<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1999
REGISTRATION NO. 333-90677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE GOLDMAN SACHS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6211 13-4019460
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
85 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 902-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT J. KATZ
GREGORY K. PALM
GAIL S. BERNEY
THE GOLDMAN SACHS GROUP, INC.
85 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 902-1000
(NAMES, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENTS FOR SERVICE)
------------------------
COPIES TO:
RICARDO A. MESTRES, JR.
ROBERT W. REEDER III
SULLIVAN & CROMWELL
125 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 558-4000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time 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 PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share............................... 7,985,941 $75.46875 $602,688,985 $166,110(2)
Rights(3)........................... (3) (3) (3) (3)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, and based on
the average of the high and low prices of the Common Stock on December 1,
1999 as reported by the Consolidated Tape Association.
(2) Previously paid $139,000 on November 10, 1999 with respect to up to
$500,000,000 of Common Stock.
(3) Each share of Common Stock includes one Shareholder Protection Right as
described under "Description of Capital Stock".
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
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 December 8, 1999
7,985,941 Shares
THE GOLDMAN SACHS GROUP, INC.
Common Stock
[GOLDMAN SACHS LOGO]
------------------------
This prospectus relates to 7,985,941 shares of common stock of The Goldman
Sachs Group, Inc. to be offered for sale by the charitable organizations
described under the heading "Selling Shareholders". The distribution of the
common stock by these charitable organizations may be effected from time to
time, including:
- in underwritten public offerings;
- in ordinary brokerage transactions on securities exchanges, including the
New York Stock Exchange;
- to or through brokers or dealers who may act as principal or agent; or
- in one or more negotiated transactions.
The brokers or dealers through or to whom the shares of common stock may be
sold may be deemed underwriters of the shares within the meaning of the
Securities Act of 1933, in which event all brokerage commissions or discounts
and other compensation received by those brokers or dealers may be deemed to be
underwriting compensation. To the extent required, the names of any underwriter
and applicable commissions or discounts and any other required information with
respect to any particular sale will be set forth in an accompanying prospectus
supplement. Those underwriters may include affiliates of The Goldman Sachs
Group, Inc., including Goldman, Sachs & Co. See "Plan of Distribution" for a
further description of how the selling stockholders may dispose of the shares
covered by this prospectus.
Goldman Sachs will not receive any of the proceeds from sales of the shares
of common stock made by the selling shareholders pursuant to this prospectus.
Goldman Sachs' common stock is listed on the New York Stock Exchange under
the symbol "GS". On December 7, 1999, the last reported sales price for the
common stock on the New York Stock Exchange was $80.94.
See "Risk Factors" beginning on page 8 to read about factors you should
consider before buying shares of the common stock.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
GOLDMAN, SACHS & CO.
------------------------
Prospectus dated December , 1999.
<PAGE> 3
OUR BUSINESS PRINCIPLES
1. Our clients' interests always come first. Our experience shows that if we
serve our clients well, our own success will follow.
2. Our assets are our people, capital and reputation. If any of these is ever
diminished, the last is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
3. Our goal is to provide superior returns to our shareholders. Profitability
is critical to achieving superior returns, building our capital and attracting
and keeping our best people. Significant employee stock ownership aligns the
interests of our employees and our shareholders.
4. We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
5. We stress creativity and imagination in everything we do. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
6. We make an unusual effort to identify and recruit the very best person for
every job. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.
7. We offer our people the opportunity to move ahead more rapidly than is
possible at most other places. We have yet to find the limits to the
responsibility that our best people are able to assume. Advancement depends
solely on ability, performance and contribution to the Firm's success, without
regard to race, color, religion, sex, age, national origin, disability, sexual
orientation, or any 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.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the common stock. You should read the entire prospectus
carefully, especially the risks of investing in the common stock discussed under
"Risk Factors" on pages 8-18.
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 the nine months
ended August 27, 1999, our net revenues were $9.9 billion and our pre-tax
earnings were $783 million. On a pro forma basis, our net earnings were $1.3
billion for fiscal 1998 and $1.8 billion for the nine months ended August 27,
1999. As of August 27, 1999, our total assets were $236.3 billion and our
stockholders' equity was $8.6 billion.
We have over time produced strong earnings growth and attractive returns on
equity 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 August 27, 1999, we operated offices in 23
countries and 36% of our 14,500 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.
WHY WE ARE REGISTERING THE SHARES
Goldman Sachs has long encouraged its officers and employees to participate
in charitable activities. In order to permit our former profit participating
limited partners to donate some of their shares of common stock to charitable
foundations and public charities, we have agreed to lift the transfer
restrictions on these shares. None of these former profit participating limited
partners will be permitted to sell or otherwise transfer any portion of their
common stock except to these charitable organizations.
This prospectus covers only the shares of common stock that are to be
donated by our former profit participating limited partners. This prospectus
permits the charitable organizations to sell freely those shares to the public
at any time and from time to time. See "Plan of Distribution" for a description
of the various ways in which those sales may occur.
3
<PAGE> 5
The transfer restrictions will also be lifted on 1,084,316 shares of common
stock to permit our former retired limited partners to make similar charitable
contributions. The shares of common stock that are to be donated to charitable
organizations by these former retired limited partners will be freely
transferable to the public.
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SUMMARY FINANCIAL DATA
(in millions)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED NOVEMBER ENDED AUGUST
------------------------------ ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues:
Investment Banking........................ $ 2,113 $ 2,587 $ 3,368 $ 2,547 $ 3,054
Trading and Principal Investments......... 2,693 2,926 2,379 3,042 4,522
Asset Management and Securities
Services............................... 1,323 1,934 2,773 2,016 2,296
-------- -------- -------- ------- --------
Total net revenues.......................... $ 6,129 $ 7,447 $ 8,520 $ 7,605 $ 9,872
======== ======== ======== ======= ========
</TABLE>
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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 31% of
net revenues for the nine months ended August 27, 1999. We are a market leader
in both the financial advisory and underwriting businesses, serving over 3,000
clients worldwide. For the period January 1, 1994 to December 31, 1998, we had
the industry-leading market share of 25.3% in worldwide mergers and acquisitions
advisory services, having advised on over $1.7 trillion of transactions. Over
the same period, we also achieved number one market shares of 15.2% in
underwriting worldwide initial public offerings and 14.4% in underwriting
worldwide common stock issues. The source for this market share information is
Thomson Financial Securities Data, formerly known as Securities Data Company.
TRADING AND PRINCIPAL INVESTMENTS
Trading and Principal Investments represented 28% of fiscal 1998 net
revenues and 46% of net revenues for the nine months ended August 27, 1999. 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.
4
<PAGE> 6
ASSET MANAGEMENT AND SECURITIES SERVICES
Asset Management and Securities Services represented 33% of fiscal 1998 net
revenues and 23% of net revenues for the nine months ended August 27, 1999. 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 $412.6 billion as of August 27, 1999. As of August 27,
1999, we had $220.5 billion of assets under management. We manage merchant
banking funds that had $17.3 billion of capital commitments as of August 27,
1999.
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.
OUR HEADQUARTERS
Our headquarters are located at 85 Broad Street, New York, New York 10004,
telephone (212) 902-1000.
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<PAGE> 7
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 August 27, 1999 and for the nine
months ended August 27, 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 nine months ended August 27, 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 nine months ended August 27, 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
for the nine months ended August 27, 1999 have been derived from the pro forma
data set forth in "Pro Forma Consolidated Income Statement Information" included
elsewhere in this prospectus. The pro forma data set forth in "Pro Forma
Consolidated Income Statement Information" for the year ended November 27, 1998
have been examined by PricewaterhouseCoopers LLP and the pro forma data set
forth in "Pro Forma Consolidated Income Statement Information" for the nine
months ended August 27, 1999 have been reviewed by PricewaterhouseCoopers LLP.
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 Income Statement Information" and the
consolidated financial statements and their notes.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED NOVEMBER AS OF OR FOR
--------------------------------------------------- NINE MONTHS
1994 1995 1996 1997 1998 ENDED AUGUST 1999
---- ---- ---- ---- ---- -------------------
(unaudited)
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................................. $ 3,537 $ 4,483 $ 6,129 $ 7,447 $ 8,520 $ 9,872
Pre-tax earnings(1)........................... 508 1,368 2,606 3,014 2,921 783(4)
BALANCE SHEET DATA:
Total assets(2)............................... $95,296 $100,066 $152,046 $178,401 $217,380 $236,273
Long-term borrowings.......................... 14,418 13,358 12,376 15,667 19,906 20,340
Partners' capital............................. 4,771 4,905 5,309 6,107 6,310 --
Stockholders' equity.......................... -- -- -- -- -- 8,597
COMMON SHARE DATA:
Earnings per share:
Basic....................................... -- -- -- -- -- $ 4.18
Diluted..................................... -- -- -- -- -- 4.11
Average common shares outstanding:
Basic....................................... -- -- -- -- -- 475
Diluted..................................... -- -- -- -- -- 483
PRO FORMA DATA(3):
Pro forma net earnings........................ -- -- -- -- $ 1,256 $ 1,794
Pro forma diluted earnings per share.......... -- -- -- -- 2.62 3.63
SELECTED DATA AND RATIOS (UNAUDITED):
Pre-tax return on average partners'
capital(1).................................. 10% 28% 51% 53% 47% --
Ratio of compensation and benefits to net
revenues(1)................................. 51 45 40 42 45 50%
Assets under supervision:
Assets under management..................... $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $220,522
Other client assets......................... 49,061 57,716 76,892 102,033 142,018 192,034
------- -------- -------- -------- -------- --------
Total assets under supervision................ $92,732 $110,074 $171,491 $237,962 $336,839 $412,556
======= ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Since we operated as a partnership until May 7, 1999, 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 for the five years
ended November 27, 1998 do not reflect any payments for services rendered
by our managing directors who were profit participating limited partners.
Accordingly, our pre-tax earnings in these periods understate the operating
costs incurred by us in corporate form. As a corporation, we 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 since the beginning of fiscal 1998,
see "Pro Forma Consolidated Income Statement Information".
(2) Total assets and liabilities were increased by $11.64 billion as of
November 27, 1998 and $3.68 billion as of August 27, 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 of Goldman Sachs on a
pro forma basis. See "Pro Forma Consolidated Income Statement Information"
for more detailed information concerning these adjustments.
(4) Our pre-tax earnings for the nine months ended August 27, 1999 were reduced
by non-recurring items of $2.46 billion associated with our conversion to
corporate form and related transactions. These non-recurring charges
included $2.26 billion for employee initial public offering awards and $200
million for a contribution to the Goldman Sachs Fund, a charitable
foundation.
7
<PAGE> 9
RISK FACTORS
An investment in the common stock involves a number of risks, some of
which, including market, liquidity, credit, operational, legal and regulatory
risks, could be substantial and are inherent in our businesses. You should
carefully consider the following information about these risks, together with
the other information in this prospectus, before buying shares of common stock.
MARKET FLUCTUATIONS COULD ADVERSELY AFFECT
OUR BUSINESSES IN MANY WAYS
As an investment banking and securities firm, our businesses are materially
affected by conditions in the financial markets and economic conditions
generally, both in the United States and elsewhere around the world. The equity
and debt markets in the United States and elsewhere have achieved record or near
record levels, and this favorable business environment will not continue
indefinitely. In the event of a market downturn, our businesses could be
adversely affected in many ways, including those described below. Our revenues
are likely to decline in such circumstances and, if we were unable to reduce
expenses at the same pace, our profit margins would erode. For example, in the
second half of fiscal 1998, we recorded negative net revenues from our Trading
and Principal Investments business and from mid-August to mid-October the number
of equity underwritings and announced mergers and acquisitions transactions in
which we participated declined substantially due to adverse economic and market
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Business Environment" for a discussion of the market
environment in which we operated during that period. Even in the absence of a
market downturn, we are exposed to substantial risk of loss due to market
volatility.
We May Incur Significant Losses from Our Trading and Investment Activities Due
to Market Fluctuations and Volatility
We generally maintain large trading and investment positions in the fixed
income, currency, commodity and equity markets. To the extent that we own
assets, i.e., have long positions, in any of those markets, a downturn in those
markets could result in losses from a decline in the value of those long
positions. Conversely, to the extent that we have sold assets we do not own,
i.e., have short positions, in any of those markets, an upturn in those markets
could expose us to potentially unlimited losses as we attempt to cover our short
positions by acquiring assets in a rising market. We may from time to time have
a trading strategy consisting of holding a long position in one asset and a
short position in another, from which we expect to earn revenues based on
changes in the relative value of the two assets. If, however, the relative value
of the two assets changes in a direction or manner that we did not anticipate or
against which we are not hedged, we might realize a loss in those paired
positions. We incurred significant losses in our Trading and Principal
Investments business in the second half of fiscal 1998 from this type of
"relative value" trade. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Business Environment" for a discussion of
those losses and the market environment in which we operated during that period.
In addition, we maintain substantial trading positions that can be adversely
affected by the level of volatility in the financial markets, i.e., the degree
to which trading prices fluctuate over a particular period, in a particular
market, regardless of market levels.
Our Investment Banking Revenues May Decline in Adverse Market or Economic
Conditions
Unfavorable financial or economic conditions would likely reduce the number
and size of transactions in which we provide underwriting, mergers and
acquisitions advisory and other services. Our Investment Banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. In particular,
our results of operations would be adversely affected by a significant
8
<PAGE> 10
reduction in the number or size of mergers and acquisitions transactions.
We May Generate Lower Revenues from Commissions and Asset Management Fees
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.
Even in the absence of a market downturn, below market performance by our
mutual funds may result in increased withdrawals and reduced inflows, which
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.
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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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.
Other risk management methods depend upon evaluation of information
regarding markets, clients or other matters that is publicly available or
otherwise accessible by Goldman Sachs. This information may not in all cases be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risk requires, among other things, policies and procedures
to record properly and verify a large number of transactions and events, and
these policies and procedures may not be fully effective.
LIQUIDITY RISK COULD IMPAIR OUR ABILITY
TO FUND OPERATIONS AND JEOPARDIZE OUR
FINANCIAL CONDITION
Liquidity, i.e., ready access to funds, is essential to our businesses. In
addition to maintaining a cash position, we rely on three principal sources of
liquidity: borrowing in the debt markets; access to the repurchase and
securities lending markets; and selling securities and other assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" for a discussion of our sources of liquidity.
An Inability to Access the Debt Capital Markets Could Impair Our Liquidity
We depend on continuous access to the debt capital markets to finance our
day-to-day operations. An inability to raise money in the long-term or
short-term debt markets, or to engage in repurchase agreements or securities
lending, could have a substantial negative effect on our liquidity. Our access
to debt in amounts adequate to finance our activities could be impaired by
factors that affect Goldman Sachs in particular or the financial services
industry in general. For example, lenders could develop a negative perception of
our long-term or short-term financial prospects if we incurred large trading
losses, if the level of our business activity decreased due to a market
downturn, if regulatory authorities took significant action against us or if we
discovered that one of our employees had engaged in serious unauthorized or
illegal activity. Our ability to borrow in the debt markets also could be
impaired by factors that are not specific to Goldman Sachs, such as a severe
disruption of the financial markets or negative views about the prospects for
the investment banking, securities or financial services industries generally.
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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
August 27, 1999, Goldman Sachs had $21.81 billion of outstanding commercial
paper and promissory notes with a weighted-average maturity of approximately 66
days. Our liquidity depends to an important degree on our ability to refinance
these borrowings on a continuous basis. Investors who hold our outstanding
commercial paper and promissory notes have no obligation to purchase new
instruments when the outstanding instruments mature.
Our Liquidity Could Be Adversely Affected If Our Ability to Sell Assets Is
Impaired
If we were unable to borrow in the debt capital markets, we would need to
liquidate assets in order to meet our maturing liabilities. In certain market
environments, such as times of market volatility or uncertainty, overall market
liquidity may decline. In a time of reduced liquidity, we may be unable to sell
some of our assets, or we may have to sell assets at depressed prices, which
could adversely affect our results of operations and financial condition.
Our ability to sell our assets may be impaired by other market participants
seeking to sell similar assets into the market at the same time. In the late
third and early fourth quarters of fiscal 1998, for example, the markets for
some assets were adversely affected by simultaneous attempts by a number of
institutions to sell similar assets.
A Reduction in Our Credit Ratings Could Adversely Affect Our Liquidity and
Competitive Position and Increase Our Borrowing Costs
Our borrowing costs and our access to the debt capital markets depend
significantly on our credit ratings. These ratings are assigned by rating
agencies, which may reduce or withdraw their ratings or place Goldman Sachs on
"credit watch" with negative implications at any time. Credit ratings are also
important to Goldman Sachs when competing in certain markets and when seeking to
engage in longer-term transactions, including over-the-counter derivatives. A
reduction in our credit ratings could increase our borrowing costs and limit our
access to the capital markets. This, in turn, could reduce our earnings and
adversely affect our liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity -- Credit Ratings"
for additional information concerning our credit ratings.
CREDIT RISK EXPOSES US TO LOSSES CAUSED
BY FINANCIAL OR OTHER PROBLEMS
EXPERIENCED BY THIRD PARTIES
We are exposed to the risk that third parties that owe us money, securities
or other assets will not perform their obligations. These parties include our
trading counterparties, customers, clearing agents, exchanges, clearing houses
and other financial intermediaries as well as issuers whose securities we hold.
These parties may default on their obligations to us due to bankruptcy, lack of
liquidity, operational failure or other reasons. This risk may arise, for
example, from holding securities of third parties; entering into swap or other
derivative contracts under which counterparties have long-term 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 Manage-
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ment -- Credit Risk" for a further discussion of the credit risks to which we
are exposed.
We May Suffer Significant Losses from Our Credit Exposures
In recent years, we have significantly expanded our swaps and other
derivatives businesses and placed a greater emphasis on providing credit and
liquidity to our clients. As a result, our credit exposures have increased in
amount and in duration. In addition, as competition in the financial services
industry has increased, we have experienced pressure to assume longer-term
credit risk, extend credit against less liquid collateral and price more
aggressively the credit risks that we take.
Our Clients and Counterparties May Be Unable to Perform Their Obligations to Us
as a Result of Economic or Political Conditions
Country, regional and political risks are components of credit risk, as
well as market risk. Economic or political pressures in a country or region,
including those arising from local market disruptions or currency crises, may
adversely affect the ability of clients or counterparties located in that
country or region to obtain foreign exchange or credit and, therefore, to
perform their obligations to us. See "-- We Are Exposed to Special Risks in
Emerging and Other Markets" for a further discussion of our exposure to these
risks.
Defaults by a Large Financial Institution Could Adversely Affect Financial
Markets Generally and Us Specifically
The commercial soundness of many financial institutions may be closely
interrelated as a result of credit, trading, clearing or other relationships
between the institutions. As a result, concerns about, or a default by, one
institution could lead to significant liquidity problems or losses in, or
defaults by, other institutions. This is sometimes referred to as "systemic
risk" and may adversely affect financial intermediaries, such as clearing
agencies, clearing houses, banks, securities firms and exchanges, with which we
interact on a daily basis.
The possibility of default by a major market participant in the second half
of fiscal 1998 and concerns throughout the financial industry regarding the
resulting impact on markets led us to participate in an industry-wide consortium
that invested in Long-Term Capital Portfolio, L.P., which is described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity -- The Balance Sheet". Actual defaults, increases in
perceived default risk and other similar events could arise in the future and
could have an adverse effect on the financial markets and on Goldman Sachs.
The Information That We Use in Managing Our Credit Risk May Be Inaccurate or
Incomplete
Although we regularly review our credit exposure to specific clients and
counterparties and to specific industries, countries and regions that we believe
may present credit concerns, default risk may arise from events or circumstances
that are difficult to detect, such as fraud. We may also fail to receive full
information with respect to the trading risks of a counterparty. In addition, in
cases where we have extended credit against collateral, we may find that we are
undersecured, for example, as a result of sudden declines in market values that
reduce the value of collateral.
OUR COMPUTER SYSTEMS AND THOSE OF THIRD PARTIES MAY NOT ACHIEVE YEAR 2000
READINESS -- YEAR 2000 READINESS DISCLOSURE
With the year 2000 rapidly approaching, many institutions around the world
have been reviewing and modifying their computer systems to ensure that they are
Year 2000 compliant. The issue, in general terms, is that many computer systems
and microprocessors (including those in non-information technology equipment and
systems) used only two digits to identify a year in the date field with the
assumption that the first two digits of the year would always be "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.
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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.
In preparation for the Year 2000 transition, we have continued to assess
counterparties, intermediaries and vendors with whom we have important financial
or operational relationships to determine the extent of their Year 2000
preparedness. In many cases, however, we are not in a position to verify the
accuracy or completeness of the information we receive from third parties and as
a result are dependent on their willingness and ability to disclose, and to
address, their Year 2000 problems. In some cases, we have not yet received
sufficient information about a party's Year 2000 preparedness to assess the
effectiveness of its efforts. In addition, in some international markets in
which we do business, the level of awareness, remediation and contingency
planning efforts relating to the Year 2000 issue has been 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, we expect 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 plan 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
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<PAGE> 15
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. Consequently, we rely heavily on our financial, accounting
and other data processing systems. If any of these systems do not operate
properly or are disabled, we could suffer financial loss, a disruption of our
businesses, liability to clients, regulatory intervention or reputational
damage. The inability of our systems to accommodate an increasing volume of
transactions could also constrain our ability to expand our businesses. In
recent years, we have substantially upgraded and expanded the capabilities of
our data processing systems and other operating technology, and we expect that
we will need to continue to upgrade and expand in the future to avoid disruption
of, or constraints on, our operations.
LEGAL AND REGULATORY RISKS ARE INHERENT AND
SUBSTANTIAL IN OUR BUSINESSES
Substantial legal liability or a significant regulatory action against
Goldman Sachs could have a material financial effect or cause significant
reputational harm to Goldman Sachs, which in turn could seriously harm our
business prospects.
Our Exposure to Legal Liability Is Significant
We face significant legal risks in our businesses and the volume and amount
of damages claimed in litigation against financial intermediaries are
increasing. These risks include potential liability under securities or other
laws for materially false or misleading statements made in connection with
securities and other transactions, potential liability for the "fairness
opinions" and other advice we provide to participants in corporate transactions
and disputes over the terms and conditions of complex trading arrangements. We
also face the possibility that counterparties in complex or risky trading
transactions will claim that we improperly failed to tell them of the risks or
that they were not authorized or permitted to enter into these transactions with
us and that their obligations to Goldman Sachs are not enforceable. Particularly
in our rapidly growing business focused on high net worth individuals, we are
increasingly exposed to claims against Goldman Sachs for recommending
investments that are not consistent with a client's investment objectives or
engaging in unauthorized or excessive trading. During a prolonged market
downturn, we would expect these types of claims to increase. We are also subject
to claims arising from disputes with employees for alleged discrimination or
harassment, among other things. These risks often may be difficult to assess or
quantify and their existence and
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<PAGE> 16
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 protect our
shareholders. Consequently, these regulations often serve to limit our
activities, including through net capital, customer protection and market
conduct requirements. We face the risk of significant intervention by regulatory
authorities, including extended investigation and surveillance activity,
adoption of costly or restrictive new regulations and judicial or administrative
proceedings that may result in substantial penalties. Among other things, we
could be fined or prohibited from engaging in some of our business activities.
See "Business -- Regulation" for a further discussion of the regulatory
environment in which we conduct our businesses.
Legal Restrictions on Our Clients May Reduce the Demand for Our Services
New laws or regulations or changes in enforcement of existing laws or
regulations applicable to our clients may also adversely affect our businesses.
For example, changes in antitrust enforcement could affect the level of mergers
and acquisitions activity and changes in regulation could restrict the
activities of our clients and, therefore, the services we provide on their
behalf.
EMPLOYEE MISCONDUCT COULD HARM
GOLDMAN SACHS AND IS DIFFICULT TO
DETECT AND DETER
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. Misconduct by
employees could include binding Goldman Sachs to transactions that exceed
authorized limits or present unacceptable risks, or hiding from Goldman Sachs
unauthorized or unsuccessful activities, which, in either case, may result in
unknown and unmanaged risks or losses. Employee misconduct could also involve
the improper use or disclosure of confidential information, which could result
in regulatory sanctions and serious reputational or financial harm. It is not
always possible to deter employee misconduct and the precautions we take to
prevent and detect this activity may not be effective in all cases.
THE FINANCIAL SERVICES INDUSTRY IS INTENSELY
COMPETITIVE AND RAPIDLY CONSOLIDATING
The financial services industry -- and all of our businesses -- are
intensely competitive, and we expect them to remain so. We compete on the basis
of a number of factors, including transaction execution, our products and
services, innovation, reputation and price. We have experienced intense price
competition in some of our businesses in recent years, such as underwriting fees
on investment grade debt offerings and privatizations. We believe we may
experience pricing pressures in these and other areas in the future as some of
our competitors seek to obtain market share by reducing prices.
We Face Increased Competition Due to a Trend Toward Consolidation
In recent years, there has been substantial consolidation and convergence
among companies in the financial services industry. In particular, a number of
large commercial banks, insurance companies and other broad-based financial
services firms have established or acquired broker-dealers or have merged with
other financial institutions. Many of these firms have the ability to offer a
wide
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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. Federal financial reform legislation was
recently enacted. This legislation may accelerate consolidation and increase
competition in the financial services industry and will enable banking
organizations to compete more effectively across a broad range of activities.
Consolidation Has Increased Our Need for Capital
This trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have had to commit capital to support our international
operations and to execute large global transactions.
Our Ability to Expand Internationally Will Depend on Our Ability to Compete
Successfully with Local Financial Institutions
We believe that some of our most significant challenges and opportunities
will arise outside the United States. In order to take advantage of these
opportunities, we will have to compete successfully with financial institutions
based in important non-U.S. markets, particularly in Europe. Some of these
institutions are larger, better capitalized and have a stronger local presence
and a longer operating history in these markets.
Our Revenues May Decline Due to Competition from Alternative Trading Systems
Securities and futures transactions are now being conducted through the
Internet and other alternative, non-traditional trading systems, and it appears
that the trend toward alternative trading systems will continue and probably
accelerate. A dramatic increase in computer-based or other electronic trading
may adversely affect our commission and trading revenues, reduce our
participation in the trading markets and associated access to market information
and lead to the creation of new and stronger competitors.
WE ARE EXPOSED TO SPECIAL RISKS IN
EMERGING AND OTHER MARKETS
In conducting our businesses in major markets around the world, including
many developing markets in Asia, Latin America and Eastern Europe, we are
subject to political, economic, legal, operational and other risks that are
inherent in operating in other countries. These risks range from difficulties in
settling transactions in emerging markets to possible nationalization,
expropriation, price controls and other restrictive governmental actions. We
also face the risk that exchange controls or similar restrictions imposed by
foreign governmental authorities may restrict our ability to convert local
currency received or held by us in their countries into U.S. dollars or other
currencies, or to take those dollars or other currencies out of those countries.
To date, a relatively small part of our businesses has been conducted in
emerging and other markets. As we expand our businesses in these areas, our
exposure to these risks will increase.
Turbulence in Emerging Markets May Adversely Affect Our Businesses
In the last several years, various emerging market countries have
experienced severe economic and financial disruptions, including significant
devaluations of their currencies and low or negative growth rates in their
economies. The possible effects of these conditions include an adverse impact on
our businesses and increased volatility in financial markets generally.
Moreover, economic or market problems in a single country or region are
increasingly affecting other markets generally. For example, the economic crisis
in Russia in August 1998 adversely affected other emerging markets and led to
turmoil in financial markets worldwide. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Business
Environment" for a discussion of the business environment in which we operated
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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 we have significant exposure.
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 initial public 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 managing directors'
continued employment. However, these shares are subject to certain restrictions
on transfer under a shareholders' agreement and under our plan of incorporation
and a portion of these shares has been pledged to support these managing
directors' obligations under noncompetition agreements. The transfer
restrictions under the shareholders' agreement and the plan of incorporation
may, however, be waived, as described under "Certain Relationships and Related
Transactions -- Shareholders' Agreement -- Transfer Restrictions" and
"-- Waivers". These transfer restrictions will be waived with respect to the
donation of shares of common stock by our former profit participating limited
partners to charitable foundations and public charities. These charitable
organizations may sell the donated shares pursuant to this prospectus as
described under "Selling Shareholders". We also will waive the restrictions on
transfer to permit charitable donations by our former retired limited partners.
See "Shares Eligible for Future Sale" for a discussion of this waiver.
The steps we have taken to encourage the continued service of our managing
directors may not be effective. For a description of the compensation plan for
our senior professionals implemented in connection with our initial public
offering, see "Management -- The Partner Compensation Plan".
In connection with our initial public offering and conversion of Goldman
Sachs from partnership to corporate form, employees, other than the managing
directors who were profit participating limited partners, received 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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Goldman Sachs Is Controlled by Its Managing Directors Whose Interests May
Differ from Those of Other Shareholders
Prior to the proposed charitable contributions of shares of common stock by
certain of our managing directors, our managing directors collectively own not
less than 250,000,000 shares of common stock, or 56% of the total shares of
common stock outstanding. These shares are subject to a shareholders' agreement,
which provides for coordinated voting by the parties. Further, both Sumitomo
Bank Capital Markets, Inc. and Kamehameha Activities Association, which together
owned 43,400,473 shares of common stock, or 9.8% of the total shares of common
stock outstanding, as of September 24, 1999, have agreed to vote their shares of
common stock in the same manner as a majority of the shares held by our managing
directors are voted. See "Certain Relationships and Related
Transactions -- Shareholders' Agreement -- Voting" and "-- Voting Agreement" for
a discussion of these voting arrangements.
As a result of these arrangements, the managing directors currently are
able to elect our entire board of directors, control the management and policies
of Goldman Sachs and, in general, determine, without the consent of the other
shareholders, the outcome of any corporate transaction or other matter submitted
to the shareholders for approval, including mergers, consolidations and the sale
of all or substantially all of the assets of Goldman Sachs. The managing
directors currently are able to prevent or cause a change in control of Goldman
Sachs.
Provisions of Our Organizational Documents May Discourage an Acquisition of
Goldman Sachs
Our organizational documents contain provisions that impede the removal of
directors and may discourage a third party from making a proposal to acquire us.
For example, our board of directors may, without the consent of shareholders,
issue preferred stock with greater voting rights than the common stock. See
"Description of Capital Stock -- Certain Anti-Takeover Matters" for a discussion
of these anti-takeover provisions.
OUR SHARE PRICE MAY DECLINE DUE TO THE
LARGE NUMBER OF SHARES ELIGIBLE
FOR FUTURE SALE
Sales of substantial amounts of common stock, or the possibility of such
sales, may adversely affect the price of the common stock and impede our ability
to raise capital through the issuance of equity securities. See "Shares Eligible
for Future Sale" for a discussion of possible future sales of common stock.
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USE OF PROCEEDS
All of the shares of our common stock offered by this prospectus will be
sold by charitable organizations. As a result, we will not receive any of the
proceeds from the sale of these shares. We will, however, pay some of the
expenses related to the sale of the shares by the charitable organizations
pursuant to this prospectus. We estimate that the expenses we will pay will
total approximately $1.5 million.
PRICE RANGE OF OUR COMMON STOCK AND DIVIDENDS
Our common stock commenced trading on the New York Stock Exchange under the
symbol "GS" on May 4, 1999. Prior to that date, there was no public market for
our common stock. The following table sets forth, for the periods indicated, the
high and low closing prices per share for our common stock as reported by the
Consolidated Tape Association and the dividend declared per share of common
stock and nonvoting common stock:
<TABLE>
<CAPTION>
DIVIDEND
DECLARED
FISCAL YEAR 1999 HIGH LOW PER SHARE
- ---------------- ------ ------ ---------
<S> <C> <C> <C>
Second fiscal quarter (from May 4, 1999 to May 28, 1999).... $74.13 $64.50 --
Third fiscal quarter (May 29, 1999 to August 27, 1999)...... 72.25 55.81 $0.12
Fourth fiscal quarter (August 28, 1999 to November 26,
1999)..................................................... 82.81 57.69 0.12
FISCAL YEAR 2000
First fiscal quarter (November 27, 1999 through December 7,
1999)..................................................... 80.94 74.50 --
</TABLE>
On December 7, 1999, the last reported sale price for our common stock on
the New York Stock Exchange was $80.94 per share. As of September 24, 1999 there
were approximately 575 common stockholders of record.
The holders of our common stock and nonvoting common stock share
proportionately on a per share basis in all dividends and other distributions
declared by our board of directors.
The declaration of dividends by Goldman Sachs is subject to the discretion
of our board of directors. Our board of directors will take into account such
matters as general business conditions, our financial results, capital
requirements, contractual, legal and regulatory restrictions on the payment of
dividends by us to our shareholders or by our subsidiaries to us, the effect on
our debt ratings and such other factors as our board of directors may deem
relevant. See "Business -- Regulation" for a discussion of potential regulatory
limitations on our receipt of funds from our regulated subsidiaries.
19
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS ON
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
To the Partners,
The Goldman Sachs Group, L.P.:
We have examined the pro forma adjustments reflecting (i) the interest
expense on junior subordinated debentures issued to retired limited partners in
exchange for their partnership interests; (ii) compensation to managing
directors who were profit participating limited partners; (iii) compensation in
the form of restricted stock units awarded to employees in lieu of ongoing cash
compensation; (iv) the amortization of the restricted stock units awarded to
employees on a discretionary basis; and (v) the provision for corporate income
taxes (collectively, the "Pro Forma Adjustments"), and the initial public
offering of Goldman Sachs, all as described in Note 2 to the Pro Forma
Consolidated Income Statement Information (included on pages 22 to 25 of this
prospectus) and the application of those adjustments to the historical amounts
in the Pro Forma Consolidated Income Statement Information for the year ended
November 27, 1998. The historical consolidated income statement information is
derived from the historical consolidated financial statements of Goldman Sachs,
which were audited by us and which are included elsewhere in this prospectus.
The Pro Forma Adjustments are based upon management's assumptions described in
Note 2 to the Pro Forma Consolidated Income Statement Information. Our
examination was made in accordance with standards established by the American
Institute of Certified Public Accountants and, accordingly, included such
procedures as we considered necessary in the circumstances.
The objective of this pro forma consolidated income statement information
is to show what the significant effects on the historical income statement
information of Goldman Sachs might have been had the Pro Forma Adjustments and
the initial public offering of Goldman Sachs occurred at an earlier date.
However, the Pro Forma Consolidated Income Statement Information is not
necessarily indicative of the results of operations that would have been
attained had the above-mentioned Pro Forma Adjustments and the initial public
offering of Goldman Sachs actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
Pro Forma Adjustments and the initial public offering of Goldman Sachs, all as
described in Note 2 to the Pro Forma Consolidated Income Statement Information,
the related pro forma adjustments give appropriate effect to those assumptions,
and the "Pro Forma" column reflects the proper application of those adjustments
to the historical consolidated income statement amounts in the Pro Forma
Consolidated Income Statement Information for the year ended November 27, 1998.
PricewaterhouseCoopers LLP
New York, New York
May 3, 1999.
20
<PAGE> 22
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS ON
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
To the Directors and Shareholders,
The Goldman Sachs Group, Inc:
We have reviewed the pro forma adjustments reflecting (i) the interest
expense on junior subordinated debentures issued to retired limited partners in
exchange for their partnership interests; (ii) the amortization of the
restricted stock units awarded to employees on a discretionary basis; (iii) the
restricted stock units awarded to employees based on a formula; (iv) the initial
irrevocable contribution of shares of common stock to the defined contribution
plan; (v) the contribution to the Goldman Sachs Fund; (vi) compensation in the
form of restricted stock units awarded to employees in lieu of ongoing cash
compensation; and (vii) the provision for corporate income taxes (collectively,
the "Pro Forma Adjustments"), all as described in Note 2 to the Pro Forma
Consolidated Income Statement Information (included on pages 22 to 25 of this
prospectus) and the application of those adjustments to the historical amounts
in the Pro Forma Consolidated Income Statement Information for the nine months
ended August 27, 1999. The historical consolidated income statement information
is derived from the historical condensed consolidated financial statements of
Goldman Sachs, which were reviewed by us and which are included elsewhere in
this prospectus. The Pro Forma Adjustments are based upon management's
assumptions described in Note 2 to the Pro Forma Consolidated Income Statement
Information. Our review was made in accordance with standards established by the
American Institute of Certified Public Accountants.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion.
The objective of this pro forma consolidated income statement information
is to show what the significant effects on the historical financial information
of Goldman Sachs might have been had the Pro Forma Adjustments occurred at an
earlier date. However, the Pro Forma Consolidated Income Statement Information
is not necessarily indicative of the results of operations that would have been
attained had the above-mentioned Pro Forma Adjustments actually occurred
earlier.
Based on our review, nothing came to our attention that caused us to
believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
Pro Forma Adjustments, all as described in Note 2 to the Pro Forma Consolidated
Income Statement Information, that the related pro forma adjustments do not give
appropriate effect to those assumptions, or that the "Pro Forma" column does not
reflect the proper application of those adjustments to the historical
consolidated income statement amounts in the Pro Forma Consolidated Income
Statement Information for the nine months ended August 27, 1999.
PricewaterhouseCoopers LLP
New York, New York
October 5, 1999.
21
<PAGE> 23
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
The following Pro Forma Consolidated Income Statement Information is based
upon the historical consolidated financial statements of Goldman Sachs. The Pro
Forma Consolidated Income Statement Information reflects the pro forma effects
of the following items:
- - the interest expense on junior subordinated debentures issued to retired
limited partners in exchange for their partnership interests;
- - 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 amortization of the restricted stock units awarded to employees on a
discretionary basis; and
- - the provision for corporate income taxes.
The pro forma results do 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; and
- - the contribution to the Goldman Sachs Fund.
All of the items discussed above are collectively referred to as the "Pro
Forma Adjustments".
The Pro Forma Adjustments are based upon available information and certain
assumptions that management believes are reasonable. The Pro Forma Consolidated
Income Statement Information and accompanying notes should be read in
conjunction with the consolidated financial statements and their notes.
THE PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION PRESENTED IS NOT
NECESSARILY INDICATIVE OF THE RESULTS OF OPERATIONS 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.
22
<PAGE> 24
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
($ in millions, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 27, 1998
-------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- ------------
<S> <C> <C> <C>
Total revenues.............................................. $ 22,478 $ -- $ 22,478
Interest expense, principally on short-term funding......... 13,958 28(a) 13,986
------------ ----------- ------------
Revenues, net of interest expense........................... 8,520 (28) 8,492
Compensation and benefits, excluding employee initial public
offering awards........................................... 3,838 303(b) 4,141
Amortization of employee initial public offering awards..... -- 461(c) 461
Other operating expenses.................................... 1,761 -- 1,761
------------ ----------- ------------
Total operating expenses.................................... 5,599 764 6,363
Pre-tax earnings............................................ 2,921 (792) 2,129
Provision for taxes......................................... 493 380(d) 873
------------ ----------- ------------
Net earnings................................................ $ 2,428 $ (1,172) $ 1,256
============ =========== ============
Shares outstanding:
Basic..................................................... 474,712,271(e)
Diluted................................................... 479,058,840(e)
Earnings per share:
Basic..................................................... $ 2.65
Diluted................................................... 2.62
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 27, 1999
-------------------------------------------
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- ------------
<S> <C> <C> <C>
Total revenues.............................................. $ 18,651 $ -- $ 18,651
Interest expense, principally on short-term funding......... 8,779 7(a) 8,786
------------ ----------- ------------
Revenues, net of interest expense........................... 9,872 (7) 9,865
Compensation and benefits, excluding employee initial public
offering awards........................................... 4,932 -- 4,932
Non-recurring employee initial public offering awards....... 2,257 (2,257)(f) --
Amortization of employee initial public offering awards..... 154 192(c) 346
Other operating expenses.................................... 1,746 (200)(g) 1,546
------------ ----------- ------------
Total operating expenses.................................... 9,089 (2,265) 6,824
Pre-tax earnings............................................ 783 2,258 3,041
(Benefit)/provision for taxes............................... (1,202) 2,449(d) 1,247
------------ ----------- ------------
Net earnings................................................ $ 1,985 $ (191) $ 1,794
============ =========== ============
Shares outstanding:
Basic..................................................... 474,698,130 3,706,245(h) 478,404,375
Diluted................................................... 483,146,111 10,529,619(i) 493,675,730
Earnings per share:
Basic..................................................... $ 4.18 $ 3.75
Diluted................................................... 4.11 3.63
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated Income
Statement Information.
23
<PAGE> 25
NOTES TO PRO FORMA CONSOLIDATED
INCOME STATEMENT INFORMATION
NOTE 1: BASIS OF PRESENTATION
As permitted by the rules and regulations of the SEC, the Pro Forma
Consolidated Income Statement Information is presented on a condensed basis. The
Pro Forma Consolidated Income Statement Information for the fiscal year ended
November 27, 1998 and the nine-month fiscal period ended August 27, 1999 was
prepared as if Goldman Sachs' conversion to corporate form and related
transactions had taken place at the beginning of fiscal 1998.
NOTE 2: PRO FORMA ADJUSTMENTS
(a) INTEREST ON THE JUNIOR SUBORDINATED DEBENTURES ISSUED TO RETIRED
LIMITED PARTNERS IN EXCHANGE FOR THEIR INTERESTS. Adjustment to reflect
additional interest expense on junior subordinated debentures issued to the
retired limited partners in exchange for their interests in The Goldman Sachs
Group, L.P. and certain affiliates. 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 operated as a partnership until May 7, 1999, 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.
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 this period. 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
has been recorded on the Pro Forma Consolidated Income Statement Information.
The compensation and benefits expense related to services rendered by the
managing directors who were profit participating limited partners is based upon
measures of financial performance, including net revenues, pre-tax earnings and
the ratio of compensation and benefits to net revenues, as described under
"Management -- The Partner Compensation Plan -- Determination of Salary and
Bonus". Management anticipates that, consistent with industry practice, it will
adjust the form and structure of its compensation 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 because a portion of cash compensation
recorded in these periods would have been replaced by restricted stock units
with future service requirements. This reduction is reflected in the Pro Forma
Consolidated Income Statement Information.
(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. These restricted stock units had a value of
$1,765 million on the date of grant, approximately 26% of which will be
amortized as a non-cash expense, after giving effect to forfeitures, in the
twelve months following the date of grant. The remaining 74% of the value of
these restricted stock
24
<PAGE> 26
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 are 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 $16.02 per option using a binomial option pricing model. If Statement
of Financial Accounting Standards No. 123 had been applied, compensation
expense, after giving effect to forfeitures, of $166 million and $123 million
would have been included in the Pro Forma Consolidated Income Statement
Information in fiscal 1998 and for the fiscal period ended August 27, 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 Sachs in corporate form at an
effective tax rate of 41%.
(e) PRO FORMA COMMON STOCK AND NONVOTING COMMON STOCK. Shares outstanding,
computed on a weighted-average basis, after giving effect to Goldman Sachs'
conversion to corporate form and related transactions. For the purpose of
calculating basic earnings per share, shares outstanding includes the nonvoting
common stock, the shares of common stock irrevocably contributed to the defined
contribution plan, the shares of common stock offered as part of the initial
public offering by The Goldman Sachs Group, Inc., and, pursuant to Statement of
Financial Accounting Standards No. 128, the shares of common stock underlying
the restricted stock units awarded to employees based on a formula since future
service is not required as a condition to the delivery of the underlying shares
of common stock.
Pro forma diluted shares outstanding reflects the dilutive effect of the
common stock deliverable pursuant to the restricted stock units awarded to
employees on a discretionary basis.
(f) NON-RECURRING EFFECT OF THE RESTRICTED STOCK UNITS AWARDED TO EMPLOYEES
BASED ON A FORMULA. Adjustment to eliminate the non-recurring expense related
to 30,025,946 restricted stock units awarded to employees based on a formula,
for which future service is not required as a condition to the delivery of the
underlying shares of common stock, and the initial irrevocable contribution of
12,555,866 shares of common stock to the defined contribution plan.
(g) CHARITABLE CONTRIBUTION. Adjustment to eliminate the non-recurring
expense related to the charitable contribution to the Goldman Sachs Fund.
(h) PRO FORMA BASIC AVERAGE COMMON SHARES OUTSTANDING. Adjustment to basic
average common shares outstanding to reflect the shares of common stock
underlying the restricted stock units that were 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.
(i) PRO FORMA DILUTED AVERAGE COMMON SHARES OUTSTANDING. Adjustment to
diluted average common shares outstanding to reflect the additional dilutive
effect of the common stock deliverable pursuant to the restricted stock units
and stock options awarded to employees on a discretionary basis for which future
service is required as a condition to the delivery of the underlying shares of
common stock. In addition, adjustment reflects the dilutive effect of the shares
of common stock underlying the restricted stock units that were 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. For purposes of calculating pro forma diluted
average common shares outstanding, the initial public offering price of $53 per
share was used from the beginning of fiscal 1998 until May 4, 1999, the day
trading in Goldman Sachs common stock commenced. Thereafter, actual daily
closing prices were used.
25
<PAGE> 27
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 August 27, 1999 and for the nine months ended
August 28, 1998 and August 27, 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 nine months ended August 27, 1999 and for
the nine months ended August 28, 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 nine months ended August 27, 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
for the nine months ended August 27, 1999 have been derived from the pro forma
data set forth in "Pro Forma Consolidated Income Statement Information" included
elsewhere in this prospectus. The pro forma data set forth in "Pro Forma
Consolidated Income Statement Information" for the year ended November 27, 1998
have been examined by PricewaterhouseCoopers LLP and the pro forma data set
forth in "Pro Forma Consolidated Income Statement Information" for the nine
months ended August 27, 1999 have been reviewed by PricewaterhouseCoopers LLP.
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Pro Forma Consolidated Income Statement Information" and the
consolidated financial statements and their notes.
<TABLE>
<CAPTION>
AS OF OR FOR
NINE MONTHS
AS OF OR FOR YEAR ENDED NOVEMBER ENDED AUGUST
--------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues.................................. $12,452 $ 14,324 $ 17,289 $ 20,433 $ 22,478 $ 18,201 $ 18,651
Interest expense................................ 8,915 9,841 11,160 12,986 13,958 10,596 8,779
------- -------- -------- -------- -------- -------- --------
Net revenues.................................... 3,537 4,483 6,129 7,447 8,520 7,605 9,872
Compensation and benefits(1).................... 1,789 2,005 2,421 3,097 3,838 3,566 4,932
Other operating expenses........................ 1,240 1,110 1,102 1,336 1,761 1,225 4,157
------- -------- -------- -------- -------- -------- --------
Pre-tax earnings(1)............................. $ 508 $ 1,368 $ 2,606 $ 3,014 $ 2,921 $ 2,814 $ 783(4)
======= ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets(2)................................. $95,296 $100,066 $152,046 $178,401 $217,380 -- $236,273
Long-term borrowings............................ 14,418 13,358 12,376 15,667 19,906 -- 20,340
Total liabilities(2)............................ 89,981 94,686 145,753 171,864 210,996 -- 227,676
Partners' capital............................... 4,771 4,905 5,309 6,107 6,310 -- --
Stockholders' equity............................ -- -- -- -- -- -- 8,597
COMMON SHARE DATA:
Earnings per share:
Basic......................................... -- -- -- -- -- -- $ 4.18
Diluted....................................... -- -- -- -- -- -- 4.11
Average common shares outstanding:
Basic......................................... -- -- -- -- -- -- 475
Diluted....................................... -- -- -- -- -- -- 483
Dividends per common share(3)................... -- -- -- -- -- -- $ 0.12
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
AS OF OR FOR
NINE MONTHS
AS OF OR FOR YEAR ENDED NOVEMBER ENDED AUGUST
--------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
($ and share amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA DATA:(5)
Pro forma net earnings.......................... -- -- -- -- $ 1,256 -- $1,794
Pro forma diluted earnings per share............ -- -- -- -- 2.62 -- 3.63
Pro forma diluted shares........................ -- -- -- -- 479 -- 494
SELECTED DATA AND RATIOS (UNAUDITED):
Pre-tax return on average partners'
capital(1).................................... 10% 28% 51% 53% 47% -- --
Ratio of compensation and benefits to net
revenues(1)................................... 51 45 40 42 45 47% 50%
Employees:
United States................................. 5,822 5,356 5,818 6,879 8,349 8,178 9,201
International................................. 3,176 2,803 3,159 3,743 4,684 4,497 5,253
------- -------- -------- -------- -------- -------- --------
Total employees(6).............................. 8,998 8,159 8,977 10,622 13,033 12,675 14,454
======= ======== ======== ======== ======== ======== ========
Assets under supervision:
Assets under management....................... $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $173,991 $220,522
Other client assets........................... 49,061 57,716 76,892 102,033 142,018 119,005 192,034
------- -------- -------- -------- -------- -------- --------
Total assets under supervision.................. $92,732 $110,074 $171,491 $237,962 $336,839 $292,996 $412,556
======= ======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Since we operated as a partnership until May 7, 1999, 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 for the five years
ended November 27, 1998 and for the nine months ended August 28, 1998 do not
reflect any payments for services rendered by our managing directors who
were profit participating limited partners. Accordingly, our pre-tax
earnings in these periods understate the operating costs incurred by us in
corporate form. As a corporation, we 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
since the beginning of fiscal 1998, see "Pro Forma Consolidated Income
Statement Information".
(2) Total assets and liabilities were increased by $11.64 billion as of November
27, 1998 and $3.68 billion as of August 27, 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 the quarterly dividend paid on August 27, 1999 to voting and
nonvoting common stockholders. In addition, a dividend of $0.12 per share
was declared on September 20, 1999, to be paid on November 22, 1999 to
voting and nonvoting common stockholders. See "Price Range of Our Common
Stock and Dividends" for a discussion of the factors that our board of
directors may consider in declaring future dividends.
(4) Our pre-tax earnings for the nine months ended August 27, 1999 were reduced
by non-recurring items of $2.46 billion associated with our conversion to
corporate form and related transactions. These non-recurring charges
included $2.26 billion for employee initial public offering awards and $200
million for a contribution to the Goldman Sachs Fund, a charitable
foundation.
(5) Reflects such adjustments as are necessary, in the opinion of management,
for a fair presentation of the results of operations of Goldman Sachs on a
pro forma basis. See "Pro Forma Consolidated Income Statement Information"
for more detailed information concerning these adjustments.
(6) 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 August 27, 1999, we had
approximately 3,900 temporary staff and consultants. For more detailed
information regarding our employees, see "Business -- Employees".
27
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS ON MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To the Partners,
The Goldman Sachs Group, L.P.:
We have examined Management's Discussion and Analysis of Financial
Condition and Results of Operations, except as discussed in the third paragraph
below ("MD&A"), taken as a whole, of The Goldman Sachs Group, L.P. and
Subsidiaries (the "Firm") for the three-year period ended November 27, 1998,
included on pages 29 to 52 of this prospectus. Management is responsible for the
preparation of the Firm's MD&A pursuant to the rules and regulations adopted by
the Securities and Exchange Commission. Our responsibility is to express an
opinion on the presentation based on our examination. We have audited, in
accordance with generally accepted auditing standards, the consolidated
financial statements of the Firm as of November 27, 1998 and November 28, 1997,
and for each of the three years in the period ended November 27, 1998, and in
our report dated January 22, 1999, we expressed an unqualified opinion on those
financial statements.
Our examination of MD&A was made in accordance with attestation standards
established by the American Institute of Certified Public Accountants and,
accordingly, included examining, on a test basis, evidence supporting the
historical amounts and disclosures in the presentation. An examination also
includes assessing the significant determinations made by management as to the
relevance of information to be included and the estimates and assumptions that
affect reported information. We believe that our examination provides a
reasonable basis for our opinion.
The preparation of MD&A requires management to interpret the criteria, make
determinations as to the relevance of information to be included, and make
estimates and assumptions that affect reported information. MD&A includes
information regarding the estimated future impact of transactions and events
that have occurred or are expected to occur, expected sources of liquidity and
capital resources, operating trends, commitments, and uncertainties, including
those related to the Year 2000 readiness issue. Actual results in the future may
differ materially from management's present assessment of this information
because events and circumstances frequently do not occur as expected.
Our examination of MD&A of the Firm did not include (i) the information
presented under the headings "VaR" or "VaR Methodology, Assumptions and
Limitations" or (ii) information for the nine months ended August 27, 1999 and
August 28, 1998. Accordingly, we express no opinion on such information.
In our opinion, the Firm's presentation of MD&A for the three-year period
ended November 27, 1998 includes, in all material respects, the required
elements of the rules and regulations adopted by the Securities and Exchange
Commission; the historical financial amounts included therein have been
accurately derived, in all material respects, from the Firm's financial
statements; and the underlying information, determinations, estimates, and
assumptions of the Firm provide a reasonable basis for the disclosures contained
therein.
PricewaterhouseCoopers LLP
New York, New York
March 15, 1999.
28
<PAGE> 30
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 merchant banking investments); 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 August 1998 and August
1999 refer to our nine-month fiscal period ended, or the date, as the context
requires, August 28, 1998 and August 27, 1999, respectively.
When we use the terms "Goldman Sachs", "we" and "our", we mean, prior to
May 7, 1999, The Goldman Sachs Group, L.P., a Delaware limited partnership, and
its consolidated subsidiaries and, on and after May 7, 1999, 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.
In the second half of 1998, we also experienced losses in equity arbitrage
and in
29
<PAGE> 31
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, 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 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 during the quarter.
During the second quarter of 1999, global markets continued to be strong as
a result of a favorable macroeconomic environment, which benefited our key
businesses. The U.S. economy continued its strong growth rate amid low
unemployment and favorable inflation and interest rate conditions, leading to
record highs in the major U.S. equity market indices. The financial markets
declined towards the end of the quarter as inflation concerns arose and interest
rates trended upwards in the United States. European financial markets posted
positive gains following interest rate cuts and renewed signs of economic
expansion, while financial markets in Asia and Latin America continued to
improve as the economies of Japan and Brazil stabilized.
The Federal Reserve raised overnight interest rates twice during the third
quarter of 1999, as inflation concerns were fueled by continued U.S. economic
growth and a rally in commodity prices. Although major U.S. equity market
indices achieved record highs during the quarter, the uncertainty regarding the
direction of interest rates led to market volatility and wider credit spreads
during the quarter. European equity markets posted new highs following further
signs of economic growth and a favorable interest rate environment. Asian
economies benefited from the continued recovery in Japan, as economic growth
resulted in an appreciation of the yen versus the U.S. dollar and led Japanese
equity markets to twelve-month highs.
RESULTS OF OPERATIONS
Management believes that prior to our conversion to corporate form 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 we operated as a partnership until May 7, 1999, 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 for the three years ended November 1998 and
for the nine months ended August 1998 does not reflect any payments for services
rendered by managing directors who were profit partici-
30
<PAGE> 32
pating limited partners and therefore understates the operating costs incurred
by us in corporate form. As a corporation, we include these payments to managing
directors who were profit participating limited partners in compensation and
benefits expense, as discussed under "Pro Forma Consolidated Income Statement
Information". See "Management -- The Partner Compensation Plan" for a further
discussion of the plan we have adopted for the purpose of compensating our
managing directors who were profit participating limited partners.
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, pre-tax earnings and net
earnings and diluted earnings per share on an actual and pro forma basis:
FINANCIAL OVERVIEW
(in millions, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $6,129 $7,447 $8,520 $7,605 $9,872
Pre-tax earnings................... 2,606 3,014 2,921 2,814 783
Net earnings....................... 2,399 2,746 2,428 2,384 1,985
Diluted earnings per share......... -- -- -- -- 4.11
Pro forma net earnings(1).......... -- -- 1,256 -- 1,794
Pro forma diluted earnings per
share(1)......................... -- -- 2.62 -- 3.63
</TABLE>
- ---------------
(1) Reflects the results of Goldman Sachs as if Goldman Sachs' conversion to
corporate form and related transactions had taken place at the beginning
of 1998. See "Pro Forma Consolidated Income Statement Information" for a
discussion of the Pro Forma Adjustments.
------------------------
AUGUST 1999 VERSUS AUGUST 1998. Our net revenues were $9.87 billion for
the nine months ended August 1999, an increase of 30% compared to the same
period in 1998. Net revenues in Investment Banking increased 20% primarily due
to higher financial advisory fees in mergers and acquisitions and increased
equity underwriting fees. Net revenues in Trading and Principal Investments
increased 49% due to increased contributions from all components of the
business. Net revenues in Asset Management and Securities Services increased 14%
principally due to growth in asset management fees.
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.
31
<PAGE> 33
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.
The following table sets forth the net revenues of our principal business
lines:
NET REVENUES BY PRINCIPAL BUSINESS LINE
(in millions)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Investment Banking................. $2,113 $2,587 $3,368 $2,547 $3,054
Trading and Principal
Investments........................ 2,693 2,926 2,379 3,042 4,522
Asset Management and Securities
Services......................... 1,323 1,934 2,773 2,016 2,296
------ ------ ------ ------ ------
Total net revenues................. $6,129 $7,447 $8,520 $7,605 $9,872
====== ====== ====== ====== ======
</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>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
------------------------------ ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Financial advisory......... $ 931 $1,184 $1,774 $1,360 $1,648
Underwriting............... 1,182 1,403 1,594 1,187 1,406
------ ------ ------ ------ ------
Total Investment Banking... $2,113 $2,587 $3,368 $2,547 $3,054
====== ====== ====== ====== ======
</TABLE>
32
<PAGE> 34
AUGUST 1999 VERSUS AUGUST 1998. The Investment Banking business achieved
net revenues of $3.05 billion for the nine months ended August 1999, an increase
of 20% compared to the same period in 1998. Net revenue growth was strong in our
worldwide advisory and financing businesses as global corporate consolidation
fueled healthy deal flow in financial advisory, and new issue markets remained
active. Net revenue growth in our Investment Banking business was particularly
strong in Europe and the United States.
Financial advisory revenues increased 21% compared to the same period in
1998 due to higher levels of merger and acquisition activity, particularly in
the technology, energy and power and retail industries, as the global
consolidation trend continued. Underwriting revenues increased 18% for the year,
primarily due to an active new issues calendar in the United States and Europe,
particularly in the technology and energy and power industries.
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 merchant banking investments.
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
33
<PAGE> 35
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.
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>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
FICC..................................... $1,749 $2,055 $1,438 $2,109 $2,448
Equities................................. 730 573 795 659 1,531
Principal investments.................... 214 298 146 274 543
------ ------ ------ ------ ------
Total Trading and Principal
Investments............................ $2,693 $2,926 $2,379 $3,042 $4,522
====== ====== ====== ====== ======
</TABLE>
------------------------
AUGUST 1999 VERSUS AUGUST 1998. The Trading and Principal Investments
business achieved net revenues of $4.52 billion for the nine months ended August
1999, an increase of 49% compared to the same period in 1998. Net revenues in
FICC increased 16% as growth in our credit-sensitive businesses and commodities
was partially offset by lower net revenues in currencies and fixed income
derivatives. Net revenues in equities increased substantially primarily due to
strength in equity arbitrage and increased customer flow in our global shares
businesses and equity derivatives. Net revenues from principal investments
increased 98% due to higher net revenues related to mark-to-market gains on
certain investments, particularly in the technology and communications sectors,
partially offset by lower gains on the disposition of investments compared to
the prior year.
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
34
<PAGE> 36
event-oriented securities resulting from a reduction in announced mergers and
acquisitions and other corporate activity in the second half of 1998.
Net revenues from principal investments declined 51% compared to 1997 as
investments in certain publicly held companies decreased in value during the
second half of 1998. This decrease was partially offset by an increase in gains
on the disposition of investments compared to the prior year.
1997 VERSUS 1996. The Trading and Principal Investments business achieved
net revenues of $2.93 billion in 1997, an increase of 9% compared to 1996.
Strong performances in FICC and principal investments more than offset a net
revenue reduction in equities.
Net revenues in FICC increased 17% compared to 1996 due principally to
higher net revenues from market-making and trading in currencies, fixed income
derivatives and commodities. Fixed income arbitrage activities also contributed
to net revenue growth in FICC. Net revenues from market-making in and trading of
emerging market debt securities and corporate bonds declined in 1997 compared to
1996.
Net revenues in equities decreased 22% in 1997 compared to 1996 due
principally to reductions in net revenues from derivatives and convertibles
resulting from volatility in the global equity markets in October and November
1997 and declining asset values in Japan in late November 1997. This reduction
was partially offset by increased net revenues from higher customer trading
volume in certain European 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 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>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
-------------------------- -------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Asset management................ $ 242 $ 458 $ 675 $ 483 $ 637
Securities services............. 354 487 730 528 576
Commissions..................... 727 989 1,368 1,005 1,083
------ ------ ------ ------ ------
Total Asset Management and
Securities Services........... $1,323 $1,934 $2,773 $2,016 $2,296
====== ====== ====== ====== ======
</TABLE>
35
<PAGE> 37
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>
AS OF NOVEMBER AS OF AUGUST
-------------------------------- --------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Assets under
management............ $ 94,599 $135,929 $194,821 $173,991 $220,522
Other client assets..... 76,892 102,033 142,018 119,005 192,034
-------- -------- -------- -------- --------
Total assets under
supervision........... $171,491 $237,962 $336,839 $292,996 $412,556
======== ======== ======== ======== ========
</TABLE>
------------------------
AUGUST 1999 VERSUS AUGUST 1998. The Asset Management and Securities
Services business achieved net revenues of $2.30 billion for the nine months
ended August 1999, an increase of 14% compared to the same period in 1998. Asset
management revenues increased 32%, primarily reflecting a 33% increase in
average assets under management. Net revenues from securities services increased
9% primarily due to growth in our securities lending and margin lending
businesses. Commissions increased 8% as fees earned on higher transaction
volumes worldwide in listed equity securities were partially offset by a
reduction in our increased share of income and gains from our merchant banking
funds.
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 Corporation 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
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<PAGE> 38
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 operated as a partnership until May 7, 1999, 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 for the three years ended November 1998 and
for the nine months ended August 1998 does not reflect any payments for services
rendered by our managing directors who were profit participating limited
partners. Accordingly, our compensation and benefits expense, the principal
component of our operating expenses, has increased significantly as a result of
our conversion to corporate form.
The following table sets forth our operating expenses and number of
employees:
OPERATING EXPENSES AND EMPLOYEES
($ in millions)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
---------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Compensation and benefits..... $2,421 $ 3,097 $ 3,838 $ 3,566 $ 4,932
Non-recurring employee initial
public offering awards........ -- -- -- -- 2,257
Amortization of employee
initial public offering
awards...................... -- -- -- -- 154
Brokerage, clearing and
exchange fees............... 278 357 424 301 328
Market development............ 137 206 287 201 247
Communications and
technology.................. 173 208 265 189 224
Depreciation and
amortization................ 172 178 242 158 229
Occupancy..................... 154 168 207 147 221
Professional services and
other....................... 188 219 336 229 297
Charitable contribution....... -- -- -- -- 200
------ ------- ------- ------- -------
Total operating expenses...... $3,523 $ 4,433 $ 5,599 $ 4,791 $ 9,089
====== ======= ======= ======= =======
Employees at period end(1).... 8,977 10,622 13,033 12,675 14,454
</TABLE>
- ---------------
(1) Excludes employees of Goldman Sachs' two property management
subsidiaries. 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 August 1999, we had approximately 3,900 temporary staff and
consultants. For more detailed information regarding our employees, see
"Business -- Employees".
37
<PAGE> 39
AUGUST 1999 VERSUS AUGUST 1998. Operating expenses were $9.09 billion for
the nine months ended August 1999, an increase of 90% over the same period in
1998 primarily due to the non-recurring charges associated with Goldman Sachs'
conversion to corporate form and related transactions, compensation for the
managing directors who were profit participating limited partners, and higher
levels of compensation commensurate with higher net revenues. The non-recurring
charges included $2.26 billion for employee initial public offering awards and
$200 million for a contribution to the Goldman Sachs Fund, a charitable
foundation. Compensation and benefits, excluding employee initial public
offering awards, was 50% of net revenues for the nine months ended August 1999.
Brokerage, clearing and exchange fees increased 9% for the nine months
ended August 1999 primarily due to higher transaction volumes in commodities and
fixed income and equity derivatives. Market development expenses increased 23%
primarily due to higher levels of advertising and business activity.
Communications and technology expenses increased 19%, reflecting higher
telecommunications and market data costs associated with growth in employment
levels and additional spending on technology initiatives. Depreciation and
amortization increased 45% due to capital expenditures on leasehold improvements
and technology-related and telecommunications equipment in support of Goldman
Sachs' increased worldwide activities. Occupancy expenses increased 50%,
reflecting additional office space needed to accommodate growth in employment
levels. Professional services and other expenses increased 30% due to higher
levels of business activity.
1998 VERSUS 1997. Operating expenses were $5.60 billion in 1998, an
increase of 26% over 1997, primarily due to increased compensation and benefits
expense.
Compensation and benefits increased as a percentage of net revenues to 45%
from 42% in 1997, principally as a result of increases in employment levels and
in expenses associated with temporary staff and consultants. Employment levels
increased 23% during the year, with particularly strong growth in asset
management. Expenses associated with our temporary staff and consultants were
$330 million in 1998, an increase of 85% compared to 1997, reflecting greater
business activity, Goldman Sachs' global expansion and consulting costs
associated with various technology initiatives, including preparations for the
Year 2000 and the establishment of the European Economic and Monetary Union.
Brokerage, clearing and exchange fees increased 19%, primarily due to
higher transaction volumes in European and U.S. equities and futures contracts.
Market development expenses increased 39% and professional services and other
expenses increased 53%, due to higher levels of business activity and Goldman
Sachs' global expansion. Communications and technology expenses increased 27%,
reflecting higher telecommunications and market data costs associated with
higher employment levels and additional spending on technology initiatives.
Depreciation and amortization increased 36%, principally due to capital
expenditures on telecommunications and technology-related equipment and
leasehold improvements. Occupancy expenses increased 23%, reflecting additional
office space needed to accommodate higher employment levels.
1997 VERSUS 1996. Operating expenses were $4.43 billion in 1997, an
increase of 26% over 1996, primarily due to increased compensation and benefits
expense.
Compensation and benefits increased as a percentage of net revenues to 42%
from 40% in 1996. This increase primarily reflected higher compensation due to
higher profit levels and an 18% increase in employment levels across Goldman
Sachs due to higher levels of market activity and our global expansion into new
businesses and markets. Expenses associated with our temporary staff and
consultants also contributed to the increase in compensation and benefits as a
percentage of net revenues. These expenses were $178 million in 1997, an
increase of 55% compared to 1996, reflecting greater business activity, Goldman
Sachs' global expansion
38
<PAGE> 40
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 provision for taxes for the nine months ended August 1999 reflected a
net benefit of $1.83 billion primarily due to non-recurring items recognized
during the second quarter. These non-recurring items included a net benefit of
$825 million related to our conversion to corporate form, a benefit of $880
million related to the granting of employee initial public offering awards and a
benefit of $80 million related to the contribution to the Goldman Sachs Fund.
Goldman Sachs' effective tax rate for the period from May 7, 1999 to the end of
the third quarter, excluding the effect of these non-recurring items, was 41%.
Prior to our conversion to corporate form, we generally were not subject to
U.S. federal and state income taxes. Some of our earnings, however, were subject
to the 4% New York City unincorporated business tax, and certain of our non-U.S.
subsidiaries were subject to income taxes in their local jurisdictions. The
amount of our provision for income and unincorporated business taxes while we
were a partnership varied significantly from period to period depending on the
mix of earnings among our subsidiaries.
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.
NINE MONTHS ENDED AUGUST 1999
Cash and cash equivalents decreased to $1.90 billion in 1999. Cash of $5.31
billion was used for operating activities, primarily to fund higher trading and
securities services net assets, due to increased levels of business activity.
Cash of $249 million was used for investing activities, primarily for the
purchase of technology-related equipment and leasehold improvements. Cash of
$4.62 billion was provided by financing activities, reflecting an increase in
the net issuance of long-term borrowings and proceeds from the issuance of
common stock, partially offset by the net distributions to partners and a
decrease in net repurchase agreements.
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.
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<PAGE> 41
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 numerous
creditors, including banks, insurance companies, mutual funds, bank trust
departments and other asset managers. We monitor our creditors to maintain broad
and diversified 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 publicly as well as 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 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.
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<PAGE> 42
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 stockholders'
equity 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 equity 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, 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. We generally fund our equity investments in subsidiaries with equity
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 $236.27 billion as of August 1999 and $217.38 billion
as of November 1998.
Our balance sheet size as of August 1999 and November 1998 increased by
$3.68 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 August 1999 and November 1998, we held approximately $1.20 billion
and $1.04 billion, respectively, in high-yield debt securities and $1.79 billion
and $1.49 billion, re-
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<PAGE> 43
spectively, 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 August 1999 and November 1998, we held approximately $1.04 billion
and $1.17 billion, respectively, of emerging market securities, and $54 million
and $109 million, respectively, in emerging market loans, all of which are
valued on a mark-to-market basis. Of the $1.09 billion and $1.28 billion in
emerging market securities and loans, as of August 1999 and November 1998,
respectively, approximately $657 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. In September 1998, we invested
$300 million in Long-Term Capital Portfolio, L.P., a substantial portion of
which was returned during fiscal 1999.
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.
The following table sets forth our credit ratings as of August 1999 and
November 1998:
<TABLE>
<CAPTION>
SHORT-TERM DEBT LONG-TERM DEBT
--------------- --------------
<S> <C> <C>
Moody's Investors Service, Inc. ............ P-1 A1
Standard & Poor's Ratings Services.......... A-1+ A+
Fitch IBCA, Inc. ........................... F1+ AA-
CBRS Inc. .................................. A-1(High) A+
</TABLE>
------------------------
LONG-TERM DEBT
As of August 1999 and November 1998, our consolidated long-term borrowings
were $20.34 billion and $19.91 billion, respectively. 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 August 1999 and November 1998 was approximately five years and
four years, respectively. 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
information regarding our long-term borrowings as of November 1998.
REGULATED SUBSIDIARIES
Many of our principal subsidiaries are subject to extensive regulation in
the United 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
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<PAGE> 44
(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 9 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 Adversely Affect Our Businesses in Many Ways" for a discussion of the
effect that market fluctuations can have on our businesses.
Goldman Sachs has established risk control procedures at several levels
throughout the organization. Trading desk managers have the first line of
responsibility for managing risk within prescribed limits. These managers have
in-depth knowledge of the primary sources of risk in their individual markets
and the instruments available to hedge our exposures. In addition, a number of
committees described in the following table are responsible for establishing
trading limits, monitoring adherence to these limits and for general oversight
of our risk management process.
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<PAGE> 45
<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> 46
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> 47
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.
46
<PAGE> 48
The daily VaR for substantially all of our trading positions as of August
1999 was not materially different from our daily VaR as of November 1998.
NON-TRADING RISK
The market risk associated with our non-trading financial instruments,
including our merchant banking investments, is measured using a sensitivity
analysis that estimates the potential reduction in our net revenues associated
with hypothetical market movements. As of August 1999 and November 1998, non-
trading market risk was not material.
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
<TABLE>
<CAPTION>
DAILY TRADING NET REVENUES
IN MILLIONS OF DOLLARS NUMBER OF DAYS
---------------
<S> <C>
less than (60) 9
(60)-(40) 5
(40)-(20) 22
(20)-0 31
0-20 87
20-40 67
40-60 24
greater than 60 6
</TABLE>
DAILY TRADING NET REVENUES (IN MILLIONS OF DOLLARS)
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.
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<PAGE> 49
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 internally 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.
48
<PAGE> 50
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
compliance with applicable regulations with respect to the clearance and
settlement of transactions and the margining of positions. The Network
Management Department oversees our relationships with our clearance and
settlement agents, regularly reviews agents' performance and meets with these
agents to review operational issues.
YEAR 2000 READINESS DISCLOSURE. In preparation for the Year 2000
transition, Goldman Sachs determined that it would 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 would properly
recognize and utilize dates beyond December 31, 1999. We currently believe that
with the modifications to existing software, conversions to new software and
replacement of some hardware, the Year 2000 issue will have been satisfactorily
resolved in our own systems worldwide. However, if such modifications have not
been implemented in an effective manner, the Year 2000 issue could 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 could 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
established a Year 2000 Oversight Committee to promote awareness and ensure the
active participation of senior management. This Committee, together with
numerous sub-
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<PAGE> 51
committees chaired by senior managers throughout Goldman Sachs and our
Global Year 2000 Project Office, has been responsible for planning, managing
and monitoring our Year 2000 efforts on a global basis. Our Management
Controls Department is responsible for assessing the scope and sufficiency
of our Year 2000 program and verifying that the principal aspects of our
Year 2000 program were implemented according to plan.
Our Year 2000 plans have been based on a five-phase approach, which
included 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. We have completed the remediation, testing and implementation
phases for all of our systems and virtually all of our technology
infrastructure. We completed our internal integration testing, which was
intended to validate that our systems can successfully perform critical business
functions beginning in January 2000, with no material problems.
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. We have
completed testing and implementation of virtually all vendor-supplied
technology products. With respect to telecommunications carriers, we are relying
on information provided by these vendors as to whether they are Year 2000
compliant because these vendors have indicated that they will not test with
individual companies.
We are also addressing Year 2000 issues that may exist outside our own
technology activities, including our facilities, external service providers and
other third parties with which we interface. We have inventoried and ranked our
customers, business and trading partners, utilities, exchanges, depositories,
clearing and custodial banks and other third parties with which we have
important financial and operational relationships. We have continued to assess
the Year 2000 preparedness of these customers, business and trading partners and
other third parties.
We have participated in 176 "external", i.e., industry-wide or
point-to-point, tests with exchanges, clearing houses and other industry
utilities, including the "Streetwide" test sponsored by the Securities Industry
Association for its U.S. members and completed in April 1999. We successfully
completed all of these tests with no material problems.
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 have
developed contingency plans for our businesses.
We are currently finalizing our event management program, which includes
the processes that will allow senior management to closely monitor and respond
to events as they occur around the date change. In addition, we have developed
contingency plans for funding and balance sheet management and other related
activities, which include establishing additional sources of liquidity that
could be drawn upon in the event of systems disruption. We plan to reduce
trading activity in the period leading up to January 2000 to limit 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 achieve Year 2000
compliance and in connection with contingency planning for the date change and
related activities. We currently estimate that these costs will total approxi-
50
<PAGE> 52
mately $185 million, of which $160 million had been spent through the end of
October 1999. These estimates include the cost of technology personnel but do
not include the cost of all non-technology personnel involved in our Year 2000
effort. We expect to incur the remaining cost of our Year 2000 program during
the remainder of 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 effectiveness of the Year 2000
modifications are based on current estimates and expectations, which reflect
numerous assumptions about future events, including the continued availability
of resources, the timing and effectiveness of third-party remediation plans and
other factors. We can give no assurance that these estimates will be achieved,
and actual results could differ materially from our plans. Specific factors that
might cause material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct relevant computer source codes and embedded chip technology, the
results of internal 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 $3.68 billion and
$11.64 billion as of August 1999 and November 1998, respectively.
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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<PAGE> 53
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". 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.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133 -- an amendment of FASB Statement No. 133", which deferred for one year the
effective date of the accounting and reporting requirements of Statement of
Financial Accounting Standards No. 133. We intend to adopt the provisions of
Statement of Financial Accounting Standards No. 133 deferred by Statement of
Financial Accounting Standards No. 137 in fiscal 2001 and are currently
assessing its effect.
52
<PAGE> 54
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.
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. As of August 1999, we operated offices in 23
countries and 36% of our 14,500 employees were based outside the United States.
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.
On May 7, 1999, The Goldman Sachs Group, Inc. succeeded to the business of
The Goldman Sachs Group, L.P.
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 Thomson Financial Securities Data, formerly known as
Securities Data Company. Thomson Financial Securities Data obtains and gathers
its information from sources it considers reliable, but Thomson Financial
Securities Data does not guarantee the accuracy or completeness of the
information. In the case of mergers and acquisitions, data are based upon the
dollar value of announced transactions for the period indicated, taken as a
whole, with full credit to each of the advisors to each party in a transaction.
In the case of underwritings, data are based upon the dollar value of total
proceeds raised (exclusive of any option to purchase additional shares) with
equal credit to each bookrunner for the period indicated, taken as a whole. As a
result of this method of 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 notwithstanding 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 $412.6 billion as of August 1999.
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<PAGE> 55
Our business lines are comprised of various product and service offerings
that are set forth in the following chart:
PRIMARY PRODUCTS AND ACTIVITIES BY BUSINESS LINE
<TABLE>
<CAPTION>
TRADING AND PRINCIPAL ASSET MANAGEMENT AND
INVESTMENT BANKING INVESTMENTS SECURITIES SERVICES
------------------ --------------------- --------------------
<S> <C> <C>
- -- Equity and debt -- Bank loans -- Commissions
underwriting -- Commodities -- Institutional and high
- -- Financial restructuring -- Currencies net worth asset 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
-- Proprietary arbitrage income and gains
-- Mutual funds
-- Prime brokerage
-- Securities lending
</TABLE>
------------------------
INVESTMENT BANKING
Investment Banking represented 39% of 1998 net revenues and 31% of net
revenues for the nine months ended August 1999. 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
46% of net revenues for the nine months ended August 1999. 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 23% of net revenues for the nine months ended August 1999. 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 $412.6 billion as of August 1999. As of August 1999, we had
$220.5 billion of assets under management. We manage merchant banking funds that
had $17.3 billion of capital commitments as of August 1999.
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<PAGE> 56
SUMMARY FINANCIAL DATA
(in millions)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues:
Investment Banking......... $2,113 $2,587 $3,368 $2,547 $3,054
Trading and Principal
Investments........... 2,693 2,926 2,379 3,042 4,522
Asset Management and
Securities Services... 1,323 1,934 2,773 2,016 2,296
------ ------ ------ ------ ------
Total net revenues......... $6,129 $7,447 $8,520 $7,605 $9,872
====== ====== ====== ====== ======
</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>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial advisory......... $ 931 $1,184 $1,774 $1,360 $1,648
Underwriting............... 1,182 1,403 1,594 1,187 1,406
------ ------ ------ ------ ------
Total Investment Banking... $2,113 $2,587 $3,368 $2,547 $3,054
====== ====== ====== ====== ======
</TABLE>
------------------------
In Investment Banking, we provide our clients with quality advice and
execution as part of our effort to develop and maintain long-term relationships
as their lead investment bank.
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.
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<PAGE> 57
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 $957 billion.
Our mergers and acquisitions capabilities are evidenced by our significant
share of assignments in large, complex transactions where we provide multiple
services, including "one-stop" acquisition financing, currency hedging and
cross-border structuring expertise.
The following table illustrates our leadership in the mergers and
acquisitions advisory market for the indicated period taken as a whole:
GOLDMAN SACHS' MERGERS AND ACQUISITIONS MARKET DATA
For the period January 1, 1994 through December 31, 1998
($ 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 September 30, 1999, Goldman Sachs has served
as lead manager in transactions that have raised more than $1 trillion of
capital for clients worldwide. We underwrite a wide range of securities and
other instruments, including common and preferred stock, convertible securities,
investment grade debt, high-yield debt, sovereign and emerging markets debt,
municipal debt, bank loans, asset-backed securities and real estate-related
securities, such as mortgage-backed securities and the securities of real estate
investment trusts.
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<PAGE> 58
EQUITY UNDERWRITING. Equity underwriting has been a long-term core
strength of Goldman Sachs. The following table illustrates our leadership
position in equity underwriting for the indicated period taken as a whole:
GOLDMAN SACHS' EQUITY UNDERWRITING MARKET DATA
For the period January 1, 1994 through December 31, 1998
($ 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 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 institutional sales professionals and 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.
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<PAGE> 59
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 merchant banking investments.
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<PAGE> 60
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>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FICC....................... $1,749 $2,055 $1,438 $2,109 $2,448
Equities................... 730 573 795 659 1,531
Principal investments...... 214 298 146 274 543
------ ------ ------ ------ ------
Total Trading and Principal
Investments.............. $2,693 $2,926 $2,379 $3,042 $4,522
====== ====== ====== ====== ======
</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 and proprietary analytical models are critical to our ability to
provide advice to our clients.
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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.
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. 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 active in the execution of large block
trades (trades of 50,000 or more shares) in the United States and abroad. We
have been able to capitalize on our expertise in block trading, our global
distribution network and our willingness to commit capital to effect
increasingly large and complex customer transactions. We expect corporate
consolidation and restructuring and increased demand for certainty and speed of
execution by sellers and issuers of securities to increase both the frequency
and size of sales of large blocks of equity securities. We believe that we are
well positioned to benefit from this trend. Block transactions, however, expose
us to increased risks, including those arising from holding large and
concentrated positions and decreasing spreads. See "Risk Factors -- Market
Fluctuations Could Adversely Affect Our Businesses in Many Ways -- Holding Large
and Concentrated Positions May Expose Us to Large Losses" for a discussion of
the risks associated with holding a large position in a single issuer and "Risk
Factors -- The Financial Services Industry Is Intensely Competitive and Rapidly
Consolidating" for a discussion of the competitive risks that we face.
We are active in the listed options and futures markets, and 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 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.
We remain committed to being at the forefront of technological innovation
in the global capital markets. To pursue our strategy of expanding our
electronic market-making capabilities, on September 24, 1999, Goldman Sachs
completed its acquisition of The Hull Group, a leading global electronic market-
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maker in exchange-traded equity derivatives and an active market-maker in equity
securities worldwide.
In addition, 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.
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. 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 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.
PRINCIPAL INVESTMENTS
In connection with our merchant banking activities, we invest by making
principal investments directly and in funds that we raise and manage. As of
August 1999, we had committed $3.1 billion, of which $2.2 billion had been
funded, of the $17.3 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 August 1999, the aggregate carrying value of our
principal investments held directly or through our merchant banking funds was
approximately $2.4 billion, which was comprised of corporate principal
investments with an aggregate carrying value of approximately $1.5 billion and
real estate investments with an aggregate carrying value of approximately $887
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 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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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>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER AUGUST
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Asset management........... $ 242 $ 458 $ 675 $ 483 $ 637
Securities services........ 354 487 730 528 576
Commissions................ 727 989 1,368 1,005 1,083
------ ------ ------ ------ ------
Total Asset Management and
Securities Services...... $1,323 $1,934 $2,773 $2,016 $2,296
====== ====== ====== ====== ======
</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 and nine months, we have grown our assets under
supervision, as set forth in the graph below:
ASSETS UNDER SUPERVISION
(in billions)
[PROJECT ECHO BAR GRAPH]
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT OTHER CLIENT ASSETS TOTAL
----------------------- ------------------- -----
<S> <C> <C> <C>
1994 44 49 $ 93
1995 52 58 $110
1996 94 77 $171
1997 136 102 $238
1998 195 142 $337
August 1999 221 192 $413
</TABLE>
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As of August 1999, equities and alternative investments represented 55% 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 AUGUST
------------------------------------ ------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ASSET CLASS
Equity....................... $ 6 $ 9 $34 $ 52 $ 69 $ 80
Fixed income and currency.... 17 19 26 36 50 53
Money markets................ 18 20 27 31 46 46
Alternative investment(1).... 3 4 8 17 30 42
--- --- --- ---- ---- ----
Total........................ $44 $52 $95 $136 $195 $221
=== === === ==== ==== ====
</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 1,000 employees. In addition,
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 August 1999, our assets under management, excluding our
merchant banking funds, sourced from outside the United States grew by over $34
billion. As of August 1999, we managed approximately $43 billion sourced from
Europe.
CLIENTS. Our primary clients are institutions, high net worth individuals
and retail investors. We access clients through both direct and third-party
channels. Our institutional clients include corporations, insurance companies,
pension funds, foundations and endowments. In the individual high net worth area
(defined as the market for individual investors with a net worth in excess of $5
million), we have established approximately 10,000 high net worth accounts
worldwide, including accounts with 40% of the 1999 "Forbes 400 List of the
Richest Americans". 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.
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The table below sets forth the amount of assets under supervision by
distribution channel and client category as of August 1999:
ASSETS UNDER SUPERVISION BY DISTRIBUTION CHANNEL
(in billions)
<TABLE>
<CAPTION>
ASSETS UNDER
SUPERVISION(1) PRIMARY INVESTMENT VEHICLES
-------------- ---------------------------
<S> <C> <C>
- - Directly distributed
-- Institutional.............. $131 Separate managed accounts
Commingled vehicles
-- High net worth
individuals................ 216 Brokerage accounts
Limited partnerships
Separate managed accounts
- - Third-party distributed
-- Institutional and retail... 49 Mutual funds
----
Total........................... $396
====
</TABLE>
- ---------------
(1) Excludes $17 billion in our merchant banking funds.
------------------------
MERCHANT BANKING
Goldman Sachs has an established successful record in the corporate and
real estate merchant banking business, with $17.3 billion of committed capital
as of August 1999, of which $12.0 billion had been funded. We have committed
$3.1 billion and funded $2.2 billion of these amounts; our clients, including
pension plans, endowments, charitable institutions and high net worth
individuals, have provided the remainder.
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.
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 August 1999, our corporate merchant banking
funds had total committed capital of $9.5 billion. Other funds, with total
committed capital of $7.8 billion as of August 1999, invest in real estate
operating companies and debt and equity interests in real estate assets.
Located 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 funds' 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.
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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.
Lenders of securities include pension funds, mutual funds, insurance
companies, investment advisors, endowments, bank trust departments and
individuals. We have entered into exclusive relationships with certain lenders
that have given us access to large pools of securities, some of which are often
hard to locate in the general lender market, providing us with a competitive
advantage.
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 "-- Internet Strategy" below for a further discussion of these investments,
and 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.
Global Investment Research employs a team approach that provides equity
research coverage of approximately 2,700 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
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interest rates based on the globally coordinated views of its regional
economists;
- - the Portfolio Strategy group, which forecasts equity market returns and
provides recommendations on both asset allocation and industry representation;
- - the Company/Industry group, which provides fundamental analysis, forecasts and
investment recommendations for companies and industries worldwide. Equity
research analysts are organized regionally by sector and globally into more
than 20 industry teams, which allows for extensive collaboration and knowledge
sharing on important investment themes; and
- - the Commodities Research group, which provides research on the global
commodity markets.
INTERNET STRATEGY
We believe that Internet technology and electronic commerce will, over
time, change the ways that securities are traded and distributed, creating both
opportunities and challenges for our businesses. In response, we 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.
We have recently established a working group to focus primarily on
utilizing the Internet to enhance and support our wealth management business.
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 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. 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
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software not only analyzes market risk on firmwide, divisional and trading desk
levels, but also breaks down our risk into its underlying exposures, permitting
management to evaluate exposures on the basis of specific interest rate,
currency rate, equity price or commodity price changes. To assist further in the
management of our credit exposures, data from many sources are aggregated daily
into credit management systems that give senior management and professionals in
the Credit and Controllers Departments the ability to receive timely information
with respect to credit exposures worldwide, including netting information, and
the ability to analyze complex risk situations effectively. Our software
accesses these data, allows for quick analysis at the level of individual trades
and interacts with other Goldman Sachs systems.
Technology has been a significant factor in improving the overall
efficiency of many areas of Goldman Sachs. By automating many trading
procedures, we have substantially increased our efficiency and accuracy.
We currently have projects under way that are designed 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.
As of August 1999, we had approximately 14,500 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 1,500 employees as of August 1999. Goldman Sachs is
reimbursed for substantially all of the costs of these employees by these funds.
COMPETITION
The financial services industry -- and all of our businesses -- are
intensely competitive, and we expect them to remain so. Our competitors are
other brokers and dealers, investment banking firms, insurance companies,
investment advisors, mutual funds, hedge funds, commercial banks and merchant
banks. We compete with some of our competitors globally and with some others on
a regional, product or niche basis. We compete on the basis of a number of
factors, including transaction execution, our products and services, innovation,
reputation and price.
Competition is also intense for the attraction and retention of qualified
employees. Our ability to continue to compete effectively in our businesses will
depend upon our ability to attract new employees and retain and motivate our
existing employees.
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
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share, which could result in pricing pressure in our businesses.
This trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have had to commit capital to support our international
operations and to execute large global transactions.
Federal financial modernization legislation was recently enacted. This
legislation significantly expands the activities permissible for firms
affiliated with a U.S. bank. The legislation, among other things, enables U.S.
banks and insurance firms to affiliate, facilitates affiliations between U.S.
banks and securities firms, and expands the permissible principal investing
activities of U.S. banking organizations. See "Risk Factors -- The Financial
Services Industry Is Intensely Competitive and Rapidly Consolidating -- We Face
Increased Competition Due to a Trend Toward Consolidation" for a discussion of
the potential impact of this legislation.
We believe that some of our most significant challenges and opportunities
will arise outside the United States. 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. 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 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
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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 9 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 registered 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 previously conducted in other affiliates.
Goldman Sachs is an active participant in the international fixed income
and equity markets. Many of our affiliates that participate in those markets are
subject to comprehensive regulations that include some form of capital adequacy
rule and other customer protection rules. For example, Goldman Sachs provides
investment services in and from the United Kingdom under a regulatory regime
that is undergoing comprehensive restructuring aimed at implementing the
Financial Services Authority as the United Kingdom's unified regulator. The
relevant Goldman Sachs entities in London are at present regulated by the
Securities and Futures Authority Limited in respect of their investment banking,
individual asset management, brokerage and principal trading activities, and the
Investment Management Regulatory Organization in respect of their institutional
asset management and fund management activities. Some of these Goldman Sachs
entities are also regulated by the London Stock Exchange and other 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 Man-
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agement 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 or pay dividends on our common stock.
LEGAL MATTERS
We are involved in a number of judicial, regulatory and arbitration
proceedings (including those described below) concerning matters arising in
connection with the conduct of our businesses. We believe, based on currently
available information, that the results of such proceedings, in the aggregate,
will not have a material adverse effect on our financial condition, but might be
material to our operating results for any particular period, depending, in part,
upon the operating results for such period.
MOBILEMEDIA SECURITIES LITIGATION
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 approximately $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.
The parties have entered into a stipulation of settlement, which is subject
to certain conditions, including court approval.
ANTITRUST MATTERS
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
offer-
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ings. 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. On May 7, 1999, the defendants moved to dismiss the amended
complaint.
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. On March 15,
1999, the plaintiffs filed a consolidated amended complaint. The defendants
moved to dismiss the consolidated amended complaint on April 29, 1999.
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.
Hull Trading Co. L.L.C., an affiliate of The Goldman Sachs Group, Inc., is
one of numerous market makers in listed equity options which have been named as
defendants, together with five national securities exchanges, in a purported
class action brought in the U.S. District Court for the Southern District of New
York on behalf of persons who purchased or sold listed equity options. The
consolidated class action complaint, filed on October 4, 1999 (which
consolidated certain previously pending actions and added Hull Trading Co.
L.L.C. and other market makers as defendants), generally alleges that the
defendants engaged in a conspiracy to preclude the multiple listing of certain
equity options on the exchanges and seeks treble damages under the antitrust
laws as well as injunctive relief.
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 Court of Chancery 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 district court granted summary
judgment dismissing all the claims in the federal action. The plaintiffs
appealed those rulings.
On July 19, 1999, the U.S. Court of Appeals for the Third Circuit rendered
its decision affirming in part and vacating in part the lower court's entry of
summary judgment dismissing the action. With respect to the claim as to which
summary judgment was vacated, the appellate court held that the dis-
trict court had committed a procedural error in converting the defendants'
motion to dismiss into a motion for summary judgment and remanded for the
district court to reconsider that claim under appropriate standards applicable
to motions to dismiss. Plaintiffs have since sought leave to amend the complaint
as to the remanded claim. The defendants have moved to dismiss the remanded
claim and are opposing the plaintiffs' motion to amend it further.
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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 Reichhold Chemicals, Inc. and Reichhold Norway
ASA, on the one hand, and Jotun A/S in Norway, on the other. That stay order was
upheld by an appellate court on June 28, 1999.
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 that the
defendants violated the federal antitrust laws in connection with the prices at
which escrow securities were sold to municipal issuers. The complaint seeks to
recover the difference between the actual and alleged "fair" prices of the
escrow securities and to treble the alleged damages with respect to the
antitrust claim.
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 several purported class
action lawsuits beginning on April 27, 1999 in the U.S. District Court for the
Southern District of New York. The lawsuits, which have been consolidated, were
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 consolidated amended 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
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managing director served as its chairman at the time of the offering.
IRIDIUM SECURITIES LITIGATION
Goldman, Sachs & Co. has been named as a defendant in two purported class
action lawsuits commenced, beginning on May 26, 1999, in the U.S. District Court
for the District of Columbia. These lawsuits were brought on behalf of
purchasers of Class A common stock of Iridium World Communications, Ltd. in a
January 1999 underwritten secondary offering of 7,500,000 shares of Class A
common stock at a price of $33.40 per share, as well as in the secondary market.
The defendants in the actions include Iridium, certain of its officers and
directors, Motorola, Inc. (an investor in Iridium) and the lead underwriters in
the offering, including Goldman, Sachs & Co.
The complaints in both actions allege violations of the disclosure
requirements of the federal securities laws and seek compensatory and/or
rescissory damages. Goldman, Sachs & Co. underwrote 996,500 shares of common
stock and Goldman Sachs International underwrote 320,625 shares of common stock,
for a total offering price of approximately $44 million.
On August 13, 1999, Iridium World Communications, Ltd. filed for protection
under the U.S. bankruptcy laws.
HUD LITIGATION
In September 1999, Goldman, Sachs & Co. was notified by the civil division
of the United States Attorney's Office for the District of Columbia that it is a
named defendant, along with other unidentified entities, in a civil action
brought by a private party in the U.S. District Court for the District of
Columbia under the qui tam provisions of the federal False Claims Act in
connection with certain auctions of competitive loans on behalf of the U.S.
Department of Housing and Urban Development. Goldman, Sachs & Co. has not been
provided with the complaint, which has been filed under seal, but has been
informed that the complaint alleges, among other things, that (i) Goldman, Sachs
& Co. and its bidding partners improperly directed approximately $4.7 billion of
government owned notes for prices below that which would have been obtained in
full and fair competition, (ii) the U.S. Department of Housing and Urban
Development's financial advisor in connection with such auctions provided
Goldman, Sachs & Co. and its bidding partners with information not available to
competing bidders relating to the details of competing bids, the value of the
assets being sold, and the structure of the sales, and (iii) in one instance,
Goldman, Sachs & Co. and its bidding partners were awarded assets despite not
being the highest bidder. Pursuant to the False Claims Act, the complaint
remains under seal pending the government's investigation and consideration as
to whether to intervene in the action. The complaint does not state a monetary
amount of damages. Under the False Claims Act, any damage award could be
trebled.
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
605,000 square feet at 180 Maiden Lane in New York, New York, that expires in
March 2014. In total, we lease over 3.3 million square feet in the New York
area, having more than doubled our space since November 1996. We have additional
offices in the United States and elsewhere in the Americas. Together, these
offices comprise approximately 675,000 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 totalled approximately 780,000 square feet as of the end of November 1999.
Our largest presence in Europe is in London, where we leased ap-
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proximately 605,000 square feet through various leases as of the end of November
1999, with the principal one, for Peterborough Court, expiring in 2016. An
additional 500,000 square feet of leased space in London is expected to be
occupied during 2000 and 2001.
In Asia, we have offices that total approximately 620,000 square feet. Our
largest offices in these regions are in Tokyo and Hong Kong. In Tokyo, we
currently lease approximately 230,000 square feet under leases that expire
between March 2000 and June 2005. In Hong Kong, we currently lease approximately
222,000 square feet under a lease that expires in 2011. There are 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 our directors and executive
officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry M. Paulson, Jr. 53 Director, Chairman and Chief Executive Officer
Robert J. Hurst 54 Director and Vice Chairman
John A. Thain 44 Director, President and Co-Chief Operating Officer
John L. Thornton 45 Director, President and Co-Chief Operating Officer
Sir John Browne 51 Director
John H. Bryan 63 Director
James A. Johnson 55 Director
John L. Weinberg 74 Director
Robert J. Katz 52 General Counsel and Executive Vice President
Gregory K. Palm 51 General Counsel and Executive Vice President
Leslie M. Tortora 43 Chief Information Officer and Executive Vice
President
David A. Viniar 44 Chief Financial Officer and Executive Vice President
Barry L. Zubrow 46 Chief Administrative Officer and Executive Vice
President
</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 a director of The Goldman Sachs Group, Inc. since
August 1998, and has been its Chairman and Chief Executive Officer since May
1999. He was Co-Chairman and Chief Executive Officer or Co-Chief Executive
Officer of The Goldman Sachs Group, L.P. from June 1998 to May 1999 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 a director of The Goldman Sachs Group, Inc. since August
1998, and has been its Vice Chairman since May 1999. He was Vice Chairman of The
Goldman Sachs Group, L.P. from February 1997 to May 1999 and served as Head or
Co-Head of Investment Banking from 1990 to November 1999. He is also a director
of VF Corporation and IDB Holding Corporation Ltd.
Mr. Thain has been a director of The Goldman Sachs Group, Inc. since August
1998, and has been its President and Co-Chief Operating Officer since May 1999.
He was President of The Goldman Sachs Group, L.P. from March 1999 to May 1999
and Co-Chief Operating Officer from January 1999 to May 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 a director of The Goldman Sachs Group, Inc. since
August 1998, and has been its President and Co-Chief Operating Officer since May
1999. He was President of The Goldman Sachs Group, L.P. from March 1999 to May
1999 and Co-Chief Operating Officer of The Goldman Sachs Group, L.P. from
January 1999 to May 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
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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 a director of The Goldman Sachs Group, Inc. since
May 1999. He has been Group Chief Executive of BP Amoco p.l.c. since January
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. Bryan has been a director of The Goldman Sachs Group, Inc. since
November 1999. He has been Chairman of the Board and Chief Executive Officer of
Sara Lee Corporation since 1976. He is a director of Bank One Corporation, BP
Amoco p.l.c. and General Motors Corporation. Mr. Bryan is a past Chairman and a
director of the Grocery Manufacturers of America, Inc., a member of The Business
Council and the Business Roundtable and a director and past national Chairman of
the Business Committee for the Arts. He is a past Chairman of Catalyst and a
trustee of the University of Chicago, Chairman of the Board of Trustees of The
Art Institute of Chicago and former Chairman of the Chicago Council on Foreign
Relations.
Mr. Johnson has been a director of The Goldman Sachs Group, Inc. since May
1999. He 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 a director of The Goldman Sachs Group, Inc. since May
1999. He was Senior Chairman of The Goldman Sachs Group, L.P. from 1990 to May
1999. 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 and an Executive Vice President of The
Goldman Sachs Group, Inc. since May 1999. He was General Counsel of The Goldman
Sachs Group, L.P. or its predecessor from 1988 to May 1999. From 1980 to 1988,
Mr. Katz was a partner in Sullivan & Cromwell.
Mr. Palm has been General Counsel and an Executive Vice President of The
Goldman Sachs Group, Inc. since May 1999. He was General Counsel of The Goldman
Sachs Group, L.P. from 1992 to May 1999. 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. Tortora has been Chief Information Officer and an Executive Vice
President of The Goldman Sachs Group, Inc. since May 1999 and has been Head of
Information Technology since March 1999. She was Chief Information Officer of
The Goldman Sachs Group, L.P. from March 1999 to May 1999. She has headed
Goldman Sachs' global technology efforts since 1994.
Mr. Viniar has been Chief Financial Officer and an Executive Vice President
of The Goldman Sachs Group, Inc. since May 1999 and has been Co-Head of
Operations, Finance and Resources since March 1999. He was Chief Financial
Officer of The Goldman Sachs Group, L.P. from March 1999 to May 1999. From July
1998 until March 1999, he was Deputy Chief Financial Officer and from 1994 until
July 1998, 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 and an Executive Vice
President of The Goldman Sachs Group, Inc. since
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May 1999 and has been Co-Head of Operations, Finance and Resources since
March 1999. He was Chief Administrative Officer of The Goldman Sachs Group, L.P.
from March 1999 to May 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.
There are no family relationships between any of the executive officers or
directors of Goldman Sachs.
THE MANAGEMENT AND PARTNERSHIP
COMMITTEES
In January 1999, the Management and Partnership Committees were constituted
as part of Goldman Sachs' overall governance structure. The Management
Committee, which is chaired by Mr. Paulson, has responsibility for policy,
strategy and management of our businesses. In addition to Messrs. Paulson,
Thain, Thornton, Hurst, Katz and Viniar 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-Head, Investment Banking), Robert S. Kaplan (Co-Head,
Investment Banking), John P. McNulty (Head, Investment Management), Michael P.
Mortara (Co-Head, FICC), Philip D. Murphy (Head, Wealth Management), Daniel M.
Neidich (Co-Head, Merchant Banking), Robin Neustein (Co-Head, Private Equity
Group of Asset Management), Mark Schwartz (Chairman, Goldman Sachs -- Asia),
Robert K. Steel (Co-Head, Equities), Patrick J. Ward (Co-Head, Equities and
Deputy Chairman -- Europe), Peter A. Weinberg (Co-Head, Investment Banking and
Deputy Chairman -- Europe) and Jon Winkelried (Head, FICC -- Europe). Mr. Palm
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 integral in
the process of selecting and compensating managing directors. In addition to
Messrs. Thain, Thornton, Palm and Zubrow and Ms. Neustein, the members of this
committee and their principal positions within Goldman Sachs are: David W. Blood
(Co-Head, Asset Management), Gary D. Cohn (Head, FICC Commodities and Emerging
Markets), Richard J. Gnodde (President, Goldman Sachs -- Asia), Jacob D.
Goldfield (Managing Director), David B. Heller (Head, Equities Derivatives
Trading), Jacquelyn M. Zehner (Managing Director), Suzanne Nora Johnson
(Co-Head, Global Healthcare Group of Investment Banking), Kevin W. Kennedy
(Managing Director), Robert B. Morris III (Head, Global Investment Research),
Wiet H.M. Pot (Chief Operating Officer, Equities -- Europe), Simon M. Robertson
(President, Goldman Sachs -- Europe), Daniel W. Stanton (Co-Head, Frankfurt
Office), Esta E. Stecher (Head, Tax) and John S. Weinberg (Co-Head, Investment
Banking Services).
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 John L. Weinberg
are members of Class II and Messrs. Bryan, 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.
Our board of directors meets at least quarterly.
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DIRECTOR COMPENSATION
Directors who are not employees of or advisors to Goldman Sachs or an
affiliate receive an annual retainer and committee and meeting fees as follows:
<TABLE>
<S> <C>
Annual Retainer................... $35,000
Committee Chair................... 25,000
Committee Member.................. 15,000
Attendance at Board or Committee
Meeting......................... 1,000
</TABLE>
For the 1999 calendar year, the annual retainer is payable in our common
stock and the committee fees are payable at the election of the non-employee
director in either cash or common stock. Beginning with the 2000 calendar year,
the annual retainer and the committee fees will be paid in fully vested
restricted stock units issued under our 1999 stock incentive plan. The meeting
fees are payable in cash. In addition, each non-employee director was awarded an
initial grant of 3,000 fully vested restricted stock units under our 1999 stock
incentive plan. Restricted stock units awarded to non-employee directors
generally provide for delivery of shares of common stock on the last business
day in May in the year following the non-employee director's retirement from the
board.
Mr. John L. Weinberg provides senior advisory services to Goldman Sachs,
receives annual compensation of $2 million and participates in various employee
benefit plans. The agreement under which Mr. Weinberg performs these services
expires November 24, 2000, unless earlier terminated on 90 days' notice.
Directors who are also employees of or advisors to Goldman Sachs or an
affiliate receive no compensation for serving as a director of Goldman Sachs.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has an Audit Committee, composed of directors who
are not employed by Goldman Sachs or affiliated with management. Sir John Browne
and Messrs. John H. Bryan and James A. Johnson are the current members of our
Audit Committee. Our Audit Committee, chaired by Sir John Browne, recommends for
approval by our board of directors a firm of independent accountants whose duty
it is to audit our consolidated financial statements for the fiscal year in
which they are appointed. The Audit Committee, among other things, monitors the
activities of our internal auditors and our independent accountants, reviews the
results and scope of the audit services provided by our independent accountants
and reviews the results of the internal and external audit work to assess the
adequacy and appropriateness of our financial and accounting controls.
Our board of directors also has a Compensation Committee, composed of
directors who are not employed by Goldman Sachs or affiliated with management.
Sir John Browne and Messrs. John H. Bryan and James A. Johnson are the current
members of our Compensation Committee. Our Compensation Committee, chaired by
Mr. Johnson, is responsible for reviewing and approving salaries and other
matters relating to the compensation of our key executives. The Compensation
Committee is also responsible for overseeing the committees appointed by our
board of directors to administer our 1999 stock incentive plan, our defined
contribution plan and our partner compensation plan.
Our board of directors may from time to time establish other committees to
facilitate the management of Goldman Sachs.
EXECUTIVE COMPENSATION
Prior to our initial public 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 initial public
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.
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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 in May 1999.
(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 the
named executive officers has earned additional benefits under the pension plan
since November 1992.
EMPLOYMENT, NONCOMPETITION AND
PLEDGE AGREEMENTS
In connection with our initial public offering, we entered into employment
agreements with each profit participating limited partner who continued 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 retired, including,
in both cases, each managing director who is a member of our board of directors
or is an executive officer.
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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 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 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 May 2004, the breaching managing director
will be liable for liquidated damages. The amount of liquidated damages for each
managing director who initially served 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
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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
- - May 2004.
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
BACKGROUND
In connection with our initial public 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 an aggregate of 30,025,946 shares of common
stock;
- - 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 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 an aggregate of 33,292,869 shares of
common stock; and
- - certain employees received a grant of options to purchase shares of common
stock awarded on a discretionary basis with respect to an aggregate of
40,127,592 shares of common stock.
The restricted stock units awarded to employees on a discretionary and a
formula basis 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. 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 are paid in cash at about the same time that the dividends are paid
generally to the shareholders. These amounts are recorded as compensation
expense since the underlying shares of common stock have not been issued.
Any shares of common stock acquired by a managing director pursuant to the
awards will be subject to the shareholders' agreement described in "Certain
Relationships and Related Transactions -- Shareholders' Agreement".
See Note 6 to the unaudited condensed consolidated financial statements for
further information regarding these awards.
CHANGE IN CONTROL
If a change in control occurs and within 18 months thereafter a grantee's
or participant's employment is terminated by Goldman Sachs other than for cause
(as defined in the applicable award agreement) or the grantee or participant
terminates employment for
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good reason (as defined in the applicable award agreement):
- - the common stock underlying any outstanding restricted stock units will be
delivered;
- - any outstanding unexercised options to purchase shares of common stock will
become exercisable; 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 business combination
involving The Goldman Sachs Group, Inc., unless immediately following the
business combination, 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.
THE STOCK INCENTIVE PLAN
The following is a description of the material terms of the 1999 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 fiscal
year.
Our Stock Incentive Plan Committee has the authority to adjust the terms of
any 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,
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<PAGE> 84
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 Committee, consisting of Messrs.
Paulson, Hurst, Thain and Thornton, administers the stock incentive plan. Our
Compensation Committee oversees the Stock Incentive Plan Committee and makes
awards to our executive officers.
The Stock Incentive Plan Committee has 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 is 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 is assignable or
transferable other than by will or by the laws of descent and distribution, and
all awards and rights are exercisable during the life of the grantee only by the
grantee or the grantee's legal representative.
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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.
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 appointed by our board of directors,
select the employees to participate in the defined contribution plan.
CONTRIBUTIONS. Goldman Sachs 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 initial public 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. Each participant has an account in his or her
name. There is also a separate, unallocated account to which any forfeitures of
common stock are credited pending reallocation to participants. The Defined
Contribution Plan Committee designates the number of shares of common stock
allocable to the account of each participant. Any common stock remaining in the
unallocated account as of the last day of each plan year due to forfeitures and
any distributions received on common stock credited to the unallocated account
will be reallocated among the accounts of participants who are employed by
Goldman Sachs on the last day of each plan year pro rata to each such
participant's share of Goldman Sachs contributions, for that plan year, or on
such other formulaic basis as the 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 are 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
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be distributable, in equal installments in June 2002, June 2003 and June 2004 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 is administered by the Defined Contribution Plan Committee, consisting of
Messrs. Paulson, Hurst, Thain and Thornton. Our Compensation Committee oversees
the Defined Contribution Plan Committee and makes awards to our executive
officers.
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
are paid or provided solely from the assets of the Defined Contribution Plan
Trust and Goldman Sachs has 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.
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 adopted a partner compensation plan for the
purpose of compensating senior professionals. The partner compensation plan is
administered by the Partner Compensation Plan Committee, consisting of Messrs.
Paulson, Hurst, Thain and Thornton. Our Compensation Committee oversees the
Partner Compensation Plan Committee.
Individuals are selected to participate in the partner compensation plan
for a one- or two-fiscal year cycle. Upon selection to the partner compensation
plan, participants are allocated a percentage interest in a pool for annual
bonus payments in addition to base salaries. The size of the pool is 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 provides additional incentives for teamwork. Further, we
believe that the tying of the bonus payments to overall financial results more
closely aligns 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 provides 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".
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ELIGIBILITY AND PARTICIPATION
Consistent with our historical practice of partnership elections, the
initial cycle is through the end of fiscal 2000. The participants in this
initial cycle 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 is 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, the Partner Compensation Plan Committee determines both
the salaries of and the percentage of the partner compensation plan pool that
may be allocable to any particular participant. (This determination was made
prior to the consummation of our initial public offering in the case of the
initial cycle.) The percentage allocated to any particular participant is
expected to be applicable for each fiscal year within the applicable cycle. Any
remaining portion of the partner compensation plan pool not so allocated is
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 are 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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SELLING SHAREHOLDERS
Our board of directors, and the shareholders' committee under the
shareholders' agreement, have agreed to waive certain transfer restrictions in
order to permit the former profit participating limited partners in The Goldman
Sachs Group, L.P. to make charitable contributions of shares of common stock.
See "Risk Factors -- Goldman Sachs Is Controlled by Its Managing Directors Whose
Interests May Differ from Those of Other Shareholders" and "Certain
Relationships and Related Transactions -- Shareholders' Agreement -- Waivers"
for a discussion of the transfer restrictions to be waived by our board of
directors and the shareholders' committee. These charitable contributions may be
made only to charitable foundations and public charities that are charitable
organizations as described in the Internal Revenue Code, whether or not
organized in the United States, and only after the date of this prospectus. The
charitable organizations that receive the contributions of shares of common
stock may sell some or all those shares under this prospectus from time to time
and the charitable organizations making such sales are the selling shareholders
under this prospectus. See "Plan of Distribution" for a description of the
various ways in which those sales may occur.
The following table sets forth the names of the charitable organizations to
which we anticipate shares of common stock will be donated and that may be
selling shareholders under this prospectus, and the maximum number of donated
shares of common stock that each such charitable organization may sell using
this prospectus. To the best of Goldman Sachs' knowledge, no charitable
organization listed below will beneficially own more than one percent of the
outstanding shares of common stock either before or after the sales contemplated
by this prospectus. Each sale of shares by any selling shareholder may, if
required, be accompanied by a supplement to this prospectus setting forth the
name of the selling shareholder using that prospectus supplement, the number of
shares being sold and a supplemental plan of distribution describing the
specific manner of sale of those shares.
<TABLE>
<CAPTION>
SHARES TO
NAME OF SELLING SHAREHOLDER BE DONATED
--------------------------- ----------
<S> <C>
Academy of Natural Sciences of Philadelphia................. 3,008
Adventure Unlimited......................................... 10,461
American Friends of New College, Ltd........................ 1,308
American School in London Foundation........................ 11,768
American Women's Economic Development Corporation........... 1,438
Amherst College............................................. 9,807
Anti-Defamation League of B'nai B'rith...................... 1,308
Binghamton University Foundation............................ 6,996
Bonnie Brae................................................. 1,308
Boston College.............................................. 18,306
Brearley School............................................. 2,288
Brown University............................................ 11,769
Brunswick School, Inc....................................... 7,846
Camp Ramah in Wisconsin Endowment Corp...................... 1,308
Carnegie Mellon University.................................. 6,538
Central Synagogue Congregation Ahavath Chesed Shaar
Hashomayin................................................ 1,308
Chapin School............................................... 1,308
Chewonki Foundation, Inc.................................... 2,615
Children's Aid and Family Services, Inc..................... 3,269
Children's Hospital......................................... 1,308
Children's Hospital Foundation at WCMC, Inc................. 13,076
Church of the Holy Spirit................................... 1,308
</TABLE>
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<TABLE>
<CAPTION>
SHARES TO
NAME OF SELLING SHAREHOLDER BE DONATED
--------------------------- ----------
<S> <C>
Columbia University......................................... 18,306
Community Foundation of Collier County...................... 17,653
Connecticut College......................................... 3,269
Constitutional Rights Foundation Chicago.................... 1,308
Cornell University.......................................... 26,152
Crossroads Incorporated..................................... 1,961
Cystic Fibrosis Foundation.................................. 19,614
Dalton Schools, Inc. ....................................... 6,538
Dana Farber Cancer Institute, Inc. ......................... 1,308
Deerfield Academy........................................... 3,596
Duke University............................................. 26,152
Educational Broadcasting Corporation (Thirteen/WNET)........ 3,269
Fairfield University........................................ 13,076
Fidelity Investments Charitable Gift Fund................... 1,018,632
First Baptist Church of Greenport........................... 1,308
First Church of Christ Scientist............................ 13,076
First Presbyterian Church................................... 3,923
Florida State University.................................... 5,884
Fordham University.......................................... 3,269
Forest Bluff School, Inc. .................................. 1,308
Foundation of the University of Medicine and Dentistry of
NJ........................................................ 4,577
Friends Academy............................................. 5,230
Friends Central School Corp. ............................... 3,269
Georgetown University....................................... 6,538
Greenwich Academy, Inc. .................................... 15,038
Greenwich Country Day School, Inc........................... 5,230
Habitat for Humanity New York City, Inc..................... 1,438
Hamilton College............................................ 75,384
Harvard University.......................................... 27,460
Harvard-Westlake School..................................... 13,076
Haverford School............................................ 9,153
Hispanic Culture Foundation................................. 1,961
Horace Mann-Barnard School.................................. 4,446
Hospital for Special Surgery Fund, Inc. .................... 1,308
Hotchkiss School............................................ 30,729
The Institute for Contemporary Art, PS 1 Contemporary Art
Center and the Clocktower Gallery......................... 3,269
Inter-Actions Adapted Activities Community Access &
Socialization............................................. 1,308
Ivy 1879 Foundation Inc. ................................... 1,308
Jewish Communal Fund of New York............................ 8,500
John F. Kennedy Center for the Performing Arts.............. 1,308
Johns Hopkins University.................................... 1,308
Keewaydin Foundation........................................ 3,269
Kent School Corporation..................................... 1,308
Kessenich Family Center MDA/ALS Center...................... 3,269
Kids Corporation II......................................... 2,615
Lake Forest Open Lands Association.......................... 6,538
Marymount School of New York................................ 1,961
Maryville Academy........................................... 3,269
Massachusetts Institute of Technology....................... 15,691
</TABLE>
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<TABLE>
<CAPTION>
SHARES TO
NAME OF SELLING SHAREHOLDER BE DONATED
--------------------------- ----------
<S> <C>
Menlo Park Presbyterian Church.............................. 13,076
Menlo School................................................ 13,076
Metropolitan Opera Association, Inc. ....................... 14,384
Morristown-Beard School..................................... 13,076
Morristown Memorial Health Foundation, Inc. ................ 1,308
Morry's Camp, Inc........................................... 1,308
Mount Holyoke College....................................... 5,884
National Foundation for Facial Reconstruction............... 1,308
New Jersey Performing Arts Center Corp. .................... 1,308
New York University......................................... 19,614
Overlook Hospital Foundation................................ 6,538
Peck School................................................. 1,308
The Pennsylvania State University........................... 13,076
Peregrine Fund, Inc. ....................................... 13,076
Philharmonic-Symphony Society of New York, Inc. ............ 1,308
Princeton Day School, Inc. ................................. 3,269
Princeton Junior School, Inc. .............................. 3,269
Princeton University........................................ 7,192
Redeemer Presbyterian Church................................ 2,615
Rippowan-Cisqua School, Inc. ............................... 3,269
Riverdale Country School, Inc. ............................. 1,569
Robin Hood Foundation....................................... 2,616
Rumsey Hall School, Inc. ................................... 1,961
Rye Country Day School...................................... 15,691
Salvation Army.............................................. 9,153
School of American Ballet, Inc. ............................ 1,961
Solomon Schechter School of Westchester, Inc. .............. 7,846
Somerset Hills YMCA......................................... 1,308
St. Bernard's Church........................................ 1,308
St. George's School......................................... 2,615
Stanbridge Academy.......................................... 10,461
Stanford University......................................... 16,345
Suffield Academy............................................ 3,269
The Susan G. Komen Breast Cancer Foundation, Inc............ 1,308
Trinity College............................................. 13,076
Union College............................................... 13,076
Union of American Hebrew Congregations...................... 1,308
United Jewish Appeal Federation -- Federation of Jewish
Philanthropies of New York, Inc........................... 7,323
University of Chicago....................................... 33,671
The University of Pennsylvania.............................. 15,037
University of Virginia Darden School Foundation............. 3,269
University School........................................... 3,269
US Naval Academy Alumni Association......................... 1,308
Valley Hospital Foundation.................................. 6,538
Vanguard Charitable Endowment Program....................... 41,190
Villanova University........................................ 6,538
Wellesley College........................................... 14,384
Wesleyan University......................................... 3,727
William Marsh Rice University............................... 6,538
</TABLE>
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<TABLE>
<CAPTION>
SHARES TO
NAME OF SELLING SHAREHOLDER BE DONATED
--------------------------- ----------
<S> <C>
Williams College............................................ 14,384
World TEAM Sports........................................... 2,615
Yale University............................................. 18,961
YMCA of Greenwich........................................... 1,308
Zarephath Community Chapel.................................. 23,537
Private foundations established by directors and continuing
executive officers of Goldman Sachs, as a group(1).......... 689,114
Other private foundations(2)................................ 5,280,088
---------
Total....................................................... 7,985,941
=========
</TABLE>
- ---------------
(1) See "Principal Shareholders" for a discussion of the charitable
contributions anticipated to be made by certain of our directors and
executive officers.
(2) Includes 169 private foundations established by certain former profit
participating limited partners of The Goldman Sachs Group, L.P., some of
whom are currently managing directors of Goldman Sachs. Each of these
foundations is receiving a donation of less than 117,000 shares, and these
foundations in the aggregate will beneficially own less than 1.2% of the
outstanding shares of common stock.
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<PAGE> 92
PRINCIPAL SHAREHOLDERS
The following table sets forth as of September 24, 1999 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.
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.
For purposes of this table, information as to the shares of common stock is
calculated based on 441,270,600 shares of common stock outstanding as of
September 24, 1999. For purposes of this table, "beneficial ownership" is
determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, pursuant to which a person or group of persons is deemed to have
"beneficial ownership" of any shares of common stock that such person has the
right to acquire within 60 days after the date of this prospectus. For purposes
of computing the percentage of outstanding shares of common stock held by each
person or group of persons named above, any shares which such person or persons
has the right to acquire within 60 days after the date of this prospectus are
deemed to be outstanding but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AS OF
SEPTEMBER 24, 1999
----------------------
NAME NUMBER PERCENT
- ---- ------ -------
<S> <C> <C>
5% Shareholders:
Sumitomo Bank Capital Markets, Inc.(1).................... 28,865,414 6.4%
Kamehameha Activities Association(2)...................... 21,975,421 5.0
Directors and named executive officers:
Henry M. Paulson, Jr.(3)(4)............................... 4,132,235 *
Robert J. Hurst(3)(4)..................................... 3,835,124 *
John A. Thain(3)(4)....................................... 3,101,426 *
John L. Thornton(3)(4).................................... 3,012,541 *
Sir John Browne(5)........................................ 3,000 *
John H. Bryan(5).......................................... 3,000 *
James A. Johnson(5)....................................... 5,000 *
John L. Weinberg(4)....................................... 444,444 *
Jon S. Corzine(4)(6)...................................... 4,414,198 1.0
Roy J. Zuckerberg(4)(7)................................... 3,026,974 *
All directors and continuing executive officers as a group
(13 persons)(5)(8)........................................ 24,288,671 5.5
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
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<PAGE> 93
(1) This information has been derived from a Schedule 13D of Sumitomo Bank
Capital Markets, Inc. filed with the SEC on May 17, 1999. 277 Park Avenue,
New York, New York 10172. Includes 7,440,362 shares of common stock that
Sumitomo Bank Capital Markets, Inc. would receive upon the conversion of its
7,440,362 shares of nonvoting common stock. The shares of nonvoting common
stock are currently convertible into common stock, as described under
"Description of Capital Stock -- Nonvoting Common Stock".
Sumitomo Bank Capital Markets, Inc. in the ordinary course of business
enters into derivative contracts and other transactions with Goldman Sachs.
These contracts and other transactions are negotiated on an arm's-length
basis and contain customary terms and conditions.
(2) This information has been derived from a Schedule 13D of Kamehameha
Activities Association filed with the SEC on May 18, 1999. 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.
(3) c/o The Goldman Sachs Group, Inc., 85 Broad Street, New York, New York
10004. Excludes any shares of common stock subject to the shareholders'
agreement referred to below that are owned by 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" and "-- Voting Agreement" for a discussion of the
shareholders' agreement and the voting agreements.
(4) Includes shares of common stock that we anticipate will be donated to public
charities and private foundations as follows: 62,765 shares and 125,531
shares, respectively, by Mr. Paulson; 45,767 shares and 103,302 shares,
respectively, by Mr. Hurst; 28,767 shares and 87,610 shares, respectively,
by Mr. Thain; 43,152 shares and 86,303 shares, respectively, by Mr.
Thornton; 13,076 shares to a private foundation by Mr. Weinberg; 58,190
shares and 116,378 shares, respectively, by Mr. Corzine; and 10,000 shares
and 15,000 shares, respectively, by Mr. Zuckerberg.
(5) Includes 3,000 fully vested restricted stock units awarded to each of Sir
John Browne and Mr. Johnson on June 23, 1999 and to Mr. Bryan on November 9,
1999 under our 1999 stock incentive plan, as described under
"Management -- Information Regarding the Board of Directors -- Director
Compensation". Since these restricted stock units are fully vested, we have
included the shares of common stock underlying these restricted stock units
in the foregoing table even though these shares are not deliverable within
60 days.
(6) Mr. Corzine, who resigned in May 1999, 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.
(7) Mr. Zuckerberg, who retired in November 1998, served as Vice Chairman of The
Goldman Sachs Group, L.P. during fiscal 1998.
(8) Total includes 281,988 and 689,114 shares of common stock, respectively,
that we anticipate will be donated to public charities and private
foundations. 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" and
"-- Voting Agreement" for a discussion of the shareholders' agreement and
the voting agreements.
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<PAGE> 94
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 TRANSACTIONS
Simultaneously with the consummation of our initial public 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 are summarized below.
Pursuant to our plan of incorporation:
- - 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;
- - The retired limited partners of Goldman Sachs exchanged their interests in The
Goldman Sachs Group, L.P. and certain affiliates for $891 million in cash,
$295 million principal amount of junior subordinated debentures and 47,270,551
shares of common stock;
- - 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, and sold 9,000,000
shares of common stock in our initial public offering; and
- - Kamehameha Activities Association exchanged its interests in The Goldman Sachs
Group, L.P. for 30,975,421 shares of common stock, and sold 9,000,000 shares
of common stock in our initial public offering.
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 May 7, 1999 or has become a managing
director since that date is a party to the shareholders' agreement. In addition,
each new managing director will become a party to the shareholders' agreement.
Not less than 281,000,000 shares of common stock initially were 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 that were 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 an underwritten
public offering are not 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.
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
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<PAGE> 95
connection with the incorporation transactions described under "-- Incorporation
Transactions". Under these additional restrictions, each of these persons agreed
that he or she will not transfer any of these shares, other than up to 140,000
shares in the aggregate that are excluded from these restrictions, until May
2002. These restrictions will lapse in equal installments in May 2002, May 2003
and May 2004.
All transfer restrictions applicable to a party to the shareholders'
agreement 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 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.
The Shareholders' Committee will waive the restrictions on transfer
pursuant to the second bullet point above in order to permit our former profit
participating limited partners to donate some of their shares of common stock to
charitable foundations and public charities. See "Prospectus Summary -- Why We
Are Registering the Shares" for a discussion of why the Shareholders' Committee
will waive the transfer restrictions.
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.
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,
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<PAGE> 96
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 obligations 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 consists of Messrs.
Paulson, Hurst, Thain and Thornton. 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 as
described under "Description of Capital Stock -- Limitation of Liability and
Indemnification Matters".
VOTING AGREEMENT
Both Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association 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 initial public 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 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 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.
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<PAGE> 97
DIRECTOR AND OFFICER INDEMNIFICATION
We 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 our behalf, 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 for our initial public offering 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. We have also entered into a similar indemnification agreement
with our directors, some of our officers and all other persons requested or
authorized by our board of directors or any committee thereof to take actions on
our behalf in connection with the registration statement of which this
prospectus is a part and certain other registration statements. These agreements
are in addition to our indemnification obligations under our by-laws as
described under "Description of Capital Stock -- Limitation of Liability and
Indemnification Matters".
TAX INDEMNIFICATION AGREEMENT AND
RELATED MATTERS
An entity that has historically operated in corporate form generally is
liable for any adjustments to the corporation's taxes for periods prior to its
initial public offering. In contrast, the 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
initial public offering. In connection with our initial public 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 then-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 initial public offering. We are
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 is 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
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.
MARGIN ACCOUNTS
Goldman Sachs, in the ordinary course of business, maintains margin
accounts for certain of its directors and executive officers. Any credit
extended to any director or executive officer pursuant to his or her margin
account was made on substantially the same terms, including interest and
collateral, as those generally prevailing at the time for comparable third-party
extensions of credit, and did not involve more than the usual risk of
collectibility or present unfavorable terms.
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DESCRIPTION OF CAPITAL STOCK
Pursuant to our amended and restated certificate of incorporation, our
authorized capital stock consists of 4,350,000,000 shares, each with a par value
of $0.01 per share, of which:
- - 150,000,000 shares are designated as preferred stock;
- - 4,000,000,000 shares are designated as common stock, 441,270,600 shares of
which were outstanding as of September 24, 1999; and
- - 200,000,000 shares are designated as nonvoting common stock, 7,440,362 shares
of which were outstanding as of September 24, 1999.
All outstanding shares of common stock and nonvoting common stock are validly
issued, fully paid and nonassessable.
The shareholders' agreement contains provisions relating to the voting and
disposition of certain shares of common stock. See "Certain Relationships and
Related Transactions -- Shareholders' Agreement" for a discussion of those
provisions.
PREFERRED STOCK
Our authorized capital stock includes 150,000,000 shares of preferred
stock. Our board of directors is authorized to divide the preferred stock into
series and, with respect to each series, to determine the designations and the
powers, preferences and rights, and the qualifications, limitations and
restrictions thereof, including the dividend rights, conversion or exchange
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking fund provisions and the number of shares constituting the series. Our
board of directors could, without shareholder approval, issue preferred stock
with voting and other rights that could adversely affect the voting power of the
holders of common stock and which could have certain anti-takeover effects.
Subject to the rights of the holders of any series of preferred stock, the
number of authorized shares of any series of preferred stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by
resolution adopted by our board of directors and approved by the affirmative
vote of the holders of a majority of the voting power of all outstanding shares
of capital stock entitled to vote on the matter, voting together as a single
class.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share owned of
record on all matters submitted to a vote of shareholders. There are no
cumulative voting rights. Accordingly, the holders of a majority of the shares
of common stock voting for the election of directors can elect all the directors
if they choose to do so, subject to any voting rights of holders of preferred
stock to elect directors. For a discussion of the ability of the parties to the
shareholders' agreement to elect all of our directors, see "Risk Factors --
Goldman Sachs Is Controlled by Its Managing Directors Whose Interests May Differ
from Those of Other Shareholders".
Subject to the preferential rights of any holders of any outstanding series
of preferred stock, the holders of common stock, together with the holders of
the nonvoting common stock, are entitled to such dividends and distributions,
whether payable in cash or otherwise, as may be declared from time to time by
our board of directors from legally available funds. Subject to the preferential
rights of holders of any outstanding series of preferred stock, upon our
liquidation, dissolution or winding-up and after payment of all prior claims,
the holders of common stock, with the shares of the common stock and the
nonvoting common stock being considered as a single class for this purpose, will
be entitled to receive pro rata all our assets. Any dividend in shares of common
stock paid on or with respect to shares of common stock may be paid only with
shares of common stock. Other than the shareholder protection rights discussed
below, holders of common stock have no redemption or conversion rights or
preemptive rights to purchase or subscribe for securities of Goldman Sachs.
NONVOTING COMMON STOCK
The nonvoting common stock has the same rights and privileges as, and ranks
equally and shares proportionately with, and is identical in all respects as to
all matters to, the common stock, except that the nonvoting common stock has no
voting rights other than
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those voting rights required by law. All of the outstanding shares of nonvoting
common stock are beneficially owned by Sumitomo Bank Capital Markets, Inc. on
the date of this prospectus.
Our board of directors will not declare or pay dividends, and no dividend
will be paid, with respect to any outstanding share of common stock or nonvoting
common stock, unless, simultaneously, the same dividend is paid with respect to
each share of common stock and nonvoting common stock, except that in the case
of any dividend in the form of capital stock of a subsidiary of Goldman Sachs,
the capital stock of the subsidiary distributed to holders of common stock may
differ from the capital stock of the subsidiary distributed to holders of the
nonvoting common stock to the extent and only to the extent that the common
stock and the nonvoting common stock differ. Any dividend paid on or with
respect to nonvoting common stock may be paid only with shares of nonvoting
common stock.
The nonvoting common stock will, upon transfer by Sumitomo Bank Capital
Markets, Inc. to a third party, and in certain other circumstances, convert into
shares of common stock on a one-for-one basis. The nonvoting common stock has
standard anti-dilution provisions.
SHAREHOLDER PROTECTION RIGHTS
Each share of common stock and non-voting common stock has attached to it a
shareholder protection right. The shareholder protection rights are currently
represented only by the certificates for the shares and will not trade
separately from the shares unless and until:
- - it is announced by Goldman Sachs that a person or group has become the
beneficial owner of 15% or more of the outstanding common stock (other than
persons deemed to beneficially own common stock solely because they are
parties to the shareholders' agreement, members of the Shareholders' Committee
or certain other persons)(an "acquiring person"); or
- - ten business days (or such later date as our board of directors may fix by
resolution) after the date a person or group commences a tender or exchange
offer that would result in such person or group becoming an acquiring person.
If and when the shareholder protection rights separate and prior to the date of
the announcement by Goldman Sachs that any person has become an acquiring
person, each shareholder protection right will entitle the holder to purchase,
in the case of shareholder protection rights relating to the common stock,
1/100 of a share of Series A participating preferred stock or, in the case of
shareholder protection rights relating to the nonvoting common stock, 1/100 of a
share of Series B participating preferred stock, in each case, for an exercise
price of $250. Each 1/100 of a share of Series A participating preferred stock
and Series B participating preferred stock would have economic and voting terms
equivalent to one share of common stock and nonvoting common stock,
respectively.
Upon the date of the announcement by Goldman Sachs that any person or group
has become an acquiring person, each shareholder protection right (other than
shareholder protection rights beneficially owned by the acquiring person or
their transferees, which shareholder protection rights become void) will entitle
its holder to purchase, for the exercise price, a number of shares of common
stock or, in the case of shareholder protection rights relating to nonvoting
common stock, a number of shares of nonvoting common stock having a market value
of twice the exercise price. Also, if, after the date of the announcement by
Goldman Sachs that any person has become an acquiring person, the acquiring
person controls our board of directors and:
- - Goldman Sachs is involved in a merger or similar form of business combination
and (i) any term of the transaction provides for different treatment of the
shares of capital stock held by the acquiring person as compared to the shares
of capital stock held by all other shareholders or (ii) the person with whom
such transaction occurs is the acquiring person or an affiliate thereof; or
- - Goldman Sachs sells or transfers assets representing more than 50% of its
assets or generating more than 50% of its operating income or cash flow to any
person
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other than Goldman Sachs or its wholly owned subsidiaries,
then each shareholder protection right will entitle its holder to purchase, for
the exercise price, a number of shares (A) with respect to shareholder
protection rights relating to the common stock, of capital stock with the
greatest voting power in respect of the election of directors and (B) with
respect to shareholder protection rights relating to the nonvoting common stock,
of capital stock identical to the stock described in clause (A) except with
voting provisions identical to that of the nonvoting common stock, of either the
acquiring person or the other party to such transaction, depending on the
circumstances of the transaction, having a market value of twice the exercise
price. If any person or group acquires from 15% to and including 50% of the
common stock, our board of directors may, at its option, exchange each
outstanding shareholder protection right, except for those held by an acquiring
person or their transferees, for one share of common stock or, in the case of
shareholder protection rights relating to nonvoting common stock, one share of
nonvoting common stock.
The shareholder protection rights may be redeemed by our board of directors
for $0.01 per shareholder protection right prior to the date of the announcement
by Goldman Sachs that any person has become an acquiring person. Our charter
permits this redemption right to be exercised by our board of directors (or
certain directors specified or qualified by the terms of the instrument
governing the shareholder protection rights).
The shareholder protection rights will not prevent a takeover of Goldman
Sachs. However, these rights may cause substantial dilution to a person or group
that acquires 15% or more of the common stock unless the shareholder protection
rights are first redeemed by our board of directors.
LIMITATION OF LIABILITY AND
INDEMNIFICATION MATTERS
Our charter provides that a director of Goldman Sachs will not be liable to
Goldman Sachs or its shareholders for monetary damages for breach of fiduciary
duty as a director, except in certain cases where liability is mandated by the
Delaware General Corporation Law. Our by-laws provide for indemnification, to
the fullest extent permitted by law, of any person made or threatened to be made
a party to any action, suit or proceeding by reason of the fact that such person
is or was a director or officer of Goldman Sachs, or is or was a director of a
subsidiary of Goldman Sachs, or is or was a member of the Shareholders'
Committee acting under the shareholders' agreement or, at the request of Goldman
Sachs, serves or served as a director or officer of or in any other capacity
for, or in relation to, any other enterprise, against all expenses, liabilities,
losses and claims actually incurred or suffered by such person in connection
with the action, suit or proceeding. Our by-laws also provide that, to the
extent authorized from time to time by our board of directors, Goldman Sachs may
provide to any one or more employees and other agents of Goldman Sachs or any
subsidiary or other enterprise, rights of indemnification and to receive payment
or reimbursement of expenses, including attorneys' fees, that are similar to the
rights conferred by the by-laws on directors and officers of Goldman Sachs or
any subsidiary or other enterprise.
CHARTER PROVISIONS APPROVING CERTAIN ACTIONS
Our charter provides that our board of directors may determine to take the
following actions, in its sole discretion, and Goldman Sachs and each
shareholder of Goldman Sachs will, to the fullest extent permitted by law, be
deemed to have approved and ratified, and waived any claim relating to, the
taking of any of these actions:
- - causing Goldman Sachs to register with the SEC for resale shares of common
stock held by our directors, employees and former directors and employees and
our subsidiaries and affiliates and former partners and employees of The
Goldman Sachs Group, L.P. and its subsidiaries and affiliates as discussed
under "Shares Eligible for Future Sale -- Other Registration Rights"; and
- - making payments to, and other arrangements with, certain former limited
partners of Goldman Sachs, including managing directors who were profit
participating limited partners, in order to compensate them for,
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or to prevent, significantly disproportionate adverse tax or other
consequences as discussed under "Certain Relationships and Related
Transactions -- Tax Indemnification Agreement and Related Matters".
SECTION 203 OF THE
DELAWARE GENERAL CORPORATION LAW
Goldman Sachs is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or a transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder" is
a person who, together with affiliates and associates, owns (or, in certain
cases, within three years prior, did own) 15% or more of the corporation's
outstanding voting stock. Under Section 203, a business combination between
Goldman Sachs and an interested stockholder is prohibited unless it satisfies
one of the following conditions:
- - prior to the time the stockholder became an interested stockholder, the board
of directors of Goldman Sachs must have previously approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
- - on consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of
the voting stock of Goldman Sachs outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, shares owned by persons who are directors and officers); or
- - the business combination is approved by the board of directors of Goldman
Sachs and authorized at an annual or special meeting of the stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
Our board of directors has adopted a resolution providing that neither the
shareholders' agreement nor the voting agreements of Sumitomo Bank Capital
Markets, Inc. and Kamehameha Activities Association will create an "interested
stockholder".
CERTAIN ANTI-TAKEOVER MATTERS
Our charter and by-laws include a number of provisions that may have the
effect of encouraging persons considering unsolicited tender offers or other
unilateral takeover proposals to negotiate with our board of directors rather
than pursue non-negotiated takeover attempts. These provisions include:
CLASSIFIED BOARD OF DIRECTORS
Our charter provides for a board of directors divided into three classes,
with one class to be elected each year to serve for a three-year term. The terms
of the initial classes of directors will terminate on the date of the annual
meetings of shareholders in 2000, 2001 and 2002. As a result, at least two
annual meetings of shareholders may be required for the shareholders to change a
majority of our board of directors. In addition, the shareholders of Goldman
Sachs can only remove directors for cause by the affirmative vote of the holders
of not less than 80% of the outstanding shares of capital stock of Goldman Sachs
entitled to vote in the election of directors. Vacancies on our board of
directors may be filled only by our board of directors. The classification of
directors and the inability of shareholders to remove directors without cause
and to fill vacancies on the board of directors makes it more difficult to
change the composition of our board of directors, but promotes a continuity of
existing management.
CONSTITUENCY PROVISION
In accordance with our charter, a director of Goldman Sachs may (but is not
required to) in taking any action (including an action that may involve or
relate to a change or potential change in control of Goldman Sachs) consider,
among other things, the effects that Goldman Sachs' actions may have on other
interests or persons (including its employees, former partners of The
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Goldman Sachs Group, L.P. and the community) in addition to our shareholders.
ADVANCE NOTICE REQUIREMENTS
Our by-laws establish advance notice procedures with regard to shareholder
proposals relating to the nomination of candidates for election as directors or
new business to be brought before meetings of shareholders of Goldman Sachs.
These procedures provide that notice of such shareholder proposals must be
timely given in writing to the Secretary of Goldman Sachs prior to the meeting
at which the action is to be taken. Generally, to be timely, notice must be
received at the principal executive offices of Goldman Sachs not less than 90
days nor more than 120 days prior to the first anniversary date of the annual
meeting for the preceding year. The notice must contain certain information
specified in the by-laws.
SPECIAL MEETINGS OF SHAREHOLDERS
Our charter and by-laws deny shareholders the right to call a special
meeting of shareholders. Our charter and by-laws provide that special meetings
of the shareholders may be called only by a majority of the board of directors.
NO WRITTEN CONSENT OF SHAREHOLDERS
Our charter requires all shareholder actions to be taken by a vote of the
shareholders at an annual or special meeting, and does not permit our
shareholders to act by written consent, without a meeting.
MAJORITY VOTE NEEDED FOR SHAREHOLDER PROPOSALS
Our by-laws require that any shareholder proposal be approved by a majority
of all of the outstanding shares of common stock and not by only a majority of
the shares present at the meeting and entitled to vote. This requirement may
make it more difficult to approve shareholder resolutions.
AMENDMENT OF BY-LAWS AND CHARTER
Our charter requires the approval of not less than 80% of the voting power
of all outstanding shares of Goldman Sachs' capital stock entitled to vote to
amend any by-law by shareholder action or the charter provisions described in
this section. Those provisions make it more difficult to dilute the anti-
takeover effects of our by-laws and our charter.
BLANK CHECK PREFERRED STOCK
Our charter provides for 150,000,000 authorized shares of preferred stock.
The existence of authorized but unissued shares of preferred stock may enable
the board of directors to render more difficult or to discourage an attempt to
obtain control of Goldman Sachs by means of a merger, tender offer, proxy
contest or otherwise. For example, if in the due exercise of its fiduciary
obligations, the board of directors were to determine that a takeover proposal
is not in the best interests of Goldman Sachs, the board of directors could
cause shares of preferred stock to be issued without shareholder approval in one
or more private offerings or other transactions that might dilute the voting or
other rights of the proposed acquiror or insurgent shareholder or shareholder
group. In this regard, the charter grants our board of directors broad power to
establish the rights and preferences of authorized and unissued shares of
preferred stock. The issuance of shares of preferred stock could decrease the
amount of earnings and assets available for distribution to holders of shares of
common stock and nonvoting common stock. The issuance may also adversely affect
the rights and powers, including voting rights, of such holders and may have the
effect of delaying, deterring or preventing a change in control of Goldman
Sachs. The board of directors currently does not intend to seek shareholder
approval prior to any issuance of shares of preferred stock, unless otherwise
required by law.
LISTING
The common stock is listed on the NYSE.
TRANSFER AGENT
The transfer agent for the common stock is ChaseMellon Shareholder
Services, L.L.C.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market,
or the perception that such sales may occur, could adversely affect the
prevailing market price of the common stock. As of September 24, 1999, there
were 471,182,760 shares of common stock outstanding, including shares of common
stock underlying the restricted stock units awarded based on a formula for which
future service is not required as a condition to the delivery of the underlying
shares of common stock, but excluding 7,440,362 shares of nonvoting common
stock. As of September 24, 1999, and prior to giving effect to the charitable
contributions contemplated by this prospectus, a substantial number of our
outstanding shares of common stock were eligible for future sale as described
below.
- - 264,882,840 shares held by the managing directors who were profit
participating limited partners are transferable beginning May 2002, unless
these restrictions are waived by our board of directors and the shareholders'
committee. See "Certain Relationships and Related Transactions --
Shareholders' Agreement";
- - 21,425,052 shares held by Sumitomo Bank Capital Markets, Inc., together with
the 7,440,362 shares of nonvoting common stock that it holds, are transferable
only as described under "-- Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association Registration Rights", unless these restrictions are
waived by our board of directors;
- - 21,975,421 shares held by Kamehameha Activities Association are transferable
only as described under "-- Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association Registration Rights", unless these restrictions are
waived by our board of directors;
- - 47,270,551 shares were held by the former retired limited partners, of which
31,099,839 shares are transferable beginning May 2000, and the remainder of
which will be transferable beginning May 2002, unless these restrictions are
waived by our board of directors;
- - 12,555,866 shares held by the defined contribution plan will not be
distributable to the plan participants until on or about June 2002, June 2003
and June 2004, assuming the relevant conditions have been satisfied. See
"Management -- The Employee Initial Public Offering Awards" for a description
of the defined contribution plan;
- - 29,898,091 shares of common stock underlying the restricted stock units
awarded based on a formula generally will be deliverable beginning June 2000,
assuming the relevant conditions are satisfied, as described in
"Management -- The Employee Initial Public Offering Awards -- Formula Awards";
and
- - 4,024,637 shares of common stock issued in the acquisition of The Hull Group
are transferable beginning May 2002, unless these restrictions are waived by
our board of directors.
In order to permit charitable donations by our former retired limited
partners, our board of directors will lift the transfer restrictions on
1,084,316 of their shares of common stock. These donations are subject to the
same restrictions that apply to the donations by our former profit participating
limited partners; they may be made only to private foundations and public
charities that are charitable organizations as described in the Internal Revenue
Code, whether or not organized in the United States. See "Certain Relationships
and Related Transactions -- Shareholders' Agreements -- Waivers". Upon donation,
these shares of common stock will be freely transferable to the public.
Shares of common stock underlying the restricted stock units awarded on a
discretionary basis are deliverable beginning June 2002, assuming the relevant
conditions have been satisfied. The options to purchase shares of common stock
awarded on a discretionary basis are exercisable beginning June 2002, assuming
the relevant conditions have been satisfied. See "Management--The Employee
Initial Public Offering Awards" for a discussion of the terms of the restricted
stock units awarded based on a formula, the re-
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stricted stock units awarded on a discretionary basis and the options to
purchase shares of common stock awarded on a discretionary basis.
We have registered the reoffer and resale of the shares of common stock
issued pursuant to the defined contribution plan, restricted stock units awarded
based on a formula, restricted stock units awarded on a discretionary basis and
options to purchase shares of common stock awarded on a discretionary basis. As
a result, any shares of common stock delivered under these awards will, subject
to any restrictions under the shareholders' agreement, be freely transferable to
the public unless the shares of common stock are acquired by an "affiliate" of
Goldman Sachs. Any shares of common stock acquired by an "affiliate" of Goldman
Sachs will be transferable to the public in accordance with the SEC's Rule 144.
The shares of common stock received by the managing directors who were
profit participating limited partners, Sumitomo Bank Capital Markets, Inc. and
Kamehameha Activities Association constitute "restricted securities" for
purposes of the Securities Act of 1933. As a result, absent registration under
the Securities Act of 1933 or compliance with Rule 144 thereunder or an
exemption therefrom, these shares of common stock are not freely transferable to
the public. For a description of the registration rights granted to Sumitomo
Bank Capital Markets, Inc. and Kamehameha Activities Association and the
restrictions on the transfer of their shares of common stock, see "-- Sumitomo
Bank Capital Markets, Inc. and Kamehameha Activities Association Registration
Rights" below and for a description of the registration rights granted in
connection with the shares of common stock offered pursuant to this prospectus
and that may be granted to the managing directors who were profit participating
limited partners, see "-- Registration Rights Instrument" and "-- Other
Registration Rights" below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who beneficially owns
"restricted securities" may not sell those securities until they have been
beneficially owned for at least one year. Thereafter, the person would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
- - 1% of the number of shares of common stock then outstanding (which equaled
approximately 4.4 million shares as of September 24, 1999); or
- - the average weekly trading volume of the common stock on the NYSE during the
four calendar weeks preceding the filing with the SEC of a notice on the SEC's
Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice and availability of current public
information about Goldman Sachs.
Under Rule 144(k), a person who is not, and has not been at any time during
the 90 days preceding a sale, an affiliate of Goldman Sachs and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate) is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. While the
shares of common stock received by the retired limited partners constitute
"restricted securities", these shares will be freely transferable by the retired
limited partners in accordance with Rule 144(k) upon the lapse or waiver of the
transfer restrictions described above.
SUMITOMO BANK CAPITAL MARKETS, INC. AND
KAMEHAMEHA ACTIVITIES ASSOCIATION
REGISTRATION RIGHTS
Goldman Sachs is a party to agreements with Sumitomo Bank Capital Markets,
Inc. and The Sumitomo Bank, Limited under which Sumitomo Bank Capital Markets,
Inc. and The Sumitomo Bank, Limited may require Goldman Sachs to register under
the Securities Act of 1933 certain of Sumitomo Bank Capital Markets, Inc.'s
shares of common stock, which includes shares of common stock receivable upon
the conversion of the nonvoting common stock. Goldman Sachs is
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a party to similar agreements with Kamehameha Activities Association.
Except for certain transfers to wholly owned subsidiaries, each
registration rights holder has agreed that it will only dispose of common stock
(i) by means of a widely dispersed underwritten public offering and (ii)
pursuant to the exercise of the registration rights set forth below.
Each registration rights holder has the right:
- - on up to ten occasions (but not more than twice every 12 months) to require
Goldman Sachs to register shares of common stock under the Securities Act of
1933; and
- - to include its shares of common stock in any registered public offering in
which the managing directors participate.
Prior to May 2000, the registration rights holders are not permitted to
transfer shares of common stock or nonvoting common stock. Between May 2000 and
May 2002, each registration rights holder may use its available registration
rights described above to sell:
- - in each 12-month period following May 2000 and May 2001, up to 20% of the
shares of common stock received by such registration rights holder in the
incorporation transactions (such holder's "original block"); and
- - with the consent of Goldman Sachs, common stock constituting up to an
additional 13 1/3% of such holder's original block.
In each 12-month period following May 2002, each registration rights holder
may use its available registration rights described above to sell common stock
constituting up to 33 1/3% of its original block.
These rights are not available for nonvoting common stock.
In addition to the rights described above, each registration rights holder
will also be entitled to sell additional shares of common stock to the extent
that managing directors who were profit participating limited partners sell
shares of common stock in an amount which in any one-year period represents, in
the aggregate, a greater percentage of the number of shares of common stock
issued to these managing directors in the incorporation transactions than the
percentages specified above (i.e., 0% during year one, 20% during years two and
three, and 33 1/3% thereafter). The exercise by the registration rights holders
of their respective rights under their registration rights agreement may, if we
determine that such exercise would interfere with a public offering by us, be
delayed by us for up to 90 days.
The registration rights agreements provide that the expenses of an offering
of common stock are generally the responsibility of each participating
registration rights holder selling common stock, apportioned on a pro rata
basis. Under the registration rights agreements, Goldman Sachs has agreed to
indemnify each participating registration rights holder against certain
liabilities, including those arising under the Securities Act of 1933.
The registration rights agreements also provide that if Goldman Sachs makes
a general offer to purchase shares of common stock held by the managing
directors who were profit participating limited partners, then a registration
rights holder will be permitted to participate in such transaction on a pro rata
basis with these managing directors. In addition, a registration rights holder
may tender its shares of common stock in any tender or exchange offer
recommended for approval by our board of directors (or as to which our board of
directors makes no recommendation).
REGISTRATION RIGHTS INSTRUMENT
In connection with the proposed donation of shares of common stock by our
former profit participating limited partners to charitable foundations and
public charities, which foundations and charities may sell those shares pursuant
to this prospectus as described under "Selling Shareholders", our board of
directors has adopted a registration rights instrument and a supplemental
registration rights instrument. The following is a description of the material
terms of the registration rights instrument, as supplemented.
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You should, however, refer to the exhibits that are a part of the registration
statement for a copy of the registration rights instrument and the supplemental
registration rights instrument. See "Available Information".
Pursuant to the registration rights instrument, as supplemented, we have
agreed to register the shares of common stock covered by this prospectus for
resale by charitable foundations and public charities.
We have agreed in the registration rights instrument, as supplemented, to
pay all of the fees and expenses relating to the offering by the charitable
organizations, other than any agency fees and commissions or underwriting
commissions or discounts or any transfer taxes incurred by the charitable
organizations in connection with their resales. We also have agreed to indemnify
the charitable organizations against certain liabilities, including those
arising under the Securities Act of 1933.
We may amend the registration rights instrument and the supplemental
registration rights instrument in any manner we deem appropriate, without the
consent of any charitable organization. However, we may not make any amendment
that would cause the shares of common stock covered by this prospectus to fail
to be "qualified appreciated stock" within the meaning of Section 170 of the
Internal Revenue Code. In addition, we may not make any amendment that would
materially and adversely affect the rights of any charitable organization
without the consent of a majority of the materially and adversely affected
charitable organizations.
OTHER REGISTRATION RIGHTS
The managing directors who were profit participating limited partners were
not granted the right to require Goldman Sachs to register the shares of common
stock that they received in connection with the incorporation transactions under
the Securities Act of 1933. However, the plan of incorporation and our charter
permit our board of directors to grant registration rights to these managing
directors. As a result, the board of directors may at any time and from time to
time grant registration rights to these managing directors. Our board of
directors exercised its authority under these instruments in connection with
adopting the registration rights instrument and the supplemental registration
rights instrument described above under "-- Registration Rights Instrument".
The ability of our board of directors to grant registration rights to the
managing directors who were profit participating limited partners, together with
the ability of the Shareholders' Committee under the shareholders' agreement to
waive the transfer restrictions related to the managing directors who were
profit participating limited partners thereunder and under the plan of
incorporation, could, if exercised, permit these managing directors to sell
significant amounts of common stock. See "Risk Factors -- Our Share Price May
Decline Due to the Large Number of Shares Eligible for Future Sale" for a
further discussion of the risks associated with these actions.
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby has been passed upon for
The Goldman Sachs Group, Inc. by Sullivan & Cromwell, New York, New York.
Certain legal matters have been passed upon for The Goldman Sachs Group, Inc. by
one of its General Counsel, Robert J. Katz or Gregory K. Palm.
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
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November 27, 1998 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The Pro Forma Consolidated Income Statement Information for the year ended
November 27, 1998 included in this prospectus has been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, on their
examination of the Pro Forma Adjustments as described in Note 2 to the Pro Forma
Consolidated Income Statement Information, and the application of those
adjustments to the historical amounts in the Pro Forma Consolidated Income
Statement Information for the year ended November 27, 1998, given on the
authority of said firm as experts in performing examinations of pro forma
financial information in accordance with standards established by the American
Institute of Certified Public Accountants.
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations", except for the (i) information
presented under the headings "VaR" or "VaR Methodology, Assumptions and
Limitations" and (ii) information for the nine months ended August 27, 1999 and
August 28, 1998, taken as a whole, of Goldman Sachs for the three-year period
ended November 27, 1998 included in this prospectus has been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in performing examinations of
management's discussion and analysis of financial condition and results of
operations in accordance with standards established by the American Institute of
Certified Public Accountants.
With respect to the unaudited condensed consolidated financial statements
of Goldman Sachs as of and for the nine months ended August 27, 1999 and for the
nine months ended August 28, 1998, and the unaudited consolidated pro forma
income statement information for the nine months ended August 27, 1999, included
in this prospectus, PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate reports dated October 5, 1999 with
respect to the unaudited condensed consolidated financial statements of Goldman
Sachs as of and for the nine months ended August 27, 1999 and for the nine
months ended August 28, 1998, and October 5, 1999 with respect to the unaudited
pro forma consolidated income statement information for the nine months ended
August 27, 1999, appearing herein state that they did not audit and they do not
express an opinion on the unaudited historical financial information or the
unaudited pro forma income statement information. Accordingly, the degree of
reliance on their reports on such information should be restricted in light of
the limited nature of the review procedures applied. PricewaterhouseCoopers LLP
is not subject to the liability provisions of Section 11 of the Securities Act
of 1933 for their reports on the unaudited historical financial information and
on the unaudited pro forma income statement information because those reports
are not a "report" or a "part" of the registration statement prepared or
certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11
of the 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 Thomson Financial
Securities Data, and have been so included in reliance on the authority of
Thomson Financial Securities Data as experts in compiling and classifying
information as to securities transactions.
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AVAILABLE INFORMATION
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, on which our common stock is listed.
We have filed a registration statement on Form S-1 with the SEC relating to
the shares of common stock covered by this prospectus. This prospectus is a part
of the registration statement and does not contain all of the information in the
registration statement. Whenever a reference is made in this prospectus to a
contract or other document of Goldman Sachs, please be aware that such reference
is not necessarily complete and that you should refer to the exhibits that are a
part of the registration statement for a copy of the contract or other document.
You may review a copy of the registration statement at the SEC's public
reference room in Washington, D.C., as well as through the SEC's Internet site.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
We have included in this prospectus statements that may constitute
"forward-looking statements" within the meaning of the safe harbor provisions of
The Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not historical facts but instead represent only our belief
regarding future events, many of which, by their nature, are inherently
uncertain and outside of our control. It is possible that our actual results may
differ, possibly materially, from the anticipated results indicated in these
forward-looking statements.
Information regarding important factors that could cause actual results to
differ, perhaps materially, from those in our forward-looking statements is
contained under the caption "Risk Factors" in this prospectus.
107
<PAGE> 109
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 August 27,
1999 and for the nine months ended August 27, 1999 and
August 28, 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 Stockholders'
Equity and Partners' Capital.............................. F-27
Condensed Consolidated Statements of Cash Flows............. F-28
Notes to Condensed Consolidated Financial Statements........ F-29
</TABLE>
F-1
<PAGE> 110
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 26 and 27 of this
prospectus) is fairly stated, in all material respects, in relation to the
consolidated financial statements from which it has been derived.
PricewaterhouseCoopers LLP
New York, New York
January 22, 1999.
F-2
<PAGE> 111
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> 112
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", effective for transactions occurring after
December 31, 1996. SFAS No. 125 establishes standards for distinguishing
transfers of financial assets that are accounted for as sales from transfers
that are accounted for as secured borrowings.
The provisions of SFAS No. 125 relating to repurchase agreements,
securities lending transactions and other similar transactions were deferred by
the provisions of SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", and became effective for transactions
entered into after December 31, 1997. This Statement requires that the
collateral obtained in certain types of secured lending transactions be recorded
on the balance sheet with a corresponding liability reflecting the obligation to
return such collateral to its owner. Effective January 1, 1998, the Firm adopted
the provisions of SFAS No. 125 that were deferred by SFAS No. 127. The adoption
of this standard increased the Firm's total assets and liabilities by $11.64
billion as of November 1998.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
("EPS"), effective for periods ending after December 15, 1997, with restatement
required for all prior periods. SFAS No. 128 establishes new standards for
computing and presenting EPS. This Statement replaces primary and fully diluted
EPS with "basic EPS", which excludes dilution, and "diluted EPS", which includes
the effect of all potentially dilutive common shares and other dilutive
securities. Because the Firm has not historically reported EPS, this Statement
will have no impact on the Firm's historical financial statements. This
Statement will, however, apply to financial statements of the Firm prepared
after the offerings.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997, with
reclassification of earlier periods required for comparative purposes. SFAS No.
130 establishes standards for the reporting and presentation of comprehensive
income and its components in the financial statements. The Firm intends to adopt
this standard in the first quarter of fiscal 1999. This Statement is limited to
issues of reporting and presentation and, therefore, will not affect the Firm's
results of operations or financial condition.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", effective for fiscal years beginning
after December 15, 1997, with reclassification of earlier periods required for
comparative purposes. SFAS No. 131 establishes the criteria for determining an
operating segment and establishes the disclosure requirements for reporting
information about operating segments. The Firm intends to adopt this standard at
the end of fiscal 1999. This Statement is limited to issues of reporting and
presentation and, therefore, will not affect the Firm's results of operations or
financial condition.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", effective for fiscal years
beginning after December 15, 1997, with restatement of disclosures for earlier
periods required for comparative purposes. SFAS No. 132 revises certain
employers' disclosures about pension and other post-retirement benefit plans.
The Firm intends to adopt this standard at the end of fiscal 1999. This
Statement is limited to issues of reporting and presentation and, therefore,
will not affect the Firm's results of operations or financial condition.
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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 $19,906
======= ====== ======= ======= ====== =======
</TABLE>
F-16
<PAGE> 125
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Firm enters into non-trading derivative contracts, such as interest
rate and currency swap agreements, to effectively convert a substantial portion
of its fixed rate long-term borrowings into U.S. dollar-based floating rate
obligations. Accordingly, the aggregate carrying value of these long-term
borrowings and related hedges approximates fair value. The effective weighted
average interest rates for long-term borrowings, after hedging activities, are
set forth below:
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER 1997 NOVEMBER 1998
--------------- ----------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
($ in millions)
<S> <C> <C> <C> <C>
Long-term borrowings:
Fixed-rate obligations................ $ 291 7.76% $ 222 8.09%
Floating-rate obligations............. 15,376 5.84 19,684 5.63
------- -------
Total long-term
borrowings................ $15,667 5.88 $19,906 5.66
======= =======
</TABLE>
The notional amounts, fair value and carrying value of the related swap
agreements used for non-trading purposes are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
--------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
Notional amount........................................ $8,708 $10,206
</TABLE>
<TABLE>
<CAPTION>
AS OF NOVEMBER
-----------------------------------------------
1997 1998
---------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(in millions)
<S> <C> <C> <C> <C>
Fair value.......................... $212 $4 $519 $7
Carrying value...................... 98 4 98 8
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Firm is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
businesses. Management believes, based on currently available information, that
the results of such proceedings, in the aggregate, will not have a material
adverse effect on the Firm's financial condition, but might be material to the
Firm's operating results for any particular period, depending, in part, upon the
operating results for such period.
LEASES
The Firm has obligations under long-term non-cancelable lease agreements,
principally for office space, expiring on various dates through 2016. Certain
agreements are subject to periodic escalation charges for increases in real
estate taxes and other charges. Minimum rental commitments, net of minimum
sublease rentals, under non-cancelable leases for 1999 and the
F-17
<PAGE> 126
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
succeeding four years and rent charged to operating expense for the last three
years are set forth below:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
MINIMUM RENTAL COMMITMENTS:
1999.......................................... $ 142
2000.......................................... 139
2001.......................................... 139
2002.......................................... 136
2003.......................................... 128
Thereafter.................................... 860
------
Total............................... $1,544
======
NET RENT EXPENSE:
1996.......................................... $ 83
1997.......................................... 87
1998.......................................... 104
</TABLE>
OTHER COMMITMENTS
The Firm acts as an investor in merchant banking transactions which
includes making long-term investments in equity and debt securities in privately
negotiated transactions, corporate acquisitions and real estate transactions,
and in connection with a bridge loan fund. In connection with these activities,
the Firm had commitments to invest up to $670 million and $1.39 billion in
corporate and real estate merchant banking investment and bridge loan funds as
of November 1997 and November 1998, respectively.
In connection with loan origination and participation, the Firm had loan
commitments of $5.23 billion and $1.51 billion as of November 1997 and November
1998, respectively. These commitments are agreements to lend to counterparties,
have fixed termination dates and are contingent on all conditions to borrowing
set forth in the contract having been met. Since these commitments may expire
unused, the total commitment amount does not necessarily reflect the actual
future cash flow requirements.
The Firm also had outstanding guarantees of $786 million and $790 million
relating to its fund management activities as of November 1997 and November
1998, respectively.
The Firm had pledged securities of $23.60 billion and $22.88 billion as
collateral for securities borrowed of approximately equivalent value as of
November 1997 and November 1998, respectively.
The Firm obtains letters of credit issued to counterparties by various
banks that are used in lieu of securities or cash to satisfy various collateral
and margin deposit requirements. Letters of credit outstanding were $10.13
billion and $8.81 billion as of November 1997 and November 1998, respectively.
NOTE 7. EMPLOYEE BENEFIT PLANS
The Firm sponsors various pension plans and certain other post-retirement
benefit plans, primarily health care and life insurance, which cover most
employees worldwide. The Firm also provides certain benefits to former or
inactive employees prior to retirement. Plan benefits are primarily based on the
employee's compensation and years of service. Pension costs are
F-18
<PAGE> 127
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined actuarially and are funded in accordance with the Internal Revenue
Code. Plan assets are held in a trust and consist primarily of listed stocks and
U.S. bonds. A summary of these plans is set forth below:
DEFINED BENEFIT PENSION PLANS
The components of pension expense/(income) are set forth below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost, benefits earned during the period............. $ 15 $ 15 $ 14
Interest cost on projected benefit obligation............... 8 10 11
Return on plan assets....................................... (24) (18) (14)
Net amortization............................................ 14 4 (1)
---- ---- ----
Total pension expense............................. $ 13 $ 11 $ 10
==== ==== ====
U.S. plans.................................................. $ (1) $ (3) $ (3)
International plans......................................... 14 14 13
---- ---- ----
Total pension expense............................. $ 13 $ 11 $ 10
==== ==== ====
</TABLE>
The weighted average assumptions used to develop net periodic pension cost
and the actuarial present value of the projected benefit obligation are set
forth below. The assumptions represent a weighted average of the assumptions
used for the U.S. and international plans and are based on the economic
environment of each applicable country.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
U.S. PLANS:
Discount rate............................................... 7.50% 7.50% 7.00%
Rate of increase in future compensation levels.............. 5.00 5.00 5.00
Expected long-term rate of return on plan assets............ 7.50 7.50 7.50
INTERNATIONAL PLANS:
Discount rate............................................... 5.70 5.70 5.00
Rate of increase in future compensation levels.............. 5.30 5.30 4.75
Expected long-term rate of return on plan assets............ 7.00 7.00 6.00
</TABLE>
F-19
<PAGE> 128
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> 129
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> 130
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>
<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.
F-22
<PAGE> 131
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 132
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
------------------------------
To the Directors and Shareholders,
The Goldman Sachs Group, Inc.:
We have reviewed the condensed consolidated statement of financial
condition of The Goldman Sachs Group, Inc. and Subsidiaries (the "Company") as
of August 27, 1999, and the condensed consolidated statements of earnings for
the nine months ended August 27, 1999 and August 28, 1998, the condensed
consolidated statements of cash flows for the nine months ended August 27, 1999
and August 28, 1998 and the condensed consolidated statement of changes in
stockholders' equity and partners' capital for the nine months ended August 27,
1999. These financial statements are the responsibility of the Company'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 financial statements for them to be
in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
New York, New York
October 5, 1999.
F-24
<PAGE> 133
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST
----------------------------------------
1998 1999
---- ----
(in millions, except share and per share
amounts)
<S> <C> <C>
REVENUES:
Investment banking.......................................... $ 2,547 $ 3,054
Trading and principal investments........................... 2,719 4,540
Asset management and securities services.................... 1,531 1,788
Interest income............................................. 11,404 9,269
------------ ------------
Total revenues......................................... 18,201 18,651
Interest expense, principally on short-term funding......... 10,596 8,779
------------ ------------
Revenues, net of interest expense...................... 7,605 9,872
OPERATING EXPENSES:
Compensation and benefits, excluding employee initial public
offering awards........................................... 3,566 4,932
Non-recurring employee initial public offering awards(1).... -- 2,257
Amortization of employee initial public offering awards..... -- 154
Brokerage, clearing and exchange fees....................... 301 328
Market development.......................................... 201 247
Communications and technology............................... 189 224
Depreciation and amortization............................... 158 229
Occupancy................................................... 147 221
Professional services and other............................. 229 297
Charitable contribution..................................... -- 200
------------ ------------
Total operating expenses............................... 4,791 9,089
Pre-tax earnings............................................ 2,814 783
Provision/(benefit) for taxes............................... 430 (1,202)
------------ ------------
Net earnings................................................ $ 2,384 $ 1,985
============ ============
Earnings per share:
Basic..................................................... $ 4.18
Diluted................................................... 4.11
Average common shares outstanding:
Basic..................................................... 474,698,130
Diluted................................................... 483,146,111
</TABLE>
- ---------------
(1) Includes expense of $666 million related to the initial irrevocable
contribution of shares of common stock to a defined contribution plan.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-25
<PAGE> 134
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF
AUGUST 1999
-----------
(in millions,
except
share and
per share
amounts)
<S> <C>
ASSETS:
Cash and cash equivalents................................... $ 1,900
Cash and securities segregated in compliance with U.S.
federal and other regulations (principally U.S. government
obligations).............................................. 8,945
Receivables from brokers, dealers and clearing
organizations............................................. 4,236
Receivables from customers and counterparties............... 25,183
Securities borrowed......................................... 78,662
Securities purchased under agreements to resell............. 36,702
Right to receive securities................................. 2,010
Financial instruments owned, at fair value:
Commercial paper, certificates of deposit and time
deposits................................................ 1,699
U.S. government, federal agency and sovereign
obligations............................................. 23,997
Corporate debt............................................ 9,918
Equities and convertible debentures....................... 13,358
State, municipal and provincial obligations............... 584
Derivative contracts...................................... 23,883
Physical commodities...................................... 671
Other assets................................................ 4,525
--------
$236,273
========
LIABILITIES AND EQUITY:
Short-term borrowings, including commercial paper........... $ 36,612
Payables to brokers, dealers and clearing organizations..... 762
Payables to customers and counterparties.................... 37,862
Securities loaned........................................... 26,331
Securities sold under agreements to repurchase.............. 32,634
Obligation to return securities............................. 4,728
Financial instruments sold, but not yet purchased, at fair
value:
U.S. government, federal agency and sovereign
obligations............................................. 25,039
Corporate debt............................................ 2,405
Equities and convertible debentures....................... 9,084
Derivative contracts...................................... 25,798
Physical commodities...................................... 673
Other liabilities and accrued expenses...................... 5,408
Long-term borrowings........................................ 20,340
--------
227,676
Commitments and contingencies
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............................................... 4
Restricted stock units; 63,252,726 units issued and
outstanding............................................... 3,356
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized, 7,440,362 shares issued and
outstanding............................................... --
Additional paid-in capital.................................. 7,152
Accumulated deficit......................................... (279)
Unearned compensation....................................... (1,617)
Accumulated other comprehensive loss........................ (19)
--------
8,597
--------
$236,273
========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-26
<PAGE> 135
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 1999
------------
(in millions, except
per share amounts)
<S> <C>
Partners' capital
Balance, beginning of period................................ $ 6,310
Transfer of beginning partners' capital allocated for
income taxes and potential withdrawals.................. 74
Net earnings.............................................. 2,264(1)
Capital contributions..................................... 48
Returns on capital and certain distributions to
partners................................................ (306)
Distributions of remaining partners' capital.............. (4,520)(2)
Exchange of partnership interests for shares of common
stock................................................... (3,901)
Transfer to accumulated other comprehensive income........ 31
-------
Balance, end of period.................................... --
Common stock, par value $0.01
Balance, beginning of period.............................. --
Common stock issued....................................... 4
-------
Balance, end of period.................................... 4
Restricted stock units
Balance, beginning of period.............................. --
Restricted stock units granted, net of forfeitures of $23
million................................................. 3,356
-------
Balance, end of period.................................... 3,356
Nonvoting common stock, par value $0.01
Balance, beginning of period.............................. --
Nonvoting common stock issued............................. --
-------
Balance, end of period.................................... --
Additional paid-in capital
Balance, beginning of period.............................. --
Exchange of partnership interests for shares of common
stock................................................... 3,901
Initial public offering of common stock................... 2,638
Issuance of common stock contributed to a defined
contribution plan....................................... 666
Dividends paid............................................ (53)
-------
Balance, end of period.................................... 7,152
Accumulated deficit
Balance, beginning of period.............................. --
Net loss.................................................. (279)(3)
-------
Balance, end of period.................................... (279)
Unearned compensation
Balance, beginning of period.............................. --
Restricted stock units granted, net of forfeitures of $16
million................................................. (1,771)
Amortization of restricted stock units.................... 154
-------
Balance, end of period.................................... (1,617)
Accumulated other comprehensive loss
Balance, beginning of period.............................. --
Transfer from partners' capital........................... (31)
Currency translation adjustment........................... 12
-------
Balance, end of period.................................... (19)
-------
$ 8,597
=======
</TABLE>
- ---------------
(1) Represents net earnings of the partnership from November 28, 1998 through
May 6, 1999.
(2) Represents the retired limited partners' exchanges of partnership interests
for cash and junior subordinated debentures, the redemption of senior
limited partnership interests for cash and other distributions of partners'
capital in accordance with the partnership agreement.
(3) Represents net loss of the corporation from May 7, 1999 through August 27,
1999.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-27
<PAGE> 136
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
AUGUST 1998 AUGUST 1999
----------- -----------
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................................ $ 2,384 $ 1,985
Non-cash items included in net earnings:
Depreciation and amortization........................... 158 229
Deferred income taxes................................... 7 (1,388)
Stock-based compensation................................ -- 2,405
Changes in operating assets and liabilities:
Cash and securities segregated in compliance with U.S.
federal and other regulations......................... (2,875) (1,058)
Net receivables from brokers, dealers and clearing
organizations......................................... (307) 116
Net payables to customers and counterparties............ 6,330 (8,547)
Securities borrowed, net................................ (21,077) (4,290)
Financial instruments owned, at fair value.............. (19,688) (5,983)
Financial instruments sold, but not yet purchased, at
fair value............................................ 15,210 10,012
Other, net.............................................. 706 1,212
-------- --------
Net cash used for operating activities............. (19,152) (5,307)
Cash flows from investing activities:
Property, leasehold improvements and equipment............ (345) (368)
Financial instruments owned, at fair value................ (202) 119
-------- --------
Net cash used for investing activities............. (547) (249)
Cash flows from financing activities:
Short-term borrowings, net................................ 5,623 720
Securities sold under agreements to repurchase, net....... 8,119 (2,842)
Issuance of long-term borrowings.......................... 9,736 9,098
Repayment of long-term borrowings......................... (1,219) (572)
Capital contributions..................................... 6 48
Dividends paid............................................ -- (53)
Returns on capital and certain distributions to
partners................................................ (463) (306)
Proceeds from issuance of common stock.................... -- 2,639
Partners' capital distributions, net...................... -- (4,112)
Partners' capital allocated for income taxes and potential
withdrawals............................................. (1,235) --
-------- --------
Net cash provided by financing activities.......... 20,567 4,620
Net increase/(decrease) in cash and cash
equivalents.......................................... 868 (936)
Cash and cash equivalents, beginning of period.............. 1,328 2,836
-------- --------
Cash and cash equivalents, end of period.................... $ 2,196 $ 1,900
======== ========
</TABLE>
- ----------------
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest approximated the related expense for each of the
fiscal periods presented. Payments of income taxes were immaterial for the
period ended August 28, 1998 and were $236 million for the period ended August
27, 1999.
The junior subordinated debentures of $371 million that were issued to the
retired limited partners in exchange for their partnership interests were
excluded from the consolidated statement of cash flows as they represented
non-cash items.
Stock-based compensation includes $666 million related to the initial
irrevocable contribution of shares of common stock to a defined contribution
plan.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-28
<PAGE> 137
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS
The Goldman Sachs Group, Inc. ("Group Inc."), a Delaware corporation,
together with its consolidated subsidiaries (collectively, the "Firm"), is a
global investment banking and securities firm that provides a wide range of
financial services worldwide to a substantial and diversified client base. On
May 7, 1999, the Firm converted from a partnership to a corporation and
completed its initial public offering.
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 merchant banking investments);
and
- Asset Management and Securities Services, which includes asset
management, securities services and commissions.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the
parent company, Group Inc., 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. These condensed consolidated financial statements are
unaudited and should be read in conjunction with the audited consolidated
financial statements included elsewhere in this prospectus.
These condensed 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, 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.
These unaudited condensed 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 operating results
in 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 August 1998 and August
1999 refer to the Firm's fiscal period ended, or the date, as the context
requires, August 28, 1998 and August 27, 1999, respectively.
STOCK-BASED COMPENSATION
The Firm has elected to account for stock-based employee compensation plans
in accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", as permitted by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". In accordance with APB No. 25, compensation expense is not
recognized for stock options that have no intrinsic value on the date of grant.
Compensation expense is recognized immediately for restricted stock units for
F-29
<PAGE> 138
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
which future service is not required as a condition to the delivery of the
underlying shares of common stock. For restricted stock units with future
service requirements, compensation expense is recognized over the relevant
vesting period using an accelerated amortization methodology.
INCOME TAXES
The Firm accounts for taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes", which requires the recognition of tax benefits or expenses on
the temporary differences between the financial reporting and tax bases of its
assets and liabilities. As a partnership, the Firm was primarily subject to
unincorporated business taxes and taxes in foreign jurisdictions on certain of
its operations. As a corporation, the earnings of the Firm are subject to U.S.
federal, foreign, state and local taxes. As a result of its conversion to
corporate form, the Firm recognized the tax effect of the change in its income
tax rate on both its deferred tax assets and liabilities and the earnings
attributable to the period from May 7, 1999 to the end of its third quarter. The
Firm's tax assets and liabilities are presented as a component of "Other assets"
and "Other liabilities and accrued expenses", respectively, on the consolidated
statement of financial condition.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
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:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED AUGUST
----------------
1998 1999
---- ----
(in millions)
<S> <C> <C>
Net earnings................................................ $2,384 $1,985
Currency translation adjustment............................. (53) 12
------ ------
Total comprehensive income.................................. $2,331 $1,997
====== ======
</TABLE>
As a partnership, the Firm's cumulative translation adjustment was reported
as a component of "Partners' capital allocated for income taxes and potential
withdrawals" on the consolidated statement of financial condition. It was not
reported as a separate component of equity because it was not material. In
connection with the conversion to corporate form, the cumulative translation
adjustment is reported as a component of "Accumulated other comprehensive loss"
in stockholders' equity on the consolidated statement of financial condition.
ACCOUNTING DEVELOPMENTS
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 -- an amendment of FASB Statement No. 133", which deferred for
one year the effective date of the accounting and reporting requirements of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively
F-30
<PAGE> 139
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 the
provisions of SFAS No. 133 deferred by SFAS No. 137 in fiscal 2001 and is
currently assessing its effect.
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 fixed income and equity products, 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>
NINE MONTHS
ENDED AUGUST
----------------
1998 1999
---- ----
(in millions)
<S> <C> <C>
FICC........................................................ $2,109 $2,448
Equities.................................................... 659 1,531
Principal investments....................................... 274 543
------ ------
Total Trading and Principal Investments..................... $3,042 $4,522
====== ======
</TABLE>
F-31
<PAGE> 140
THE GOLDMAN SACHS GROUP, INC. 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 each 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 disclosures, 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. Substantially all of the 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 AUGUST 1999
----------------------
ASSETS LIABILITIES
------ -----------
(in millions)
<S> <C> <C>
Forward settlement contracts................................ $ 4,152 $ 3,751
Swap agreements............................................. 10,749 11,567
Option contracts............................................ 8,938 10,471
------- -------
Total....................................................... $23,839 $25,789
======= =======
</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-32
<PAGE> 141
THE GOLDMAN SACHS GROUP, INC. 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 AUGUST 1999
---------------------
ASSETS LIABILITIES
------ -----------
(in millions)
<S> <C> <C>
Fair value.................................................. $16 $153
Carrying value.............................................. 44 9
</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
AUGUST 1999
-----------
(in millions)
<S> <C>
Commercial paper............................................ $11,822
Promissory notes............................................ 9,989
Bank loans and other(1)..................................... 14,801
-------
Total....................................................... $36,612
=======
</TABLE>
- ---------------
(1) As of August 1999, short-term borrowings included $8,419 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. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic EPS is calculated by dividing net earnings by the
weighted-average number of common shares outstanding. Diluted EPS includes the
determinants of basic EPS and, in addition, gives effect to dilutive potential
common shares.
F-33
<PAGE> 142
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The computations of basic and diluted EPS are set forth below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 1999
-----------------
(in millions, except for share
and per share amounts)
<S> <C>
Numerator for basic and diluted earnings per
share -- earnings available to common stockholders........ $ 1,985
===========
Denominator for basic earnings per share -- weighted-average
number of common shares(1).................................. 474,698,130
Effect of dilutive securities:
Restricted stock units.................................... 4,508,530
Stock options............................................. 3,939,451
-----------
Dilutive potential common shares............................ 8,447,981
-----------
Denominator for diluted earnings per share --
weighted-average number of common shares and dilutive
potential common shares................................... 483,146,111
===========
Basic earnings per share.................................... $ 4.18
Diluted earnings per share.................................. 4.11
</TABLE>
- ---------------
(1) Includes common stock, nonvoting common stock and restricted stock units
awarded to employees for which future service is not required as a condition
to the delivery of the underlying common stock.
NOTE 6. EMPLOYEE INCENTIVE PLANS
STOCK INCENTIVE PLAN
The Firm sponsors a stock incentive plan which provides for grants of
incentive stock options, nonqualified stock options, stock appreciation rights,
dividend equivalent rights, restricted stock, restricted stock units and other
stock-based awards. The stock incentive plan also permits the making of loans to
purchase shares of common stock.
The total number of shares of common stock that may be issued under the
stock incentive plan through fiscal 2002 may not exceed 300,000,000 shares and,
in each fiscal year thereafter, may not exceed five percent 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. As of August 1999, 196,984,072 shares were available for grant under the
stock incentive plan, after giving effect to stock-based awards granted by the
Firm through August 1999.
Through August 1999, the Firm granted the following awards under the stock
incentive plan to its employees (other than managing directors who were profit
participating limited partners) and to its outside directors.
RESTRICTED STOCK UNITS
Restricted stock units granted to employees through August 1999 and
outstanding as of the end of the period, for which no additional service is
required to obtain delivery of the underlying common stock, were 29,906,160, net
of forfeitures of 127,855. The common stock underlying these restricted stock
units will generally be deliverable in equal installments on or about the first,
second and third anniversaries of the date of grant. While no additional service
is required to
F-34
<PAGE> 143
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
obtain delivery of the underlying common stock, delivery of the common stock is
conditioned on the grantee's satisfying certain requirements. For purposes of
calculating basic earnings per share and book value per share, the shares of
common stock underlying the restricted stock units are included in common shares
outstanding. During the nine-month period ended August 1999, the Firm recorded
$1.59 billion in non-cash compensation expense related to these restricted stock
units.
Restricted stock units granted to employees through August 1999 and
outstanding as of the end of the period, for which additional service is
required to obtain delivery of the underlying common stock, were 33,340,566, net
of forfeitures of 304,471. Substantially all of these restricted stock units
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 grant if the grantee has satisfied certain conditions and the grantee's
employment with the Firm has not been terminated, with certain exceptions for
terminations of employment due to death, retirement, extended absence or a
change in control. For purposes of calculating basic earnings per share and book
value per share, the shares of common stock underlying these restricted stock
units are excluded from common shares outstanding since future service is
required as a condition to the delivery of the underlying common stock. The
dilutive effect of these restricted stock units is, however, included in diluted
common shares outstanding under the treasury stock method. The Firm has recorded
non-cash expense of $154 million related to these awards through August 1999 and
will record $1.62 billion over the remaining related service period.
OUTSIDE DIRECTOR AWARDS
Restricted stock units granted to outside directors through August 1999 and
outstanding as of the end of the period, for which no additional service is
required to obtain delivery of the underlying common stock, were 6,000. The
common stock underlying these restricted stock units will be deliverable the
year after the grantee retires. For purposes of calculating basic earnings per
share and book value per share, the shares of common stock underlying these
restricted stock units are included in common shares outstanding.
STOCK OPTIONS
Stock options granted to employees through August 1999 and outstanding as
of the end of the period were 39,763,202, net of forfeitures of 364,390. These
options generally will become exercisable in equal installments commencing on or
about the third, fourth and fifth anniversaries of the date of grant if the
grantee has satisfied certain conditions and the grantee's employment with the
Firm has not been terminated, with certain exceptions for terminations of
employment due to death, retirement, extended absence or a change in control.
Once vested, these options will generally remain exercisable, subject to
satisfaction of certain conditions, until the tenth anniversary of the date of
grant. The dilutive effect of these options is included in diluted common shares
outstanding under the treasury stock method. As of August 1999, the outstanding
options had a weighted-average exercise price of $53 and a weighted-average
remaining life of approximately 10 years.
F-35
<PAGE> 144
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The weighted-average fair value of options granted was $16.02 per option.
Fair value is estimated as of the grant date based on a binomial option pricing
model using the following weighted-average assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 6.1%
Expected life............................................... 7 years
Expected volatility......................................... 30.0%
Dividend yield.............................................. 1.0%
</TABLE>
Pro Forma Effect of SFAS No. 123
In accordance with APB No. 25, compensation expense will not be recognized
since these options had no intrinsic value on the date of grant. If the Firm
were to recognize compensation expense under the fair value-based method of SFAS
No. 123, net earnings would have decreased resulting in pro forma net earnings
and earnings per share as set forth below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 1999
-----------------
(in millions, except for share
and per share amounts)
<S> <C>
Net earnings, as reported................................... $ 1,985
Pro forma net earnings...................................... 1,953
EPS, as reported:
Basic..................................................... $ 4.18
Diluted................................................... 4.11
Pro forma EPS:
Basic..................................................... $ 4.11
Diluted................................................... 4.04
Basic common shares outstanding............................. 474,698,130
Diluted common shares outstanding........................... 483,146,111
</TABLE>
In the table above, pro forma compensation expense associated with option
grants is recognized over the relevant vesting period. The effect of applying
SFAS No. 123 in the pro forma disclosure above is not representative of the
potential pro forma effect on net earnings in future periods.
DEFINED CONTRIBUTION PLAN
In addition to the stock incentive plan, the Firm has established a
non-qualified defined contribution plan (the "Plan") for certain senior
employees. Shares of common stock contributed to and outstanding in the Plan as
of August 1999 were 12,555,866. The initial irrevocable contribution of common
stock to the Plan in connection with the initial public offering will vest and
be distributable to each participant in equal installments on or about the
third, fourth and fifth anniversaries of the date of grant if the participant
satisfies certain conditions, and the participant's employment with the Firm has
not been terminated, with certain exceptions for terminations of employment due
to death or a change in control. Dividends on the underlying shares of common
stock are paid currently to the participants. Forfeited shares remain in the
Plan and will be reallocated to the remaining participants. The Firm's expense
for the Plan was $666 million through August 1999, resulting from the immediate
recognition of expense related to contributions made in connection with the
initial public offering in the second quarter.
F-36
<PAGE> 145
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 7. INCOME TAXES
Prior to its conversion to corporate form, the Firm operated as a
partnership and generally was not subject to U.S. federal and state income
taxes. The earnings of the Firm, however, were subject to local unincorporated
business taxes. In addition, certain of the Firm's non-U.S. subsidiaries were
subject to income taxes in their local jurisdictions. The partners of the Firm's
predecessor partnership were taxed on their proportionate share of the
partnership's taxable income or loss. Effective with the conversion from a
partnership to a corporation on May 7, 1999, the Firm became subject to U.S.
federal, foreign, state and local corporate income taxes. The components of
pre-tax earnings and income tax expense and benefits reflected on the
consolidated statements of earnings are set forth below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 1999
-----------------
(in millions)
<S> <C>
Pre-tax earnings:
U.S. ....................................................... $ 120
Non-U.S. ................................................... 663
-------
Total pre-tax earnings................................. $ 783
=======
Current taxes:
U.S. federal................................................ $ (197)
State and local............................................. (16)
Non-U.S..................................................... 399
-------
Total current tax (benefit)/expense.................... 186
Deferred taxes:
U.S. federal................................................ (901)
State and local............................................. (285)
Non-U.S. ................................................... (202)
-------
Total deferred tax expense/(benefit)................... (1,388)
-------
Total tax expense/(benefit)............................ $(1,202)
=======
</TABLE>
F-37
<PAGE> 146
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Deferred income taxes reflect the net tax effects of temporary differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when such
differences are expected to reverse. In connection with the conversion from a
partnership to a corporation, the Firm recognized a deferred tax benefit of $825
million primarily related to the revaluation of net deferred tax assets recorded
in accordance with the provisions of SFAS No. 109. Significant components of the
Firm's net deferred tax assets as of August 1999 are set forth below:
<TABLE>
<CAPTION>
AS OF AUGUST
1999
------------
(in millions)
<S> <C>
Deferred tax assets:
Compensation and benefits................................... $1,273
Depreciation and amortization............................. 51
Other, net................................................ 320
Less: valuation allowance(1).............................. (113)
------
Total deferred tax assets......................... 1,531
------
Deferred tax liabilities:
Unrealized income......................................... 72
------
Total deferred tax liabilities.................... 72
------
Net deferred tax assets........................... $1,459
======
</TABLE>
- ---------------
(1) Relates primarily to the ability to recognize tax benefits associated with
foreign operations.
A reconciliation of the statutory U.S. federal income tax rate of 35% to
the Firm's effective income tax rate is set forth below:
<TABLE>
<CAPTION>
TAX BENEFIT
-----------------
NINE MONTHS ENDED
AUGUST 1999
-----------------
<S> <C>
U.S. statutory tax rate..................................... 35.0%
Increase related to:
State and local taxes, net of U.S. income tax effects..... 5.7
Other..................................................... 0.3
------
Rate before one-time events................................. 41.0
Revaluation of deferred tax assets upon the change in tax
status.................................................... (105.3)
Rate benefit for partnership period......................... (96.0)
Other....................................................... 6.8
------
Total tax benefit................................. (153.5%)
======
</TABLE>
The deferred tax assets recognized upon the change in tax status of the
Firm primarily reflect the revaluation of the Firm's deferred tax assets and
liabilities at the Firm's corporate income tax rate. The Firm's effective tax
rate in the nine-month period ended August 1999 includes a rate benefit
attributable to the fact that the Firm generally was not subject to corporate
taxes on its earnings prior to its conversion to corporate form.
F-38
<PAGE> 147
THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 8. COMMITMENTS AND 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.
NOTE 9. REGULATED SUBSIDIARIES
GS&Co., a registered U.S. broker-dealer and subsidiary of Group Inc., 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 August 1999, GS&Co. had regulatory
net capital, as defined, of $3.16 billion, which exceeded the amount required by
$2.61 billion.
GSI, a registered U.K. broker-dealer and subsidiary of Group Inc., 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 August 1999, GSI and GSJL were in compliance with their local
capital adequacy requirements.
Certain other subsidiaries of the Firm are also subject to capital adequacy
requirements promulgated by authorities of the countries in which they operate.
As of August 1999, these subsidiaries were in compliance with their local
capital adequacy requirements.
NOTE 10. SUBSEQUENT EVENT
On September 20, 1999, the Board of Directors of Group, Inc. declared a
dividend of $0.12 per share to be paid on November 22, 1999 to voting and
nonvoting common stockholders of record on October 25, 1999.
F-39
<PAGE> 148
PLAN OF DISTRIBUTION
The selling shareholders, and their pledgees, donees, transferees or other
successors in interest, may offer and sell, from time to time, some or all of
the shares of common stock covered by this prospectus. We have registered the
shares of common stock covered by this prospectus for offer and sale by the
selling shareholders so that those shares may be freely sold to the public by
them. Registration of the shares of common stock covered by this prospectus does
not mean, however, that those shares necessarily will be offered or sold. We
will not receive any proceeds from any sale by the selling shareholders of the
securities. See "Use of Proceeds". We will pay all costs, expenses and fees in
connection with the registration of the shares of common stock, including fees
of our counsel and accountants, fees payable to the SEC and listing fees. We
estimate those fees and expenses to be approximately $1.5 million. The selling
shareholders will pay all underwriting discounts and commissions and similar
selling expenses, if any, attributable to the sale of the shares of common stock
covered by this prospectus.
The selling shareholders, including their pledgees, donees, transferees or
other successors in interest, may sell the shares of common stock covered by
this prospectus from time to time, at market prices prevailing at the time of
sale, at prices related to market prices, at a fixed price or prices subject to
change or at negotiated prices, by a variety of methods including the following:
- - in privately negotiated transactions;
- - through broker-dealers, who may act as agents or principals;
- - in a block trade in which a broker-dealer will attempt to sell a block of
shares of common stock as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
- - through one or more underwriters on a firm commitment or best-efforts basis;
- - directly to one or more purchasers;
- - through agents; or
- - in any combination of the above.
In effecting sales, brokers or dealers engaged by the selling shareholders
may arrange for other brokers or dealers to participate. Broker-dealer
transactions may include:
- - purchases of the shares of common stock by a broker-dealer as principal and
resales of the shares of common stock by the broker-dealer for its account
pursuant to this prospectus;
- - ordinary brokerage transactions; or
- - transactions in which the broker-dealer solicits purchasers.
At any time a particular offer of the shares of common stock covered by
this prospectus is made, a revised prospectus or prospectus supplement, if
required, will be distributed which will set forth the aggregate amount of
shares of common stock covered by this prospectus being offered and the terms of
the offering, including the name or names of any underwriters, dealers, brokers
or agents, any discounts, commissions, concessions and other items constituting
compensation from the selling shareholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers. Such prospectus supplement,
and, if necessary, a post-effective amendment to the registration statement of
which this prospectus is a part, will be filed with the SEC to reflect the
disclosure of additional information with respect to the distribution of the
shares of common stock covered by this prospectus.
In connection with the sale of the shares of common stock covered by this
prospectus through underwriters, underwriters may receive compensation in the
form of underwriting discounts or commissions and may also receive commissions
from purchasers of shares of common stock for whom they may act as agent.
Underwriters may sell to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agent.
P-1
<PAGE> 149
Goldman, Sachs & Co., a subsidiary of The Goldman Sachs Group, Inc., may be
one such underwriter.
The common stock is listed on the NYSE under the symbol "GS".
Because Goldman, Sachs & Co. is a member of the NYSE and because of its
relationship to The Goldman Sachs Group, Inc., it is not permitted under the
rules of the NYSE to make markets in or recommendations regarding the purchase
or sale of the common stock.
Any underwriters, broker-dealers or agents participating in the
distribution of the shares of common stock covered by this prospectus may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933,
and any commissions received by any of those underwriters, broker-dealers or
agents may be deemed to be underwriting commissions under the Securities Act of
1933.
We have agreed, in the registration rights instrument, to indemnify the
selling shareholders and each person or entity which participates as or may be
deemed to be an underwriter in the offering or sale of the selling shareholders'
shares of common stock against certain liabilities (and to contribute to
payments in respect of those liabilities), including liabilities arising under
the Securities Act of 1933. See "Shares Eligible for Future Sale -- Registration
Rights Instrument" for a further description of the terms of the registration
rights instrument.
Some of the shares of common stock covered by this prospectus may be sold
in private transactions or under Rule 144 under the Securities Act of 1933
rather than pursuant to this prospectus.
This prospectus may also be used in connection with sales by Goldman, Sachs
& Co. of up to 1,084,316 shares of common stock donated to charitable
organizations by our retired limited partners.
P-2
<PAGE> 150
- -------------------------------------------------------
- -------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell or to buy only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Our Business Principles............... 2
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 19
Price Range of Our Common Stock and
Dividends........................... 19
Report of Independent Accountants on
Pro Forma Consolidated Income
Statement Information............... 20
Review Report of Independent
Accountants on Pro Forma
Consolidated Income Statement
Information......................... 21
Pro Forma Consolidated Income
Statement Information............... 22
Notes to Pro Forma Consolidated Income
Statement Information............... 24
Selected Consolidated Financial
Data................................ 26
Report of Independent Accountants on
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Business.............................. 53
Management............................ 75
Selling Shareholders.................. 87
Principal Shareholders................ 91
Certain Relationships and Related
Transactions........................ 93
Description of Capital Stock.......... 97
Shares Eligible for Future Sale....... 102
Validity of Common Stock.............. 105
Experts............................... 105
Available Information................. 107
Cautionary Statement Pursuant to The
Private Securities Litigation Reform
Act of 1995......................... 107
Index to Consolidated Financial
Statements.......................... F-1
Plan of Distribution.................. P-1
</TABLE>
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
7,985,941 Shares
THE GOLDMAN SACHS
GROUP, INC.
Common Stock
------------------
[GOLDMAN SACHS LOGO]
------------------
GOLDMAN, SACHS & CO.
-------------------------------------------------------
-------------------------------------------------------
<PAGE> 151
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the estimated expenses to be incurred by
the Registrant in connection with the distribution of the securities registered
under this registration statement:
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 166,110
NASD fees................................................... 30,500
Legal fees and expenses..................................... 500,000
Fees and expenses of qualification under state securities
laws (including legal fees)............................... 10,000
Accounting fees and expenses................................ 60,000
Printing and engraving fees................................. 575,000
Miscellaneous............................................... 158,390
----------
Total............................................. $1,500,000
==========
</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 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 has entered into
agreements with certain directors, officers and employees who are asked to serve
in specified capacities at subsidiaries and other entities.
II-1
<PAGE> 152
The Registrant has 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 and certain 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. The Registrant has also
entered into a similar indemnification agreement with its directors, some of its
officers and all other persons requested or authorized by the Registrant's board
of directors or any committee thereof to take actions on behalf of the
Registrant in connection with this registration statement and certain other
registration statements. These agreements are 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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its conversion to corporate form, the Registrant issued:
(i) 265,019,073 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 these managing
directors' interests in The Goldman Sachs Group, L.P. and certain other
affiliates; (ii) 47,270,551 shares of common stock and $295 million principal
amount of 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 affiliates; (iii) 30,425,052 shares of common stock and 7,440,362 shares
of the Registrant's nonvoting common stock, par value $0.01 per share, to
Sumitomo Bank Capital Markets, Inc. in exchange for its interests in The Goldman
Sachs Group, L.P. and Goldman, Sachs & Co.; and (iv) 30,975,421 shares of common
stock to Kamehameha Activities Association in exchange for its interests in The
Goldman Sachs Group, L.P. Also, simultaneously with its conversion to corporate
form on May 7, 1999, the Registrant made awards of restricted stock units and/or
stock options to substantially all of its employees and made an irrevocable
contribution of shares 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 Activities Association were not registered under
the Securities Act of 1933, because the offering and sale (i) was made in
reliance on the exemption provided by Section 4(2) of the Securities
II-2
<PAGE> 153
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 provided no 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 $53.00 per share. Under this arrangement, up to 386,500
shares of common stock may be issued. The offering and sale of these 386,500
shares of common stock was made pursuant to Rule 701 under the Securities Act of
1933.
On September 24, 1999, the Registrant issued 4,024,637 shares of common
stock in connection with its acquisition of The Hull Group. These shares were
issued in a transaction not involving a public offering 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 shares for their own
accounts and not with a view to the distribution thereof and acknowledging that
the shares were issued in a transaction not registered under the Securities Act
of 1933).
During the period from May 7, 1999 to December 7, 1999, the Registrant
issued its Euro Medium-Term Notes, Series C, with maturities ranging from 13
months to 66 months, in an aggregate face or principal amount equivalent to $144
million (including certain of those notes which were not denominated in U.S.
dollars). All of these notes were offered and sold 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. Goldman Sachs International
acted as the sole placement agent for these offerings.
During the period from May 7, 1999 to December 7, 1999, the Registrant
issued a series of $1 billion aggregate principal amount of Medium-Term Notes,
Series A, with a thirteen-month final maturity, exchangeable monthly for a new
like security. This series was issued in a transaction not involving a public
offering in reliance upon 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 purchasers representing their intentions
to acquire the notes for their own accounts and not with a view to the
distribution thereof and acknowledging that the notes were not registered under
the Securities Act of 1933). Goldman, Sachs & Co. acted as the sole placement
agent for this offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
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.**
</TABLE>
II-3
<PAGE> 154
<TABLE>
<S> <C>
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 Specimen of certificate representing The Goldman Sachs Group, Inc.'s common stock, par value $0.01 per
share.*
4.2 Stockholder Protection Rights Agreement, dated as of April 5, 1999, between The Goldman Sachs Group, Inc.
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 5 to
the Registrant's registration statement on Form 8-A filed on June 29, 1999).
Certain instruments defining the rights of holders of long-term debt securities of the Registrant and its
subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby
undertakes to furnish to the SEC, upon request, copies of any such instruments.
5.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs Group, Inc.
10.1 Lease, dated June 11, 1985, between Metropolitan Life Insurance Company and Goldman, Sachs & Co.*
10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank (National Association) and The Goldman Sachs
Group, L.P., 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.*
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.*
</TABLE>
II-4
<PAGE> 155
<TABLE>
<C> <S>
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 John L. 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.*
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.**
</TABLE>
II-5
<PAGE> 156
<TABLE>
<C> <S>
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.**
10.39 Indenture, dated May 19, 1999, between The Goldman Sachs
Group, Inc. and The Bank of New York (incorporated by
reference to Exhibit 6 to the Registrant's registration
statement on Form 8-A filed on June 29, 1999).
10.40 Letter Agreement, dated August 18, 1999, between The Goldman
Sachs Group, Inc. and Mr. James A. Johnson (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended August 27, 1999).
10.41 Letter Agreement, dated August 18, 1999, between The Goldman
Sachs Group, Inc. and Sir John Browne (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the period ended August 27, 1999).
10.42 Letter Agreement, dated November 9, 1999, between The
Goldman Sachs Group, Inc. and Mr. John H. Bryan.
10.43 Form of Registration Rights Instrument.
10.44 Form of Indemnification Agreement.***
10.45 Form of Supplemental Registration Rights Instrument.
11.1 Statement re computation of per share earnings (incorporated
by reference to Exhibit 11.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended August 27, 1999).
15.1 Letter re Unaudited Interim Financial Information.
21.1 List of subsidiaries of the Registrant.***
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.1
above).
23.3 Consent of Thomson Financial Securities Data.
24.1 Powers of Attorney.***
</TABLE>
- ---------------
* Incorporated by reference to the corresponding exhibit to the Registrant's
registration statement on Form S-1 (No. 333-74449).
** Incorporated by reference to the corresponding exhibit to the Registrant's
registration statement on Form S-1 (No. 333-75213).
*** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Condensed financial information of The Goldman Sachs Group, L.P. and report
of PricewaterhouseCoopers LLP thereon.
II-6
<PAGE> 157
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a)(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 of 1933;
(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. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) may be
reflected in the form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if the change in volume represents no
more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(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 of 1933, 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 offered which remain unsold at the termination
of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted against the Registrant by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-7
<PAGE> 158
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement (No.
333-90677) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, New York on the 7(th) day of December,
1999.
THE GOLDMAN SACHS GROUP, INC.
By: /s/ GREGORY K. PALM
------------------------------------
Name: Gregory K. Palm
Title: General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement (No. 333-90677) has been signed by the
following persons in the capacities indicated on the 7(th) day of December,
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 *
----------------------------------------------
John H. Bryan
Director *
----------------------------------------------
James A. Johnson
Director *
----------------------------------------------
John L. Weinberg
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> 159
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners,
The Goldman Sachs Group, L.P.:
In connection with our audits of the consolidated financial statements of The
Goldman Sachs Group, L.P. and Subsidiaries as of November 27, 1998 and November
28, 1997, and for the three years in the period ended November 27, 1998, which
financial statements are included on pages F-3 to F-23 of this Form S-1, we have
also audited the financial statement schedule listed in Item 16(b) herein.
In our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
New York, New York
January 22, 1999.
S-1
<PAGE> 160
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 in 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> 161
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> 162
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> 163
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> 164
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
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 Specimen of certificate representing The Goldman Sachs
Group, Inc.'s common stock, par value $0.01 per share.*
4.2 Stockholder Protection Rights Agreement, dated as of April
5, 1999, between The Goldman Sachs Group, Inc. and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent
(incorporated by reference to Exhibit 5 to the Registrant's
registration statement on Form 8-A filed on June 29, 1999).
5.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc.
10.1 Lease, dated June 11, 1985, between Metropolitan Life
Insurance Company and Goldman, Sachs & Co.*
10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank
(National Association) and The Goldman Sachs Group, L.P., 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.*
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.*
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
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 John L. 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.*
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.**
</TABLE>
<PAGE> 166
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
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.**
10.39 Indenture, dated May 19, 1999, between The Goldman Sachs
Group, Inc. and The Bank of New York (incorporated by
reference to Exhibit 6 to the Registrant's registration
statement on Form 8-A filed on June 29, 1999).
10.40 Letter Agreement, dated August 18, 1999, between The Goldman
Sachs Group, Inc. and Mr. James A. Johnson (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended August 27, 1999).
10.41 Letter Agreement, dated August 18, 1999, between The Goldman
Sachs Group, Inc. and Sir John Browne (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the period ended August 27, 1999).
10.42 Letter Agreement, dated November 9, 1999, between The
Goldman Sachs Group, Inc. and Mr. John H. Bryan.
10.43 Form of Registration Rights Instrument.
10.44 Form of Indemnification Agreement.***
10.45 Form of Supplemental Registration Rights Instrument.
11.1 Statement re computation of per share earnings (incorporated
by reference to Exhibit 11.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended August 27, 1999).
15.1 Letter re Unaudited Interim Financial Information.
21.1 List of subsidiaries of the Registrant.***
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.1
above).
23.3 Consent of Thomson Financial Securities Data.
24.1 Powers of Attorney.***
</TABLE>
- ---------------
* Incorporated by reference to the corresponding exhibit to the Registrant's
registration statement on Form S-1 (No. 333-74449).
** Incorporated by reference to the corresponding exhibit to the Registrant's
registration statement on Form S-1 (No. 333-75213).
*** Previously filed.
<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
December 8, 1999
The Goldman Sachs Group, Inc.,
85 Broad Street,
New York, New York 10004.
Dear Sirs:
In connection with the registration under the Securities Act
of 1933 (the "Act") of 7,985,941 shares (the "Securities") of Common Stock, par
value $.01 per share, of The Goldman Sachs Group, Inc., a Delaware corporation
(the "Company"), and 7,985,941 related stock purchase rights (the "Rights")
issued pursuant to the Stockholder Protection Rights Agreement, dated as of
April 5, 1999 (the "Rights Agreement"), between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent (the "Rights Agent"), we, as your
counsel, have examined such corporate and partnership 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
<PAGE> 2
basis of such examination, we advise you that, in our opinion:
(1) The Securities have been validly issued and are fully paid
and nonassessable.
(2) Assuming that the Rights Agreement has been duly
authorized, executed and delivered by the Rights Agent, the Rights associated
with the Securities have been validly issued.
In connection with our opinion set forth in paragraph (2)
above, we note that the question whether the Board of Directors of the Company
might be required to redeem the Rights at some future time will depend upon the
facts and circumstances existing at that time and, accordingly, is beyond the
scope of such opinion.
The foregoing opinion is limited to the Federal laws of the
United States and the laws 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 the general partner of The
Goldman Sachs Group, L.P. and other sources believed by us to be responsible.
<PAGE> 3
We hereby consent to the filing of this opinion as an exhibit
to the registration statement relating to the Securities and the Rights and to
the reference to us under the heading "Validity of Common Stock" 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 Act.
Very truly yours,
/s/ SULLIVAN & CROMWELL
<PAGE> 1
Exhibit 10.42
November 9, 1999
PERSONAL AND CONFIDENTIAL
- -------------------------
Mr. John H. Bryan
Chairman and Chief Executive Officer
Sara Lee Corporation
Three First National Plaza
Chicago, Illinois 60602
Dear John:
We are very pleased that you have agreed to join the Board of Directors of The
Goldman Sachs Group, Inc. ("GS Inc."), and are writing to set forth the general
terms of your compensation as a director. The terms of your compensation are,
of course, subject to future modification by the Board.
Your term as a director will commence on November 9, 1999 and will run through
the 2002 annual meeting of shareholders of GS Inc. You have also been elected a
member of the Audit Committee and the Compensation Committee.
Pursuant to existing resolutions of the Board, as compensation for your
services, you will receive:
o $35,000 per year (the "Annual Retainer");
o $15,000 per year for serving on each of the Board committees of which
you are a member (the "Committee Fees");
o $1,000 for each meeting of the Board or of a Board committee that you
attend (the "Meeting Fees"); and
o an initial grant on November 9, 1999 of 3,000 fully vested restricted
stock units ("RSUs") under The Goldman Sachs 1999 Stock Incentive Plan
(the "SIP").
For the current calendar year, the Annual Retainer is payable in GS Inc. common
stock, and the Committee Fees are payable at your election in either cash or
common stock; I am enclosing an election form. In respect of the current
calendar year, the cash portion of your compensation will be paid to you, and
the common stock portion will be delivered to you, on or before December 31,
1999. Beginning with the 2000 calendar year, the Annual Retainer and the
Committee Fees will be paid annually in arrears in the form of fully vested
RSUs unless we agree othewise. The RSUs will provide for delivery of shares of
common stock on the last business day in May in the year following your
retirement from the Board.
The Meeting Fees are payable in cash and will be paid to you annually in
arrears.
The number of shares of Common Stock or RSUs you receive in respect of the
Annual Retainer and the Committee Fees will be determined in the same manner as
grants to employees. All RSUs will be subject to the terms and conditions of
the SIP and the relevant award agreements.
We have enclosed various documents in connection with these arrangements.
Please complete them and sign where indicated and return them to Bob Katz in
the enclosed envelope. The remaining copies are for your records.
Very truly yours,
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Henry M. Paulson, Jr.
----------------------------------------
Henry M. Paulson, Jr.
Chairman and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.43
REGISTRATION RIGHTS INSTRUMENT
REGISTRATION RIGHTS INSTRUMENT, dated as of December __, 1999
(the "Instrument").
WHEREAS, pursuant to the Amended and Restated Plan of
Incorporation (the "Plan") of The Goldman Sachs Group, L.P. ("GS Group") adopted
on April 30, 1999 and Article Twelfth of the Amended and Restated Certificate of
Incorporation of The Goldman Sachs Group, Inc. (the "Company"), the Company's
Board of Directors is expressly authorized to grant registration rights to
current and former directors and employees of the Company and its subsidiaries
and affiliates and former partners and employees of GS Group and its
subsidiaries and affiliates (each a "Holder"); and
WHEREAS, pursuant to and in accordance with its authority
under applicable law and the authority contained in the Plan and the Company's
Amended and Restated Certificate of Incorporation, the Company's Board of
Directors has determined that the Company shall enter into this Instrument;
NOW THEREFORE, the Company hereby enters into this Instrument
pursuant to these authorities;
THEREFORE, the Company undertakes as follows:
1. Request Registration.
(a) If at any time the Company shall determine, in its sole discretion,
that all or any part of the Registrable Stock should be registered under the
Securities Act of 1933 (the "Securities Act") and any other securities laws on
behalf of any one or more of the Holders of the Registrable Stock selected by
the Company in its sole discretion in a manner which would permit or facilitate
the sale or other disposition and distribution of such Registrable Stock, the
Company will notify (the "Notification") such Holders of that determination and
afford such Holders the opportunity to include Registrable Stock in a
registration statement filed under the Securities Act (the "Request
Registration"; and such Holder or Holders making such request, the "Requesting
Holders"). "Registrable Stock" means all shares of the Company's common stock,
par value $.01 per share ("Common Stock"), including any shares of Common Stock
that may be issued upon conversion of the Company's nonvoting common stock, par
value $.01 per share, or any other security or instrument issued by the Company
that is convertible or exchangeable for shares of Common Stock, that may be
deemed held by an "affiliate" of the Company (as used for purposes of Section
2(a)(11) of the Securities Act) or may be deemed "restricted securities" as
defined in Rule 144(a)(3) under the Securities Act or that is subject to
restrictions on transfer pursuant to the Plan or the Shareholders' Agreement,
dated May 7, 1999, among the Company and the parties listed therein as such
Agreement may be
<PAGE> 2
amended from time to time. Shares of Common Stock shall cease to be Registrable
Stock, and any Participating Stock (as defined below) shall cease to be
Participating Stock, upon any sale of such Stock to the public pursuant to, and
in accordance with, a registration statement contemplated by this Instrument or
pursuant to Rule 144 under the Securities Act, Regulation S under the Securities
Act or Section 4(1) of the Securities Act.
(b) The determination to register any shares of Registrable Stock, the
selection of which Holder or Holders to notify of such determination and the
timing and manner of the Notification, the schedule and procedures for
responding to the Notification and the selection of which Requesting Holders
will participate in the Request Registration (the "Participating Holders") and
how many shares of Registrable Stock of each such Participating Holder will be
included in such Request Registration (the "Participating Stock") will be made
in the sole discretion of the Company, and each such matter may be modified or
rescinded by the Company from time to time in its sole discretion. Without
limiting the generality of the foregoing, (i) the Company may limit
Participating Stock to one or more categories of Registrable Stock (e.g.,
Registrable Stock donated to private foundations and public charities) and (ii)
the Company will at no time be obligated to proceed with a Request Registration,
and may withdraw a Request Registration at any time for any reason.
(c) In the event the Company determines to register shares of
Participating Stock under the Securities Act, the Participating Holders may
choose to distribute their Participating Stock by such method or methods of
distribution as shall be selected by the Company and as shall be set forth in
the registration statement with respect thereto filed by the Company under the
Securities Act. If any shares of Participating Stock are to be distributed by
means of any firm commitment underwritten offering, the Company shall designate
the underwriter or underwriters to be employed in connection therewith (any
underwriters participating in the firm commitment underwriting, the
"Underwriters") and the participation by any Requesting Holder in a Request
Registration shall be conditioned upon such Requesting Holder's agreement to the
procedures established by the Company and the Underwriters for such Request
Registration and the offering of the Participating Stock covered thereby.
(d) By electing to participate in a Request Registration, each
Participating Holder shall be deemed to have agreed (i) to furnish, on a timely
basis, to the Company such information regarding such Participating Holder and
the method of distribution of the applicable Participating Stock proposed by
such Participating Holder as the Company may reasonably request in writing and
as shall be required by law, the Securities and Exchange Commission (the "SEC")
or otherwise in connection with any Request Registration and any distribution of
such Participating Holder's Participating Stock pursuant to the related
registration statement under the Securities Act, and (ii) to notify
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<PAGE> 3
the Company promptly of any inaccuracy or change in the information previously
furnished by such Participating Holder to the Company;
(e) With respect to the Request Registration, unless otherwise
determined by the Company, the Company will take such actions as are reasonably
necessary to give each Participating Holder the benefit of the Request
Registration, including:
(i) the Company will use its reasonable efforts to prepare and
file with the SEC a registration statement under the Securities Act
with respect to the Participating Stock (the "Registration Statement")
and will use its reasonable efforts to cause the Registration Statement
to become effective as promptly as practicable following the date on
which the Registration Statement is filed with the SEC, subject always
to the Company's right to withdraw such Registration Statement at any
time, including, with respect to unsold shares thereunder, after the
Registration Statement is declared effective;
(ii) subject to the issuance of any notice by the Company in
accordance with Section 1(e)(v) hereof of the existence of any fact or
the happening of any event of the kind described in Section 1(e)(v)(C)
hereof, the Company shall use all reasonable efforts to keep the
Registration Statement effective for a reasonable period of time to
permit the distribution of the Participating Stock in the manner
contemplated by the prospectus (the "Prospectus") included in the
Registration Statement, which reasonable period of time shall be
determined in the Company's sole discretion;
(iii) subject to the issuance of any notice by the Company in
accordance with Section 1(e)(v) hereof of the existence of any fact or
the happening of any event of the kind described in Section 1(e)(v)(C)
hereof, following the effective date of the Registration Statement, the
Company will prepare and file with the SEC as soon as reasonably
practicable such amendments to the Registration Statement or
supplements to the Prospectus as may be necessary to permit the
distribution of the Participating Stock in the manner contemplated by
the Prospectus;
(iv) the Company will furnish to the Participating Holders and
any Underwriters copies of the Registration Statement, the Prospectus,
any applicable supplement to the Prospectus and other documents
relating to the Request Registration as may be reasonably requested in
order to facilitate the offering and disposition of the Participating
Stock and to permit any of such persons to satisfy the prospectus
delivery requirements of the Securities Act; and the Company hereby
consents to the use of the Prospectus or any amendment or supplement
thereto by each of the Participating Holders and by each Underwriter
thereof, if
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<PAGE> 4
any, in connection with the offering and sale of the Participating
Stock covered by the Prospectus or any amendment or supplement thereto;
(v) the Company will use its reasonable efforts to notify the
Participating Holders promptly, (A) of the issuance by the SEC of any
stop order suspending the effectiveness of the Registration Statement
or the initiation or threatening of any proceedings for that purpose,
(B) of the receipt by the Company of any notification with respect to
the suspension of the qualification of the Participating Stock for sale
under the securities or "Blue Sky" laws of any jurisdiction or the
initiation or threatening of any proceeding for such purpose, and (C)
of the existence of a state of facts or the happening of an event
(including without limitation pending negotiations relating to, or the
consummation of, a transaction or the occurrence of any event which in
the opinion of the Company might require additional disclosure of
material, non-public information by the Company in the Registration
Statement or the Prospectus) which in the opinion of counsel to the
Company might reasonably result in (y) the Registration Statement, any
amendment or post-effective amendment thereto, or any document incorpo-
rated therein by reference containing an untrue statement of a material
fact or omitting to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or (z) the
Prospectus, any prospectus supplement, or any document incorporated
therein by reference including an untrue statement of material fact or
omitting to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, provided that the Company will not be
required to provide the Participating Holders and the Underwriter or
Underwriters, if any, of any details or information as to any such
facts or events referred to in this clause (C);
(vi) prior to any public offering of Participating Stock, the
Company will use its reasonable efforts to (A) if necessary, register
or qualify the Participating Stock covered by the Registration
Statement for offer and sale under the securities or "Blue Sky" laws of
such jurisdictions within the United States as any Participating Holder
or Underwriter reasonably shall request and (B) keep such registrations
or qualifications in effect and comply with such laws so as to permit
the continuance of offers, sales and dealings therein in such
jurisdictions for so long as may be necessary to enable any such
Participating Holder or Underwriter to complete its distribution of
Participating Stock in the manner contemplated by the Prospectus;
provided, however, that the Company shall not be required for any such
purpose to qualify as a foreign corporation in any jurisdiction wherein
it would not otherwise be required to qualify but for the requirements
of this Section 1(e)(vi) or consent to general service of process in
any such jurisdiction;
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<PAGE> 5
(vii) as soon as reasonably practicable after the occurrence
of any fact or event of the kind described in subparagraph (e)(v)(C) of
this Section 1, the Company will prepare an amendment to the
Registration Statement or a supplement to the Prospectus, any
prospectus supplement, or any document incorporated therein by
reference or file any other required document so that, as thereafter
delivered by the purchasers of Participating Stock, the Prospectus will
not contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that if the fact or event no longer exists, the Company shall
not be required to prepare and file any such amendment, supplement or
document, but shall use its reasonable efforts to notify promptly the
Participating Holders that the fact or event no longer exists; and
provided further, however, that if there continues to exist a state of
facts or an event of the kind described in subparagraph (e)(v)(C) of
this Section 1 which in the opinion of counsel to the Company might
reasonably result in the effects contemplated by clause (y) or (z) of
such subparagraph (e)(v)(C) and which in the opinion of the Company
might require the disclosure of material, non-public information by the
Company, then for so long as such fact or event continues to exist, the
Company shall not be required to prepare and file any such amendment,
supplement or document pursuant to the terms of this Instrument; and
(viii) the Company will use its reasonable efforts to cause
the shares of its Common Stock constituting Participating Stock covered
by the Registration Statement to qualify for listing on the New York
Stock Exchange or, if the Common Stock is not then listed on the New
York Stock Exchange, to list such shares on each securities exchange on
which outstanding Common Stock of the Company is then listed, if any.
(f) If all or any part of the Request Registration is to be conducted
as a firm commitment underwriting, the Company and each Participating Holder
shall enter into an underwriting agreement with respect to such distribution in
a form approved by the Company.
(g) Each Participating Holder agrees that, upon receipt of any notice
from the Company of the existence of any fact or the happening of any event of
the kind described in Section 1(e)(v)(C) hereof, such Participating Holder will
forthwith discontinue disposition of Participating Stock pursuant to the
Registration Statement until such Participating Holder's receipt of copies of
the amendment, supplement or document contemplated by Section 1(e)(vii) hereof,
or until it is advised in writing by the Company that the use of the Prospectus
may be resumed, and, if so directed by the Company, such Participating Holder
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in such Participating Holder's possession of the
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<PAGE> 6
Prospectus, including any amendment or supplement thereto, covering such
Participating Stock at the time of receipt of such notice.
2. Expenses. The Company shall pay the following expenses in connection with an
offering pursuant to the Request Registration: (i) the fees, disbursements and
expenses of the Company's counsel(s) (United States and foreign) and accountants
in connection with the registration of the Participating Stock to be disposed of
under the Securities Act and all other expenses in connection with the
preparation, printing and filing of the Registration Statement, any preliminary
prospectus or final Prospectus, any amendments and supplements thereto and the
mailing and delivering of copies thereof to the underwriters, dealers or other
purchasers of the Participating Stock; (ii) the cost of printing or producing
any agreement(s) among underwriters, underwriting agreement(s), any Blue Sky or
Legal Investment memoranda, any selling agreements and any other documents in
connection with the offering, sale or delivery of the Participating Stock to be
disposed of; (iii) all expenses in connection with the qualification of the
Participating Stock to be disposed of for offering and sale under state
securities laws, including the fees and disbursements of counsel for any
Underwriters in connection with such qualification and in connection with any
Blue Sky and Legal Investment surveys; (iv) the filing fees incident to, and the
fees and disbursements of counsel in connection with, securing any required
review by the National Association of Securities Dealers, Inc. of the terms of
the sale of the Participating Stock to be disposed of; and (v) all fees and
expenses incurred in connection with the listing of the shares of Common Stock
constituting Participating Stock on the New York Stock Exchange, or the listing
of such shares on any other securities exchange, pursuant to Section 1(e)(viii)
hereof. The Participating Holders shall pay their own expenses, except that the
Company, in its sole discretion, may pay the fees and expenses of one, but not
more than one, counsel retained by the Participating Holders and approved by the
Company. Without limiting the generality of the prior sentence, the
Participating Holders of the Participating Stock to be sold pursuant to the
Registration Statement shall pay all agency fees and commissions, underwriting
discounts and commissions, and stock transfer taxes, attributable to the sale of
their Participating Stock.
3. Indemnification and Contribution.
(a) Indemnification by the Company. In connection with any registration
of Registrable Stock under the Securities Act, the Company shall, and it hereby
agrees to, indemnify and hold harmless each Participating Holder and each
Underwriter, selling agent or other securities professional, if any, that
participates in the disposition of Participating Stock, and each of their
respective officers and directors and each person who controls such
Participating Holder, Underwriter, selling agent or other securities
professional within the meaning of Section 15 of the Securities Act or Section
20 of the Securities Exchange Act of 1934 (the "Exchange Act") (each such person
being sometimes referred to as an "Indemnified Person") against any losses,
claims, damages or
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<PAGE> 7
liabilities, joint or several, to which such Indemnified Person may become
subject under the Securities 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 the Registration Statement under which such Participating Stock is
registered under the Securities Act, or any preliminary prospectus or Prospectus
contained therein or furnished by the Company to any Indemnified Person, 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 the
Company hereby agrees to reimburse such Indemnified Person for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such action or claim; provided, however, that the Company shall
not be liable to any such Indemnified Person 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 the Registration Statement or Prospectus, or amendment or supplement
thereto, in reliance upon and in conformity with written information furnished
to the Company by such Indemnified Person expressly for use therein; provided
further, however, that the foregoing indemnity agreement with respect to any
preliminary prospectus, Prospectus or amendment or supplement thereto shall not
inure to the benefit of any Indemnified Person from whom the person asserting
any such losses, claims, damages or liabilities purchased Participating Stock,
or any person controlling such Indemnified Person, if a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of such
Indemnified Person to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Participating Stock
to such person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such loss, claim, damage or liability.
(b) Indemnification by the Participating Holders and any Agents and
Underwriters. The Company may require, as a condition to including any
Participating Stock in the Registration Statement, that the Company shall have
received an undertaking reasonably satisfactory to it from each Participating
Holder and from each Underwriter, selling agent or other securities
professional, if any, that participates in the disposition of Participating
Stock, severally and not jointly, to (i) indemnify and hold harmless the
Company, its directors and officers who sign the Registration Statement and each
person, if any, who controls the Company within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act, against any losses,
claims, damages or liabilities to which the Company or such other persons may
become subject, under the Securities 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 the Registration Statement, or any
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<PAGE> 8
Prospectus contained therein or furnished by the Company to any such
Participating Holder, Underwriter, selling agent or other securities
professional, 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 reliance upon and in conformity with written information furnished in writing
to the Company by such Participating Holder, Underwriter, selling agent or other
securities professional, as applicable, expressly for use therein, and (ii)
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;
(c) Notices of Claims, Etc. 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 an indemnifying party under this Section 3, notify such
indemnifying party in writing of the commencement thereof; but the omission so
to notify the indemnifying party shall not relieve it from any liability which
it may have to any indemnified party otherwise than under paragraph (a). In case
any such action shall be brought against any indemnified party and it shall
notify an indemnifying party of the commencement thereof, such 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, and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, such indemnifying party shall not be
liable to such indemnified party under this Section 3 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 3 (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) Contribution. If for any reason the indemnification provided for in
this Section 3 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
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<PAGE> 9
losses, claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and the indemnified party 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 fault of such indemnifying party and indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by such indemnifying party or by
such indemnified party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The indemnifying parties and the indemnified parties agree that it would not be
just and equitable if contribution pursuant to this Section 3(d) were determined
by pro rata allocation (even if the Participating Holders or any Underwriters,
selling agents or other securities professionals or all of them 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 in this Section 3(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
shall be deemed to include any legal or other fees or expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The obligations of the Participating Holders and any
Underwriters, selling agents or other securities professionals in this Section
3(d) to contribute shall be several in proportion to the amount of Participating
Stock registered or underwritten, as the case may be, by them and not joint.
(e) Notwithstanding any other provision of this Section 3, in no event
will any (i) Participating Holder be required to undertake liability to any
person under this Section 3 for any amounts in excess of the dollar amount of
the proceeds received by such Participating Holder from the sale of such
Participating Holder's Participating Stock (after deducting any fees, discounts
and commissions applicable thereto) pursuant to any Registration Statement which
is the subject of a claim under this Section 3 and (ii) Underwriter, selling
agent or other securities professional be required to undertake liability to any
person hereunder for any amounts in excess of the amount by which the sales
price of the Participating Stock which they participated in selling exceeds any
amount of damages such Underwriter, selling agent or securities professional has
otherwise been required to pay as a result of such untrue or alleged untrue
statement or omission or alleged omission.
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<PAGE> 10
(f) The obligations of the Company under this Section 3 shall be in
addition to any liability which the Company may otherwise have to any
Indemnified Person and the obligations of any Indemnified Person under this
Section 3 shall be in addition to any liability which such Indemnified Person
may otherwise have to the Company. The remedies provided in this Section 3 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to an indemnified party at law or in equity.
(g) The provisions of this Section 3 may be varied by the Company in
any manner it deems appropriate in connection with any particular Request
Registration.
4. Governing Law; Arbitration.
(a) THIS INSTRUMENT SHALL BE GOVERNED BY AND BE CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF
CONFLICTS OF LAW.
(b) Any dispute, controversy or claim arising out of or relating to
provisions of this Instrument shall be finally settled by arbitration in New
York City before, and in accordance with the rules then applying of, the New
York Stock Exchange, Inc. ("NYSE"), or if the NYSE declines to arbitrate the
matter or the matter is not otherwise arbitrable before it, the American
Arbitration Association ("AAA") in accordance with the commercial arbitration
rules of the AAA.
5. Registered Address; Notices. 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 Holders, at c/o Goldman, Sachs & Co., 85 Broad Street,
New York, New York 10004, Attention: General Counsel, or at such other address
as a Holder shall furnish to the Company in writing, or (b) if to the Company,
at 85 Broad Street, New York, New York 10004, Attention: General Counsel, or at
such other address as the Company shall have furnished to the Holders in
writing.
6. Parties in Interest. Each Participating Holder shall be entitled to receive
the benefits of this Instrument and shall be bound by the terms and provisions
of this Instrument by reason of such Participating Holder's election to
participate in a Request Registration pursuant to Section 1(a) hereof. All the
terms and provisions of this Instrument shall be binding upon, shall inure to
the benefit of and shall be enforceable by the respective successors and assigns
of the Company and any Participating Holder with respect to the relevant Request
Registration. Unless otherwise specified by the Company in its sole discretion,
any transferee (including, without limitation, any charitable foundations or
public charities) of any Participating Holder who or that shall acquire
Participating Stock, in any manner, whether by gift, bequest, purchase,
operation of law or otherwise, shall, without any further writing or action of
any kind, be entitled to
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<PAGE> 11
receive the benefits of and be conclusively deemed to have agreed to be bound by
and to perform all of the terms and provisions of this Instrument to the
aforesaid extent as if such person were a Participating Holder hereunder with
respect to the relevant Request Registration. The Company may, however, require
any such transferee to sign an agreement acknowledging that it is bound by the
terms and provisions of this Instrument as if such transferee were a
Participating Holder with respect to the relevant Request Registration.
7. Survival. The respective indemnities, agreements, representations, warranties
and each other provision set forth in this Instrument or made pursuant hereto
shall remain in full force and effect regardless of any investigation (or
statement as to the results thereof) made by or on behalf of any Participating
Holder, any director, officer, partner or trustee of such Participating Holder,
any agent or Underwriter or any director, officer or partner thereof, or any
controlling person of any of the foregoing, and shall survive the transfer of
the Participating Stock by such Participating Holder.
8. Amendments and Waivers. This Instrument may be amended and the observance of
any term of this Instrument may be waived (either generally or in a particular
instance and either retroactively or prospectively) by a written instrument duly
executed by the Company. Each Holder of any Registrable Stock at the time or
thereafter outstanding shall be bound by any amendment or waiver effected
pursuant to this Section 8, whether or not any notice, writing or marking
indicating such amendment or waiver appears on such Registrable Stock or is
delivered to such Holder. Any such amendment may be retroactive and apply to
Holders of Registrable Stock previously included in a Registration Statement so
long as such amendment does not adversely affect the rights of any Holder in any
material respect. In the case of any amendment that materially and adversely
affects the rights of a Holder, such amendment must be approved by the Holders
of not less than a majority of the shares of Registrable Stock held by the
materially and adversely affected Holders, treating any convertible or
exchangeable instrument as if it had been converted or exchanged, except that
the approval of each materially and adversely affected Holder must be obtained
with respect to any amendment to the indemnification or contribution provisions
of this Instrument in order for such amendment to be applicable to such Holder.
9. Waiver of Claims. Each Holder recognizes and agrees that prior to the
Company's determination to permit such Holder to include such Holder's
Registrable Stock in a Request Registration, such Holder has no right to any
benefits provided by this Instrument. Accordingly, in consideration of the
Holder's participation in a Request Registration, such Holder expressly waives
any right to contest the terms of any Request Registration, any determination,
action or omission made by the Company in connection with any Request
Registration or any amendment of this Instrument (other than an
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<PAGE> 12
amendment of this Instrument to which such Holder's consent is expressly
required by the express terms of this Instrument).
10. Miscellaneous. The headings in this Instrument are for purposes of reference
only and shall not limit or otherwise affect the meaning thereof.
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<PAGE> 13
IN WITNESS WHEREOF, the Company has executed and delivered
this Instrument as of the date above written.
THE GOLDMAN SACHS GROUP, INC.
By:_________________________________
Name:
Title:
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<PAGE> 1
EXHIBIT 10.45
SUPPLEMENTAL REGISTRATION RIGHTS INSTRUMENT
SUPPLEMENTAL REGISTRATION RIGHTS INSTRUMENT, dated as of
December __, 1999 (the "Supplemental Instrument").
WHEREAS, The Goldman Sachs Group, Inc., a Delaware corporation
(the "Company") has entered into a Registration Rights Instrument, dated as of
December __, 1999 (the "Registration Rights Instrument") (attached as Annex A
hereto);
WHEREAS, pursuant to Section 1 of the Registration Rights
Instrument, the Company has determined to register under the Securities Act of
1933 (the "Securities Act") the Designated Stock (as defined below) for resale
by the Charities (as defined below); and
WHEREAS, pursuant to Section 1 of the Registration Rights
Instrument, the Company has notified each person listed in Schedule I hereto
(each, a "Donating Partner") of such determination, and each Donating Partner
has requested that the Company include his or her Designated Stock in the
Registration Statement (as defined below);
NOW THEREFORE, the Company undertakes as follows:
1. Definitions.
(a) Unless otherwise defined herein, all capitalized and undefined
terms shall have the meanings assigned to them in the Registration Rights
Instrument.
(b) The following terms shall have the following meanings for the
purposes of both this Supplemental Instrument and the Registration Rights
Instrument:
"Charities" means collectively the public charities and
private foundations listed in Schedule II hereto. For the purposes of the
Registration Rights Instrument, the Charities shall be deemed to be the
Participating Holders.
"Designated Stock" means the shares of Common Stock listed
next to each Charity in Schedule II hereto. For the purposes of the Registration
Rights Instrument, the Designated Stock shall be deemed to be the Participating
Stock, subject to such stock ceasing to be Participating Stock pursuant to the
last sentence of Section 1(a) of the Registration Rights Instrument.
<PAGE> 2
"Registration Statement" means, for the purposes of both this
Supplemental Instrument and the Registration Rights Instrument, the Company's
Registration Statement on Form S-1 (File No. 333-90677) registering the
Designated Stock for resale by the Charities.
"Request Registration" means, for the purposes of both this
Supplemental Instrument and the Registration Rights Instrument, the registration
of Common Stock for resale by the Charities and the distribution of the
Designated Stock by the Charities pursuant to the Registration Statement.
2. Charities. The Charities will be entitled to receive the benefits of and will
be conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of the Registration Rights Instrument as supplemented,
modified and superseded by this Supplemental Instrument.
3. Supplements and Modifications. With respect to the Request Registration
contemplated by this Supplemental Instrument, the Registration Rights Instrument
is hereby supplemented, modified and superseded as follows:
(a) Notwithstanding Sections 1(b)(ii) and 1(e)(i) of the Registration
Rights Instrument, the Company shall not withdraw the Registration Statement
after the Registration Statement has been declared effective by the SEC;
provided, however, that the Company may withdraw the Registration Statement at
any time on or after the earliest date on which each share of Designated Stock
has either (i) ceased to be Participating Stock or (ii) become eligible for
resale pursuant to Rule 144(k) under the Securities Act.
(b) Pursuant to Section 1(c) of the Registration Rights Instrument, the
Company hereby determines that the Charities may distribute the Designated Stock
in any manner contemplated by the Registration Statement; provided, however,
that any firm commitment underwriting will need to be approved by the Company in
the manner contemplated by Sections 1(c) and 1(f) of the Registration Rights
Instrument, although no Charity, unless and until it agrees otherwise, will be
obligated to participate in any such underwriting.
(c) Notwithstanding Section 1(e)(ii) of the Registration Rights
Instrument, and subject to the issuance of any notice by the Company in
accordance with Section 1(e)(v) of the Registration Rights Instrument, the
Company shall use all reasonable efforts to keep the Registration Statement
effective until the earliest date on which each share of Designated Stock has
either (i) ceased to be Participating Stock or (ii) become eligible for resale
pursuant to Rule 144(k) under the Securities Act.
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<PAGE> 3
(d) The expense reimbursement provisions of Section 2 of the
Registration Rights Instrument shall apply to the distribution of the Designated
Stock in the manner contemplated by the Registration Statement; provided,
however, that the Company will not pay the fees and expenses of counsel to the
Charities.
(e) The indemnification and contribution provisions of Section 3 of the
Registration Rights Instrument shall apply to the distribution of the Designated
Stock in the manner contemplated by the Registration Statement; provided,
however, that the Company shall not require that any Charity provide the
undertaking referred to in Section 3(b) of the Registration Rights Instrument
and no Charity shall be deemed to be an "indemnifying party" for any purpose
under the Registration Rights Instrument; provided further, however, that, in
the case of a firm commitment underwriting, the Company may modify the
indemnification and contribution provisions of Section 3 of the Registration
Rights Instrument in any manner it deems appropriate.
(f) To the extent that Goldman, Sachs & Co. is required to deliver a
prospectus in connection with the sale of the shares of Common Stock listed on
Schedule III hereto, the indemnification and contribution provisions of Section
3 of the Registration Rights Instrument, as supplemented, modified and
superseded by this Supplemental Instrument, shall apply to such sale as if such
Common Stock was Participating Stock and the Charities listed in Schedule III
were Participating Holders, in each case under the Registration Rights
Instrument.
(g) Notwithstanding the provisions of Section 8 of the Registration
Rights Instrument, the Company shall not amend the Registration Rights
Instrument or this Supplemental Instrument in any manner that would cause the
Designated Stock not to qualify as "qualified appreciated stock" within the
meaning of Section 170(e)(5)(B) of the Internal Revenue Code of 1986, as
amended. Moreover, the Registration Rights Instrument and this Supplemental
Instrument shall be interpreted in a manner consistent with the treatment of the
Designated Stock as "qualified appreciated stock".
4. Application of Registration Rights Instrument. Except as supplemented,
modified and superseded by this Supplemental Instrument, the Registration Rights
Instrument shall apply to the registration and distribution of the Designated
Stock in the manner contemplated by the Registration Statement, and each
Charity, by agreeing in advance that any Designated Stock donated to it will be
covered by the Registration Statement, shall be deemed to have agreed to
undertake the obligations of a Participating Holder under the Registration
Rights Instrument, as so supplemented, modified and superseded.
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<PAGE> 4
IN WITNESS WHEREOF, the Company has executed and delivered
this Supplemental Instrument as of the date above written.
THE GOLDMAN SACHS GROUP, INC.
By:_________________________________
Name:
Title:
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<PAGE> 1
Exhibit 15.1
December 8, 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. 333-90677)
Commissioners:
We are aware that our report dated October 5, 1999 on our review of the
condensed consolidated financial statements of The Goldman Sachs Group, Inc. and
Subsidiaries (the "Company") as of August 27, 1999 and for the nine months ended
August 27, 1999 and August 28, 1998 is included in the Company's Prospectus
constituting part of this Registration Statement on Form S-1. We are also aware
that our report dated October 5, 1999 on our review of the Pro Forma
Consolidated Income Statement Information of The Goldman Sachs Group, Inc. and
Subsidiaries for the nine months ended August 27, 1999 is included in this
Registration Statement on Form S-1. Pursuant to Rule 436(c) under the Securities
Act of 1933, these reports should not be considered a part of the Registration
Statement prepared or certified by us within the meaning of Sections 7 and 11 of
that Act.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
------------------------
We consent to the inclusion in the Prospectus constituting part of this
Registration Statement on Form S-1 of (i) our reports dated January 22, 1999, on
our audits of the consolidated financial statements, selected historical
consolidated income statement and balance sheet data and the financial statement
schedule of The Goldman Sachs Group, L.P. and Subsidiaries (the "Firm"); (ii)
our report dated May 3, 1999 on our examination of the Pro Forma Consolidated
Income Statement Information of the Firm for the year ended November 27, 1998;
and (iii) our report dated March 15, 1999 relating to Management's Discussion
and Analysis of Financial Condition and Results of Operations of the Firm for
the three-year period ended November 27, 1998. We also consent to the references
to our firm under the captions "Experts", "Summary Consolidated Financial Data",
and "Selected Consolidated Financial Data".
/s/ PricewaterhouseCoopers LLP
New York, New York
December 8, 1999.
<PAGE> 1
Exhibit 23.3
Thomson Financial
Securities Data
We hereby consent to the inclusion in Amendment No. 1 to the Registration
Statement (No. 333-90677) of The Goldman Sachs Group, Inc. of the
information we provided for use in the prospectus contained in such
Amendment No. 1, and to the references to our name in such Amendment No. 1,
including under the caption "Experts".
Thomson Financial Securities Data,
A division of Thomson Information Services
/s/ Kenneth J. Seng
-----------------------------
Kenneth J. Seng
Director, Account Management & Client Training
December 6, 1999
