employee Covered
Persons and members of the Board of Directors of GS Inc. and who agree to serve
as members of the Shareholders' Committee.
Section 5.2 Additional Members. If there are less than three
individuals who are both Employee Covered Persons and members of the Board of
Directors of GS Inc. and who agree to serve as members of the Shareholders'
Committee, the Shareholders' Committee shall consist of each such individual
plus such additional individuals who are Employee Covered Persons and who are
selected pursuant to procedures established by the Shareholders' Committee as
shall assure a Shareholders' Committee of not less than three members who are
Employee Covered Persons.
Section 5.3 Determinations of and Actions by the Shareholders'
Committee.
(a) All determinations necessary or advisable under this
Agreement (including determinations of beneficial ownership) shall be
made by the Shareholders' Committee, whose determinations shall be
final and binding. The Shareholders' Committee's determinations under
this Agreement and the Plan of Incorporation and actions (including
waivers) hereunder and thereunder need not be uniform and may be made
selectively among Covered Persons (whether or not such Covered Persons
are similarly situated).
(b) Each Covered Person recognizes and agrees that the members
of the Shareholders' Committee in acting hereunder shall at all times
be acting in their individual capacities and not as directors or
officers of the Company and in so acting or failing to act shall not
have any fiduciary duties to the Covered Persons as a member of the
Shareholders' Committee by virtue of the fact that one or more of such
members may also be serving as a director or officer of the Company or
otherwise.
(c) The Shareholders' Committee shall act through a majority
vote of its members and such actions may be taken in person at a
meeting or by a written instrument signed by all of the members.
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<PAGE> 13
Section 5.4 Certain Obligations of the Shareholders'
Committee. The Shareholders' Committee shall be obligated (a) to attend as
proxy, or cause a person designated by it and acting as lawful proxy to attend
as proxy, each meeting of the stockholders of GS Inc. and to vote or to cause
such designee to vote the Covered Shares over which it has the power to vote in
accordance with the results of the Preliminary Vote as set forth in Section 4.2,
and (b) to develop procedures governing Preliminary Votes and other votes and
actions to be taken pursuant to this Agreement.
ARTICLE VI
OTHER AGREEMENTS OF THE PARTIES
Section 6.1 Standstill Provisions. Each Covered Person agrees
that such Covered Person shall not, directly or indirectly, alone or in concert
with any other person, (a) make, or in any way participate in, any
"solicitation" of "proxies" (as such terms are defined in Exchange Act Rule
14a-1) relating to any securities of the Company to or with any Restricted
Person; (b) deposit any Covered Shares in a voting trust or subject any Covered
Shares to any voting agreement or arrangement that includes as a party any
Restricted Person; (c) form, join or in any way participate in a group (as
contemplated by Exchange Act Rule 13d-5(b)) with respect to any securities of
the Company (or any securities the ownership of which would make the owner
thereof a beneficial owner of securities of the Company (for this purpose as
determined by Exchange Act Rule 13d-3 and Exchange Act Rule 13d-5)) that
includes as a party any Restricted Person; (d) make any announcement subject to
Exchange Act Rule 14a-1(l)(2)(iv) to any Restricted Person; (e) initiate or
propose any "shareholder proposal" subject to Exchange Act Rule 14a-8; (f)
together with any Restricted Person, make any offer or proposal to acquire any
securities or assets of GS Inc. or any of its Subsidiaries or solicit or propose
to effect or negotiate any form of business combination, restructuring,
recapitalization or other extraordinary transaction involving, or any change in
control of, GS Inc., its Subsidiaries or any of their respective securities or
assets; (g) together with any Restricted Person, seek the removal of any
directors or a change in the composition or size of the board of directors of GS
Inc.; (h) together with any Restricted Person, in any way participate in a call
for any special meeting of the stockholders of GS Inc.; or (i) assist, advise or
encourage any person with respect to, or seek to do, any of the foregoing.
Section 6.2 Expenses.
(a) GS Inc. shall be responsible for all expenses of the
members of the Shareholders' Committee incurred in the operation and
administration of this Agreement, including expenses of proxy
solicitation for and tabulation of the Preliminary Vote, expenses
incurred in preparing appropriate filings and correspondence with the
Securities and Exchange Commission, lawyers', accountants',
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<PAGE> 14
agents', consultants', experts', investment banking and other
professionals' fees, expenses incurred in enforcing the provisions of
this Agreement, expenses incurred in maintaining any necessary or
appropriate books and records relating to this Agreement and expenses
incurred in the preparation of amendments to and waivers of provisions
of this Agreement.
(b) Each Covered Person shall be responsible for all expenses
of such Covered Person incurred in connection with the compliance by
such Covered Person with his obligations under this Agreement,
including expenses incurred by the Shareholders' Committee or GS Inc.
in enforcing the provisions of this Agreement relating to such
obligations.
Section 6.3 Filing of Schedule 13D or 13G.
(a) In the event that a Covered Person is required to file a
report of beneficial ownership on Schedule 13D or 13G with respect to
the Covered Shares beneficially owned by him (for this purpose as
determined by Exchange Act Rule 13d-3 and Exchange Act Rule 13d-5),
such Covered Person agrees that, unless otherwise directed by the
Shareholders' Committee, such Covered Person will not file a separate
such report, but will file a report together with the other Covered
Persons, containing the information required by the Exchange Act, and
such Covered Person understands and agrees that such report shall be
filed on his behalf by the Shareholders' Committee or any member
thereof. Such Covered Person shall cooperate fully with the other
Covered Persons and the Shareholders' Committee to achieve the timely
filing of any such report and any amendments thereto as may be
required, and such Covered Person agrees that any information
concerning such Covered Person which such Covered Person furnishes in
connection with the preparation and filing of such report will be
complete and accurate.
(b) By his signature hereto, each Covered Person appoints the
Shareholders' Committee and each member thereof, with full power of
substitution and resubstitution, his true and lawful attorney-in-fact
to execute such reports and any and all amendments thereto and to file
such reports with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission,
granting to such attorneys, and each of them, full power and authority
to do and perform each and every act and thing whatsoever that such
attorney or attorneys may deem necessary, advisable or appropriate to
carry out fully the intent of this Section 6.3 as such Covered Person
might or could do personally, hereby ratifying and confirming all acts
and things that such attorney or attorneys may do or cause to be done
by virtue of this power of attorney. Each Covered Person hereby further
designates such attorneys as such Covered Person's
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<PAGE> 15
agents authorized to receive notices and communications with respect to
such reports and any amendments thereto. It is understood and agreed by
each such Covered Person that this appointment, empowerment and
authorization may be exercised by the aforementioned persons for the
period beginning on the date hereof and ending on the date such Covered
Person is no longer subject to the provisions of this Agreement (and
shall extend thereafter for such time as is required to reflect that
such Covered Person is no longer a party to this Agreement).
Section 6.4 Adjustment upon Changes in Capitalization;
Adjustments upon Changes of Control; Representatives, Successors and Assigns.
(a) In the event of any change in the outstanding Common Stock
by reason of stock dividends, stock splits, reverse stock splits,
spin-offs, split-ups, recapitalizations, combinations, exchanges of
shares and the like, the term "Covered Shares" shall refer to and
include the securities received or resulting therefrom, but only to the
extent such securities are received in exchange for or in respect of
Covered Shares. Upon the occurrence of any event described in the
immediately preceding sentence, the Shareholders' Committee shall make
such adjustments to or interpretations of the restrictions of Section
2.2 (and, if it so determines, any other provisions hereof) as it shall
deem necessary or desirable to carry out the intent of such
provision(s). If the Shareholders' Committee deems it desirable, any
such adjustments may take effect from the record date, the "when issued
trading date", the "ex dividend date" or another appropriate date.
(b) In the event of any business combination, restructuring,
recapitalization or other extraordinary transaction involving GS Inc.,
its Subsidiaries or any of their respective securities or assets as a
result of which the Covered Persons shall hold voting securities of a
person other than GS Inc., the Covered Persons agree that this
Agreement shall also continue in full force and effect with respect to
such voting securities of such other person formerly representing or
distributed in respect of Covered Shares of GS Inc., and the terms
"Covered Shares," "Common Stock" and "Voting Interests," and "GS Inc."
and "Company," shall refer to such voting securities formerly
representing or distributed in respect of Covered Shares of GS Inc. and
such person, respectively. Upon the occurrence of any event described
in the immediately preceding sentence, the Shareholders' Committee
shall make such adjustments to or interpretations of the restrictions
of Section 2.2 (and, if it so determines, any other provisions hereof)
as it shall deem necessary or desirable to carry out the intent of such
provision(s). If the Shareholders' Committee deems it desirable, any
such adjustments may take effect from the record date or another
appropriate date.
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<PAGE> 16
(c) This Agreement shall be binding upon and inure to the
benefit of the respective legatees, legal representatives, successors
and assigns of the Covered Persons (and GS Inc. in the event of a
transaction described in Section 6.4(b) hereof); provided, however,
that a Covered Person may not assign this Agreement or any of his
rights or obligations hereunder without the prior written consent of GS
Inc., and any assignment without such consent by a Covered Person shall
be void; and provided further that no assignment of this Agreement by
GS Inc. or to a successor of GS Inc. (by operation of law or otherwise)
shall be valid unless such assignment is made to a person which
succeeds to the business of GS Inc.
substantially as an entirety.
Section 6.5 Further Assurances. Each Covered Person agrees to
execute such additional documents and take such further action as may be
reasonably necessary to effect the provisions of this Agreement.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Term of the Agreement; Termination of Certain
Provisions.
(a) The term of this Agreement shall continue until the first
to occur of January 1, 2050 and such time as this Agreement is
terminated by the affirmative vote of not less than 66 2/3% of the
outstanding Voting Interests. If this Agreement is terminated prior to
the expiration or termination of the restrictions on transfer referred
to in Section 2.3(a), such restrictions on transfer shall continue to
apply in accordance with the provisions of Section 6(e) of the
Underwriting Agreement referred to in Section 2.3(a) unless waived or
terminated as provided in said Underwriting Agreement. If this
Agreement is terminated prior to the expiration or termination of the
PLP Transfer Restrictions, the PLP Transfer Restrictions shall continue
to apply in accordance with the provisions of the Plan of Incorporation
unless waived or terminated as provided in the Plan of Incorporation.
(b) Unless this Agreement is theretofore terminated pursuant
to Section 7.1(a) hereof, any Covered Person who ceases to be an
employee for any reason other than death shall no longer be bound by
the provisions of Section 2.2 and Section 6.1 hereof (unless such
Covered Person is subject to the PLP Transfer Restrictions in which
case Section 6.1 shall continue to apply until December 31, 2000) but
shall be bound by all other provisions of this Agreement until such
time as such Covered Person holds all Covered Shares free from PLP
Transfer Restrictions. Thereafter, such Covered Person shall no longer
be bound by the provisions of this Agreement (other than Sections 5.3,
6.2, 6.3, 6.5, 7.4, 7.5, 7.6,
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<PAGE> 17
7.8, 7.10 and 7.11 (the "Continuing Provisions")), and such Covered
Person's name shall be removed from Appendix A to this Agreement.
(c) Unless this Agreement is theretofore terminated pursuant
to Section 7.1(a) hereof, the estate of any Covered Person who ceases
to be an employee by reason of death or any Covered Person who ceases
to be an employee for any reason other than death and who subsequently
dies shall from and after the date of such death be bound only by the
restrictions on transfer imposed by Section 2.3(a) hereof and the
Continuing Provisions; and upon the expiration of the restrictions in
Section 2.3(a), the estate of such Covered Person shall no longer be
bound by the provisions of this Agreement (other than the Continuing
Provisions), and such Covered Person's name shall be removed from
Appendix A to this Agreement.
Section 7.2 Amendments.
(a) Except as provided in this Section 7.2, provisions of this
Agreement may be amended only by the affirmative vote of a majority of
the outstanding Voting Interests.
(b) This Section 7.2(b), Section 7.1(a) and Section 7.3(a)(i)
may be amended only by the affirmative vote of 66 2/3% of the
outstanding Voting Interests. Any amendment of any other provision of
this Agreement that would have the effect, in connection with a tender
or exchange offer by any person other than the Company as to which the
Board of Directors of GS Inc. is recommending rejection, of permitting
Transfers which would not be permitted by the terms of this Agreement
as theretofore in effect shall also require the affirmative vote of
66 2/3% of the outstanding Voting Interests.
(c) This Section 7.2(c), Article V, Section 7.3(b) and any
other provision the amendment (or addition) of which has the effect of
materially changing the rights or obligations of the Shareholders'
Committee hereunder may be amended (or added) either (i) with the
approval of the Shareholders' Committee and the affirmative vote of a
majority of the Voting Interests or (ii) by the affirmative vote of
66 2/3% of the outstanding Voting Interests.
(d) In addition to any other vote or approval that may be
required under this Section 7.2, any amendment to the General Transfer
Restrictions that would make such General Transfer Restrictions
materially more onerous to a Covered Person will not be enforceable
against that Covered Person unless that Covered Person has consented to
such amendment.
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<PAGE> 18
(e) In addition to any other vote or approval that may be
required under this Section 7.2, any amendment of this Agreement that
has the effect of changing the obligations of GS Inc. hereunder to make
such obligations materially more onerous to GS Inc. shall require the
approval of GS Inc.
(f) In addition to any other vote or approval that may be
required under this Section 7.2, any amendment that has the effect of
amending the provisions of Section 2.3(a), 2.3(b) or 2.3(c) shall
require the approval of GS Inc.
(g) Each Covered Person understands that it is intended that
each managing director of the Company will be a Covered Person under
this Agreement or will become a Covered Person upon his appointment to
such position, and each Covered Person further understands that from
time to time certain other persons may become Covered Persons and
certain Covered Persons will cease to be bound by the provisions of
this Agreement pursuant to the terms hereof. Accordingly, this
Agreement may be amended by action of the Shareholders' Committee from
time to time and without the approval of any other person, but solely
for the purposes of (i) adding to Appendix A such persons as shall be
made party to this Agreement pursuant to the terms hereof or shall (A)
be appointed managing directors of the Company and (B) execute a
counterpart of the signature page of this Agreement, such addition to
be effective as of the time of such action or appointment and (ii)
removing from Appendix A such persons as shall cease to be bound by the
provisions of this Agreement pursuant to Sections 7.1(b) or (c) hereof,
which additions and removals shall be given effect from time to time by
appropriate changes to Appendix A.
Section 7.3 Waivers. The Transfer Restrictions and the other
provisions of this Agreement may be waived only as provided in this
Section 7.3.
(a) The holders of the outstanding Voting Interests may waive
the Transfer Restrictions and the other provisions of this Agreement
without the consent of any other person as follows:
(i) The Transfer Restrictions may be waived, in
connection with any tender or exchange offer by
any person other than the Company as to which
the Board of Directors of GS Inc. is
recommending rejection at the time of such
waiver, only by the affirmative vote of 66 2/3%
of the outstanding Voting Interests;
(ii) The Transfer Restrictions may be waived, in
connection with any tender or exchange offer by
any person other than the
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<PAGE> 19
Company as to which the Board of Directors
of GS Inc. is recommending acceptance or is
not making any recommendation with respect
to acceptance at the time of such waiver,
only by the affirmative vote of a majority
of the outstanding Voting Interests;
(iii) The Transfer Restrictions may be waived, in
connection with any tender or exchange offer
by the Company, by the affirmative vote of a
majority of the outstanding Voting
Interests;
(iv) In all circumstances other than those set
forth in Section 7.3(a)(i), (ii) and (iii),
the provisions of this Agreement may be
waived only by the affirmative vote of a
majority of the outstanding Voting
Interests; provided, however, that the
holders of the outstanding Voting Interests
may not waive the provisions of this
Agreement in the circumstances set forth in
Section 7.3(b); and
(v) In addition to any other action that may be
required under this Section 7.3(a), any
waiver that has the effect of waiving the
provisions of Section 2.3(a), 2.3(b) or
2.3(c) shall require the approval of GS Inc.
(b) The Shareholders' Committee may waive the Transfer
Restrictions and the other provisions of this Agreement without the
consent of any other person as follows:
(i) The Shareholders' Committee may waive the
Transfer Restrictions and the other
provisions of this Agreement to permit: (A)
Covered Persons to participate as sellers in
underwritten public offerings of, and stock
repurchase programs and tender offers by GS
Inc. for, Common Stock; (B) Transfers of
Covered Shares to organizations described in
Section 501(c)(3) of the Code, including
gifts to "private foundations" subject to
the requirements of Section 509 of the Code;
(C) Transfers of Covered Shares held in
employee benefit plans of the Company either
generally or in particular situations; and
(D) particular Covered Persons or all
Covered Persons to Transfer Covered Shares
in particular situations (such as Transfers
to family members, partnerships or trusts),
but not generally (provided that in each of
(A) through (D),
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<PAGE> 20
waivers of the restrictions imposed by Section
2.3(a), 2.3(b) and 2.3(c) shall also require
the prior written consent of GS Inc.);
(ii) The Shareholders' Committee may waive the PLP
Transfer Restrictions in all circumstances
other than in connection with a tender or
exchange offer by any person other than the
Company; and
(iii) The Shareholders' Committee may waive any or
all of the Transfer Restrictions and the other
provisions of this Agreement with respect to
Covered Shares owned by a person at the time
the person becomes a managing director of the
Company or acquired by the person in connection
with such person's becoming a managing director
of the Company; provided that such person was
not an employee of the Company prior to the
granting of such waiver by the Shareholders'
Committee.
(c) GS Inc. agrees that the PLP Transfer Restrictions shall be
deemed to be waived under the Plan of Incorporation if they are waived
as provided in this Agreement.
(d) In connection with any waiver granted under this
Agreement, the Shareholders' Committee or the holders of the percentage
of Voting Interests required for the waiver, as the case may be, may
impose such conditions as they determine on the granting of such
waivers.
(e) The failure of the Company or the Shareholders' Committee
at any time or times to require performance of any provision of this
Agreement shall in no manner affect the rights at a later time to
enforce the same. No waiver by the Company or the Shareholders'
Committee of the breach of any term contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be
deemed to be or construed as a further or continuing waiver of any such
breach or the breach of any other term of this Agreement.
Section 7.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
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<PAGE> 21
Section 7.5 Resolution of Disputes.
(a) The Shareholders' Committee shall have the sole and
exclusive power to enforce the provisions of this Agreement. The
Shareholders' Committee may in its sole discretion request GS Inc. to
conduct such enforcement, and GS Inc. agrees to conduct such
enforcement as requested and directed by the Shareholders' Committee.
(b) Without diminishing the finality and conclusive effect of
any determination by the Shareholders' Committee of any matter under
this Agreement which is provided herein to be determined or proposed by
the Shareholders' Committee (and subject to the provisions of
paragraphs (c) and (d) hereof), any dispute, controversy or claim
arising out of or relating to or concerning the provisions of this
Agreement shall be finally settled by arbitration in New York City
before, and in accordance with the rules then obtaining of, the New
York Stock Exchange, Inc. ("NYSE"), or if the NYSE declines to
arbitrate the matter, the American Arbitration Association ("AAA") in
accordance with the commercial arbitration rules of the AAA.
(c) Notwithstanding the provisions of paragraph (b), and in
addition to its right to submit any dispute or controversy to
arbitration, the Shareholders' Committee may bring, or may cause GS
Inc. to bring, on behalf of the Shareholders' Committee or on behalf of
one or more Covered Persons, an action or special proceeding in a state
or federal court of competent jurisdiction sitting in the State of
Delaware, whether or not an arbitration proceeding has theretofore been
or is ever initiated, for the purpose of temporarily, preliminarily or
permanently enforcing the provisions of this Agreement and, for the
purposes of this paragraph (c), each Covered Person (i) expressly
consents to the application of paragraph (d) to any such action or
proceeding, (ii) agrees that proof shall not be required that monetary
damages for breach of the provisions of this Agreement would be
difficult to calculate and that remedies at law would be inadequate and
(iii) irrevocably appoints each General Counsel of GS Inc., c/o The
Corporation Trust Company, Corporation Trust Center, 1209 Orange
Street, Wilmington, Delaware 19801 as such Covered Person's agent for
service of process in connection with any such action or proceeding,
who shall promptly advise such Covered Person of any such service of
process.
(d) (i) EACH COVERED PERSON HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE
STATE OF DELAWARE OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO OR CONCERNING THIS AGREEMENT THAT IS NOT OTHERWISE
ARBITRATED ACCORDING TO THE PROVISIONS OF PARAGRAPH (B)
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<PAGE> 22
HEREOF. This includes any suit, action or proceeding to compel
arbitration or to enforce an arbitration award. The parties acknowledge
that the forum designated by this paragraph (d) has a reasonable
relation to this Agreement, and to the parties' relationship with one
another. Notwithstanding the foregoing, nothing herein shall preclude
the Shareholders' Committee or GS Inc. from bringing any action or
proceeding in any other court for the purpose of enforcing the
provisions of this Section 7.5.
(ii) The agreement of the parties as to forum is independent
of the law that may be applied in the action, and they each agree to
such forum even if the forum may under applicable law choose to apply
non-forum law. The parties hereby waive, to the fullest extent
permitted by applicable law, any objection which they now or hereafter
may have to personal jurisdiction or to the laying of venue of any such
suit, action or proceeding brought in any court referred to in
paragraph (d)(i). The parties undertake not to commence any action
arising out of or relating to or concerning this Agreement in any forum
other than a forum described in paragraph (d)(i). The parties agree
that, to the fullest extent permitted by applicable law, a final and
non-appealable judgment in any such suit, action or proceeding in any
such court shall be conclusive and binding upon the parties.
Section 7.6 Relationship of Parties. The terms of this
Agreement are intended not to create a separate entity for U.S. federal income
tax purposes, and nothing in this Agreement shall be read to create any
partnership, joint venture or separate entity among the parties or to create any
trust or other fiduciary relationship between them.
Section 7.7 Notices.
(a) Any communication, demand or notice to be given hereunder
will be duly given (and shall be deemed to be received) when delivered
in writing by hand or first class mail or by telecopy to a party at its
address as indicated below:
If to a Covered Person,
c/o The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3876
Attention: General Counsel;
If to the Shareholders' Committee, at
Shareholders' Committee under the Shareholders'
Agreement,
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<PAGE> 23
dated May 7, 1999
c/o The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3876
Attention: General Counsel;
and
If to GS Inc., at
The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3876
Attention: General Counsel.
GS Inc. shall be responsible for notifying each Covered Person
of the receipt of a communication, demand or notice under this
Agreement relevant to such Covered Person at the address of such
Covered Person then in the records of GS Inc. (and each Covered Person
shall notify GS Inc. of any change in such address for communications,
demands and notices).
(b) Unless otherwise provided to the contrary herein, any
notice which is required to be given in writing pursuant to the terms
of this Agreement may be given by telecopy.
Section 7.8 Severability. If any provision of this Agreement
is finally held to be invalid, illegal or unenforceable, (a) the remaining terms
and provisions hereof shall be unimpaired and (b) the invalid or unenforceable
term or provision shall be deemed replaced by a term or provision that is valid
and enforceable and that comes closest to expressing the intention of the
invalid or unenforceable term or provision.
Section 7.9 Right to Determine Tender Confidentially. In
connection with any tender or exchange offer for all or any portion of the
outstanding Common Stock, subject to compliance with all applicable restrictions
on Transfer in this Agreement, the Plan of Incorporation or any other agreement
with GS Inc., each Covered Person will have the right to determine
confidentially whether such Covered Person's Covered Shares will be tendered in
such tender or exchange offer.
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<PAGE> 24
Section 7.10 No Third-Party Rights. Nothing expressed or
referred to in this Agreement will be construed to give any person other than
the parties to this Agreement any legal or equitable right, remedy, or claim
under or with respect to this Agreement or any provision of this Agreement. This
Agreement and all of its provisions and conditions are for the sole and
exclusive benefit of the parties to this Agreement and their successors and
assigns.
Section 7.11 Section Headings. The headings of sections in
this Agreement are provided for convenience only and will not affect its
construction or interpretation.
Section 7.12 Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed an
original, but all such counterparts shall together constitute but one and the
same instrument.
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<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have duly executed or
caused to be duly executed this Agreement as of the dates indicated.
THE GOLDMAN SACHS GROUP, INC.
By _________________________________
Name:
Title:
Dated: May 7, 1999
[Signature Page 1 and Signature Page 2 Follow]
<PAGE> 26
Signature Page 1
to
Shareholders' Agreement
Bradley I. Abelow
Paul M. Achleitner
Jonathan R. Aisbitt
Andrew M. Alper
Armen A. Avanessians
David M. Baum
Ron E. Beller
Milton R. Berlinski
Lloyd C. Blankfein
David W. Blood
Peter L. Briger Jr.
Richard J. Bronks
Lawrence R. Buchalter
Michael J. Carr
Christopher J. Carrera
Mary Ann Casati
Andrew A. Chisholm
Zachariah Cobrinik
Abby Joseph Cohen
Gary D. Cohn
Christopher A. Cole
Carlos A. Cordeiro
Henry Cornell
E. Gerald Corrigan
Jon S. Corzine
Claudio Costamagna
Frank L. Coulson, Jr.
Randolph L. Cowen
Philip M. Darivoff
Timothy D. Dattels
Gavyn Davies
David A. Dechman
Paul C. Deighton
Robert V. Delaney
Joseph Della Rosa
Alexander C. Dibelius
John O. Downing
Connie K. Duckworth
C. Steven Duncker
Gordon E. Dyal
Glenn P. Earle
<PAGE> 27
Signature Page 1
to
Shareholders' Agreement (cont.)
Paul S. Efron
J. Michael Evans
W. Mark Evans
Pieter Maarten Feenstra
Lawton W. Fitt
David B. Ford
Edward C. Forst
Christopher G. French
Richard A. Friedman
Joseph D. Gatto
Peter C. Gerhard
Nomi P. Ghez
Joseph H. Gleberman
Richard J. Gnodde
Jeffrey B. Goldenberg
Jacob D. Goldfield
Amy O. Goodfriend
Andrew M. Gordon
Geoffrey T. Grant
Eric P. Grubman
Joseph D. Gutman
Robert S. Harrison
Thomas J. Healey
Sylvain M. Hefes
David B. Heller
Steven M. Heller
David L. Henle
Mary C. Henry
Robert E. Higgins
M. Roch Hillenbrand
Jacquelyn M. Hoffman-Zehner
Robert J. Hurst
Francis J. Ingrassia
Timothy J. Ingrassia
Reuben Jeffery III
Stefan J. Jentzsch
Chansoo Joung
Ann F. Kaplan
Barry A. Kaplan
Robert S. Kaplan
Scott B. Kapnick
<PAGE> 28
Signature Page 1
to
Shareholders' Agreement (cont.)
Erland S. Karlsson
Robert J. Katz
Kevin W. Kennedy
Peter D. Kiernan III
Douglas W. Kimmelman
Bradford C. Koenig
Jonathan L. Kolatch
Peter S. Kraus
David G. Lambert
Thomas D. Lasersohn
Anthony D. Lauto
Matthew G. L'Heureux
Lawrence H. Linden
Robert Litterman
Robert H. Litzenberger
Jonathan M. Lopatin
Michael R. Lynch
Peter G.C. Mallinson
Ronald G. Marks
Eff W. Martin
David J. Mastrocola
John P. McNulty
E. Scott Mead
Sanjeev K. Mehra
T. Willem Mesdag
Eric M. Mindich
Steven T. Mnuchin
Masanori Mochida
Karsten N. Moller
Thomas K. Montag
Wayne L. Moore
Robert B. Morris III
Michael P. Mortara
Sharmin Mossavar-Rahmani
Edward A. Mule
Philip D. Murphy
Thomas S. Murphy, Jr.
Avi M. Nash
Daniel M. Neidich
Kipp M. Nelson
Robin Neustein
<PAGE> 29
Signature Page 1
to
Shareholders' Agreement (cont.)
Suzanne M. Nora Johnson
Michael E. Novogratz
Alok Oberoi
Terence J. O'Neill
Timothy J. O'Neill
Donald C. Opatrny, Jr.
Robert J. O'Shea
Greg M. Ostroff
Terence M. O'Toole
Robert J. Pace
Gregory K. Palm
Henry M. Paulson, Jr.
Scott M. Pinkus
Timothy C. Plaut
Wiet H. Pot
John J. Powers
Michael A. Price
Scott S. Prince
Stephen D. Quinn
Michael G. Rantz
Girish V. Reddy
Arthur J. Reimers
James P. Riley, Jr.
Simon M. Robertson
J. David Rogers
Emmanuel Roman
Ralph F. Rosenberg
Stuart M. Rothenberg
Michael S. Rubinoff
Richard M. Ruzika
John C. Ryan
Michael D. Ryan
Richard A. Sapp
Joseph Sassoon
Tsutomu Sato
Muneer A. Satter
Jonathan S. Savitz
Peter Savitz
Howard B. Schiller
Antoine Schwartz
Eric S. Schwartz
<PAGE> 30
Signature Page 1
to
Shareholders' Agreement (cont.)
Mark Schwartz
Charles B. Seelig, Jr.
Steven M. Shafran
Richard S. Sharp
James M. Sheridan
Richard G. Sherlund
Michael S. Sherwood
Howard A. Silverstein
Dinakar Singh
Christian J. Siva-Jothy
Cody J Smith
Jonathan S. Sobel
Marc A. Spilker
Daniel W. Stanton
Esta E. Stecher
Fredric E. Steck
Robert K. Steel
Hsueh J. Sung
Peter D. Sutherland
Gene T. Sykes
Mark R. Tercek
Donald F. Textor
John A. Thain
John L. Thornton
John R. Tormondsen
Leslie C. Tortora
John L. Townsend, III
Byron D. Trott
Robert B. Tudor III
Thomas E. Tuft
Malcolm B. Turnbull
John E. Urban
Lee G. Vance
David A. Viniar
Barry S. Volpert
George H. Walker
Thomas B. Walker III
Patrick J. Ward
John S. Weinberg
Peter A. Weinberg
George W. Wellde, Jr.
<PAGE> 31
Signature Page 1
to
Shareholders' Agreement (cont.)
Anthony G. Williams
Gary W. Williams
Kendrick R. Wilson III
Jon Winkelried
Steven J. Wisch
Richard E. Witten
Tracy R. Wolstencroft
Yasuyo Yamazaki
Danny O. Yee
Michael J. Zamkow
Yoel Zaoui
Gregory H. Zehner
Jide J. Zeitlin
Joseph R. Zimmel
Barry L. Zubrow
Mark A. Zurack
By:_________________________
Name:
Title: Attorney-in-Fact
Dated: May 7, 1999
<PAGE> 32
Signature Page 2
to
Shareholders' Agreement
____________________________
Name:
Dated: May 7, 1999
<PAGE> 33
APPENDIX A
PARTIES TO THE SHAREHOLDERS' AGREEMENT
NAME
Bradley I. Abelow
Peter C. Aberg
Paul M. Achleitner
Jonathan R. Aisbitt
Elliot M. Alchek
Andrew M. Alper
Philippe J. Altuzarra
Kazutaka P. Arai
David M. Atkinson
Mitchel J. August
Armen A. Avanessians
John S. Barakat
Barbara J. Basser-Bigio
David M. Baum
Robert A. Beckwitt
Jonathan A. Beinner
Ron E. Beller
Tarek M. Ben Halim
Jaime I. Bergel
Todd L. Bergman
Milton R. Berlinski
Andrew S. Berman
Frances R. Bermanzohn
Jeffrey J. Bernstein
Robert A. Berry
Jean-Luc Biamonti
James J. Birch
Lloyd C. Blankfein
David W. Blood
David R. Boles
David A. Bolotsky
Charles W.A. Bott
Charles C. Bradford III
Benjamin S. Bram
Thomas C. Brasco
Peter L. Briger Jr.
<PAGE> 34
APPENDIX A (CONT.)
Craig W. Broderick
Richard J. Bronks
Charles K. Brown
Vern J. Brownell
Peter D. Brundage
Lawrence R. Buchalter
Steven M. Bunson
Timothy B. Bunting
Calvert C. Burkhart
Michael S. Burton
George H. Butcher III
Lawrence V. Calcano
John D. Campbell
Richard M. Campbell-Breeden
Anthony H. Carpet
Michael J.Carr
Christopher J. Carrera
Virginia E. Carter
Calvin R. Carver, Jr.
Mary Ann Casati
Chris Casciato
Douglas W. Caterfino
Michael J. Certo
Varkki P. Chacko
David K. Chang
Thomas P. Chang
Sacha A. Chiaramonte
Andrew A. Chisholm
Robert J. Christie
Peter T. Cirenza
Kent A. Clark
Zachariah Cobrinik
Abby Joseph Cohen
Gary D. Cohn
Christopher A. Cole
Timothy J. Cole
Laura C. Conigliaro
Frank T. Connor
Donna L. Conti
Edith W. Cooper
Philip A. Cooper
John W. Copeland
Carlos A. Cordeiro
<PAGE> 35
APPENDIX A (CONT.)
Henry Cornell
E. Gerald Corrigan
Jon S. Corzine
Claudio Costamagna
Frank L. Coulson, Jr.
Randolph L. Cowen
Neil D. Crowder
John W. Curtis
Stephen C. Daffron
John S. Daly
Philip M. Darivoff
Matthew S. Darnall
Timothy D. Dattels
Gavyn Davies
David A. Dechman
Paul C. Deighton
Juan A. Del Rivero
Robert V. Delaney
Joseph Della Rosa
Emanuel Derman
Andrew C. Devenport
Stephen D. Dias
Alexander C. Dibelius
Simon P. Dingemans
Sandra D'Italia
Paula A. Dominick
Noel B. Donohoe
Jana Hale Doty
Robert G. Doumar, Jr.
John O. Downing
Michael B. Dubno
Connie K. Duckworth
William C. Dudley
Matthieu B. Duncan
C. Steven Duncker
Karlo J. Duvnjak
Jay S. Dweck
Gordon E. Dyal
Isabelle Ealet
Glenn P. Earle
Paul S. Efron
Herbert E. Ehlers
Alexander S. Ehrlich
<PAGE> 36
APPENDIX A (CONT.)
John E. Eisenberg
Glenn D. Engel
Michael P. Esposito
George C. Estey
Mark D. Ettenger
J. Michael Evans
W. Mark Evans
Charles P. Eve
Paul D. Farrell
Elizabeth C. Fascitelli
Pieter Maarten Feenstra
Steven M. Feldman
Laurie R. Ferber
Robert P. Fisher, Jr.
Lawton W. Fitt
Stephen C. Fitzgerald
David N. Fleischer
Jeffrey S. Flug
David B. Ford
Eric O. Fornell
Edward C. Forst
Oliver L. Frankel
Matthew T. Fremont-Smith
Christopher G. French
Richard A. Friedman
C. Douglas Fuge
Joseph D. Gatto
Emmanuel Gavaudan
Eduardo B. Gentil
Peter C. Gerhard
Nomi P. Ghez
H. John Gilbertson, Jr.
Alan R. Gillespie
Joseph H. Gleberman
Richard J. Gnodde
Jeffrey B. Goldenberg
Jacob D. Goldfield
Amy O. Goodfriend
Jay S. Goodgold
Andrew M. Gordon
Robert D. Gottlieb
Geoffrey T. Grant
William M. Grathwohl
<PAGE> 37
APPENDIX A (CONT.)
David J. Greenwald
Louis S. Greig
Christopher Grigg
Douglas C. Grip
Eric P. Grubman
Celeste A. Guth
Joseph D. Gutman
Erol Hakanoglu
Roger C. Harper
Charles T. Harris III
Robert S. Harrison
Shelley A. Hartman
Nobumichi Hattori
Stephen J. Hay
Walter H. Haydock
Isabelle Hayen
Thomas J. Healey
John P. Heanue
Robert C. Heathcote
Sylvain M. Hefes
David B. Heller
Steven M. Heller
R. Douglas Henderson
David L. Henle
Mary C. Henry
Robert E. Higgins
M. Roch Hillenbrand
Maykin Ho
Timothy E. Hodgson
Jacquelyn M. Hoffman-Zehner
Christopher G. Hogg
Gregory T. Hoogkamp
Robert D. Hormats
Robert G. Hottensen, Jr.
James A. Hudis
Terry P. Hughes
Bimaljit S. Hundal
Robert J. Hurst
Francis J. Ingrassia
Timothy J. Ingrassia
Masahiro Iwano
William L. Jacob III
Mark M. Jacobs
<PAGE> 38
APPENDIX A (CONT.)
Richard I. Jaffee
Reuben Jeffery III
Stefan J. Jentzsch
Dan H. Jester
Daniel J. Jick
Robert H. Jolliffe
Robert C. Jones
Reginald L. Jones III
Chansoo Joung
Andrew J. Kaiser
Donald G. Kane II
Ann F. Kaplan
Barry A. Kaplan
David A. Kaplan
Jason S. Kaplan
Robert S. Kaplan
Scott B. Kapnick
Erland S. Karlsson
Carolyn F. Katz
Robert J. Katz
Sofia Katzap
Haruo Kawamura
Tetsuya Kawano
Sion P. Kearsey
R. Mark Keating
John L. Kelly
Kevin M. Kelly
Kevin W. Kennedy
Peter D. Kiernan III
James T. Kiernan, Jr.
Sun Bae Kim
Douglas W. Kimmelman
Colin E. King
Robert C. King, Jr.
Adrian P. Kingshott
Ewan M. Kirk
Michael K. Klingher
Craig A. Kloner
Bradford C. Koenig
Mark J. Kogan
Jonathan L. Kolatch
David J. Kostin
Koji Kotaka
<PAGE> 39
APPENDIX A (CONT.)
Peter S. Kraus
Christoph M. Ladanyi
David G. Lambert
Pierre F. Lapeyre Jr.
Bruce M. Larson
Thomas D. Lasersohn
Anthony D. Lauto
Susan R. Leadem
Andrew D. Learoyd
Donald C. Lee
Kenneth H. M. Leet
Paulo C. Leme
Hughes B. Lepic
Alan B. Levande
Thomas B. Lewis, Jr.
Mark E. Leydecker
Matthew G. L'Heureux
Aaron D. Liberman
Gwen R. Libstag
Stephen C. Lichtenauer
Roger A. Liddell
Richard J. Lieb
Mitchell J. Lieberman
Josephine Linden
Lawrence H. Linden
Robert Litterman
Robert H. Litzenberger
Ernest S. Liu
David J. Lockwood
Jonathan M. Lopatin
Francisco Lopez-Balboa
Victor M. Lopez-Balboa
Antigone Loudiadis
C. Richard Lucy
Michael C. Luethke
Michael R. Lynch
Shogo Maeda
John A. Mahoney
Sean O. Mahoney
Jun Makihara
Russell E. Makowsky
Peter G.C. Mallinson
Charles G. R. Manby
<PAGE> 40
APPENDIX A (CONT.)
Barry A. Mannis
Richard J. Markowitz
Ronald G. Marks
Robert J. Markwick
Eff W. Martin
Jacques Martin
John J. Masterson
David J. Mastrocola
Kathy M. Matsui
Tadanori Matsumura
Heinz Thomas Mayer
Richard X. McArdle
Theresa E. McCabe
Joseph M. McConnell
Mark E. McGoldrick
Stephen J. McGuinness
John C. McIntire
John W. McMahon
Geraldine F. McManus
Audrey A. McNiff
Anne Welsh McNulty
John P. McNulty
E. Scott Mead
David M. Meerschwam
Sanjeev K. Mehra
Richard W. Meister
Amos Meron
T. Willem Mesdag
Kenneth A. Miller
Therese L. Miller
James E. Milligan
Eric M. Mindich
Peter A. Mindnich
Edward S. Misrahi
Steven T. Mnuchin
Kurt C. Mobley
Masanori Mochida
Karsten N. Moller
Thomas K. Montag
Wayne L. Moore
Yukihiro Moroe
Robert B. Morris III
Michael P. Mortara
<PAGE> 41
APPENDIX A (CONT.)
Matthias R. Mosler
Jeffrey M. Moslow
Sharmin Mossavar-Rahmani
Ian Mukherjee
Edward A. Mule
Donald J. Mulvihill
Patrick E. Mulvihill
Richard A. Murley
Philip D. Murphy
Thomas S. Murphy, Jr.
Gaetano J. Muzio
Michiya Nagai
Kiyotaka Nakamura
Avi M. Nash
Trevor Nash
Warwick M. Negus
Daniel M. Neidich
Kipp M. Nelson
Robin Neustein
Duncan L. Niederauer
Suzanne M. Nora Johnson
Christopher K. Norton
Michael E. Novogratz
Jay S. Nydick
Alok Oberoi
Jinsuk T. Oh
John C. O'Hara
Terence J. O'Neill
Timothy J. O'Neill
Richard T. Ong
Ronald M. Ongaro
Donald C. Opatrny, Jr.
Daniel B. O'Rourke
Robert J. O'Shea
Greg M. Ostroff
Terence M. O'Toole
Robert J. Pace
Robert N. Packer
Gregory K. Palm
Mukesh K. Parekh
Melissa B. Patrusky
Henry M. Paulson, Jr.
Alberto M. Piedra Jr.
<PAGE> 42
APPENDIX A (CONT.)
Stephen R. Pierce
Philip J. Pifer
Scott M. Pinkus
Timothy C. Plaut
Andrea Ponti
Wiet H. Pot
Michael J. Poulter
John J. Powers
Michael A. Price
Scott S. Prince
Stephen D. Quinn
John J. Rafter
Dioscoro-Roy I. Ramos
Charlotte P. Ransom
Michael G. Rantz
Joseph Ravitch
Girish V. Reddy
Arthur J. Reimers
Anthony John Reizenstein
James P. Riley, Jr.
Simon M. Robertson
J. David Rogers
John F.W. Rogers
Emmanuel Roman
Pamela P. Root
Ralph F. Rosenberg
Jacob D. Rosengarten
Stuart M. Rothenberg
Michael S. Rubinoff
Paul M. Russo
Richard M. Ruzika
John C. Ryan
Michael D. Ryan
J. Michael Sanders
Allen Sangines-Krause
Richard A. Sapp
Joseph Sassoon
Tsutomu Sato
Muneer A. Satter
Jonathan S. Savitz
Peter Savitz
P. Sheridan Schechner
Gary B. Schermerhorn
<PAGE> 43
APPENDIX A (CONT.)
Mitchell I. Scherzer
Howard B. Schiller
Antoine Schwartz
Eric S. Schwartz
Mark Schwartz
Steven M. Scopellite
David J. Scudellari
Charles B. Seelig, Jr.
Steven M. Shafran
Richard S. Sharp
John P. Shaughnessy
Robert J. Shea, Jr.
James M. Sheridan
Richard G. Sherlund
Michael S. Sherwood
Howard A. Silverstein
Richard P. Simon
Victor R. Simone, Jr.
Dinakar Singh
Ravi Sinha
Allen W. Sinsheimer
Edward M. Siskind
Christian J. Siva-Jothy
Mark F. Slaughter
Cody J Smith
Michael M. Smith
Sarah E. Smith
Randolph C. Snook
Jonathan S. Sobel
Judah C. Sommer
Theodore T. Sotir
Marc A. Spilker
Daniel W. Stanton
Esta E. Stecher
Fredric E. Steck
Robert K. Steel
Robert S. Stellato
Raymond S. Stolz
Steven H. Strongin
Andrew J. Stuart
Patrick Sullivan
Hsueh J. Sung
George M. Suspanic
<PAGE> 44
APPENDIX A (CONT.)
Peter D. Sutherland
Gene T. Sykes
Gary A. Syman
John H. Taylor
Robert E. Taylor
Greg W. Tebbe
Mark R. Tercek
Donald F. Textor
John A. Thain
John L. Thornton
Daisuke Toki
John R. Tormondsen
Leslie C. Tortora
John L. Townsend, III
Mark J. Tracey
Byron D. Trott
Michael A. Troy
Robert B. Tudor III
Thomas E. Tuft
Barry S. Turkanis
Malcolm B. Turnbull
Harkanwar Uberoi
Kaysie P. Uniacke
John E. Urban
Hugo H. Van Vredenburch
Lee G. Vance
John J. Vaske
Oksana Vayner-Ryklin
David A. Viniar
Barry S. Volpert
George H. Walker
Thomas B. Walker III
Nicholas J. Walsh
David R. Walton
Hsueh-Ming Wang
Patrick J. Ward
Haruko Watanuki
Edward F. Watts Jr.
David M. Weil
John S. Weinberg
Peter A. Weinberg
Mark S. Weiss
George W. Wellde, Jr.
<PAGE> 45
APPENDIX A (CONT.)
Bradley W. Wendt
Peter S. Wheeler
Barbara A. White
A. Carver Wickman
Susan A. Willetts
Anthony G. Williams
Gary W. Williams
Todd A. Williams
Kendrick R. Wilson III
Jon Winkelried
Steven J. Wisch
Richard E. Witten
Tracy R. Wolstencroft
Zi Wang Xu
Tetsufumi Yamakawa
Yasuyo Yamazaki
Danny O. Yee
Jaime E. Yordan
W. Thomas York Jr.
Michael J. Zamkow
Paolo Zannoni
Yoel Zaoui
Gregory H. Zehner
Jide J. Zeitlin
Joan H. Zief
Joseph R. Zimmel
James P. Ziperski
Barry L. Zubrow
Mark A. Zurack
<PAGE> 1
EXHIBIT 10.27
INSTRUMENT OF INDEMNIFICATION
WHEREAS, The Goldman Sachs Group, Inc. ("GS Inc.") desires that
(a) each Schedule I Limited Partner, each Schedule II Limited Partner (each as
defined in the Memorandum of Agreement as hereinafter defined) and certain
former partners of The Goldman Sachs Group, L.P. ("GS Group"), Goldman, Sachs &
Co., J. Aron and Company and affiliates thereof, who or which have accepted or
consented to and are participating in the Plan of Incorporation (the "Plan")
proposed by the General Partner of GS Group and approved at a meeting on March
8, 1999 by the Schedule II Limited Partners having 51% or more in interest in
the profits of GS Group pursuant to Article I, Section 14 of the Memorandum of
Agreement, amended and restated as of November 28, 1998, as amended (the
"Memorandum of Agreement"), (b) other former partners of GS Group or Goldman,
Sachs & Co. and certain other persons or entities who or which have executed and
delivered to GS Group an Acceptance Document and Power of Attorney for Persons
Entitled to Capital Awaiting Settlement (each such former partner or other
person or entity, a "CAS Indemnitee"), (c) Sumitomo Bank Capital Markets Inc.
("SBCM") and (d) Kamehameha Activities Association ("KAA") (such Schedule I
Limited Partners, Schedule II Limited Partners, former partners, CAS
Indemnitees, SBCM and KAA, herein collectively, the "Indemnitees") be
indemnified as provided herein;
<PAGE> 2
WHEREAS, GS Inc. desires to assume the obligations of such
Indemnitees as are parties to the Indemnification Agreement, dated as of
November 30, 1996, among the signatories thereto (the "Indemnification
Agreement"), under the Indemnification Agreement;
WHEREAS, GS Inc. has determined that it is desirable and in its
best interest to indemnify the Indemnitees and assume the obligations thereof
under the Indemnification Agreement as an inducement to the approval of the Plan
and for other good and valid consideration.
This Instrument witnesseth
1. GS Inc. hereby indemnifies, to the full extent provided by law,
each Indemnitee, each director, officer and trustee thereof, each
person who was formerly such a director, officer or trustee, and the
estate of any such person (each, an "Indemnified Person") in the event
such Indemnified Person is made or threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such Indemnitee or its
predecessor in interest was a general or limited partner, stockholder,
member, director, officer, employee or agent of GS Group, Goldman,
Sachs & Co., J. Aron and Company or any Affiliate or Subsidiary thereof
(each as defined in the Memorandum of Agreement) or is serving or
served at the request of any of such persons as a general or limited
partner, stockholder, member, director, officer, employee or agent of
another partnership, corporation, limited
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<PAGE> 3
liability company, joint venture, trust or other enterprise; provided
that no indemnification or reimbursement shall be made to an
Indemnified Person in respect of conduct that is or was a breach of the
Memorandum of Agreement or to the extent that a final judgment or other
final adjudication binding upon the Indemnified Person establishes that
the acts or omissions of such Indemnified Person resulted from such
Indemnified Person's bad faith, fraud or willful criminal act or
omission; and provided, further, no indemnification or reimbursement
shall be made in respect of indebtedness incurred by an Indemnified
Person in his, her or its individual capacity to GS Group, GS Inc.,
Goldman, Sachs & Co., J. Aron and Company or any Affiliate or
Subsidiary (each as defined in the Memorandum of Agreement) or in
respect of any guarantee by an Indemnified Person in such capacity of
debt owed to any such person. GS Inc. agrees promptly to reimburse upon
the incurrence thereof the reasonable expenses, including attorneys
fees, of any Indemnified Person incurred in defending or investigating
any action, suit or proceeding, or any alleged action, suit or
proceeding, provided that such Indemnitee shall repay such expenses if
it shall ultimately be determined that such Indemnitee is not entitled
to be indemnified hereunder by GS Inc. An Indemnified Person shall be
entitled to indemnification hereunder of its expenses in a proceeding
to enforce its rights under this Instrument if the Indemnified Person
is successful (in whole or in part) in such proceeding. The foregoing
indemnity shall extend to any Liabilities (as
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<PAGE> 4
defined in the Memorandum of Agreement) for which an Indemnified Person
may be liable or to which an Indemnified Person may be subject.
Notwithstanding any other provision in this Instrument, the foregoing
indemnity shall not extend to any taxes imposed on, or with respect to,
the gross or net income of any Indemnified Person regardless of whether
such income is derived from the activities of GS Group, Goldman, Sachs
& Co., J. Aron and Company or any of their affiliates except to the
extent such taxes are imposed in respect of payments otherwise made
pursuant to this Instrument, in which case such Indemnified Person's
Losses shall include an amount not greater than the net taxes payable
(taking into account any deductions or other tax benefits available to
the Indemnified Person as a result of the expense or loss in respect of
which such payment is made).
2. (a) GS Inc. shall not have any liability to indemnify under
Section 1 unless it receives prompt notice from the Indemnified Person
seeking such indemnification of the initiation or threat known to the
Indemnified Person of an action, suit or proceeding as to which
indemnification is sought.
(b) In case any action, suit or proceeding for which
indemnification is available under Section 1 shall be brought against
any such Indemnified Person and such Indemnified Person notifies GS
Inc. of the commencement thereof, GS Inc. may seek to participate
therein and, to the extent that GS Inc. shall wish, to assume the
defense thereof. GS Inc. shall not be responsible for or be required to
pay the fees and expenses of more than one counsel representing all
-4-
<PAGE> 5
Indemnified Persons, GS Inc. and its predecessors or affiliates in
defending such action, suit or proceeding (in addition to a single firm
of local counsel). In addition, the Indemnified Persons shall be
entitled to employ one separate counsel for such Indemnitees in such
action, suit or proceeding at the expense of GS Inc. if such
Indemnitees reasonably conclude that if they did not there would be a
conflict of interest between GS Inc. (and its predecessors or
affiliates) and such Indemnified Person.
(c) GS Inc. shall not be liable hereunder for amounts paid in
settlement of any action or claim effected without GS Inc.'s prior
written consent, which shall not be unreasonably withheld.
3. GS Inc. hereby assumes the obligations as an Indemnifying Party
(as defined in the Indemnification Agreement) of each Indemnitee who is
a signatory of the Indemnification Agreement, as though GS Inc. were
such Indemnifying Party.
4. (a) GS Inc. shall, to the extent practicable, make any
payments, whether of damages, claims, liabilities, costs or expenses,
required to be made by an Indemnified Person as a result of an action,
suit or proceeding as to which GS Inc. has indemnified hereunder
directly to the party to which the Indemnified Person would otherwise
make a payment.
(b) Any payments otherwise required to be made by GS Inc.
hereunder shall be offset by any and all amounts received by an
Indemnified Person from
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<PAGE> 6
any other indemnitor or under one or more liability insurance policies
maintained by an indemnitor or otherwise and shall not be duplicative
of any other payments received by an Indemnified Person from GS Inc. in
respect of the matter giving rise to the indemnity hereunder. The
rights of an Indemnified Person hereunder shall not affect or be
affected in any way by the rights of an Indemnified Person under any
other agreement, arrangement, resolution or instrument providing
indemnification or expense advancement or reimbursement, other than
through the elimination of any right to duplicative payments as
provided in the immediately preceding sentence. Without limiting the
foregoing, the rights of any Indemnified Person under the resolution of
the Executive Committee of GS L.P., adopted on May 12, 1997 (the
"Resolution") shall remain in full force and effect insofar as an
Indemnified Person has any rights thereunder with respect to the acts,
omissions and status of such person through the date of this
Instrument. The execution and delivery of this Instrument shall
constitute notice, effective as of the date of this Instrument, that
the Resolution is rescinded insofar as it relates to the acts,
omissions and status of such person after the date of this Instrument.
When an Indemnified Person is entitled to indemnification, expense
advancement or reimbursement under this Instrument and any other
agreement, arrangement, resolution or instrument of GS Inc. or The
Goldman Sachs Group, L.P., the Indemnified Person may choose to pursue
its rights under one or more, but less than all, of such applicable
agreements, arrangements, resolutions or instruments,
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<PAGE> 7
in which case such Indemnified Person need only comply with the
standards and procedures of the agreements, arrangements, resolutions
or instruments under which it chooses to pursue its rights.
5. GS Inc. on its own behalf and on behalf of Goldman, Sachs &
Co., J. Aron and Company and each Affiliate and Subsidiary, hereby
irrevocably releases each Indemnified Person from any and all causes of
action, suits, damages, claims and demands whatsoever, whether at law
or in equity, which GS Inc. may have as successor to GS Group arising
out of an Indemnitee's partnership or other interest in GS Group and/or
its Affiliates and Subsidiaries or arising out of the conduct of such
Indemnitee as a general or limited partner, stockholder, member,
director, officer or employee thereof engaged in the conduct of the
business thereof; provided that this release shall not extend to
conduct that a final judgment or other final adjudication binding upon
the Indemnitee determines resulted from such Indemnified Person's bad
faith, fraud or willful criminal act or omission; and provided,
further, that this release shall not extend to representations or
warranties made or agreements entered into by an Indemnitee in
connection with the Plan, to conduct that is or was a breach of the
Memorandum of Agreement or to indebtedness incurred by an Indemnified
Person in his, her or its individual capacity to GS Group, GS Inc.,
Goldman, Sachs & Co., J. Aron and Company or any Affiliate or
Subsidiary or to any claims that may be made by any such person for
payment or reimbursement if and to the extent any such person
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<PAGE> 8
shall have performed under any guarantee of indebtedness incurred by an
Indemnified Person in such capacity.
6. This Instrument shall inure solely to the benefit of the
Indemnified Persons, and their respective heirs, executors,
administrators and successors, and no other person shall acquire or
have any right under or by virtue of this Instrument.
7. GS Inc. expressly reserves the right to make all determinations
under this Instrument, including determinations as to whether an
Indemnitee has accepted the Plan, and all such determinations by GS
Inc. shall be final and binding upon all parties hereto and
beneficiaries hereof.
8. THIS INSTRUMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. ANY DISPUTES ARISING HEREUNDER SHALL BE
GOVERNED BY THE PROVISIONS OF SECTION 16. "OTHER - ARBITRATION" OF THE
PLAN.
9. This Instrument is coupled with an interest and shall be
irrevocable by GS Inc., its successors and assigns.
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In witness thereof, The Goldman Sachs Group, Inc. by its duly
authorized officer has executed and delivered this Instrument in New York, New
York this 7th day of May 1999.
The Goldman Sachs Group, Inc.
By: /s/ Gregory K. Palm
------------------------
Gregory K. Palm
Executive Vice President
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<PAGE> 1
EXHIBIT 10.28
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into as of the 7th day of May, 1999, by and between The Goldman Sachs Group,
Inc., a Delaware corporation ("GS Inc.") and each of the Indemnitees listed on
the signature pages to this agreement (each, an "Indemnitee", and collectively,
the "Indemnitees") as such signature pages may be amended and supplemented from
time to time.
WITNESSETH
WHEREAS, GS Inc. has become party to a plan for the incorporation of
the business of The Goldman Sachs Group, L.P. ("GS Group") and the related
reorganization of the business of GS Group, which plan was approved by The
Goldman Sachs Corporation ("GS Corp.") in its capacity as general partner of GS
Group and by the Schedule II Limited Partners of GS Group in March 1999 (such
plan of incorporation together with all exhibits thereto as it or they may be
amended from time to time, the "Plan of Incorporation");
WHEREAS, as part of the Plan of Incorporation, GS Inc. has filed and
proposes to file registration statements (the "Registration Statements") with
the Securities and Exchange Commission for the public offering and sale of
shares of its common stock (including shares issuable in connection with
employee benefit plans) and debt securities (including medium-term notes);
<PAGE> 2
WHEREAS, GS Inc. has requested and will request certain of the
Indemnitees to execute the Registration Statements in the capacity or capacities
listed and to be listed in such Registration Statements; and
WHEREAS, each Indemnitee is or was one or more of the following: (i) an
officer or director of GS Inc., (ii) an officer or director of GS Corp., (iii) a
person requested or authorized by the board of directors or a person authorized
by the board of directors of GS Inc. or GS Corp. to take actions on behalf of GS
Group, GS Inc. or GS Corp. in connection with the Registration Statements or the
Plan of Incorporation or (iv) a member of the Management Committee or
Partnership Committee of GS Inc. or the former Executive Committee of GS Group.
NOW, therefore, in consideration of each Indemnitee's acting and
agreeing to act in the capacities referred to above, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties do hereby agree as follows:
1. General. GS Inc. (A) will indemnify and hold harmless each
Indemnitee against any Losses (as hereinafter defined), joint or several, to
which such Indemnitee may become subject, under the Securities Act of 1933, as
amended (the "Act") or otherwise, insofar as such Losses (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 the Registration Statements or any
related Rule 462(b) Registration Statements or any preliminary prospectus or
prospectus comprising a part thereof, or any
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<PAGE> 3
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; provided,
however, that GS Inc. shall not be liable in any such case to the extent that
any such Losses arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission relating to such Indemnitee
made in any preliminary prospectus, any registration statement or any prospectus
or any amendment or supplement in reliance upon and in conformity with written
information relating to such Indemnitee furnished to GS Inc. by such Indemnitee
expressly for use therein; and (B) will indemnify and hold harmless each
Indemnitee against any Losses (or actions in respect thereof) which otherwise
arise out of or are based upon or asserted against such Indemnitee in connection
with such Indemnitee's acting in the capacities referred to above in connection
with the transactions contemplated by the Plan of Incorporation, except to the
extent any such Losses referred to in this clause (B) arise out of or are based
upon the type of conduct for which (x) a director would not be exempt from
liability or (y) the indemnification of a director would be limited in respect
of such Losses, in the case of (x) and (y), within the meaning of Article
Twelfth of the Amended and Restated Certificate of Incorporation of GS Inc. or
Section 102(b)(7) of the Delaware General Corporation Law (whether or not such
Indemnitee is a director).
Notwithstanding the foregoing provisions of this Section 1, GS Inc. and
each Indemnitee agree that insofar as indemnification for liabilities arising
under the Act
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may be permitted under this Agreement to an Indemnitee who is a director,
officer or controlling person of GS Inc., in the event that a claim for
indemnification against such liabilities is made by such an Indemnitee (other
than the payment by GS Inc. of expenses incurred or paid by such Indemnitee in
the successful defense of any action, suit or proceeding) in connection with a
Registration Statement, GS Inc. 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 Act, and GS Inc. and such Indemnitee
will be governed by the final adjudication of such question.
2. Losses. As used in this Agreement, the term "Losses" shall include,
without limitation, damages, losses, claims, judgments, liabilities, fines,
penalties, excise taxes, settlements, and costs, attorneys' fees, accountants'
fees, and disbursements and costs of attachment or similar bonds, investigation
costs, defense preparation costs, costs of preparing for and presenting evidence
or testimony, and any expenses of establishing a right to indemnification under
this Agreement. The term "Losses" shall not include taxes except to the extent
taxes are imposed in respect of payments otherwise made pursuant to this
Agreement, in which case such Indemnitee's Losses shall include an amount not
greater than the net taxes payable (taking into account any deductions or other
tax benefits available to such Indemnitee as a result of the Losses in respect
of which such payment is made).
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3. Enforcement. Subject to the provisions of the second paragraph of
Section 1 hereof, if a claim or request by an Indemnitee under this Agreement is
not paid by GS Inc. or on its behalf, within thirty (30) days after a written
claim or request has been received by GS Inc. and, if applicable, the
affirmation in Section 5 hereof has been received by GS Inc., such Indemnitee
may at any time thereafter commence an arbitration proceeding in accordance with
Section 9 hereof against GS Inc. to recover the unpaid amount of the claim or
request and, if successful in whole or in part, such Indemnitee shall be
entitled to be paid also the expenses of prosecuting such proceeding. It shall
be a defense to any such proceeding (other than a proceeding commenced to
enforce a claim for expenses incurred in defending any actual or threatened
proceeding in advance of its final disposition where the required affirmation
and undertaking, if any is required, have been tendered to GS Inc.) that such
Indemnitee has not met the standards of conduct for GS Inc. to indemnify such
Indemnitee herein for the amount claimed, but the burden of proving such defense
shall be on GS Inc. Neither the failure of GS Inc. (including its Board of
Directors, legal counsel or shareholders) to have made a determination prior to
the commencement of such proceeding that indemnification of such Indemnitee is
proper in the circumstances because such Indemnitee has met the applicable
standard of conduct set forth herein, nor an actual determination by GS Inc.
(including its Board of Directors, legal counsel or shareholders) that such
Indemnitee has not met such applicable standard of conduct, shall be a defense
to the proceeding or create a presumption that such Indemnitee has not met the
applicable standard of conduct.
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<PAGE> 6
4. Partial Indemnification. If an Indemnitee is entitled under any
provision of this Agreement to indemnification by GS Inc. for some or a portion
of any Losses, but not for the total amount thereof, GS Inc. shall nevertheless
indemnify such Indemnitee for the portion of such Losses to which such
Indemnitee is entitled.
5. Expenses. Expenses incurred by an Indemnitee in connection with any
proceeding shall be paid by GS Inc. upon request of such Indemnitee that GS Inc.
pay such expenses, but only upon receipt by GS Inc. of (i) a written affirmation
of such Indemnitee's good faith belief that the applicable standard of conduct
necessary for indemnification by GS Inc. has been met, (ii) a written
undertaking by or on behalf of such Indemnitee to reimburse GS Inc. for expenses
if and to the extent that it is ultimately determined that the applicable
standard of conduct has not been met and (iii) satisfactory evidence of the
amount of such expenses.
6. Notice of Claim. Each Indemnitee shall promptly notify GS Inc. in
writing of any claim against such Indemnitee for which indemnification will or
could be sought under this Agreement. In addition, each Indemnitee shall give GS
Inc. such information and cooperation as it may reasonably require and as shall
be within such Indemnitee's power and at such times and places as are not unduly
burdensome for such Indemnitee.
7. Defense of Claim. With respect to any proceeding as to which an
Indemnitee notifies GS Inc. of the commencement thereof:
(a) GS Inc. will be entitled to participate at its own
expense;
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(b) subject to Section 7(c) hereof, GS Inc. shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction against any Indemnitee and any other Indemnitees, be
liable to such Indemnitee and such other Indemnitees for the fees and
expenses of more than one separate law firm (in addition to a single
firm of local counsel);
(c) except as otherwise provided below, to the extent that it
may wish, GS Inc. will be entitled to assume the defense thereof, with
counsel reasonably satisfactory to such Indemnitee, which in GS Inc.'s
sole discretion may be regular counsel to GS Inc. and may be counsel to
other Indemnitees. The Indemnitees also shall have the right to employ
one separate counsel for such Indemnitees in such action, suit or
proceeding if such Indemnitees reasonably conclude that if they did not
there would be a conflict of interest between GS Inc. and such
Indemnitees, and under such circumstances the fees and expenses of such
counsel shall be paid by GS Inc.; and
(d) GS Inc. shall not be liable to indemnify an Indemnitee
under this Agreement for any amounts paid in settlement of any action
or claim effected without GS Inc.'s written consent. GS Inc. shall not
settle any action or claim in any manner which would impose any cost or
limitation on an Indemnitee without such Indemnitee's written consent.
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<PAGE> 8
Neither GS Inc. nor an Indemnitee will unreasonably withhold or delay
its consent to any proposed settlement.
8. Non-exclusivity. The right to indemnification and the payment of
expenses incurred in defending a proceeding in advance of its final disposition
conferred in this Agreement shall not be exclusive of or affected in any way by
any other right which an Indemnitee may have or hereafter may acquire under any
statute, certificate of incorporation, by-laws, agreement, arrangement,
resolution or instrument providing indemnification or expense payment, except
that any payments otherwise required to be made by GS Inc. hereunder shall be
offset by any and all amounts received by an Indemnitee from any other
indemnitor or under one or more liability insurance policies maintained by an
indemnitor or otherwise and shall not be duplicative of any other payments
received by an Indemnitee from GS Inc. in respect of the matter giving rise to
the indemnity hereunder. When an Indemnitee is entitled to indemnification,
expense advancement or reimbursement under this Instrument and any other
agreement, arrangement, resolution or instrument of GS Inc. or The Goldman Sachs
Group, L.P., the Indemnitee may choose to pursue its rights under one or more,
but less than all, of such applicable agreements, arrangements, resolutions or
instruments, in which case such Indemnitee need only comply with the standards
and procedures of the agreements, arrangements, resolutions or instruments under
which it chooses to pursue its rights. Without limiting the foregoing, the
rights of any indemnified person under the resolution of the Executive Committee
of GS Group, adopted on May 12, 1997 (the "Resolution")
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<PAGE> 9
shall remain in full force and effect insofar as an indemnified person has any
rights thereunder with respect to the acts, omissions and status of such person
through the date of this Agreement. The execution and delivery of this
Instrument shall constitute notice, effective as of the date of this Instrument,
that the Resolution is rescinded insofar as it relates to the acts, omissions
and status of such person after the date of this Instrument.
9. Arbitration. (a)Subject to the provisions of the second paragraph of
Section 1 and Section 9(b) hereof, any dispute, controversy or claim between an
Indemnitee and GS Inc. arising out of or relating to or concerning the
provisions of this Agreement shall be finally settled by arbitration in New York
City before, and in accordance with the rules then obtaining of, the New York
Stock Exchange, Inc. ("NYSE") or, if the NYSE declines to arbitrate the matter,
the American Arbitration Association (the "AAA") in accordance with the
commercial arbitration rules of the AAA.
(b) Notwithstanding the provision of Section 9(a) and in addition to
its right to submit any dispute or controversy to arbitration, GS Inc. may bring
an action or special proceeding in a state or federal court of competent
jurisdiction sitting in the State of Delaware, whether or not an arbitration
proceeding has theretofore been or is ever initiated, for the purpose of
temporarily, preliminarily or permanently enforcing the provisions of this
Agreement or to enforce an arbitration award, and, for the purposes of this
Section 9(b), each Indemnitee (i) expressly consents to the application of
Section 9(c) hereof to any such action or proceeding, (ii) agrees that proof
shall not be required that
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<PAGE> 10
monetary damages for breach of the provisions of this Agreement would be
difficult to calculate and that remedies at law would be inadequate and (iii)
irrevocably appoints each General Counsel of GS Inc., c/o The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801 as such Indemnitee's agent for service of process in connection with any
such action or proceeding, who shall promptly advise such Indemnitee of any such
service of process.
(c) (i) EACH INDEMNITEE HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE
STATE OF DELAWARE OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO OR CONCERNING THIS AGREEMENT THAT IS NOT OTHERWISE
ARBITRATED ACCORDING TO THE PROVISIONS OF SECTION 9(a) HEREOF. This
includes any suit, action or proceeding to compel arbitration or to
enforce an arbitration award. The parties acknowledge that the forum
designated by this Section 9(c) has a reasonable relation to this
Agreement, and to the parties' relationship with one another.
Notwithstanding the foregoing, nothing herein shall preclude GS Inc.
from bringing any action or proceeding in any other court for the
purpose of enforcing the provisions of this Section 9.
(ii) The agreement of an Indemnitee as to forum is independent
of the law that may be applied in the action, and each Indemnitee
agrees to this forum even if the forum may under applicable law choose
to apply non-forum law. Each Indemnitee hereby waives, to the fullest
extent permitted by applicable law, any
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<PAGE> 11
objection which such Indemnitee now or hereafter may have to personal
jurisdiction or to the laying of venue of any such suit, action or
proceeding in any court referred to in Section 9(c)(i). The parties
undertake not to commence any action arising out of or relating to this
Agreement in any forum other than the forum described in this Section
9(c). The parties agree that, to the fullest extent permitted by
applicable law, a final and non-appealable judgment in any such suit,
action or proceeding in any such court shall be conclusive and binding
upon the parties.
10. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns (including any direct or indirect successor by merger or
consolidation), heirs, executors and administrators.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS.
12. Amendment. Each party understands that from time to time certain
other persons may become Indemnitees and certain Indemnitees will cease to be
Indemnitees to the extent provided in this Section 12. Accordingly, this
Agreement may be amended by action of GS Inc. from time to time to add
additional Indemnitees, without the approval of any other person other than such
proposed Indemnitees, each of whom shall execute a counterpart of the signature
page of this Agreement. This
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Agreement may also be amended by action of GS Inc. and without the approval of
any other person to remove an Indemnitee; provided that such amendment shall not
be effective unless GS Inc. has provided 30 days prior written notice to the
Indemnitee and, in any event, such amendment shall not affect any rights of such
Indemnitee to be indemnified in respect of Losses associated with the acts,
omissions or status of such Indemnitee through the effective date of such
termination (including the right to subsequent indemnification and expense
advancement and reimbursement relating to such acts, omissions or status).
13. Waiver of Breach. The failure or delay of a party at any time to
require performance by any other party of any provision of this Agreement, even
if known, shall not affect the right of such party to require performance of
that provision or to exercise any right, power, or remedy hereunder, and any
waiver by any party of any breach of any provision of this Agreement shall not
be construed as a waiver of any continuing or succeeding breach of such
provision, a waiver of the provision itself, or a waiver of any right, power, or
remedy under this Agreement. No notice to or demand on any party in any case
shall, of itself, entitle such party to other or further notice or demand in
similar or other circumstances.
14. Severability. GS Inc. and each Indemnitee agree that the agreements
and provisions contained in this Agreement are severable and divisible, that
each such agreement and provision does not depend upon any other provision or
agreement for its enforceability, and that each such agreement and provision set
forth
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herein constitutes an enforceable obligation between GS Inc. and such
Indemnitee. Consequently, GS Inc. and each Indemnitee hereto agrees that neither
the invalidity nor the unenforceability of any provision of this Agreement shall
affect the other provisions hereof, and this Agreement shall remain in full
force and effect and be construed in all respects as if such invalid or
unenforceable provision were omitted.
15. No Presumption. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that an Indemnitee
did not meet the applicable standard of conduct for indemnification under this
Agreement.
16. Notices. Any communication, demand or notice to be given hereunder
will be duly given when delivered in writing by hand or first class mail to GS
Inc. at its principal executive office or to an Indemnitee at its last address
appearing in the business records of GS Inc. (or to such other addresses as a
party may designate by written notice to GS Inc.).
17. No Assignments. No Indemnitee may assign its rights or obligations
under this Agreement without the prior written consent of GS Inc.
18. No Third Party Rights. Nothing expressed or referred to in this
Agreement will be construed to give any person other than the parties to this
Agreement any legal or equitable right, remedy or claim under or with respect to
this Agreement or any provision of this Agreement. This Agreement and all of its
provisions are for the sole
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and exclusive benefit of the parties to this Agreement and their successors and
permitted assigns.
19. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the date first written above.
THE GOLDMAN SACHS GROUP, INC.
By:______________________________
Name:
Title:
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INDEMNITEES:
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<PAGE> 1
EXHIBIT 10.35
[Execution Copy]
April 30, 1999
Wallace G.K. Chin
President
Kamehameha Activities Association
567 South King Street, Suite 301
Honolulu, HI 96813
The Trustees of the Estate of Bernice Pauahi Bishop
P.O. Box 3466
567 South King Street, Suite 200
Honolulu, HI 96813
Dear Mr. Chin and Bishop Estate Trustees:
This letter (this "Letter Agreement") sets forth the agreement among
Kamehameha Activities Association ("KAA" or "Knight"), The Trustees of the
Estate of Bernice Pauahi Bishop (the "Bishop Estate"), The Goldman Sachs Group,
L.P. ("GS Group") and The Goldman Sachs Group, Inc. ("GS Inc.") with respect to
certain matters, and amends and supplements the Letter Agreement among KAA and
GS Group dated March 15, 1999 (the "KAA Letter Agreement").
Reference is made to the Memorandum of Agreement of GS Group, as
amended and restated as of November 28, 1998 (the "GS Group Partnership
Agreement") and to (i) the Subscription Agreement, dated as of April 24, 1992
(the "1992 Subscription Agreement"), among the Bishop Estate, Pauahi Holdings
Corporation ("Knight's Parent") and Royal Hawaiian Shopping Center, Inc.
("RHSC"), which has transferred all its interests in GS Group to KAA pursuant to
an Assumption Agreement (the "Assumption Agreement") dated as of July 15, 1998
between KAA and RHSC for the benefit of GS Group, and GS Group, (ii) the
Subscription Agreement, dated as of November 21, 1994 (the "1994 Subscription
Agreement" and, collectively with the 1992 Subscription Agreement, the
"Subscription Agreements"), among the Bishop Estate, Knight's Parent and RHSC
and GS Group, and (iii) the Registration Rights Agreement (the "Registration
Rights Agreement"), dated as of April 24, 1992, between RHSC and GS Group, as
amended by Amendment No. 1 thereto dated November 24, 1994. KAA has assumed all
of RHSC's rights and obligations under the Subscription Agreements and the
Registration Rights Agreement pursuant to the Assumption Agreement. Capitalized
terms used herein, but not otherwise defined herein, shall have the meanings
ascribed thereto in the KAA Letter
<PAGE> 2
Kamehameha Activities Association
April 30, 1999
Page 2
Agreement. This Letter Agreement shall be a modification of and an amendment to
the KAA Letter Agreement, the Subscription Agreements and the Registration
Rights Agreement to the extent set forth herein.
The parties hereby agree as follows:
1. Common Stock to be Sold by KAA. In the KAA Letter
Agreement, KAA agreed that, if requested by GS Inc., it would sell
9,000,000 shares of Common Stock in a secondary offering as a part of
the IPO. The provisions of the KAA Letter Agreement are hereby modified
to provide that the Bishop Estate hereby agrees that, if requested by
GS Inc., the Bishop Estate shall join in the sale by KAA of 9,000,000
shares of Common Stock in a secondary offering as a part of the IPO and
shall also consent to such sale. The parties hereto agree that the
indemnification and contribution provisions contained in the
Registration Rights Agreements shall be applicable to any sale of such
shares of Common Stock in the secondary offering as part of the IPO on
the same terms and conditions as are applicable to piggy-back
registrations pursuant to Section 2(b) of the Registration Rights
Agreement.
2. Cooperation in Respect of Filings under Sections 13(d) and
16(a) of the Exchange Act. The Bishop Estate, KAA and GS Inc. each
hereby agree to furnish information to each other and to Sumitomo Bank
Capital Markets, Inc. ("SBCM") to permit each of KAA, SBCM and the
parties to the Shareholders' Agreement to be entered into among the
PLPs in connection with the Plan to satisfy their obligations to file
statements containing the information required by Schedule 13D under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
in accordance with Rule 13d-1 under the Exchange Act, and to file
statements of beneficial ownership under Section 16(a) of the Exchange
Act. GS Inc. hereby agrees to obtain similar undertakings from SBCM for
the benefit of the Bishop Estate, KAA, GS Inc. and the parties to the
foregoing Shareholders' Agreement.
3. Legend on Certificates. Section 10(a) of each of the
Subscription Agreements sets forth the legend that certificates
representing Common Stock shall bear and provides that the Bishop
Estate and GS Group may agree to another form of legend. The Bishop
Estate and GS Group hereby agree that shares of Common Stock issued in
connection with the consummation of the Plan of Incorporation (other
<PAGE> 3
Kamehameha Activities Association
April 30, 1999
Page 3
than, if requested by GS Inc., the 9,000,000 shares of Common Stock to
be sold in the secondary offering as part of the IPO) and thereafter,
unless otherwise agreed by GS Inc. and KAA, shall bear the following
legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
(THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR OTHER
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, EXCHANGED,
TRANSFERRED, ASSIGNED, PLEDGED, PARTICIPATED, HYPOTHECATED OR
OTHERWISE DISPOSED OF (EACH, A "TRANSFER") EXCEPT PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND,
IF APPLICABLE, SUCH OTHER SECURITIES LAWS AND FOLLOWING
RECEIPT BY THE GOLDMAN SACHS GROUP, INC. (THE "CORPORATION")
OF A LEGAL OPINION IN FORM AND SUBSTANCE SATISFACTORY TO IT
THAT SUCH TRANSFER IS PERMITTED.
THE SHARES ARE SUBJECT TO THE PROVISIONS OF A LETTER
AGREEMENT, DATED AS OF MARCH 15, 1999 (AS AMENDED, THE "LETTER
AGREEMENT"), AMONG KAMEHAMEHA ACTIVITIES ASSOCIATION ("KAA"),
THE TRUSTEES OF THE ESTATE OF BERNICE PAUAHI BISHOP (THE
"BISHOP ESTATE") AND THE CORPORATION (AS SUCCESSOR TO THE
GOLDMAN SACHS GROUP, L.P. ("GSLP")) , A SUBSCRIPTION
AGREEMENT, DATED AS OF APRIL 24, 1992, AMONG KAA (BY
ASSUMPTION FROM ROYAL HAWAIIAN SHOPPING CENTER, INC.), PAUAHI
HOLDINGS CORPORATION, THE BISHOP ESTATE AND THE CORPORATION
(AS SUCCESSOR TO GSLP), AND A SUBSCRIPTION AGREEMENT, DATED AS
OF NOVEMBER 21, 1994, AMONG KAA (BY ASSUMPTION FROM ROYAL
HAWAIIAN SHOPPING CENTER, INC.), PAUAHI HOLDINGS CORPORATION,
THE BISHOP ESTATE AND THE CORPORATION (AS SUCCESSOR TO GSLP),
COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL EXECUTIVE OFFICE
OF THE CORPORATION AND WHICH, AMONG OTHER MATTERS, PLACE
RESTRICTIONS ON THE DISPOSITION OF THE SHARES. THE SHARES MAY
BE SOLD, EXCHANGED, TRANSFERRED, ASSIGNED, PLEDGED,
<PAGE> 4
Kamehameha Activities Association
April 30, 1999
Page 4
PARTICIPATED, HYPOTHECATED OR OTHERWISE DISPOSED OF
ONLY IN ACCORDANCE THEREWITH. THE SHARES MAY BE
REGISTERED ONLY IN THE NAME OF KAA OR OF THE CHASE
MANHATTAN BANK OR ITS NOMINEE AS CUSTODIAN FOR
KAA.
ANY HEDGING TRANSACTIONS UNDERTAKEN IN RELATION TO THE SHARES
MUST COMPLY WITH THE HEDGING RESTRICTIONS SET FORTH IN THE
LETTER AGREEMENT.
THE SHARES MAY NOT BE VOTED IN A MANNER INCONSISTENT WITH THE
VOTING AGREEMENT, DATED AS OF APRIL 30, 1999, AMONG THE BISHOP
ESTATE, KAA AND THE CORPORATION.
4. Voting Agreement. The parties hereto agree that the proxies
that have been previously granted by KAA, Knight's Parent and the
Bishop Estate pursuant to the Subscription Agreements will be
terminated and cancelled upon the occurrence of (i) the consummation of
the IPO and (ii) the execution and delivery of the Voting Agreement
attached to the KAA Letter Agreement as Annex B.
5. The Bishop Estate to be a Party to the KAA Letter Agreement
and the Plan. By its execution of this Letter Agreement, the Bishop
Estate shall become a party to the KAA Letter Agreement for all
purposes thereof, and the Bishop Estate accepts the Plan and agrees to
become a party to the Plan.
6. Representations and Warranties. The Bishop Estate hereby
makes, and shall be deemed to have remade on the IPO Date, (a) each of
the representations and warranties set forth in Annex C to the KAA
Letter Agreement (the "Representations"), (b) Representation 8, with
"the Bishop Estate" inserted in place of "KAA" and (c) to the extent
that the Bishop Estate is considered for any purpose to have any
beneficial interest in GS Group, Representations 2 through and
including 7 and Representations 9, 10 and 12, in each case with "the
Bishop Estate" inserted in place of "KAA" each time that it appears.
The Bishop Estate hereby agrees that counsel to GS Group may rely on
the foregoing representations and warranties in rendering an opinion to
GS Group as to tax matters.
<PAGE> 5
Kamehameha Activities Association
April 30, 1999
Page 5
7. Agreements Otherwise Unimpaired. Except as expressly
provided in this Letter Agreement and the Plan of Incorporation, the
KAA Letter Agreement, the Subscription Agreements, the Registration
Rights Agreement and any other agreements between or among the parties
to this Letter Agreement shall not be modified, impaired or affected by
the execution and delivery of this Letter Agreement.
8. Successors and Assigns. This Letter Agreement will be
binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto (including,
with respect to GS Group, GS Inc.).
9. Governing Law. This Letter Agreement is being entered into
and is intended to be performed in the State of New York and will be
construed and enforced in accordance with and governed by the laws of
the State of New York.
10. Counterparts. This Letter Agreement may be executed
simultaneously in several counterparts, each of which is an original,
but all of which together shall constitute one instrument.
<PAGE> 6
Kamehameha Activities Association
April 30, 1999
Page 6
Please indicate your agreement to the terms of this letter by
signing in the space provided below.
THE GOLDMAN SACHS GROUP, L.P.
By The Goldman Sachs Corporation
By: /s/ Robert J. Katz
----------------------------
Robert J. Katz
Executive Vice President
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Robert J. Katz
----------------------------
Robert J. Katz
Executive Vice President
Accepted and Agreed to as
of the date first above
written:
KAMEHAMEHA ACTIVITIES ASSOCIATION
By: /s/ Wallace G.K. Chin
---------------------------------
Wallace G.K. Chin
President
THE TRUSTEES OF THE ESTATE OF BERNICE PUAUHI BISHOP
By: /s/ Richard Sung Hong Wong
---------------------------------
By: /s/ Oswald Kofoad Stender
---------------------------------
By: /s/ Henry Haalilio Peters
---------------------------------
<PAGE> 1
EXHIBIT 10.36
[Execution Copy]
April 30, 1999
Mr. Akira Kondoh
Managing Director
The Sumitomo Bank, Ltd.
3-2, Marunouchi 1-chome
Chiyoda-ku, Tokyo 100-8201
Mr. Ryuzo Kodama
Director
Head of Americas Division
The Sumitomo Bank, Limited
277 Park Avenue
New York, NY 10172
Dear Mr. Kondoh and Mr. Kodama:
This letter (this "Letter Agreement") sets forth the agreement among
The Sumitomo Bank, Limited ("Sumitomo"), Sumitomo Bank Capital Markets, Inc.
("SBCM"), The Goldman Sachs Group, L.P. ("GS Group"), The Goldman Sachs Group,
Inc. ("GS Inc.") and Goldman, Sachs & Co. ("GS&Co.") with respect to certain
matters, and amends and supplements the Letter Agreement among Sumitomo, SBCM,
GS Group and GS&Co. dated March 15, 1999 (the "SBCM Letter Agreement").
Reference is made to the Memorandum of Agreement of GS Group, as
amended and restated as of November 28, 1998 (the "GS Group Partnership
Agreement") and to (i) the Amended and Restated Subscription Agreement, dated as
of March 28, 1989 (the "Subscription Agreement"), among Sumitomo, SBCM (together
with Sumitomo, the "Sumitomo Group"), GS&Co. and GS Group and (ii) the Amended
and Restated Registration Rights Agreement (the "Registration Rights
Agreement"), dated as of March 28, 1989, among Sumitomo, SBCM, GS&Co. and GS
Group. Capitalized terms used herein, but not otherwise defined herein, shall
have the meanings ascribed thereto in the SBCM Letter Agreement. This Letter
Agreement shall be a modification of and an amendment to the SBCM Letter
Agreement, the Subscription Agreement and the Registration Rights Agreement to
the extent set forth herein.
The parties hereby agree as follows:
<PAGE> 2
The Sumitomo Bank, Ltd.
April 30, 1999
Page 2
1. Common Stock to be Sold by SBCM. In the SBCM Letter
Agreement, SBCM agreed that, if requested by GS Inc., it would sell
9,000,000 shares of Common Stock in a secondary offering as a part of
the IPO. The parties hereto agree that the indemnification and
contribution provisions contained in the Registration Rights Agreement
shall be applicable to any sale of such shares of Common Stock in the
secondary offering as part of the IPO on the same terms and conditions
as are applicable to piggy-back registrations pursuant to Section 5(b)
of the Registration Rights Agreement.
2. Cooperation in Respect of Filings under Sections 13(d) and
16(a) of the Exchange Act. Sumitomo, SBCM and GS Inc. each hereby agree
to furnish information to each other and to Kamehameha Activities
Association ("KAA") to permit each of SBCM, KAA and the parties to the
Shareholders' Agreement to be entered into among the PLPs in connection
with the Plan to satisfy their obligations to file statements
containing the information required by Schedule 13D under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
accordance with Rule 13d-1 under the Exchange Act, and to file
statements of beneficial ownership under Section 16(a) of the Exchange
Act. GS Inc. hereby agrees to obtain similar undertakings from KAA for
the benefit of Sumitomo, SBCM, GS Inc. and the parties to the foregoing
Shareholders' Agreement.
3. Legends on Certificates. Section 10(c) of the Subscription
Agreement sets forth the legend that certificates representing Common
Stock shall bear and provides that Sumitomo and GS Group may agree to
another form of legend. Sumitomo and GS Group hereby agree that shares
of Common Stock issued in connection with the consummation of the Plan
(other than, if requested by GS Inc., the 9,000,000 shares of Common
Stock to be sold in the secondary offering as part of the IPO) and
thereafter, unless otherwise agreed by GS Inc. and SBCM, shall bear the
following legends:
(i) Legend for Nonvoting Common Stock:
THE SHARES OF NONVOTING COMMON STOCK REPRESENTED BY THIS
CERTIFICATE (THE "SHARES") ARE NOT TRANSFERABLE AND ARE
SUBJECT TO THE PROVISIONS OF A LETTER AGREEMENT, DATED AS OF
MARCH 15, 1999 (AS
<PAGE> 3
The Sumitomo Bank, Ltd.
April 30, 1999
Page 3
AMENDED, THE "LETTER AGREEMENT"), AMONG THE SUMITOMO BANK,
LIMITED ("SUMITOMO"), SUMITOMO BANK CAPITAL MARKETS, INC.
("SBCM"), GOLDMAN, SACHS & CO. AND THE GOLDMAN SACHS GROUP,
INC. (AS SUCCESSOR TO THE GOLDMAN SACHS GROUP, L.P. ("GSLP"))
(THE "CORPORATION") AND AN AMENDED AND RESTATED SUBSCRIPTION
AGREEMENT, DATED AS OF MARCH 28, 1989, AMONG SUMITOMO, SBCM,
GOLDMAN, SACHS & CO. AND THE CORPORATION (AS SUCCESSOR TO
GSLP), COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL EXECUTIVE
OFFICE OF THE CORPORATION. THE SHARES HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933 OR OTHER SECURITIES
LAWS. THE SHARES MAY BE REGISTERED ONLY IN THE NAME OF SBCM OR
OF THE CHASE MANHATTAN BANK OR ITS NOMINEE AS CUSTODIAN FOR
SBCM.
ANY HEDGING TRANSACTIONS UNDERTAKEN IN RELATION TO THE SHARES
MUST COMPLY WITH THE HEDGING RESTRICTIONS SET FORTH IN THE
LETTER AGREEMENT.
(ii) Legend for Common Stock:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
(THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR OTHER
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, EXCHANGED,
TRANSFERRED, ASSIGNED, PLEDGED, PARTICIPATED, HYPOTHECATED OR
OTHERWISE DISPOSED OF (EACH, A "TRANSFER") EXCEPT PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND,
IF APPLICABLE, SUCH OTHER SECURITIES LAWS AND FOLLOWING
RECEIPT BY THE GOLDMAN SACHS GROUP, INC. (THE "CORPORATION")
OF A LEGAL OPINION IN FORM AND SUBSTANCE SATISFACTORY TO IT
THAT SUCH TRANSFER IS PERMITTED.
THE SHARES ARE SUBJECT TO THE PROVISIONS OF A LETTER
AGREEMENT, DATED AS OF MARCH 15, 1999 (AS AMENDED, THE "LETTER
AGREEMENT"), AMONG THE SUMITOMO BANK,
<PAGE> 4
The Sumitomo Bank, Ltd.
April 30, 1999
Page 4
LIMITED ("SUMITOMO"), SUMITOMO BANK CAPITAL MARKETS, INC.
("SBCM") AND THE CORPORATION (AS SUCCESSOR TO THE GOLDMAN
SACHS GROUP, L.P. ("GSLP")) AND AN AMENDED AND RESTATED
SUBSCRIPTION AGREEMENT, DATED AS OF MARCH 28, 1989, AMONG
SUMITOMO, SBCM, GOLDMAN, SACHS & CO. AND THE CORPORATION (AS
SUCCESSOR TO GSLP), COPIES OF WHICH ARE ON FILE AT THE
PRINCIPAL EXECUTIVE OFFICE OF THE CORPORATION AND WHICH, AMONG
OTHER MATTERS, PLACE RESTRICTIONS ON THE DISPOSITION OF THE
SHARES. THE SHARES MAY BE SOLD, EXCHANGED, TRANSFERRED,
ASSIGNED, PLEDGED, PARTICIPATED, HYPOTHECATED OR OTHERWISE
DISPOSED OF ONLY IN ACCORDANCE THEREWITH. THE SHARES MAY BE
REGISTERED ONLY IN THE NAME OF SBCM OR OF THE CHASE MANHATTAN
BANK OR ITS NOMINEE AS CUSTODIAN FOR SBCM.
ANY HEDGING TRANSACTIONS UNDERTAKEN IN RELATION TO THE SHARES
MUST COMPLY WITH THE HEDGING RESTRICTIONS SET FORTH IN THE
LETTER AGREEMENT.
THE SHARES MAY NOT BE VOTED IN A MANNER INCONSISTENT WITH THE
VOTING AGREEMENT, DATED AS OF APRIL 30, 1999, AMONG SUMITOMO,
SBCM AND THE CORPORATION.
4. Agreements Otherwise Unimpaired. Except as expressly
provided in this Letter Agreement and the Plan, the Subscription
Agreement, the Registration Rights Agreement, the SBCM Letter Agreement
and any other agreements between or among the parties to this Letter
Agreement shall not be modified, impaired or affected by the execution
and delivery of this Letter Agreement.
5. Successors and Assigns. This Letter Agreement will be
binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto (including,
with respect to GS Group, GS Inc.).
<PAGE> 5
The Sumitomo Bank, Ltd.
April 30, 1999
Page 5
6. Governing Law. This Letter Agreement is being entered into
and is intended to be performed in the State of New York and will be
construed and enforced in accordance with and governed by the laws of
the State of New York.
7. Counterparts. This Letter Agreement may be executed
simultaneously in several counterparts, each of which is an original,
but all of which together shall constitute one instrument.
<PAGE> 6
The Sumitomo Bank, Ltd.
April 30, 1999
Page 6
Please indicate your agreement to the terms of this letter by
signing in the space provided below.
THE GOLDMAN SACHS GROUP, L.P.
By The Goldman Sachs Corporation
By: /s/ Robert J. Katz
------------------------
Robert J. Katz
Executive Vice President
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Robert J. Katz
------------------------
Robert J. Katz
Executive Vice President
GOLDMAN SACHS & CO.
By The Goldman, Sachs & Co. L.L.C.
By: /s/ Robert J. Katz
------------------------
Robert J. Katz
Executive Vice President
Accepted and Agreed to as
of the date first above
written:
THE SUMITOMO BANK, LIMITED
By: /s/ Ryuzo Kodama
------------------------
Ryuzo Kodama
Director and Head of the Americas Division
SUMITOMO BANK CAPITAL MARKETS, INC.
By: /s/ Natsuo Okada
------------------------
Natsuo Okada
President
<PAGE> 1
EXHIBIT 10.37
VOTING AGREEMENT
Voting Agreement, dated as of April 30, 1999 (the "Voting
Agreement"), by and among The Goldman Sachs Group, Inc., a Delaware corporation
("GS Inc."), on the one hand, and The Trustees of the Estate of Bernice Pauahi
Bishop, a private educational charitable trust organized under the laws of the
State of Hawaii (the "Bishop Estate") and Kamehameha Activities Association, a
Hawaii non-profit corporation ("Knight"), on the other hand.
WHEREAS, pursuant to the Subscription Agreement, dated as of April
24, 1992 (the "1992 Subscription Agreement"), among the Bishop Estate, Pauahi
Holdings Corporation, a Hawaii corporation ("Knight's Parent"), and Royal
Hawaiian Shopping Center, Inc., a Hawaii corporation ("RHSC"), on the one hand,
and The Goldman Sachs Group, L.P., a limited partnership organized under the
laws of Delaware (the "Partnership"), on the other, the Bishop Estate, Knight's
Parent and RHSC each delivered to the Partnership its irrevocable proxy, dated
April 24, 1992, in the form of Annexes 4(a) and 4(b) to the 1992 Subscription
Agreement (the "1992 Proxies");
WHEREAS, pursuant to the Subscription Agreement, dated as of
November 21, 1994 (the "1994 Subscription Agreement" and, collectively with the
1992 Subscription Agreement, as amended by the letter agreement, dated March 15,
1999 of which this Voting Agreement is Annex B, the "Subscription Agreements"),
among the Bishop Estate, Knight's Parent and RHSC, on the one hand, and the
Partnership, on the other, the Bishop Estate, Knight's Parent and RHSC each
delivered to the Partnership its irrevocable proxy, dated November 21, 1994, in
the form of Annexes 4(a) and 4(b) to the 1994 Subscription Agreement (the "1994
Proxies" and, collectively with the 1992 Proxies, the "Proxies");
WHEREAS, on July 15, 1998, RHSC was merged with and into Knight's
Parent and Knight's Parent assumed all of the rights and obligations of RHSC,
including RHSC's obligations under the Subscription Agreements, the Proxies and
the Memorandum of Agreement (defined below);
WHEREAS, on July 15, 1998, through a series of transfers and
mergers, Knight's Parent was merged with and into its successor and Knight,
pursuant to the Assumption Agreement, dated as of July 15, 1998, between Knight
and RHSC for the benefit of the Partnership, Knight assumed all of the rights
and obligations of RHSC and Knight's Parent under the Subscription Agreements,
the Proxies and the Memorandum of Agreement and agreed to be bound thereby;
<PAGE> 2
WHEREAS, pursuant to a Plan of Incorporation adopted pursuant to
Article I, Section 14 of the Partnership's Amended and Restated Memorandum of
Agreement, dated as of November 28, 1998 (the "Memorandum of Agreement"), GS
Inc. will succeed to the business of the Partnership and, in connection
therewith and pursuant to the terms of the Knight Partnership Provisions of (and
as defined in) the Memorandum of Agreement and the Subscription Agreements, GS
Inc. will issue securities to Knight;
WHEREAS, the Securities are subject to the Proxies and GS Inc. is
willing to terminate the Proxies in consideration of the agreements and
undertakings of the Bishop Estate and Knight contained herein;
GS Inc., the Bishop Estate and Knight hereby agree as follows:
1. The Partnership and GS Inc., as successor to the Partnership,
issuer of the securities and beneficiary of the Proxies, release each
of the Bishop Estate and Knight from its Proxy.
2. Each of the Bishop Estate and Knight agree, during the period
of limited duration specified below, to vote any and all securities of
GS Inc. or of any subsidiary of GS Inc. which have any voting rights,
general or special (herein collectively referred to as "Securities"),
and which the Bishop Estate or Knight may from time to time hold of
record or beneficially own, and agree to cause any direct or indirect
subsidiary of the Bishop Estate to vote any securities of GS Inc. or
any subsidiary thereof that may be acquired by such subsidiary of the
Bishop Estate, at any meeting of stockholders of GS Inc. or any such
subsidiary (as the case may be), and to provide written consent on
behalf of the Bishop Estate, Knight or any such subsidiary as to any
matter as to which written consent is sought from the owners of any
Securities, in each case (x) with respect to Securities of GS Inc., in
the same manner as the majority of the shares of common stock held by
the managing directors of GS Inc. shall be voted or consented in the
vote of the stockholders of GS Inc. and (y) in the case of Securities
of a subsidiary of GS Inc., in the same manner as the shares of common
stock held by the immediate parent of such subsidiary shall be voted or
consented. Notwithstanding the foregoing, however, this agreement shall
not extend to the approval of any change or modification in (i) the
Registration Rights Agreement, the Subscription Agreements or this
Agreement or (ii) the material terms of any Securities held by the
Bishop Estate or Knight. For purposes of this Voting Agreement, the
exchange, conversion or other transfer of Securities or any other
securities by or on behalf of the Bishop Estate, Knight or any direct
or indirect subsidiary of the Bishop Estate or Knight for other
-2-
<PAGE> 3
securities of GS Inc. (or any successor or assign thereof) pursuant to
and in accordance with the Subscription Agreements and/or the Knight
Partnership Provisions shall not be considered a change in the material
terms of Securities held by the Bishop Estate or Knight.
3. For purposes of this Voting Agreement, "Securities" includes,
without limitation, any securities which have voting rights, general or
special of GS Inc. or any subsidiary thereof issued to Knight pursuant
to the Subscription Agreements or the "Knight Partnership Provisions"
referred to in the Subscription Agreements. The provisions of this
Agreement shall apply to Securities of any successor or assign of GS
Inc. (except an acquirer of the business of GS Inc. as referred to in
Section 6(c) of the Knight Partnership Provisions) on the terms set
forth therein.
4. This Voting Agreement shall terminate on the date of the final
disposition by the Bishop Estate and Knight of any and all Securities
referred to in Section 13(c) of the Subscription Agreements or the
cancellation thereof.
5. To the extent (if any) the Bishop Estate and Knight would
retain under law, regardless of the agreements in paragraph 2 hereof,
any residual rights inconsistent with paragraph 2 hereof, each of the
Bishop Estate and Knight, in consideration of the release by the
Partnership and GS Inc. of each of the Bishop Estate and Knight from
its Proxy, and as agreed with (and relied on by) the Partnership and GS
Inc., hereby specifically and expressly (i) waives such rights, (ii)
agrees never to exercise such rights and (iii) agrees never to claim,
as a complaint or a defense, or otherwise assert that this Voting
Agreement is not valid or enforceable.
6. The invalidity or unenforceability of any provisions of this
Voting Agreement shall not affect the validity or enforceability of any
other provision. To the extent (if any) any provision hereof is deemed
invalid or unenforceable by its scope but may be made valid or
enforceable by limitations thereon, the undersigned intend that this
Voting Agreement shall be valid and enforceable to the fullest extent
permitted by law.
7. (a) THIS VOTING AGREEMENT SHALL BE GOVERNED BY AND WILL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
THE STATE OF DELAWARE.
(b) Any dispute, controversy or claim arising out of or relating
to provisions of this Voting Agreement shall be finally settled by
arbitration in accordance with the Arbitration Rules of the United
Nations Commission
-3-
<PAGE> 4
on International Trade Law ("UNCITRAL") in effect on the date of this
Agreement. The number of arbitrators shall be three and the
Administering Authority shall be the American Arbitration Association.
The tribunal shall adopt rules of procedure supplementary to the rules
of UNCITRAL as it deems equitable under the circumstances. All direct
costs of an arbitration proceeding under this Section, including fees
and expenses of arbitration, shall be borne by the party incurring
them. The place of arbitration shall be The City of New York. The
arbitration shall be conducted in the English language. An award
rendered by all or a majority of the arbitrators shall be final and
binding, and judgment may be entered upon it in any court having
jurisdiction. In no event shall this subsection be construed as
conferring upon any court authority or jurisdiction to inquire into or
review such award on its merits. The parties agree to exclude any right
of application or appeal to the Federal, New York State and any other
courts in connection with any question of law or fact arising in the
course of the arbitration or with respect to any award made.
8. All notices and other communications hereunder shall be in
writing and shall be mailed by first class mail, postage prepaid,
addressed (a) if to the Bishop Estate or Knight, at Kamehameha
Activities Association, 567 South King Street, Suite 150, Honolulu,
Hawaii 96813, Attention: President, or at such other address as Knight
shall furnish to GS Inc. in writing, or (b) if to the Partnership or GS
Inc., at 85 Broad Street, New York, New York 10004, Attention: General
Counsel, or at such other address as GS Inc. shall furnish to the
Bishop Estate or Knight in writing.
9. This Voting Agreement will be binding upon and inure to the
benefit of and be enforceable by the respective successors and assigns
of the parties hereto; provided, that this Voting Agreement shall not
be binding upon a transferee of Securities that is not affiliated with
the Bishop Estate or Knight who acquired such Securities in a
disposition which is permitted under the Subscription Agreements. This
Voting Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute
one instrument.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date above written.
THE TRUSTEES OF THE ESTATE OF BERNICE
PAUAHI BISHOP
By: /s/ Richard Sung Hong Wong
------------------------------------
By: /s/ Oswald Kofoad Stender
-----------------------------------
By: /s/ Henry Haalilio Peters
-----------------------------------
KAMEHAMEHA ACTIVITIES ASSOCIATION
By: /s/ Wallace G.K. Chin
-----------------------------------
Wallace G.K. Chin
President
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Robert J. Katz
-----------------------------------
Robert J. Katz
Executive Vice President
-5-
<PAGE> 1
EXHIBIT 10.38
VOTING AGREEMENT
Voting Agreement, dated as of April 30, 1999 (the "Voting
Agreement"), by and among The Goldman Sachs Group, Inc., a Delaware corporation
("GS Inc."), on the one hand, and The Sumitomo Bank, Limited, a corporation
organized under the laws of Japan ("Sumitomo"), and Sumitomo Bank Capital
Markets, Inc., a Delaware corporation and a wholly-owned subsidiary of Sumitomo
("SBCM"), on the other hand.
WHEREAS, pursuant to the Amended and Restated Subscription
Agreement, dated as of March 28, 1989 (as amended by the letter agreement, dated
March 15, 1999 of which this Voting Agreement is Annex C, the "Subscription
Agreement"), among Sumitomo and SBCM, on the one hand, and Goldman, Sachs & Co.,
a New York limited partnership ("GSNY"), and The Goldman Sachs Group, L.P., a
Delaware limited partnership (the "Partnership"), on the other, Sumitomo and
SBCM each delivered to the Partnership its irrevocable proxy, dated March 28,
1989, in the form of Annexes 5(a) and 5(b) to the Subscription Agreement (the
"Proxies");
WHEREAS, pursuant to a Plan of Incorporation adopted pursuant
to Article I, Section 14 of the Amended and Restated Memorandum of Agreement,
dated as of November 28, 1998 (the "Memorandum of Agreement") of the
Partnership, GS Inc. will succeed to the business of the Partnership and, in
connection therewith and pursuant to the terms of the Bank Partnership
Provisions of (and as defined in) the Memorandum of Agreement and the
Subscription Agreement, GS Inc. will issue securities to SBCM;
WHEREAS, the Securities are subject to the Proxies and GS Inc.
is willing to terminate the Proxies in consideration of the agreements and
undertakings of Sumitomo and SBCM contained herein;
GS Inc., Sumitomo and SBCM hereby agree as follows:
1. The Partnership, GSNY and GS Inc., as successor to the
Partnership, issuer of the securities and beneficiary of the Proxies,
release each of Sumitomo and SBCM from its Proxy.
2. Each of Sumitomo and SBCM agree, during the period of
limited duration specified below, to vote any and all securities of GS
Inc. or of any subsidiary of GS Inc. which have any voting rights,
general or special (herein collectively referred to as "Securities"),
and which Sumitomo or SBCM may from time to time hold of record or
beneficially own, and agree
<PAGE> 2
to cause any direct or indirect subsidiary of Sumitomo to vote any
securities of GS Inc. or any subsidiary thereof that may be acquired by
such subsidiary of Sumitomo, at any meeting of stockholders of GS Inc.
or any such subsidiary (as the case may be), and to provide written
consent on behalf of Sumitomo, SBCM or any such subsidiary as to any
matter as to which written consent is sought from the owners of any
Securities, in each case (x) with respect to Securities of GS Inc., in
the same manner as the majority of the shares of common stock held by
the managing directors of GS Inc. shall be voted or consented in the
vote of the stockholders of GS Inc. and (y) in the case of Securities
of a subsidiary of GS Inc., in the same manner as the shares of common
stock held by the immediate parent of such subsidiary shall be voted or
consented. Notwithstanding the foregoing, however, this agreement shall
not extend to the approval of any change or modification in (i) the
Registration Rights Agreement, the Subscription Agreement or this
Agreement or (ii) the material terms of any Securities held by Sumitomo
and SBCM. For purposes of this Voting Agreement, the exchange,
conversion or other transfer of Securities or any other securities by
or on behalf of Sumitomo, SBCM or any direct or indirect subsidiary of
Sumitomo for other securities of GS Inc. (or any successor or assign
thereof) pursuant to and in accordance with the Subscription Agreement
and/or the Bank Partnership Provisions (including, but not limited to,
pursuant to Schedules I, II and III to the Subscription Agreement or
Section 5 of the Bank Partnership Provisions) shall not be considered a
change in the material terms of Securities held by Sumitomo or SBCM.
3. For purposes of this Voting Agreement, "Securities"
includes, without limitation, (i) the Public Preferred Stock defined in
Schedule III to the Subscription Agreement and the Public Common Stock
defined in Schedule II to the Subscription Agreement and (ii) any other
securities (which have voting rights, general or special) of GS Inc. or
any subsidiary thereof issued to SBCM pursuant to the Subscription
Agreement or the "Bank Partnership Provisions" referred to in the
Subscription Agreement. The provisions of this Agreement shall apply to
Securities of any successor or assign of GS Inc. (except an acquirer of
the business of GS Inc. as referred to in Section 6(c) of the Bank
Partnership Provisions) on the terms set forth therein.
4. This Voting Agreement shall terminate on the date of the
final disposition by Sumitomo and SBCM of any and all Securities
referred to in Section 13(b) of the Subscription Agreement or the
cancellation thereof.
5. To the extent (if any) Sumitomo and SBCM would retain under
law, regardless of the agreements in paragraph 2 hereof, any residual
-2-
<PAGE> 3
rights inconsistent with paragraph 2 hereof, each of Sumitomo and SBCM,
in consideration of the release by the Partnership, GSNY and GS Inc. of
each of Sumitomo and SBCM from its Proxy, and as agreed with (and
relied on by) the Partnership, GSNY and GS Inc., hereby specifically
and expressly (i) waives such rights, (ii) agrees never to exercise
such rights and (iii) agrees never to claim, as a complaint or a
defense, or otherwise assert that this Voting Agreement is not valid or
enforceable.
6. The invalidity or unenforceability of any provisions of
this Voting Agreement shall not affect the validity or enforceability
of any other provision. To the extent (if any) any provision hereof is
deemed invalid or unenforceable by its scope but may be made valid or
enforceable by limitations thereon, the undersigned intend that this
Voting Agreement shall be valid and enforceable to the fullest extent
permitted by law.
7. (a) THIS VOTING AGREEMENT SHALL BE GOVERNED BY AND WILL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
THE STATE OF DELAWARE.
(b) Any dispute, controversy or claim arising out of or
relating to provisions of this Voting Agreement shall be finally
settled by arbitration in accordance with the Arbitration Rules of the
United Nations Commission on International Trade Law ("UNCITRAL") in
effect on the date of this Agreement. The number of arbitrators shall
be three and the Administering Authority shall be the American
Arbitration Association. The tribunal shall adopt rules of procedure
supplementary to the rules of UNCITRAL as it deems equitable under the
circumstances. All direct costs of an arbitration proceeding under this
Section, including fees and expenses of arbitration, shall be borne by
the party incurring them. The place of arbitration shall be The City of
New York. The arbitration shall be conducted in the English language.
An award rendered by all or a majority of the arbitrators shall be
final and binding, and judgment may be entered upon it in any court
having jurisdiction. In no event shall this subsection be construed as
conferring upon any court authority or jurisdiction to inquire into or
review such award on its merits. The parties agree to exclude any right
of application or appeal to the Federal, New York State and any other
courts in connection with any question of law or fact arising in the
course of the arbitration or with respect to any award made.
8. All notices and other communications hereunder shall be in
writing and shall be mailed by first class mail, postage prepaid,
addressed (a) if to Sumitomo or SBCM, at Sumitomo Bank Capital Markets,
Inc., 277 Park Avenue, New York, New York 10172, Attention: President,
or at
-3-
<PAGE> 4
such other address as SBCM shall furnish to GS Inc. in writing, or (b)
if to the Partnership, GSNY or GS Inc., at 85 Broad Street, New York,
New York 10004, Attention: General Counsel, or at such other address as
GS Inc. shall furnish to Sumitomo or SBCM in writing.
9. This Voting Agreement will be binding upon and inure to the
benefit of and be enforceable by the respective successors and assigns
of the parties hereto; provided, that this Voting Agreement shall not
be binding upon a transferee of Securities that is not affiliated with
Sumitomo who acquired such Securities in a disposition which is
permitted under the Subscription Agreement. This Voting Agreement may
be executed in any number of counterparts, each of which shall be an
original, but all of which together shall constitute one instrument.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date above written.
THE SUMITOMO BANK, LIMITED
By: /s/ Ryuzo Kodama
-----------------------------
Ryuzo Kodama
Director and Head of the Americas Division
SUMITOMO BANK CAPITAL MARKETS, INC.
By: /s/ Natsuo Okada
-------------------------------
Natsuo Okada
President
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Robert J. Katz
--------------------------------
Robert J. Katz
Executive Vice President
-5-
<PAGE> 1
EXHIBIT 15.1
May 7, 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. 333-75213)
Commissioners:
We are aware that our report dated April 9, 1999 on our review of the condensed
consolidated financial statements 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. Pursuant to Rule
436(c) under the Securities Act of 1933, that report 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
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 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. 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
May 7, 1999.
<PAGE> 1
EXHIBIT 23.3
SECURITIES DATA COMPANY
We hereby consent to the use of the information we provided for use in Amendment
No. 2 to the Registration Statement (No. 333-75213) relating to the offering of
Debt Securities by The Goldman Sachs Group, Inc. and to the references to our
name in Amendment No. 2 to the Registration Statement, including under the
caption "Experts".
Securities Data Company,
A division of Thomson Information Services
/s/ Francine Falchook
- --------------------
Francine Falchook
Senior Vice President
May 7, 1999
<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>
