<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 1999
REGISTRATION NO. 333-77541
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE GOLDMAN SACHS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6211 13-4019460
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
85 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 902-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT J. KATZ
GREGORY K. PALM
GOLDMAN, SACHS & CO.
85 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 902-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
RICARDO A. MESTRES, JR. ALAN L. BELLER
JOHN P. MEAD CHRISTOPHER E. AUSTIN
DAVID B. HARMS CHRISTOPHER J. WALTON
ROBERT W. REEDER III CLEARY, GOTTLIEB, STEEN & HAMILTON
SULLIVAN & CROMWELL ONE LIBERTY PLAZA
125 BROAD STREET NEW YORK, NEW YORK 10006
NEW YORK, NEW YORK 10004 (212) 225-2000
(212) 558-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This registration statement covers (euro)1,000,000,000 aggregate principal
amount of % (euro) Notes due 2009 of The Goldman Sachs Group, Inc. for sale in
an initial offering. This registration statement also covers an undeterminable
amount of the notes for resale by affiliates of The Goldman Sachs Group, Inc.,
including Goldman Sachs International and Goldman, Sachs & Co., in market-making
transactions on an ongoing basis after the initial offering has begun. The
prospectus to be used in the initial offering follows immediately after this
explanatory note. The prospectus to be used in market-making transactions will
be identical, except that it will have:
- different front and inside front cover pages; and
- a section entitled "Plan of Distribution" instead of the section entitled
"Underwriting".
The alternate and additional pages of the market-making prospectus follow
immediately after the prospectus for the initial offering.
i
<PAGE> 3
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated May 11, 1999.
(euro)1,000,000,000
THE GOLDMAN SACHS GROUP, INC.
[GOLDMAN SACHS LOGO]
% (euro) Notes due 2009
------------------------
The Goldman Sachs Group, Inc. will pay interest on the notes on May 15 and
November 15 of each year, beginning on November 15, 1999. If Goldman Sachs
becomes obligated to pay additional amounts to non-U.S. investors due to changes
in U.S. withholding tax requirements, Goldman Sachs may redeem the notes before
their stated maturity at a price equal to 100% of the principal amount redeemed
plus accrued interest to the redemption date.
The notes will be issued only in book-entry form through the Cedel and
Euroclear systems. Goldman Sachs has filed an application to list the notes on
the Luxembourg Stock Exchange.
See "Risk Factors" beginning on page 11 to read about factors you should
consider before investing in the notes.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Note Total
-------- -----
<S> <C> <C>
Initial public offering price............................... % (euro)
Underwriting discount....................................... % (euro)
Proceeds, before expenses, to Goldman Sachs................. % (euro)
</TABLE>
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the notes will accrue from , 1999 and
must be paid by the purchaser if the notes are delivered after ,
1999.
------------------------
Goldman Sachs International, acting through Goldman, Sachs & Co. as its
U.S. selling agent, may offer the notes in the United States. The underwriters
expect to deliver the notes on , 1999. Investors must pay for their
notes in euros.
GOLDMAN SACHS INTERNATIONAL
Prospectus dated , 1999.
<PAGE> 4
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell or a solicitation of an offer to buy the securities it
describes, but only under circumstances and in jurisdictions where it is lawful
to do so. The information contained in this prospectus is current only as of its
date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 11
Use of Proceeds............................................. 26
Pro Forma Consolidated Financial Information................ 27
Capitalization.............................................. 34
Selected Consolidated Financial Data........................ 36
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 38
Industry and Economic Outlook............................... 63
Business.................................................... 66
Management.................................................. 91
Principal Shareholders...................................... 104
Certain Relationships and Related Transactions.............. 106
Description of Notes We Are Offering........................ 111
United States Taxation...................................... 127
Employee Retirement Income Security Act..................... 132
Validity of the Notes....................................... 132
Experts..................................................... 132
Available Information....................................... 133
Index to Consolidated Financial Statements.................. F-1
Underwriting................................................ U-1
General Information......................................... U-4
Our Business Principles..................................... U-5
</TABLE>
------------------
This prospectus does not constitute an offer to sell or the solicitation of
any offer to buy the notes offered in any jurisdiction in which such offer or
solicitation is unlawful. There are restrictions on the offer and sale of the
notes offered hereby in the United Kingdom. All applicable provisions of the
Financial Services Act of 1986 and Public Offers of Securities Regulations 1995
with respect to anything done by any person in relation to the notes offered
hereby, in, from or otherwise involving the United Kingdom must be complied
with. See "Underwriting".
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the notes. You should read the entire prospectus carefully,
especially the risks of investing in the notes discussed under "Risk Factors" on
pages 11-25.
THE GOLDMAN SACHS GROUP, INC.
Goldman Sachs is a leading global investment banking and securities firm
with three principal business lines:
- Investment Banking;
- Trading and Principal Investments; and
- Asset Management and Securities Services.
Our goal is to be the advisor of choice for our clients and a leading
participant in global financial markets. We provide services worldwide to a
substantial and diversified client base, which includes corporations, financial
institutions, governments and high net worth individuals.
For our fiscal year ended November 27, 1998, our net revenues were $8.5
billion and our pre-tax earnings were $2.9 billion, and for our fiscal quarter
ended February 26, 1999, our net revenues were $3.0 billion and our pre-tax
earnings were $1.2 billion. As of February 26, 1999, our total assets were
$230.6 billion and our partners' capital was $6.6 billion.
We have over time produced strong earnings growth and attractive returns on
partners' capital through different economic and market conditions. Over the
last 15 years, our pre-tax earnings have grown from $462 million in 1983 to $2.9
billion in 1998, representing a compound annual growth rate of 13%. Economic and
market conditions can, however, significantly affect our performance. For
example, in the second half of fiscal 1998, our performance was adversely
affected by turbulence in global financial markets.
We have achieved this growth, which has been generated without the benefit
of a large acquisition, by maintaining an intense commitment to our clients,
focusing on our core businesses and key opportunities, and operating as an
integrated franchise.
Because we believe that the needs of our clients are global and that
international markets have high growth potential, we have built upon our
strength in the United States to achieve leading positions in other parts of the
world. Today, we have a strong global presence as evidenced by the geographic
breadth of our transactions, leadership in our core products and the size of our
international operations. As of February 26, 1999, we operated offices in 23
countries and 36% of our 13,000 employees were based outside the United States.
We are committed to a distinctive culture and set of core values. These
values are reflected in our Business Principles, which emphasize placing our
clients' interests first, integrity, commitment to excellence and innovation,
and teamwork.
3
<PAGE> 6
SUMMARY FINANCIAL DATA
($ in millions)
<TABLE>
<CAPTION>
AS OF OR FOR
AS OF OR FOR THREE MONTHS
YEAR ENDED NOVEMBER ENDED FEBRUARY
------------------------------ ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues:
Investment Banking........................ $ 2,113 $ 2,587 $ 3,368 $ 633 $ 902
Trading and Principal Investments......... 2,693 2,926 2,379 1,182 1,357
Asset Management and Securities
Services............................... 1,323 1,934 2,773 657 736
-------- -------- -------- ------- --------
Total net revenues.......................... $ 6,129 $ 7,447 $ 8,520 $ 2,472 $ 2,995
======== ======== ======== ======= ========
Pre-tax earnings(1)......................... $ 2,606 $ 3,014 $ 2,921 $ 1,022 $ 1,188
Total assets................................ 152,046 178,401 217,380 -- 230,624
Partners' capital........................... 5,309 6,107 6,310 -- 6,612
Ratio of earnings to fixed charges(1)(2).... 1.23x 1.23x 1.21x 1.30x 1.41x
</TABLE>
- ---------------
Read the table above in conjunction with the footnotes to "Selected Consolidated
Financial Data" as well as the following footnotes:
(1) Since we historically operated in partnership form, payments to our profit
participating limited partners were accounted for as distributions of
partners' capital rather than as compensation expense. As a result, our
pre-tax earnings and compensation and benefits expense have not reflected
any payments for services rendered by our managing directors who were profit
participating limited partners. Accordingly, our historical pre-tax earnings
understate the expected operating costs to be incurred by us after our
conversion to corporate form. As a corporation, we will include payments for
services rendered by our managing directors who were profit participating
limited partners in compensation and benefits expense. For financial
information that reflects pro forma compensation and benefits expense as if
we had been a corporation, see "Pro Forma Consolidated Financial
Information".
(2) For purposes of the ratio of earnings to fixed charges, "earnings" represent
pre-tax earnings plus fixed charges and "fixed charges" represent interest
expense plus that portion of rent expense that, in our opinion, approximates
the interest factor included in rent expense. For a pro forma ratio of
earnings to fixed charges reflecting our conversion to corporate form,
please see "Pro Forma Consolidated Financial Information". The ratio of
earnings to fixed charges does not give effect to this offering of notes, or
to our dollar debt offering or our new medium-term note program described
below.
------------------------
STRATEGY AND PRINCIPAL BUSINESS LINES
Our strategy is to grow our three core businesses -- Investment Banking,
Trading and Principal Investments, and Asset Management and Securities
Services -- in markets throughout the world. Our leadership position in
investment banking provides us with access to governments, financial
institutions and corporate clients globally. Trading and principal investing has
been an important part of our culture and earnings, and we remain committed to
these businesses irrespective of their volatility. Managing wealth is one of the
fastest growing segments of the financial services industry and we are
positioning our asset management and securities services businesses to take
advantage of that growth.
INVESTMENT BANKING
Investment Banking represented 39% of fiscal 1998 net revenues and 35% of
fiscal 1997 net revenues. We are a market leader in both the financial advisory
and underwriting businesses, serving over 3,000 clients worldwide. For the
period January 1, 1994 to December 31, 1998, we had the industry-leading market
share of 25.3% in worldwide mergers and acquisitions advisory services, having
advised on over $1.7 trillion of trans-
4
<PAGE> 7
actions. Over the same period, we also achieved number one market shares of
15.2% in underwriting worldwide initial public offerings and 14.4% in
underwriting worldwide common stock issues. The source for this market share
information is Securities Data Company.
TRADING AND PRINCIPAL INVESTMENTS
Trading and Principal Investments represented 28% of fiscal 1998 net
revenues and 39% of fiscal 1997 net revenues. We make markets in equity and
fixed income products, currencies and commodities; enter into swaps and other
derivative transactions; engage in proprietary trading and arbitrage; and make
principal investments. In trading, we focus on building lasting relationships
with our most active clients while maintaining leadership positions in our key
markets. We believe our research, market-making and proprietary activities
enhance our understanding of markets and ability to serve our clients.
ASSET MANAGEMENT AND SECURITIES SERVICES
Asset Management and Securities Services represented 33% of fiscal 1998 net
revenues and 26% of fiscal 1997 net revenues. We provide global investment
management and advisory services; earn commissions on agency transactions;
manage merchant banking funds; and provide prime brokerage, securities lending
and financing services. Our asset management business has grown rapidly, with
assets under supervision increasing from $92.7 billion as of November 25, 1994
to $369.7 billion as of February 26, 1999, representing a compound annual growth
rate of 38%. As of February 26, 1999, we had $206.4 billion of assets under
management. We manage merchant banking funds that had $15.5 billion of capital
commitments as of the end of fiscal 1998.
Assets under supervision are comprised of assets under management and other
client assets. Assets under management typically generate fees based on a
percentage of their value. Other client assets are comprised of assets in
brokerage accounts of primarily high net worth individuals, on which we earn
commissions.
We pursue our strategy to grow our three core businesses through an
emphasis on:
EXPANDING HIGH VALUE-ADDED BUSINESSES
To achieve strong growth and high returns, we seek to build leadership
positions in high value-added services such as mergers and acquisitions,
executing large and complex transactions for institutional investors and asset
management.
INCREASING THE STABILITY OF OUR EARNINGS
While we plan to continue to grow each of our core businesses, our goal is
to gradually increase the stability of our earnings by emphasizing growth in
Investment Banking and Asset Management and Securities Services.
PURSUING INTERNATIONAL OPPORTUNITIES
We believe that our global reach will allow us to take advantage of
international growth opportunities. For example, we expect increased business
activity as a result of the establishment of the European Economic and Monetary
Union, the shift we anticipate toward privatization of pension systems and the
changing demographics around the world.
LEVERAGING THE FRANCHISE
We believe our various businesses are generally stronger and more
successful because they are part of the Goldman Sachs franchise. Our culture of
teamwork fosters cooperation among our businesses, which allows us to provide
our clients with a full range of products and services on a coordinated basis.
COMPETITIVE STRENGTHS
STRONG CLIENT RELATIONSHIPS
We focus on building long-term client relationships. For example, in fiscal
1998, over 75% of our Investment Banking revenues represented business from
existing clients.
5
<PAGE> 8
DISTINCTIVE PEOPLE AND CULTURE
Our most important asset is our people. We seek to reinforce our employees'
commitment to our culture and values through recruiting, training, a
comprehensive review system and a compensation philosophy that rewards teamwork.
GLOBAL REACH
We have achieved leading positions in major international markets by
capitalizing on our product knowledge and global research, as well as by
building a local presence where appropriate. As a result, we are one of the few
truly global investment banking and securities firms with the ability to execute
large and complex cross-border transactions.
INDUSTRY AND ECONOMIC OUTLOOK
We believe that significant growth and profit opportunities exist in the
financial services industry over the long term. These opportunities derive from
long-term trends, including financial market deregulation, the globalization of
the world economy, the increasing focus of companies on shareholder value,
consolidations in various industries, growth in investable funds and
accelerating technology and financial product innovation. We believe that over
the last 15 years these trends, coupled with generally declining interest rates
and favorable market conditions, have contributed to a substantially higher rate
of growth in activity in the financial services industry than the growth in
overall economic activity. While the future economic environment may not be as
favorable as that experienced in the last 15 years and there may be periods of
adverse economic and market conditions, we believe that these trends should
continue to affect the financial services industry positively over the long
term.
The following table sets forth selected key industry indicators:
KEY INDUSTRY INDICATORS
($ in billions, except gross domestic product)
(volume in millions of shares)
<TABLE>
<CAPTION>
AS OF OR FOR
YEAR ENDED DECEMBER 31,
----------------------------------- CAGR(6)
1983 1988 1993 1998 '83-'98
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Worldwide gross domestic product (in
trillions)(1)......................... $ 10 $ 18 $ 24 $ 29(7) 8%(7)
Worldwide mergers and acquisitions(2)... 96 527 460 2,522 24
Worldwide equity issued(2).............. 50 51 172 269 12
Worldwide debt issued(2)................ 146 631 1,546 2,932 22
Worldwide equity market
capitalization(3)..................... 3,384 9,728 14,016 27,459 15
NYSE average daily volume............... 85 162 265 674 15
Worldwide pension assets(4)............. $1,900 $3,752 $ 6,560 $10,975 12
U.S. mutual fund assets(5).............. 293 810 2,075 5,530 22
</TABLE>
- ---------------
(1) Source: The Economist Intelligence Unit, January 1999.
(2) Source: Securities Data Company.
(3) Source: International Finance Corporation.
(4) Source: InterSec Research Corp.
(5) Source: Investment Company Institute.
(6) Compound annual growth rate.
(7) Data as of December 31, 1997; compound annual growth rate 1983-1997.
------------------------
OUR HEADQUARTERS
Our headquarters are located at 85 Broad Street, New York, New York 10004,
telephone (212) 902-1000.
6
<PAGE> 9
THE OFFERING
Please refer to "Description of Notes We Are Offering" in this prospectus
for more information about the notes.
Notes offered.............. % (euro) Notes due 2009.
Issuer..................... The Goldman Sachs Group, Inc.
Stated maturity............ May 15, 2009.
Currency of payment........ We will make payments on the notes in euros (euro),
the currency of the European Economic and Monetary
Union.
Total principal amount
being issued............... (euro)1,000,000,000.
Ranking.................... The notes will rank equally in right of payment
with all other senior, unsecured debt obligations
of The Goldman Sachs Group, Inc.
Interest rate.............. % annually.
Date interest starts
accruing................... , 1999.
Interest payment dates..... Every May 15 and November 15.
First interest payment
date....................... November 15, 1999.
Regular record dates for
interest................. May 1 for May 15 interest; November 1 for November
15 interest.
Payment of additional
amounts.................... We intend to make all payments on the notes without
deducting U.S. withholding taxes. If any deduction
is required on payments to non-U.S. investors, we
will pay additional amounts on those payments to
the extent described under "Description of Notes We
Are Offering -- Payment of Additional Amounts".
Redemption features........ We will not be permitted to redeem the notes before
they mature unless we are obligated to pay
additional amounts due to changes in U.S.
withholding tax requirements. In that event, we may
redeem the outstanding notes in whole at any time,
at a price equal to 100% of their principal amount
plus accrued interest to the redemption date.
Book-entry issuance,
settlement and
clearance................ We will issue the notes only in global form,
through the Cedel and Euroclear book-entry clearing
systems in Europe. Investors may hold interests in
the notes only through organizations that
participate, directly or indirectly, in the Cedel
or Euroclear systems. Investors must pay for their
notes in euros, in immediately available funds.
Listing.................... The Goldman Sachs Group, Inc. has filed an
application to list the notes on the Luxembourg
Stock Exchange.
Use of proceeds............ We intend to use the net proceeds from the sale of
the notes to provide additional funds for our
operations and for other general corporate
purposes, including the repayment of short-term
obligations and the portion of long-term
obligations coming due during the remainder of this
calendar year.
Governing law.............. The notes and the indenture under which they will
be issued will be governed by New York law.
7
<PAGE> 10
OUR COMMON STOCK OFFERING
On May 7, 1999 we converted from partnership to corporate form, with The
Goldman Sachs Group, Inc. as the successor parent company. At the same time, The
Goldman Sachs Group, Inc. completed an initial public offering of its common
stock. In that offering, The Goldman Sachs Group, Inc. sold 51,000,000 shares
for its own account and two of its shareholders, Sumitomo Bank Capital Markets,
Inc. and Kamehameha Activities Association, sold a total of 18,000,000 shares
for their accounts.
We received net proceeds from our common stock offering of $2.6 billion,
based on the initial public offering price of $53.00 per share, after deducting
the underwriting discounts and estimated offering expenses payable by us in our
common stock offering. We intend to use those proceeds in the manner described
below under "Use of Proceeds".
We are managed by our principal owners. Simultaneously with our conversion
from partnership to corporate form and our common stock offering, we made
equity-based awards to substantially all of our employees. We also completed a
number of other transactions in order to convert from partnership to corporate
form at the time of the closing of our common stock offering. Upon the closing
of those transactions, our employees, including former partners, owned
approximately 65% of The Goldman Sachs Group, Inc. None of our employees sold
shares in our common stock offering. For a more detailed description of these
and other transactions, see "Certain Relationships and Related
Transactions -- Incorporation and Related Transactions", "Management -- The
Employee Initial Public Offering Awards" and "Pro Forma Consolidated Financial
Information".
OUR DOLLAR DEBT OFFERING
At or about the time of this offering, we plan to issue approximately $1.5
billion aggregate principal amount of debt securities payable in U.S. dollars in
a separate underwritten public offering. Those securities would be general,
unsecured obligations of The Goldman Sachs Group, Inc., would rank equally in
right of payment with the notes, would bear interest at a fixed rate payable
semi-annually and would have a stated maturity of ten years. If we complete our
dollar debt offering, we intend to use the net proceeds of that offering for the
purposes described in "Use of Proceeds". We may decide to postpone or cancel our
dollar debt offering or to conduct it on terms other than those described above.
Thus, we may not receive the proceeds referred to above.
OUR NEW MEDIUM-TERM NOTE PROGRAM
At or about the time of this offering, we also plan to begin offering debt
securities on an ongoing basis under a new medium-term note program. Under that
program, we expect to issue up to approximately $15 billion aggregate principal
amount of our debt securities over the next two years. Those debt securities
would be general, unsecured obligations of The Goldman Sachs Group, Inc. and
would rank equally in right of payment with the notes. The specific terms of
those debt securities, including as to maturity and interest, will be fixed at
the time of sale. We do not know the principal amount of debt securities we will
sell under our new medium-term note program or when sales will occur.
8
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary historical consolidated income statement and balance sheet data
set forth below have been derived from our consolidated financial statements and
their notes. Our consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, as of November 28, 1997 and
November 27, 1998 and for the years ended November 29, 1996, November 28, 1997
and November 27, 1998. Our condensed consolidated financial statements have been
reviewed by PricewaterhouseCoopers LLP as of February 26, 1999 and for the three
months ended February 26, 1999. These financial statements are included
elsewhere in this prospectus, together with the reports thereon of
PricewaterhouseCoopers LLP.
The summary historical consolidated income statement and balance sheet data
set forth below as of November 25, 1994, November 24, 1995 and November 29, 1996
and for the years ended November 25, 1994 and November 24, 1995 have been
derived from our audited consolidated financial statements that are not included
in this prospectus.
The summary historical consolidated income statement and balance sheet data
set forth below as of and for the three months ended February 26, 1999 have been
derived from our unaudited condensed consolidated financial statements that, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. The interim results
set forth below for the three months ended February 26, 1999 may not be
indicative of results for the full year.
The pro forma data set forth below for the year ended November 27, 1998 and
as of and for the three months ended February 26, 1999 have been derived from
the pro forma data set forth in "Pro Forma Consolidated Financial Information"
included elsewhere in this prospectus.
In addition to our common stock offering, the pro forma adjustments reflect
the transactions described under "Certain Relationships and Related
Transactions", compensation and benefits related to services rendered by our
managing directors who were profit participating limited partners, the provision
for corporate income taxes and the other transactions described under "Pro Forma
Consolidated Financial Information".
The summary consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Pro Forma Consolidated Financial Information" and the consolidated
financial statements and their notes.
9
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED NOVEMBER AS OF OR FOR
--------------------------------------------------- THREE MONTHS
1994 1995 1996 1997 1998 ENDED FEBRUARY 1999
---- ---- ---- ---- ---- -------------------
(unaudited)
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................................. $ 3,537 $ 4,483 $ 6,129 $ 7,447 $ 8,520 $ 2,995
Pre-tax earnings(1)........................... 508 1,368 2,606 3,014 2,921 1,188
BALANCE SHEET DATA:
Total assets(2)............................... $95,296 $100,066 $152,046 $178,401 $217,380 $230,624
Long-term borrowings.......................... 14,418 13,358 12,376 15,667 19,906 20,405
Partners' capital............................. 4,771 4,905 5,309 6,107 6,310 6,612
PRO FORMA DATA (UNAUDITED)(3):
Pro forma net earnings........................ -- -- -- -- $ 1,256 $ 516
Pro forma ratio of earnings to fixed
charges(4).................................. -- -- -- -- 1.15x 1.30x
Pro forma stockholders' equity as adjusted for
our common stock offering................... -- -- -- -- -- $ 7,627
SELECTED DATA AND RATIOS (UNAUDITED):
Ratio of earnings to fixed charges(1)(4)...... 1.06x 1.14x 1.23x 1.23x 1.21x 1.41x
Assets under supervision:
Assets under management..................... $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $206,380
Other client assets......................... 49,061 57,716 76,892 102,033 142,018 163,315
------- -------- -------- -------- -------- --------
Total assets under supervision................ $92,732 $110,074 $171,491 $237,962 $336,839 $369,695
======= ======== ======== ======== ======== ========
</TABLE>
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(1) Since we historically operated in partnership form, payments to our profit
participating limited partners were accounted for as distributions of
partners' capital rather than as compensation expense. As a result, our
pre-tax earnings and compensation and benefits expense have not reflected
any payments for services rendered by our managing directors who were
profit participating limited partners. Accordingly, our historical pre-tax
earnings understate the expected operating costs to be incurred by us after
our conversion to corporate form. As a corporation, we will include
payments for services rendered by our managing directors who were profit
participating limited partners in compensation and benefits expense. For
financial information that reflects pro forma compensation and benefits
expense as if we had been a corporation, see "Pro Forma Consolidated
Financial Information".
(2) Total assets and liabilities were increased by $11.64 billion as of
November 27, 1998 and $8.99 billion as of February 26, 1999 due to the
adoption of the provisions of Statement of Financial Accounting Standards
No. 125 that were deferred by Statement of Financial Accounting Standards
No. 127. For a discussion of Statement of Financial Accounting Standards
Nos. 125 and 127, see "Accounting Developments" in Note 2 to the audited
consolidated financial statements.
(3) Reflects such adjustments as are necessary, in the opinion of management,
for a fair presentation of the results of operations and stockholders'
equity of Goldman Sachs on a pro forma basis. See "Pro Forma Consolidated
Financial Information" for more detailed information concerning these
adjustments.
(4) For purposes of the ratio of earnings to fixed charges, "earnings"
represent pre-tax earnings plus fixed charges and "fixed charges" represent
interest expense plus that portion of rent expense that, in our opinion,
approximates the interest factor included in rent expense. Neither the pro
forma ratio of earnings to fixed charges nor the historical ratio of
earnings to fixed charges gives effect to this offering of notes, our
dollar debt offering or our new medium-term note program.
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RISK FACTORS
An investment in the notes we are offering involves a number of risks. You
should carefully consider the following information about these risks, together
with the other information in this prospectus, before investing in the notes.
THE RISKS WE FACE IN OUR BUSINESSES COULD REDUCE THE MARKET VALUE OF THE NOTES
AND IMPAIR OUR ABILITY TO REPAY THEM
We face a number of risks in our businesses, including market, liquidity,
credit, operational, legal and regulatory risks. Many of these risks are
substantial and inherent in our businesses. These risks could harm our operating
results, our business prospects or our financial condition. If that were to
occur, the value of an investment in the notes could also be reduced, in two
main ways.
Business Risks Could Hurt the Credit Ratings of the Notes and, Therefore, Their
Market Value and Marketability
The business risks we describe in this section entitled "Risk Factors"
could reduce our profitability and our ability to borrow or otherwise raise
cash. For example, we could incur large trading losses due to severe market
fluctuations, our investment banking revenues could decline due to a prolonged
market downturn or we could become unable to refinance our debt due to a
disruption in the credit markets. If this were to occur, the rating agencies
that provide the credit ratings assigned to the notes could withdraw or lower
their ratings or could place us on "credit watch" with negative implications. If
that happened, the market value of the notes could fall. In addition, the number
of potential investors who might be willing to purchase the notes, even at a
lower price, could decrease, thereby impairing your ability to sell the notes in
any trading market for the notes that may develop. Any of these developments
could reduce the value of your investment in the notes.
Even if the business risks we describe below did not have an immediate
impact on Goldman Sachs, they could harm our business prospects. For example,
serious employee misconduct could hurt our business reputation, we could become
the target of serious, protracted litigation or regulatory action or the
competition we face from other firms could hamper our ability to enhance or even
maintain our position in important markets in the future. Developments such as
these could harm our business prospects, which in turn could lead the rating
agencies to question our ability to meet our payment obligations in a timely
manner and thus to lower our credit ratings.
If Severe Enough, Business Risks Could Also Impair Our Ability to Obtain the
Cash We Will Need to Pay Interest or Principal on the Notes
The business risks we describe below could, if severe or protracted,
prevent us from obtaining the cash we will need to make timely payments on our
debt, including the notes. This could occur, for example, if our revenues
declined or our expenses increased relative to our revenues. In addition, we may
be unable to raise the funds needed to pay our obligations if our ability to
borrow in the credit markets were impaired, either because of a general
disruption in those markets or because of a decline in our credit ratings due to
events affecting our financial position in particular or our industry generally.
Similarly, our available cash could be reduced if we were unable to sell
securities or other assets we hold as needed or if The Goldman Sachs Group, Inc.
were unable to obtain sufficient funds from its subsidiaries because of
regulatory restrictions or financial problems affecting them. A significant and
sustained reduction in the cash available to The Goldman Sachs Group, Inc. could
make it difficult for us to meet our payment obligations on our debt, including
the notes, in a timely manner.
MARKET FLUCTUATIONS COULD HARM OUR
BUSINESSES IN MANY WAYS AND,
CONSEQUENTLY, COULD LOWER THE VALUE
OF AN INVESTMENT IN THE NOTES
As an investment banking and securities firm, our businesses are materially
affected by
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<PAGE> 14
conditions in the financial markets and economic conditions generally, both in
the United States and elsewhere around the world. The equity and debt markets in
the United States and elsewhere have achieved record or near record levels, and
this favorable business environment will not continue indefinitely. In the event
of a market downturn, our businesses could be adversely affected in many ways,
including those described below. Our revenues are likely to decline in such
circumstances and, if we were unable to reduce expenses at the same pace, our
profit margins would erode. For example, in the second half of fiscal 1998, we
recorded negative net revenues from our Trading and Principal Investments
business and from mid-August to mid-October the number of equity underwritings
and announced mergers and acquisitions transactions in which we participated
declined substantially due to adverse economic and market conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Business Environment" for a discussion of the market environment
in which we operated during that period. Even in the absence of a market
downturn, we are exposed to substantial risk of loss due to market volatility.
Developments such as lower revenues, declining profit margins and losses
from trading and investment activities could negatively affect the credit
ratings of the notes and, therefore, their market value. In addition, if
sufficiently severe, these developments could reduce the cash available to us to
make payments on our debt, including the notes. In the following paragraphs, we
describe several ways in which these developments could occur.
We May Incur Significant Losses from Our Trading and Investment Activities Due
to Market Fluctuations and Volatility
We generally maintain large trading and investment positions in the fixed
income, currency, commodity and equity markets. To the extent that we own
assets, i.e., have long positions, in any of those markets, a downturn in those
markets could result in losses from a decline in the value of those long
positions. Conversely, to the extent that we have sold assets we do not own,
i.e., have short positions, in any of those markets, an upturn in those markets
could expose us to potentially unlimited losses as we attempt to cover our short
positions by acquiring assets in a rising market. We may from time to time have
a trading strategy consisting of holding a long position in one asset and a
short position in another, from which we expect to earn revenues based on
changes in the relative value of the two assets. If, however, the relative value
of the two assets changes in a direction or manner that we did not anticipate or
against which we are not hedged, we might realize a loss in those paired
positions. We incurred significant losses in our Trading and Principal
Investments business in the second half of fiscal 1998 from this type of
"relative value" trade. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Business Environment" for a discussion of
those losses and the market environment in which we operated during that period.
In addition, we maintain substantial trading positions that can be adversely
affected by the level of volatility in the financial markets, i.e., the degree
to which trading prices fluctuate over a particular period, in a particular
market, regardless of market levels.
Our Investment Banking Revenues May Decline in Adverse Market or Economic
Conditions
Unfavorable financial or economic conditions would likely reduce the number
and size of transactions in which we provide underwriting, mergers and
acquisitions advisory and other services. Our Investment Banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. In particular,
our results of operations would be adversely affected by a significant reduction
in the number or size of mergers and acquisitions transactions.
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<PAGE> 15
We May Generate Lower Revenues from Commissions and Asset Management Fees in a
Market Downturn
A market downturn could lead to a decline in the volume of transactions
that we execute for our customers and, therefore, to a decline in the revenues
we receive from commissions and spreads. In addition, because the fees that we
charge for managing our clients' portfolios are in many cases based on the value
of those portfolios, a market downturn that reduces the value of our clients'
portfolios or increases the amount of withdrawals would reduce the revenue we
receive from our asset management business.
Holding Large and Concentrated Positions May Expose Us to Large Losses
Concentration of risk in the past has increased the losses that we have
incurred in our arbitrage, market-making, block trading, underwriting and
lending businesses and may continue to do so in the future. Goldman Sachs has
committed substantial amounts of capital to these businesses, which often
require Goldman Sachs to take large positions in the securities of a particular
issuer or issuers in a particular industry, country or region. Moreover, the
trend in all major capital markets is towards larger and more frequent
commitments of capital in many of these activities. For example, as described
under "Business -- Trading and Principal Investments -- Equities", we are
experiencing an increase in the number and size of block trades that we execute,
and we expect this trend to continue.
Our Hedging Strategies May Not Prevent Losses
If any of the variety of instruments and strategies we utilize to hedge our
exposure to various types of risk are not effective, we may incur losses. Many
of our strategies are based on historical trading patterns and correlations. For
example, if we hold a long position in an asset, we may hedge this position by
taking a short position in an asset where the short position has, historically,
moved in a direction that would offset a change in value in the long position.
However, these strategies may not be fully effective in mitigating our risk
exposure in all market environments or against all types of risk. We have often
hedged our exposure to corporate fixed income securities by taking a short
position in U.S. Treasury securities, since historically the value of U.S.
Treasury securities has changed in a manner similar to changes in the value of
corporate fixed income securities. Due to the move by investors to higher credit
quality fixed income securities in mid-August to mid-October 1998, however, the
prices for corporate fixed income securities declined while the prices for U.S.
Treasury securities increased and, as a result, we incurred losses on both
positions. Unexpected market developments also affected other hedging strategies
during this time, and unanticipated developments could impact these or different
hedging strategies in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Management" for a
discussion of the policies and procedures we use to identify, monitor and manage
the risks we assume in conducting our businesses and of refinements we have made
to our risk management policies and procedures as a result of our recent
experience.
A Prolonged Market Downturn Could Impair Our Operating Results
While we encountered extremely difficult market conditions in mid-August to
mid-October 1998, the financial markets rebounded late in the fourth quarter of
fiscal 1998. At some time in the future, there may be a more sustained period of
market decline or weakness that will leave us operating in a difficult market
environment and subject us to the risks that we describe in this section for a
longer period of time.
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
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<PAGE> 16
market downturn, our customers and counterparties could incur substantial losses
of their own, thereby weakening their financial condition and increasing our
credit risk to them. Our liquidity risk and credit risk are described below.
OUR RISK MANAGEMENT POLICIES AND
PROCEDURES MAY LEAVE US EXPOSED TO
UNIDENTIFIED OR UNANTICIPATED RISK
We have devoted significant resources to develop our risk management
policies and procedures and expect to continue to do so in the future.
Nonetheless, our policies and procedures to identify, monitor and manage risks
may not be fully effective. Some of our methods of managing risk are based upon
our use of observed historical market behavior. As a result, these methods may
not predict future risk exposures, which could be significantly greater than the
historical measures indicate. For example, the market movements of the late
third and early fourth quarters of fiscal 1998 were larger and involved greater
divergences in relative asset values than we anticipated. This caused us to
experience trading losses that were greater and recurred more frequently than
some of our risk measures indicated were likely to occur. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Business Environment" for a discussion of the market environment
in which we operated during the second half of fiscal 1998 and "-- Risk
Management" for a discussion of the policies and procedures we use to identify,
monitor and manage the risks we assume in conducting our businesses and of
refinements we have made to our risk management policies and procedures as a
result of our recent experience.
Other risk management methods depend upon evaluation of information
regarding markets, clients or other matters that is publicly available or
otherwise accessible by Goldman Sachs. This information may not in all cases be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risk requires, among other things, policies and procedures
to record properly and verify a large number of transactions and events, and
these policies and procedures may not be fully effective.
If we were unable to manage our risk exposure effectively, the rating
agencies could lower our credit ratings, which could reduce the market value of
the notes and your ability to resell them at attractive prices. If we suffer
serious losses due to an inability to manage risk, this could also diminish our
available cash and make it difficult for us to make timely payments on our debt,
including the notes.
A LACK OF LIQUIDITY COULD HURT AN INVESTMENT IN THE NOTES BY IMPAIRING OUR
ABILITY TO FUND OUR OPERATIONS OR, IN SOME CASES, TO PAY AMOUNTS WE OWE ON OUR
DEBT
Liquidity, i.e., ready access to funds, is essential to our businesses. In
addition to maintaining a cash position, we rely on three principal sources of
liquidity: borrowing in the debt markets; access to the repurchase and
securities lending markets; and selling securities and other assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" for a discussion of our sources of liquidity.
If we were unable to meet our liquidity needs, we could find it necessary
to reduce our business activities or it could become difficult to continue them
in their current form. This could lead the rating agencies to reduce our credit
ratings, lowering the market value of the notes and making it harder for
investors to sell them. Moreover, if our ability to obtain financing or sell
assets were sufficiently impaired, we would be unable to obtain the cash we need
to meet our payment obligations on our debt, including the notes. In the
following paragraphs, we describe our liquidity needs and the risks we face in
meeting them.
An Inability to Access the Debt Capital Markets Could Impair Our Liquidity
We depend on continuous access to the debt capital markets to finance our
day-to-day operations. An inability to raise money in the long-term or
short-term debt markets, or to engage in repurchase agreements or securities
lending, could have a substantial negative
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<PAGE> 17
effect on our liquidity. Our access to debt in amounts adequate to finance our
activities could be impaired by factors that affect Goldman Sachs in particular
or the financial services industry in general. For example, lenders could
develop a negative perception of our long-term or short-term financial prospects
if we incurred large trading losses, if the level of our business activity
decreased due to a market downturn, if regulatory authorities took significant
action against us or if we discovered that one of our employees had engaged in
serious unauthorized or illegal activity. Our ability to borrow in the debt
markets also could be impaired by factors that are not specific to Goldman
Sachs, such as a severe disruption of the financial markets or negative views
about the prospects for the investment banking, securities or financial services
industries generally.
We also depend on banks to finance our day-to-day operations. As a result
of the recent consolidation in the banking industry, some of our lenders have
merged or consolidated with other banks and financial institutions. While we
have not been materially adversely affected to date, it is possible that further
consolidation could lead to a loss of a number of our key banking relationships
and a reduction in the amount of credit extended to us.
An Inability to Access the Short-Term Debt Markets Could Impair Our Liquidity
We depend on the issuance of commercial paper and promissory notes as a
principal source of unsecured short-term funding for our operations. As of
February 26, 1999, Goldman Sachs had $21.63 billion of outstanding commercial
paper and promissory notes with a weighted-average maturity of approximately 75
days. Our liquidity depends to an important degree on our ability to refinance
these borrowings on a continuous basis. Investors who hold our outstanding
commercial paper and promissory notes have no obligation to purchase new
instruments when the outstanding instruments mature.
Our Liquidity Could Be Adversely Affected If Our Ability to Sell Assets Is
Impaired
If we were unable to borrow in the debt capital markets, we would need to
liquidate assets in order to meet our maturing liabilities, perhaps including
the notes. In certain market environments, such as times of market volatility or
uncertainty, overall market liquidity may decline. In a time of reduced
liquidity, we may be unable to sell some of our assets, or we may have to sell
assets at depressed prices, which could adversely affect our results of
operations and financial condition.
Our ability to sell our assets may be impaired by other market participants
seeking to sell similar assets into the market at the same time. In the late
third and early fourth quarters of fiscal 1998, for example, the markets for
some assets were adversely affected by simultaneous attempts by a number of
institutions to sell similar assets.
A Reduction in Our Credit Ratings Could Adversely Affect Our Liquidity and
Competitive Position and Increase Our Borrowing Costs
Our borrowing costs and our access to the debt capital markets depend
significantly on our credit ratings. These ratings are assigned by rating
agencies, which may reduce or withdraw their ratings or place Goldman Sachs on
"credit watch" with negative implications at any time. Credit ratings are also
important to Goldman Sachs when competing in certain markets and when seeking to
engage in longer-term transactions, including over-the-counter derivatives. A
reduction in our credit ratings could increase our borrowing costs and limit our
access to the capital markets. This, in turn, could reduce our earnings and
adversely affect our liquidity. In addition, a reduction in the credit rating of
the notes could adversely affect their market value or your ability to sell the
notes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity -- Credit Ratings" for additional information
concerning our credit ratings.
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LOSSES DUE TO FINANCIAL OR OTHER PROBLEMS EXPERIENCED BY THIRD PARTIES COULD
IMPAIR AN INVESTMENT IN THE NOTES
We are exposed to the risk that third parties that owe us money, securities
or other assets will not perform their obligations. These parties include our
trading counterparties, customers, clearing agents, exchanges, clearing houses
and other financial intermediaries as well as issuers whose securities we hold.
These parties may default on their obligations to us due to bankruptcy, lack of
liquidity, operational failure or other reasons. This risk may arise, for
example, from holding securities of third parties; entering into swap or other
derivative contracts under which counterparties have long-term obligations to
make payments to us; executing securities, futures, currency or commodity trades
that fail to settle at the required time due to non-delivery by the counterparty
or systems failure by clearing agents, exchanges, clearing houses or other
financial intermediaries; and extending credit to our clients through bridge or
margin loans or other arrangements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Management -- Credit Risk"
for a further discussion of the credit risks to which we are exposed.
Significant failures by third parties to perform their obligations to us
could reduce our revenue and make it difficult for us to borrow in the credit
markets. If severe enough, these developments could reduce the amount of funds
available to us to meet our payment obligations on our debt, including the
notes, in a timely manner. Even in less severe cases, these developments could
raise concerns about our financial condition and lead the rating agencies to
lower our credit ratings. Thus, even if our ability to repay the notes were not
impaired, their market value could decline. In the following paragraphs, we
describe the ways in which we are exposed to these credit risks.
We May Suffer Significant Losses from Our Credit Exposures
In recent years, we have significantly expanded our swaps and other
derivatives businesses and placed a greater emphasis on providing credit and
liquidity to our clients. As a result, our credit exposures have increased in
amount and in duration. In addition, as competition in the financial services
industry has increased, we have experienced pressure to assume longer-term
credit risk, extend credit against less liquid collateral and price more
aggressively the credit risks that we take.
Our Clients and Counterparties May Be Unable to Perform Their Obligations to Us
as a Result of Economic or Political Conditions
Country, regional and political risks are components of credit risk, as
well as market risk. Economic or political pressures in a country or region,
including those arising from local market disruptions or currency crises, may
adversely affect the ability of clients or counterparties located in that
country or region to obtain foreign exchange or credit and, therefore, to
perform their obligations to us. See "-- We Are Exposed to Special Risks in
Emerging and Other Markets, Which Could Impair Our Ability to Fund Payments on
Our Debt" 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
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Capital Portfolio, L.P., which is described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity -- The
Balance Sheet". Actual defaults, increases in perceived default risk and other
similar events could arise in the future and could have an adverse effect on the
financial markets and on Goldman Sachs.
The Information That We Use in Managing Our Credit Risk May Be Inaccurate or
Incomplete
Although we regularly review our credit exposure to specific clients and
counterparties and to specific industries, countries and regions that we believe
may present credit concerns, default risk may arise from events or circumstances
that are difficult to detect, such as fraud. We may also fail to receive full
information with respect to the trading risks of a counterparty. In addition, in
cases where we have extended credit against collateral, we may find that we are
undersecured, for example, as a result of sudden declines in market values that
reduce the value of collateral.
OUR COMPUTER SYSTEMS AND THOSE OF THIRD PARTIES MAY NOT ACHIEVE YEAR 2000
READINESS -- YEAR 2000 READINESS DISCLOSURE
With the year 2000 approaching, many institutions around the world are
reviewing and modifying their computer systems to ensure that they are Year 2000
compliant. The issue, in general terms, is that many existing computer systems
and microprocessors (including those in non-information technology equipment and
systems) use only two digits to identify a year in the date field with the
assumption that the first two digits of the year are always "19". Consequently,
on January 1, 2000, computers that are not Year 2000 compliant may read the year
as 1900. Systems that calculate, compare or sort using the incorrect date may
malfunction.
The Year 2000 problems described below could disrupt our normal funding
administration process, resulting in late payments or the payment of wrong
amounts on our debt, including the notes. If sufficiently severe and protracted,
these problems could also lead the rating agencies to reduce our credit ratings,
which could hurt the market value of the notes and possibly your ability to
resell them.
Our Computer Systems May Fail
Because we are dependent, to a very substantial degree, upon the proper
functioning of our computer systems, a failure of our systems to be Year 2000
compliant would have a material adverse effect on us. Failure of this kind
could, for example, cause settlement of trades to fail, lead to incomplete or
inaccurate accounting, recording or processing of trades in securities,
currencies, commodities and other assets, result in generation of erroneous
results or give rise to uncertainty about our exposure to trading risks and our
need for liquidity. If not remedied, potential risks include business
interruption or shutdown, financial loss, regulatory actions, reputational harm
and legal liability.
The Computer Systems of Third Parties on Which We Depend May Fail
We depend upon the proper functioning of third-party computer and
non-information technology systems. These parties include trading
counterparties, financial intermediaries such as securities and commodities
exchanges, depositories, clearing agencies, clearing houses and commercial banks
and vendors such as providers of telecommunication services and other utilities.
We continue to assess counterparties, intermediaries and vendors with whom we
have important financial or operational relationships to determine the extent of
their Year 2000 preparedness. We have not yet received sufficient information
from all parties about their Year 2000 preparedness to assess the effectiveness
of their efforts. Moreover, in many cases, we are not in a position to verify
the accuracy or completeness of the information we receive from third parties
and as a result are dependent on their willingness and ability to disclose, and
to address, their Year 2000 problems. In addition, in some international markets
in which we do business, the level of awareness and remediation efforts relating
to the Year 2000 issue may be less advanced than in the United States.
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If third parties with whom we interact have Year 2000 problems that are not
remedied, problems could include the following:
- - in the case of vendors, disruption of important services upon which Goldman
Sachs depends, such as telecommunications and electrical power;
- - in the case of third-party data providers, receipt of inaccurate or
out-of-date information that would impair our ability to perform critical data
functions, such as pricing our securities or other assets;
- - in the case of financial intermediaries, such as exchanges and clearing
agents, failed trade settlements, inability to trade in certain markets and
disruption of funding flows;
- - in the case of banks and other lenders, disruption of capital flows
potentially resulting in liquidity stress; and
- - in the case of counterparties and customers, financial and accounting
difficulties for those parties that expose Goldman Sachs to increased credit
risk and lost business.
Disruption or suspension of activity in the world's financial markets is also
possible.
Our Revenues May Decline If Market Activity Decreases Shortly Before and After
the Year 2000
We believe that uncertainty about the success of remediation efforts
generally may cause many market participants to reduce the level of their market
activities temporarily as they assess the effectiveness of these efforts during
a "phase-in" period beginning in late 1999. We believe that lenders are likely
to take similar steps, which will result in a reduction in available funding
sources. Consequently, there may be a downturn in customer and general market
activity for a short period of time before and after January 1, 2000. If this
occurs, our net revenues may be adversely affected, possibly materially,
depending on how long the reduction in activity continues and how broadly it
affects the markets. In addition, we expect to reduce our own trading activities
and the size of our balance sheet in order to manage the number and type of our
transactions that settle during this period and our related funding needs. This
also could reduce our net revenues. We cannot predict the magnitude of the
impact that these kinds of reductions would have on our businesses.
We May Be Exposed to Litigation as a Result of Year 2000 Problems
We may be exposed to litigation with our customers and counterparties as a
result of Year 2000 problems. For example, litigation could arise from problems
relating to our internal systems or to external systems on which we depend, as
well as from problems involving companies in which our clients or the funds we
manage hold investments.
Our Year 2000 Program May Not Be Effective and Our Estimates of Timing and Cost
May Not Be Accurate
Our Year 2000 program may not be effective and our estimates about the
timing and cost of completing our program may not be accurate. For a description
of our program and the steps that remain to be taken, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Management -- Operational and Year 2000 Risks -- Year 2000 Readiness
Disclosure".
OTHER OPERATIONAL RISKS MAY DISRUPT OUR
BUSINESSES, RESULT IN REGULATORY ACTION
AGAINST US OR LIMIT OUR GROWTH
We face operational risk arising from mistakes made in the confirmation or
settlement of transactions or from transactions not being properly recorded,
evaluated or accounted for. Our businesses are highly dependent on our ability
to process, on a daily basis, a large number of transactions across numerous and
diverse markets in many currencies, and the transactions we process have become
increasingly complex. 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
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reputational damage. The inability of our systems to accommodate an increasing
volume of transactions could also constrain our ability to expand our
businesses. In recent years, we have substantially upgraded and expanded the
capabilities of our data processing systems and other operating technology, and
we expect that we will need to continue to upgrade and expand in the future to
avoid disruption of, or constraints on, our operations.
If sufficiently severe and protracted, problems caused by our inability to
manage our operations effectively could lead the rating agencies to question our
controls and financial condition and to lower the credit ratings of the notes.
Problems of this kind could also reduce our profitability or make lenders less
willing to provide funding to us. If these two important sources of liquidity
were impaired, we could find it difficult to obtain the cash we need to make
payments on our debt, including payments on the notes.
LEGAL AND REGULATORY RISKS ARE INHERENT AND
SUBSTANTIAL IN OUR BUSINESSES AND COULD
LEAD TO A REDUCTION IN OUR CREDIT RATINGS
OR IN OUR ABILITY TO REPAY THE NOTES
Substantial legal liability or a significant regulatory action against
Goldman Sachs could have a material financial effect or cause significant
reputational harm to Goldman Sachs, which in turn could seriously harm our
business prospects. In that event, the credit ratings, and therefore the market
value, of the notes could decline. In some cases, these developments could have
a negative effect on the willingness of our lenders to provide us with the funds
we may need to meet our payment obligations on our debt, including the notes, in
a timely manner.
Our Exposure to Legal Liability Is Significant
We face significant legal risks in our businesses and the volume and amount
of damages claimed in litigation against financial intermediaries are
increasing. These risks include potential liability under securities or other
laws for materially false or misleading statements made in connection with
securities and other transactions, potential liability for the "fairness
opinions" and other advice we provide to participants in corporate transactions
and disputes over the terms and conditions of complex trading arrangements. We
also face the possibility that counterparties in complex or risky trading
transactions will claim that we improperly failed to tell them of the risks or
that they were not authorized or permitted to enter into these transactions with
us and that their obligations to Goldman Sachs are not enforceable. Particularly
in our rapidly growing business focused on high net worth individuals, we are
increasingly exposed to claims against Goldman Sachs for recommending
investments that are not consistent with a client's investment objectives or
engaging in unauthorized or excessive trading. During a prolonged market
downturn, we would expect these types of claims to increase. We are also subject
to claims arising from disputes with employees for alleged discrimination or
harassment, among other things. These risks often may be difficult to assess or
quantify and their existence and magnitude often remain unknown for substantial
periods of time. We incur significant legal expenses every year in defending
against litigation, and we expect to continue to do so in the future. See
"Business -- Legal Matters" for a discussion of some of the legal matters in
which we are currently involved.
Extensive Regulation of Our Businesses Limits Our Activities and May Subject Us
to Significant Penalties
The financial services industry is subject to extensive regulation. Goldman
Sachs is subject to regulation by governmental and self-regulatory organizations
in the United States and in virtually all other jurisdictions in which it
operates around the world.
The requirements imposed by our regulators are designed to ensure the
integrity of the financial markets and to protect customers and other third
parties who deal with Goldman Sachs and are not designed to 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 in-
19
<PAGE> 22
vestigation and surveillance activity, adoption of costly or restrictive new
regulations and judicial or administrative proceedings that may result in
substantial penalties. Among other things, we could be fined or prohibited from
engaging in some of our business activities. See "Business -- Regulation" for a
further discussion of the regulatory environment in which we conduct our
businesses.
Legal Restrictions on Our Clients May Reduce the Demand for Our Services
New laws or regulations or changes in enforcement of existing laws or
regulations applicable to our clients may also adversely affect our businesses.
For example, changes in antitrust enforcement could affect the level of mergers
and acquisitions activity and changes in regulation could restrict the
activities of our clients and, therefore, the services we provide on their
behalf.
INVESTORS IN THE NOTES FACE ADDITIONAL RISK BECAUSE THE GOLDMAN SACHS GROUP,
INC. IS A HOLDING COMPANY
Because The Goldman Sachs Group, Inc. is a holding company, it depends on
dividends, distributions and other payments from its subsidiaries to fund all
payments on its debt obligations, including its obligations to make payments on
the notes we are offering. The Goldman Sachs Group, Inc.'s right to participate
in a distribution of assets of any of its subsidiaries, whether on liquidation,
reorganization or otherwise, however, will be subject to the prior claims of the
creditors of that subsidiary. The ability of holders of the notes to benefit
from distributions of assets from The Goldman Sachs Group, Inc.'s subsidiaries
will also be subject to those prior claims. Consequently, the notes will be
effectively subordinated to all existing and future liabilities and obligations
of The Goldman Sachs Group, Inc.'s subsidiaries. This means that, if any
subsidiary of The Goldman Sachs Group, Inc. were to become bankrupt or
insolvent, its assets would be used to satisfy its own liabilities and
obligations before The Goldman Sachs Group, Inc. could use those assets to make
payment on The Goldman Sachs Group, Inc.'s own liabilities and obligations,
including the notes.
THE VALUE OF THE NOTES MAY BE IMPAIRED
BECAUSE WE DEPEND ON FUNDS
FROM OUR REGULATED SUBSIDIARIES
Many of our subsidiaries, including Goldman, Sachs & Co., our principal
U.S. subsidiary, are subject to laws that authorize regulatory bodies to block
or reduce the flow of funds from those subsidiaries to The Goldman Sachs Group,
Inc. Regulatory action of that kind could impede our access to the funds we need
to make payments on our debt, including the notes.
WE MAY BE LIABLE TO CREDITORS
OF OUR PARTNERSHIP SUBSIDIARIES
Goldman, Sachs & Co. is structured as a partnership in which The Goldman
Sachs Group, Inc. is a general partner, and we may structure other subsidiaries
the same way. A general partner of a partnership may be liable for the
partnership's obligations. Thus, for example, if there were a bankruptcy or
liquidation proceeding with respect to any partnership subsidiary in which The
Goldman Sachs Group, Inc. is a general partner and the assets of that subsidiary
were insufficient to meet all its outstanding liabilities and obligations, The
Goldman Sachs Group, Inc.'s own assets could become available to the
subsidiary's creditors. This could reduce the assets of The Goldman Sachs Group,
Inc. that are available to satisfy The Goldman Sachs Group, Inc.'s direct
creditors, including investors in the notes.
WE MAY BE ABLE TO OBTAIN WAIVERS OF
SOME OF OUR COVENANTS UNDER THE NOTES
WITHOUT YOUR APPROVAL
The indenture governing the notes permits us to issue an unlimited amount
of debt securities in different series from time to time. The notes will be a
single, distinct series of debt securities under the indenture. If we want to
make some types of changes to the indenture or obtain a waiver of compliance
with our covenants under it, we must obtain the approval of the holders of a
majority in principal amount of all series of debt securities that we issue
under the indenture and that are affected by the change or waiver, taken
together as a single class. In many cases, the approval of those holders will be
20
<PAGE> 23
sufficient for us to make the change or to obtain the waiver, even if it affects
the notes and the holders of a majority in principal amount of the notes do not
grant their approval. For a description of provisions governing consents and
waivers, see "Description of Notes We Are Offering -- Modification and Waiver of
Covenants -- Changes Requiring Majority Approval".
EMPLOYEE MISCONDUCT IS DIFFICULT TO
DETECT AND DETER AND COULD HARM GOLDMAN SACHS AND REDUCE THE VALUE OF THE NOTES
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. Misconduct by
employees could include binding Goldman Sachs to transactions that exceed
authorized limits or present unacceptable risks, or hiding from Goldman Sachs
unauthorized or unsuccessful activities, which, in either case, may result in
unknown and unmanaged risks or losses. Employee misconduct could also involve
the improper use or disclosure of confidential information, which could result
in regulatory sanctions and serious reputational or financial harm. It is not
always possible to deter employee misconduct and the precautions we take to
prevent and detect this activity may not be effective in all cases.
Employee misconduct could hurt our business, operations or financial
condition and could lead to a decline in our credit ratings and the
marketability of the notes. If these problems were severe enough, they could
also make it difficult for us to obtain from our operations or our lenders the
cash we may need to repay the notes when they come due.
THE FINANCIAL SERVICES INDUSTRY IS INTENSELY
COMPETITIVE AND RAPIDLY CONSOLIDATING
The financial services industry -- and all of our businesses -- are
intensely competitive, and we expect them to remain so. We compete on the basis
of a number of factors, including transaction execution, our products and
services, innovation, reputation and price. We have experienced intense price
competition in some of our businesses in recent years, such as underwriting fees
on investment grade debt offerings and privatizations. We believe we may
experience pricing pressures in these and other areas in the future as some of
our competitors seek to obtain market share by reducing prices.
If we were unable to compete effectively, or if competition became too
costly, our business and operations could suffer. This in turn could lead to a
decline in the credit ratings of the notes. In the following paragraphs, we
describe some of the ways in which competition could affect us.
We Face Increased Competition Due to a Trend Toward Consolidation
In recent years, there has been substantial consolidation and convergence
among companies in the financial services industry. In particular, a number of
large commercial banks, insurance companies and other broad-based financial
services firms have established or acquired broker-dealers or have merged with
other financial institutions. Many of these firms have the ability to offer a
wide range of products, from loans, deposit-taking and insurance to brokerage,
asset management and investment banking services, which may enhance their
competitive position. They also have the ability to support investment banking
and securities products with commercial banking, insurance and other financial
services revenues in an effort to gain market share, which could result in
pricing pressure in our businesses.
Consolidation Has Increased Our Need for Capital
This trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have had to commit capital to support our international
operations and to execute large global transactions.
21
<PAGE> 24
Our Ability to Expand Internationally Will Depend on Our Ability to Compete
Successfully with Local Financial Institutions
We believe that some of our most significant challenges and opportunities
will arise outside the United States, as described under "Industry and Economic
Outlook". In order to take advantage of these opportunities, we will have to
compete successfully with financial institutions based in important non-U.S.
markets, particularly in Europe. Some of these institutions are larger, better
capitalized and have a stronger local presence and a longer operating history in
these markets.
Our Revenues May Decline Due to Competition from Alternative Trading Systems
Securities and futures transactions are now being conducted through the
Internet and other alternative, non-traditional trading systems, and it appears
that the trend toward alternative trading systems will continue and probably
accelerate. A dramatic increase in computer-based or other electronic trading
may adversely affect our commission and trading revenues, reduce our
participation in the trading markets and associated access to market information
and lead to the creation of new and stronger competitors.
WE ARE EXPOSED TO SPECIAL RISKS IN EMERGING
AND OTHER MARKETS, WHICH COULD IMPAIR
OUR ABILITY TO FUND PAYMENTS ON OUR DEBT
In conducting our businesses in major markets around the world, including
many developing markets in Asia, Latin America and Eastern Europe, we are
subject to political, economic, legal, operational and other risks that are
inherent in operating in other countries. These risks range from difficulties in
settling transactions in emerging markets to possible nationalization,
expropriation, price controls and other restrictive governmental actions. We
also face the risk that exchange controls or similar restrictions imposed by
foreign governmental authorities may restrict our ability to convert local
currency received or held by us in their countries into U.S. dollars or other
currencies, or to take those dollars or other currencies out of those countries.
To date, a relatively small part of our businesses has been conducted in
emerging and other markets. As we expand our businesses in these areas, our
exposure to these risks will increase.
If our business or operations were hurt by events in emerging and other
markets described below, the rating agencies could reduce the credit ratings of
the notes, making it more difficult for you to sell them at a favorable price.
If these events were severe enough, they could also diminish the cash generated
by our operations or impair our ability to borrow in the credit markets, making
it difficult for us to obtain the funds we need to meet our payment obligations
on the notes.
Turbulence in Emerging Markets May Adversely Affect Our Businesses
In the last several years, various emerging market countries have
experienced severe economic and financial disruptions, including significant
devaluations of their currencies and low or negative growth rates in their
economies. The possible effects of these conditions include an adverse impact on
our businesses and increased volatility in financial markets generally.
Moreover, economic or market problems in a single country or region are
increasingly affecting other markets generally. For example, the economic crisis
in Russia in August 1998 adversely affected other emerging markets and led to
turmoil in financial markets worldwide. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Business
Environment" for a discussion of the business environment in which we operated
during the second half of fiscal 1998. A continuation of these situations could
adversely affect global economic conditions and world markets and, in turn,
could adversely affect our businesses. Among the risks are regional or global
market downturns and, as noted above, increasing liquidity and credit risks,
particularly in Japan where the economy continues to be weak and we have
significant exposure.
22
<PAGE> 25
Compliance with Local Laws and Regulations May Be Difficult
In many countries, the laws and regulations applicable to the securities
and financial services industries are uncertain and evolving, and it may be
difficult for us to determine the exact requirements of local laws in every
market. Our inability to remain in compliance with local laws in a particular
foreign market could have a significant and negative effect not only on our
businesses in that market but also on our reputation generally. These
uncertainties may also make it difficult for us to structure our transactions in
such a way that the results we expect to achieve are legally enforceable in all
cases. See "-- Legal and Regulatory Risks Are Inherent and Substantial in Our
Businesses and Could Lead to a Reduction in Our Credit Ratings or in Our Ability
to Repay the Notes -- Our Exposure to Legal Liability Is Significant" for
additional information concerning these matters and "Business -- Regulation" for
a discussion of the regulatory environment in which we conduct our businesses.
OUR CONVERSION TO CORPORATE FORM
MAY ADVERSELY AFFECT OUR ABILITY TO RECRUIT,
RETAIN AND MOTIVATE KEY EMPLOYEES
Our performance is largely dependent on the talents and efforts of highly
skilled individuals. Competition in the financial services industry for
qualified employees is intense. Our continued ability to compete effectively in
our businesses depends on our ability to attract new employees and to retain and
motivate our existing employees.
In connection with our common stock offering and the conversion of Goldman
Sachs from partnership to corporate form, the managing directors who were profit
participating limited partners received substantial amounts of common stock in
exchange for their interests in Goldman Sachs. Because these shares of common
stock were received in exchange for partnership interests, ownership of these
shares is not dependent upon these partners' continued employment. However,
these shares are subject to certain restrictions on transfer under a
shareholders' agreement and a portion may be pledged to support these partners'
obligations under noncompetition agreements. The transfer restrictions under the
shareholders' agreement may, however, be waived, as described under "Certain
Relationships and Related Transactions -- Shareholders' Agreement -- Transfer
Restrictions" and "-- Waivers". The steps we have taken to encourage the
continued service of these individuals after our common stock offering may not
be effective. For a description of the compensation plan for our senior
professionals that we have implemented in connection with our common stock
offering, see "Management -- The Partner Compensation Plan".
In connection with our common stock offering and conversion of Goldman
Sachs from partnership to corporate form, employees, other than the managing
directors who were profit participating limited partners, will receive grants of
restricted stock units, stock options or interests in a defined contribution
plan. The incentives to attract, retain and motivate employees provided by these
awards or by future arrangements may not be as effective as the opportunity,
which existed prior to conversion, to become a partner of Goldman Sachs. See
"Management -- The Employee Initial Public Offering Awards" for a description of
these awards.
BECAUSE THE NOTES ARE PAYABLE IN EUROS, THEY MAY NOT BE AN APPROPRIATE
INVESTMENT FOR ALL INVESTORS
The notes are denominated and payable in euros, the currency of the 11
countries participating in the European Economic and Monetary Union. This means
that investors must pay for the notes in euros and, unless euros are
unavailable, we will make all payments on the notes in euros. Investors who
reside in the United States or other non-EMU countries should consult their own
financial and legal advisors as to the currency-related risks entailed by an
investment in the notes.
The information in this risk factor is directed primarily to investors who
are residents of the United States or other non-EMU countries, except for the
risk described under "-- The Notes Permit Us to Make Payments in U.S. Dollars If
We Are Unable to Obtain Euros". The notes are not an appro-
23
<PAGE> 26
priate investment for investors who are unsophisticated about foreign currency
transactions.
An Investment in the Notes Involves Currency-Related Risks
Because the notes are payable in euros, an investment in the notes entails
significant risks that are not associated with an investment in debt securities
payable solely in U.S. dollars. These risks include the possibility of
significant changes in rates of exchange between the euro and the U.S. dollar or
other currencies, and the possibility that governmental authorities could impose
foreign exchange controls or other conditions that affect the euro. These risks
depend on factors over which we have no control, such as economic and political
events within the EMU countries and the supply of and demand for the euro in the
global currency markets.
Changes in Currency Exchange Rates Can Be Volatile and Unpredictable
In recent years, rates of exchange between the U.S. dollar and other
currencies, including some of the national currencies of the EMU countries, have
been volatile. This volatility may continue to affect the rate of exchange
between the euro and the U.S. dollar and other currencies.
Depreciation of the euro against the U.S. dollar would result in a decrease
in the U.S. dollar-equivalent value of payments made on the notes, including the
principal payable at maturity. This in turn could cause the market value of the
notes to fall. Depreciation of the euro against the U.S. dollar could result in
a loss to investors on a U.S.-dollar basis.
The Euro Is a New Currency with a Limited Exchange Rate History
The euro was adopted as the official currency of the 11 EMU countries only
on January 1, 1999. Consequently, the currency exchange rate history for the
euro is very brief. The value of the euro relative to the U.S. dollar and other
currencies that has prevailed in the currency exchange markets to date may give
little or no indication of the relative value that will prevail in the future.
Government Policy Can Adversely Affect the Euro and the Value of the Notes
Exchange rates between the euro and other currencies, including the U.S.
dollar, can either float or be fixed by governmental authorities, such as the
European Central Bank and other governmental authorities in the EMU countries.
From time to time, these authorities could use a variety of techniques, such as
intervention in the currency markets or imposition of regulatory controls or
taxes, to affect the exchange rate of the euro. They may also issue a new
currency to replace the euro, alter its exchange rate or exchange
characteristics by devaluation or revaluation or add to or eliminate currencies
that are currently included in the euro. Thus, the U.S. dollar-equivalent value
of the notes could be significantly and unpredictably affected by governmental
actions. Even in the absence of governmental action directly affecting currency
exchange rates, political or economic developments in the EMU countries or
elsewhere could lead to significant and sudden changes in the euro-dollar
exchange rate -- and therefore in the U.S. dollar-equivalent value of the
notes -- as participants in the global currency markets move to buy or sell
euros or U.S. dollars in reaction to those developments.
The Notes Permit Us to Make Payments in U.S. Dollars If We Are Unable to Obtain
Euros
The notes provide that, if euros or any currency that succeeds the euro in
the EMU countries are not available to us on each of the two business days
before a payment on the notes comes due because of circumstances beyond our
control, we will be entitled to make the payment in U.S. dollars. These
circumstances could include the imposition of exchange controls or our inability
to obtain euros because of a disruption in the currency markets. If we make
payment in U.S. dollars, the exchange rate we would use would be based on the
noon buying rate in New York City for cable transfers of euros, as of whatever
date the exchange rate is then most recently available from the Federal Reserve
Bank of New York. The most recently available rate may be for a date
substantially before the payment date. As a result, the
24
<PAGE> 27
amount of dollars received on the payment date may not reflect currency market
conditions at the time of payment. We describe these matters in "Description of
Notes We Are Offering -- Payment Mechanics".
We Will Not Adjust the Notes to Compensate for the Euro-U.S. Dollar Exchange
Rate
Except as described above, we will not make any adjustment or change in the
terms of the notes in the event of any change in exchange rates for the euro,
whether in the event of any devaluation, revaluation or imposition of exchange
or other regulatory controls or taxes or in the event of other developments
affecting the euro, the U.S. dollar or any other currency. Consequently,
investors will bear the risk that their investment in the notes may be adversely
affected by these types of events.
In a Lawsuit for Payment on the Notes, Investors May Bear Currency Exchange Risk
Under Section 27 of the New York Judiciary Law, a state court in the State
of New York rendering a judgment on a note would be required to render the
judgment in euros; however, the judgment would be converted into U.S. dollars at
the exchange rate prevailing on the date of entry of the judgment. Consequently,
in a lawsuit for payment on the notes, investors would bear currency exchange
risk until a judgment is entered and we cannot predict how long it would take to
obtain a judgment.
In courts outside of New York, investors may not be able to obtain judgment
in euros. For example, a judgment for money in an action based on a note
denominated in a currency other than U.S. dollars in many other U.S. federal or
state courts ordinarily would be enforced in the United States only in U.S.
dollars. In those cases, the date used to determine the rate of conversion of
the euro into U.S. dollars would depend upon various factors, including which
court renders the judgment.
YOU MAY HOLD YOUR INTERESTS IN THE NOTES ONLY THROUGH THE CEDEL OR
EUROCLEAR SYSTEM IN EUROPE
We will issue the notes only in book-entry form through the Cedel and
Euroclear book-entry clearance systems in Europe. You will not be able to hold
an interest in the notes through any clearing system in the United States.
Trading in the notes, as well as the receipt of payments and notices relating to
the notes, will be governed by the rules and procedures of Cedel and Euroclear,
and time-zone differences between the United States and Europe may mean that
U.S. investors who wish to effect a transaction in the notes on a particular day
may be unable to do so until the next day on which Cedel or Euroclear is open
for business.
25
<PAGE> 28
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the notes in this
offering of approximately (euro)1 billion. We intend to use the net proceeds
from this offering to provide additional funds for our operations and for other
general corporate purposes, including the repayment of short-term obligations
and the portion of long-term obligations coming due during the remainder of this
calendar year. Until we apply the proceeds to these uses, we expect to invest
them in short-term marketable securities. We intend to use the net proceeds from
our dollar debt offering for the same purposes.
We do not expect to receive any proceeds from subsequent resales of the
notes by Goldman Sachs International, Goldman, Sachs & Co. or any of our other
affiliates in market-making transactions. We expect our affiliates to retain the
proceeds of their market-making resales and not pay the proceeds to us.
We intend to use the net proceeds from our common stock offering to provide
additional funds for our operations and for other general corporate purposes,
although we have not yet determined a specific use. Pending specific application
of the net proceeds, we intend to use them to purchase short-term marketable
securities.
26
<PAGE> 29
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Consolidated Financial Information is based upon
the historical consolidated financial statements of Goldman Sachs. In addition
to our common stock offering, this information reflects the pro forma effects of
the following items:
- - the incorporation transactions and the related transactions described under
"Certain Relationships and Related Transactions -- Incorporation and Related
Transactions";
- - compensation to managing directors who were profit participating limited
partners;
- - compensation in the form of restricted stock units awarded to employees in
lieu of ongoing cash compensation;
- - the provision for corporate income taxes;
- - the redemption of our senior limited partnership interests;
- - cash distributions by The Goldman Sachs Group, L.P. to its partners in the
second quarter of fiscal 1999 in accordance with its partnership agreement,
including distributions for partner income taxes related to earnings in the
first quarter of fiscal 1999, capital withdrawals by the managing directors
who were profit participating limited partners, Sumitomo Bank Capital Markets,
Inc. and Kamehameha Activities Association and distributions to satisfy
obligations to retired limited partners; and
- - the recognition of net tax assets.
These items are collectively referred to as the "Pro Forma Adjustments".
The Pro Forma Consolidated Income Statement Information does not give
effect to the following items because of their non-recurring nature:
- - the restricted stock units awarded to employees based on a formula;
- - the initial irrevocable contribution of shares of common stock to the defined
contribution plan;
- - the recognition of net tax assets; and
- - a contribution to the Goldman Sachs Fund, a charitable foundation.
The Pro Forma Consolidated Balance Sheet Information, however, does give
effect to these non-recurring items.
This Pro Forma Consolidated Financial Information, including the pro forma
ratio of earnings to fixed charges, does not give effect to this offering, our
dollar debt offering or our new medium-term note program.
The Pro Forma Adjustments are based upon available information and certain
assumptions that management believes are reasonable. The Pro Forma Consolidated
Financial Information and accompanying notes should be read in conjunction with
the consolidated financial statements and their notes.
THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION PRESENTED IS NOT
NECESSARILY INDICATIVE OF THE RESULTS OF OPERATIONS OR FINANCIAL POSITION THAT
MIGHT HAVE OCCURRED HAD THE PRO FORMA ADJUSTMENTS ACTUALLY TAKEN PLACE AS OF THE
DATES SPECIFIED, OR THAT MAY BE EXPECTED TO OCCUR IN THE FUTURE.
27
<PAGE> 30
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
(unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 27, 1998
--------------------------------------------------------------------------
PRO FORMA
ADJUSTMENT AS ADJUSTED
PRO FORMA FOR OUR COMMON FOR OUR COMMON
HISTORICAL ADJUSTMENTS PRO FORMA STOCK OFFERING STOCK OFFERING
---------- ----------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Total revenues.......................... $22,478 $ -- $22,478 $ -- $22,478
Interest expense, principally on short-
term funding.......................... 13,958 28(a) 13,986 -- 13,986
------- ------- ------- ----- -------
Revenues, net of interest expense....... 8,520 (28) 8,492 -- 8,492
Compensation and benefits, excluding
employee initial public offering
awards................................ 3,838 303(b) 4,141 -- 4,141
Employee initial public offering
awards................................ -- 461(c) 461 -- 461
Other operating expenses................ 1,761 -- 1,761 -- 1,761
------- ------- ------- ----- -------
Total operating expenses................ 5,599 764 6,363 -- 6,363
Pre-tax earnings........................ 2,921 (792) 2,129 -- 2,129
Provision for taxes..................... 493 380(d) 873 -- 873
------- ------- ------- ----- -------
Net earnings............................ $ 2,428 $(1,172) $ 1,256 $ -- $ 1,256
======= ======= ======= ===== =======
Ratio of earnings to fixed charges...... 1.21x 1.15x 1.15x
Shares outstanding:
Basic................................. 424(e) 51(f) 475
Diluted............................... 428(e) 51(f) 479
Earnings per share:
Basic................................. $ 2.96 $ 2.65
Diluted............................... 2.93 2.62
</TABLE>
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION
(unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 26, 1999
--------------------------------------------------------------------------
PRO FORMA
ADJUSTMENT AS ADJUSTED
PRO FORMA FOR OUR COMMON FOR OUR COMMON
HISTORICAL ADJUSTMENTS PRO FORMA STOCK OFFERING STOCK OFFERING
---------- ----------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Total revenues........................... $ 5,856 $ -- $ 5,856 $ -- $ 5,856
Interest expense, principally on
short-term funding..................... 2,861 7(a) 2,868 -- 2,868
------- ------- ------- ----- -------
Revenues, net of interest expense........ 2,995 (7) 2,988 -- 2,988
Compensation and benefits, excluding
employee initial public offering
awards................................. 1,275 191(b) 1,466 -- 1,466
Employee initial public offering
awards................................. -- 115(c) 115 -- 115
Other operating expenses................. 532 -- 532 -- 532
------- ------- ------- ----- -------
Total operating expenses................. 1,807 306 2,113 -- 2,113
Pre-tax earnings......................... 1,188 (313) 875 -- 875
Provision for taxes...................... 181 178(d) 359 -- 359
------- ------- ------- ----- -------
Net earnings............................. $ 1,007 $ (491) $ 516 $ -- $ 516
======= ======= ======= ===== =======
Ratio of earnings to fixed charges....... 1.41x 1.30x 1.30x
Shares outstanding:
Basic.................................. 427(e) 51(f) 478
Diluted................................ 437(e) 51(f) 488
Earnings per share:
Basic.................................. $ 1.21 $ 1.08
Diluted................................ 1.18 1.06
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Information.
28
<PAGE> 31
PRO FORMA CONSOLIDATED BALANCE SHEET INFORMATION
(unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
AS OF FEBRUARY 26, 1999
----------------------------------------------------------------------
PRO FORMA
ADJUSTMENT AS ADJUSTED
FOR OUR FOR OUR
PRO FORMA COMMON STOCK COMMON STOCK
HISTORICAL ADJUSTMENTS PRO FORMA OFFERING OFFERING
---------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................ $ 3,345 $ (200)(g) $ 134 $2,568(f) $ 2,702
(891)(h)
(888)(i)
(1,232)(k)
Other.................................... 227,279 1,815(l) 229,094 -- 229,094
-------- ------- -------- ------ --------
Total assets............................. $230,624 $(1,396) $229,228 $2,568 $231,796
======== ======= ======== ====== ========
Long-term borrowings..................... $ 20,405 $ 371(a) $ 20,776 $ -- $ 20,776
Other.................................... 203,228 165(b) 203,393 -- 203,393
-------- ------- -------- ------ --------
Total liabilities........................ 223,633 536 224,169 -- 224,169
Partners' capital, partners' capital
allocated for income taxes and
potential withdrawals, and accumulated
other comprehensive income............. 6,991 (371)(a)
(891)(h)
(888)(i)
(3,609)(j)
(1,232)(k)
-------- ------- -------- ------ --------
Total partnership capital................ 6,991 (6,991) -- -- --
Common stock and nonvoting common stock,
par value $0.01 per share.............. -- 4(j) 4 -- 4
Restricted stock units................... -- 3,356(m) 3,356 -- 3,356
Additional paid-in capital............... -- 3,605(j) 4,271 2,568(f) 6,839
666(m)
Retained earnings........................ -- (165)(b) (807) -- (807)
(200)(g)
1,815(l)
(2,257)(m)
Unearned compensation.................... -- (1,765)(m) (1,765) -- (1,765)
-------- ------- -------- ------ --------
Total stockholders' equity............... -- 5,059 5,059 2,568 7,627
Total liabilities, partnership capital
and stockholders' equity............... $230,624 $(1,396) $229,228 $2,568 $231,796
======== ======= ======== ====== ========
Book value per share..................... $ 11.94 $ 16.07
</TABLE>
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Information.
29
<PAGE> 32
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
NOTE 1: BASIS OF PRESENTATION
As permitted by the rules and regulations of the SEC, the Pro Forma
Consolidated Financial Information is presented on a condensed basis. The Pro
Forma Consolidated Balance Sheet Information was prepared as if the Pro Forma
Adjustments had occurred as of February 26, 1999. Book value per share equals
stockholders' equity divided by the shares of common stock and nonvoting common
stock outstanding, including the shares of common stock underlying the
restricted stock units awarded to employees based on a formula, of 423,712,271
prior to our common stock offering and 474,712,271 as adjusted for our common
stock offering. Our nonvoting common stock has no voting rights (except as
required by law) but otherwise has the same rights and privileges, including
dividend rights, as the common stock. See Note 2(e) below for a further
discussion of shares outstanding.
The Pro Forma Consolidated Income Statement Information for the fiscal year
ended November 27, 1998 and the three-month fiscal period ended February 26,
1999 was prepared as if the Pro Forma Adjustments had taken place at the
beginning of fiscal 1998.
For pro forma purposes, our common stock offering and, where applicable,
the related transactions reflect the initial public offering price of $53.00 per
share.
For purposes of the pro forma ratio of earnings to fixed charges,
"earnings" represent pre-tax earnings plus fixed charges and "fixed charges"
represent interest expense plus that portion of rent expense that, in our
opinion, approximates the interest factor included in rent expense. Neither the
pro forma ratio of earnings to fixed charges nor the historical ratio of
earnings to fixed charges gives effect to this offering of notes, our dollar
debt offering or our new medium-term note program.
NOTE 2: PRO FORMA ADJUSTMENTS AND ADJUSTMENT FOR OUR COMMON STOCK OFFERING
(a) RETIRED LIMITED PARTNERS EXCHANGE OF INTERESTS FOR
DEBENTURES. Adjustment to reflect the issuance of junior subordinated
debentures to the retired limited partners in exchange for their interests in
The Goldman Sachs Group, L.P. and certain affiliates. These junior subordinated
debentures have a principal amount of $295 million, an initial carrying value of
$371 million and an effective interest rate of 7.5%. The annual interest expense
to be recorded on these debentures in the first year will be $28 million.
(b) COMPENSATION AND BENEFITS, EXCLUDING EMPLOYEE INITIAL PUBLIC OFFERING
AWARDS. Since Goldman Sachs has operated as a partnership, there is no
meaningful historical measure of the compensation and benefits that would have
been paid, in corporate form, to the managing directors who were profit
participating limited partners for services rendered in fiscal 1998 and in the
three months ended February 26, 1999. Accordingly, management has estimated
these amounts, which are substantially performance-based, by reference to a pro
forma ratio of total compensation and benefits to net revenues that it deemed
appropriate for Goldman Sachs as a whole, given the historical operating results
in these periods. As a result, additional compensation and benefits expense
related to the managing directors who were profit participating limited partners
of $427 million in fiscal 1998 and $242 million in the three months ended
February 26, 1999 has been recorded on the Pro Forma Consolidated Income
Statement Information.
The future compensation and benefits related to services rendered by the
managing directors who were profit participating limited partners will be based
upon measures of financial performance, including net revenues, pre-tax earnings
and the ratio of compensation and benefits to net revenues, as described under
"Management -- The Partner Compensation Plan -- Determination of Salary and
Bonus". Management anticipates that, consistent with industry practice, it will
adjust
30
<PAGE> 33
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
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 and $51 million in the three months ended
February 26, 1999 because a portion of cash compensation recorded in these
periods would have been replaced by restricted stock units with future service
requirements. These reductions are reflected in the Pro Forma Consolidated
Income Statement Information.
The adjustment of $165 million to the Pro Forma Consolidated Balance Sheet
Information reflects the additional compensation and benefits that we would have
recorded assuming the Pro Forma Adjustments had occurred as of February 26,
1999. This adjustment includes $232 million in compensation and benefits related
to the managing directors who were profit participating limited partners offset
by a reduction of $67 million related to the issuance of restricted stock units
to employees, in lieu of a portion of cash compensation, for which future
service is required as a condition to the delivery of the underlying shares of
common stock. This adjustment to the Pro Forma Consolidated Balance Sheet
Information excludes the compensation expense of $26 million in the first
quarter of fiscal 1999 related to the portion of restricted stock units that,
for pro forma income statement purposes only, were assumed to be awarded in
fiscal 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations -- Operating Expenses" for a
discussion of the actual expense we expect to record in the second quarter of
fiscal 1999.
(c) EXPENSE RELATED TO EMPLOYEE INITIAL PUBLIC OFFERING AWARDS. Adjustment
to reflect the amortization of the 33,292,869 restricted stock units awarded to
employees on a discretionary basis. On the date of grant, these restricted stock
units had a value of $1,765 million, approximately 26% of which will be
amortized as a non-cash expense in the twelve months following the date of
grant. The remaining 74% of the value of these restricted stock units will be
amortized over the next four years as follows: 26%, 26%, 15% and 7% in years
two, three, four and five, respectively.
The options to purchase 40,127,592 shares of common stock awarded to
employees on a discretionary basis will be accounted for pursuant to Accounting
Principles Board Opinion No. 25, as permitted by paragraph 5 of Statement of
Financial Accounting Standards No. 123. Since these options had no intrinsic
value on the date of grant, no compensation expense will be recognized.
The estimated fair value of these discretionary options on the date of
grant was $709 million using a Black-Scholes option pricing model. If Statement
of Financial Accounting Standards No. 123 had been applied, compensation expense
of $185 million and $46 million would have been included in the Pro Forma
Consolidated Income Statement Information in fiscal 1998 and the three months
ended February 26, 1999, respectively. See "Management -- The Employee Initial
Public Offering Awards" for a description of these awards.
(d) PRO FORMA PROVISION FOR INCOME TAXES. Adjustment to reflect a pro
forma
31
<PAGE> 34
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
provision for income taxes for Goldman Sachs in corporate form at an effective
tax rate of 41%.
(e) PRO FORMA COMMON STOCK AND NON-VOTING COMMON STOCK. Shares
outstanding, computed on a weighted-average basis, after giving effect to the
Pro Forma Adjustments. For the purpose of calculating basic earnings per share
and book value per share, shares outstanding prior to our common stock offering
includes the nonvoting common stock, the shares of common stock irrevocably
contributed to the defined contribution plan and, pursuant to Statement of
Financial Accounting Standards No. 128, the shares of common stock underlying
the restricted stock units awarded to employees on a discretionary basis since
future service is not required as a condition to the delivery of the underlying
shares of common stock.
With respect to the three months ended February 26, 1999, pro forma basic
common shares outstanding also includes the shares of common stock underlying
the restricted stock units assumed to be awarded in lieu of ongoing cash
compensation in fiscal 1998 for which future service would not have been
required as a condition to the delivery of the underlying shares of common
stock.
Pro forma diluted shares outstanding prior to our common stock offering
reflects the dilutive effect of the common stock deliverable pursuant to the
restricted stock units awarded to employees on a discretionary basis, and, with
respect to the three months ended February 26, 1999, the dilutive effect of the
shares of common stock underlying the restricted stock units assumed to be
awarded in lieu of ongoing cash compensation in fiscal 1998 for which future
service would have been required as a condition to the delivery of the
underlying shares of common stock.
(f) ADJUSTMENT FOR OUR COMMON STOCK OFFERING. Shares as adjusted to
reflect the issuance of 51,000,000 shares of common stock offered by The Goldman
Sachs Group, Inc. in our common stock offering, which reflects the exercise, in
full, of the underwriters' options to purchase 9,000,000 shares of common stock.
Net proceeds from our common stock offering reflect the deduction of
underwriting discounts and of estimated expenses payable by Goldman Sachs in
connection with our common stock offering.
(g) CHARITABLE CONTRIBUTION. Adjustment to reflect the charitable
contribution of $200 million.
(h) RETIRED LIMITED PARTNER EXCHANGES OF INTERESTS FOR CASH. Adjustment to
reflect the payment of $891 million in cash to the retired limited partners in
exchange for their interests in The Goldman Sachs Group, L.P. and certain
affiliates.
(i) REDEMPTION OF SENIOR LIMITED PARTNERSHIP INTERESTS FOR
CASH. Adjustment to reflect the redemption of the senior limited partnership
interests for cash of $888 million by The Goldman Sachs Group, L.P. prior to the
incorporation transactions described under "Certain Relationships and Related
Transactions -- Incorporation and Related Transactions -- Incorporation
Transactions".
(j) PARTNER EXCHANGES OF INTERESTS FOR SHARES. Adjustment of $3,609
million to reflect the issuance of 265,019,073 shares of common stock to the
managing directors who were profit participating limited partners, 47,270,551
shares of common stock to retired limited partners, 30,425,052 shares of common
stock and 7,440,362 shares of nonvoting common stock to Sumitomo Bank Capital
Markets, Inc. and 30,975,421 shares of common stock to Kamehameha Activities
Association, in exchange for their respective interests in The Goldman Sachs
Group, L.P. and certain affiliates.
(k) CASH DISTRIBUTIONS. Adjustment to reflect cash distributions of $1,232
million by The Goldman Sachs Group, L.P. to its partners, including Sumitomo
Bank Capital Markets, Inc. and Kamehameha Activities Association, in the second
quarter of fiscal 1999 in accordance with its partnership agreement, including
distributions for partner income taxes related to earnings in the first quarter
of fiscal 1999, capital withdrawals by the managing directors who were profit
par-
32
<PAGE> 35
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
ticipating limited partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association and distributions to satisfy obligations to certain
retired limited partners.
Goldman Sachs made additional cash distributions for partner income taxes
related to earnings in the second quarter of fiscal 1999 that were significant
due, in part, to certain expenses that were not deductible by the partners.
Goldman Sachs recognized a substantial tax asset on the consummation of our
common stock offering related to these expenses. These cash distributions and
the related tax asset are not reflected in the Pro Forma Consolidated Balance
Sheet Information.
(l) NET TAX ASSETS. Adjustment to reflect the addition to retained
earnings related to the recognition of a net tax asset of $1,815 million under
Statement of Financial Accounting Standards No. 109 at an effective tax rate of
41%. The components of this net tax asset, which will be included in "Other
assets" on the consolidated statement of financial condition, are (i) a net
benefit of $808 million related to the conversion of The Goldman Sachs Group,
L.P. to corporate form, (ii) a benefit of $925 million related to the 30,025,946
restricted stock units awarded to employees based on a formula and the initial
irrevocable contribution of 12,555,866 shares of common stock to the defined
contribution plan and (iii) a benefit of $82 million related to the charitable
contribution.
As discussed in Note 2(k) above, Goldman Sachs recognized a substantial tax
asset on the consummation of our common stock offering related to certain
expenses that were not deductible by the partners in fiscal 1999. The tax asset
associated with these expenses in the second quarter of fiscal 1999 is not
reflected in the Pro Forma Consolidated Balance Sheet Information.
(m) EFFECT ON STOCKHOLDERS' EQUITY OF EMPLOYEE INITIAL PUBLIC OFFERING
AWARDS. Adjustment to reflect the effect on the components of stockholders'
equity, excluding the tax benefit described in Note 2(l) above, of (i) the
restricted stock units awarded to employees based on a formula, (ii) the initial
irrevocable contribution of shares of common stock to the defined contribution
plan and (iii) the restricted stock units awarded to employees on a
discretionary basis.
The following table sets forth each of these components as of February 26,
1999:
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
AND NONVOTING RESTRICTED PAID-IN RETAINED UNEARNED
COMMON STOCK STOCK UNITS CAPITAL EARNINGS COMPENSATION
------------- ----------- ---------- -------- ------------
(in millions)
<S> <C> <C> <C> <C> <C>
Restricted stock units awarded based on
a formula............................. $-- $1,591 $ -- $(1,591) $ --
Contribution of shares of common stock
to the defined contribution plan...... -- -- 666 (666) --
Restricted stock units awarded on a
discretionary basis................... -- 1,765 -- -- (1,765)
--- ------ ---- ------- -------
Total Adjustment........................ $-- $3,356 $666 $(2,257) $(1,765)
=== ====== ==== ======= =======
</TABLE>
33
<PAGE> 36
CAPITALIZATION
The following table sets forth the consolidated capitalization of Goldman
Sachs as of February 26, 1999 on an historical basis, and on a pro forma basis
after giving effect to the Pro Forma Adjustments, described under "Pro Forma
Consolidated Financial Information", and as further adjusted for:
- - the sale of 51,000,000 shares of common stock by The Goldman Sachs Group, Inc.
in our common stock offering at the initial public offering price of $53.00
per share, after deduction of the underwriting discounts and estimated
expenses payable by Goldman Sachs in our common stock offering;
- - the sale of the notes in this offering; and
- - the issuance of $1.5 billion aggregate principal amount of our debt
securities, payable in U.S. dollars, in our dollar debt offering.
The table below does not give effect to our new medium-term note program.
This table should be read in conjunction with the consolidated financial
statements and their notes and the Pro Forma Consolidated Financial Information
and their notes.
<TABLE>
<CAPTION>
AS OF FEBRUARY 26, 1999
------------------------------------------------
PRO FORMA AS
ADJUSTED
FOR OUR COMMON STOCK
OFFERING, THIS OFFERING
AND OUR
HISTORICAL PRO FORMA DOLLAR DEBT OFFERING
---------- --------- -----------------------
($ in millions)
<S> <C> <C> <C>
Short-term borrowings (including commercial paper)(1)....... $33,863 $33,863 $33,863
======= ======= =======
Long-term borrowings:
Senior debt other than the notes we are offering and
dollar debt securities(2)............................... $20,405 $20,405 $20,405
Notes to be sold in this offering(3)...................... -- -- 1,079
Debt securities sold in our dollar debt offering.......... -- -- 1,500
Junior subordinated debentures(4)......................... -- 371 371
------- ------- -------
Total long-term borrowings......................... 20,405 20,776 23,355
Partners' capital........................................... 6,612 -- --
Stockholders' equity:
Preferred stock, par value $0.01 per share; 150,000,000
shares authorized, no shares issued and outstanding..... -- -- --
Common stock, par value $0.01 per share; 4,000,000,000
shares authorized, 437,245,963 shares issued and
outstanding(5).......................................... -- 4 4
Restricted stock units; 63,318,815 units issued and
outstanding(6).......................................... -- 3,356 3,356
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized and 7,440,362 shares
issued and outstanding.................................. -- 0 0
Additional paid-in capital................................ -- 4,271 6,839
Retained earnings......................................... -- (807) (807)
Unearned compensation(7).................................. (1,765) (1,765)
------- ------- -------
Total stockholders' equity......................... -- 5,059 7,627
------- ------- -------
Total capitalization............................. $27,017 $25,835 $30,982
======= ======= =======
</TABLE>
- ---------------
(1) Includes current portion of long-term borrowings of $6,285 million. See Note
4 to the unaudited condensed consolidated financial statements as of
February 26, 1999 for further information regarding Goldman Sachs'
short-term borrowings.
(2) Includes subordinated debt of Goldman, Sachs & Co. of $275 million.
(3) Euros have been converted to dollars at the rate of $1.0787 for (euro)1.00,
the noon buying rate for cable transfers in New York City on May 10, 1999.
(4) Consists of junior subordinated debentures issued to the retired limited
partners as part of the incorporation transactions. See "Certain
Relationships and Related Transactions -- Incorporation and Related
Transactions" for further information regarding the issuance of the
debentures.
(5) Common stock outstanding includes 12,555,866 shares of common stock
irrevocably contributed to the defined contribution plan. Common stock
outstanding excludes 40,127,592 shares of common stock deliverable pursuant
to the options awarded to
(Footnotes continued on following page)
34
<PAGE> 37
employees on a discretionary basis. See "Management -- The Employee Initial
Public Offering Awards" for more detailed information regarding these
awards.
(6) Restricted stock units include 30,025,946 shares of common stock underlying
the restricted stock units awarded to employees based on a formula and
33,292,869 shares of common stock underlying the restricted stock units
awarded to employees on a discretionary basis.
(7) Unearned compensation relates to the award of the restricted stock units
awarded to employees on a discretionary basis.
35
<PAGE> 38
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated income statement and balance sheet
data set forth below have been derived from Goldman Sachs' consolidated
financial statements and their notes. Goldman Sachs' consolidated financial
statements have been audited by PricewaterhouseCoopers LLP, independent public
accountants, as of November 28, 1997 and November 27, 1998 and for the years
ended November 29, 1996, November 28, 1997 and November 27, 1998. Goldman Sachs'
condensed consolidated financial statements have been reviewed by
PricewaterhouseCoopers LLP as of February 26, 1999 and for the three months
ended February 27, 1998 and February 26, 1999. These financial statements are
included elsewhere in this prospectus, together with the reports thereon of
PricewaterhouseCoopers LLP.
The selected historical consolidated income statement and balance sheet
data set forth below as of November 25, 1994, November 24, 1995 and November 29,
1996 and for the years ended November 25, 1994 and November 24, 1995 have been
derived from audited consolidated financial statements of Goldman Sachs not
included in this prospectus.
The selected historical consolidated income statement and balance sheet
data set forth below as of and for the three months ended February 26, 1999 and
for the three months ended February 27, 1998 have been derived from Goldman
Sachs' unaudited condensed consolidated financial statements that, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. The interim results
set forth below for the three months ended February 26, 1999 may not be
indicative of results for the full year.
The pro forma data set forth below for the year ended November 27, 1998 and
as of and for the three months ended February 26, 1999 have been derived from
the pro forma data set forth in "Pro Forma Consolidated Financial Information"
included elsewhere in this prospectus.
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Pro Forma Consolidated Financial Information" and the consolidated
financial statements and their notes.
<TABLE>
<CAPTION>
AS OF OR FOR
THREE MONTHS
AS OF OR FOR YEAR ENDED NOVEMBER ENDED FEBRUARY
--------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues.................................. $12,452 $ 14,324 $ 17,289 $ 20,433 $ 22,478 $ 5,903 $ 5,856
Interest expense................................ 8,915 9,841 11,160 12,986 13,958 3,431 2,861
------- -------- -------- -------- -------- -------- --------
Net revenues.................................... 3,537 4,483 6,129 7,447 8,520 2,472 2,995
Compensation and benefits(1).................... 1,789 2,005 2,421 3,097 3,838 1,100 1,275
Other operating expenses........................ 1,240 1,110 1,102 1,336 1,761 350 532
------- -------- -------- -------- -------- -------- --------
Pre-tax earnings(1)............................. $ 508 $ 1,368 $ 2,606 $ 3,014 $ 2,921 $ 1,022 $ 1,188
======= ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets(2)................................. $95,296 $100,066 $152,046 $178,401 $217,380 -- $230,624
Long-term borrowings............................ 14,418 13,358 12,376 15,667 19,906 -- 20,405
Total liabilities(2)............................ 89,981 94,686 145,753 171,864 210,996 -- 223,633
Partners' capital............................... 4,771 4,905 5,309 6,107 6,310 -- 6,612
PRO FORMA DATA (UNAUDITED)(3):
Pro forma net earnings.......................... -- -- -- -- $ 1,256 -- $ 516
Pro forma ratio of earnings to fixed
charges(4).................................... -- -- -- -- 1.15x -- 1.30x
Pro forma stockholders' equity as adjusted for
our common stock offering..................... -- -- -- -- -- -- $ 7,627
</TABLE>
36
<PAGE> 39
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR
THREE MONTHS
AS OF OR FOR YEAR ENDED NOVEMBER ENDED FEBRUARY
--------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED DATA AND RATIOS (UNAUDITED):
Ratio of earnings to fixed charges(1)(4)........ 1.06x 1.14x 1.23x 1.23x 1.21x 1.30x 1.41x
Employees:
United States................................. 5,822 5,356 5,818 6,879 8,349 7,008 8,244
International................................. 3,176 2,803 3,159 3,743 4,684 3,891 4,634
------- -------- -------- -------- -------- -------- --------
Total employees(5).............................. 8,998 8,159 8,977 10,622 13,033 10,899 12,878
======= ======== ======== ======== ======== ======== ========
Assets under supervision:
Assets under management....................... $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $151,189 $206,380
Other client assets........................... 49,061 57,716 76,892 102,033 142,018 114,928 163,315
------- -------- -------- -------- -------- -------- --------
Total assets under supervision.................. $92,732 $110,074 $171,491 $237,962 $336,839 $266,117 $369,695
======= ======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Since we historically operated in partnership form, payments to our profit
participating limited partners were accounted for as distributions of
partners' capital rather than as compensation expense. As a result, our
pre-tax earnings and compensation and benefits expense have not reflected
any payments for services rendered by our managing directors who were profit
participating limited partners. Accordingly, our historical pre-tax earnings
understate the expected operating costs to be incurred by us after our
conversion to corporate form. As a corporation, we will include payments for
services rendered by our managing directors who were profit participating
limited partners in compensation and benefits expense. For financial
information that reflects pro forma compensation and benefits expense as if
we had been a corporation, see "Pro Forma Consolidated Financial
Information".
(2) Total assets and liabilities were increased by $11.64 billion as of November
27, 1998 and $8.99 billion as of February 26, 1999 due to the adoption of
the provisions of Statement of Financial Accounting Standards No. 125 that
were deferred by Statement of Financial Accounting Standards No. 127. For a
discussion of Statement of Financial Accounting Standards Nos. 125 and 127,
see "Accounting Developments" in Note 2 to the audited consolidated
financial statements.
(3) Reflects such adjustments as are necessary, in the opinion of management,
for a fair presentation of the results of operations and stockholders'
equity of Goldman Sachs on a pro forma basis. See "Pro Forma Consolidated
Financial Information" for more detailed information concerning these
adjustments.
(4) For purposes of the ratio of earnings to fixed charges, "earnings" represent
pre-tax earnings plus fixed charges and "fixed charges" represent interest
expense plus that portion of rent expense that, in our opinion, approximates
the interest factor included in rent expense. Neither the pro forma ratio of
earnings to fixed charges nor the historical ratio of earnings to fixed
charges gives effect to this offering of notes, our dollar debt offering or
our new medium-term note program.
(5) Excludes employees of Goldman Sachs' two property management subsidiaries,
The Archon Group, L.P. and Archon Group (France) S.C.A. Substantially all of
the costs of these employees are reimbursed to Goldman Sachs by the real
estate investment funds to which the two companies provide property
management services. In addition, as of February 26, 1999, we had 3,400
temporary staff and consultants. For more detailed information regarding our
employees, see "Business -- Employees".
37
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Goldman Sachs is a global investment banking and securities firm that
provides a wide range of services worldwide to a substantial and diversified
client base.
Our activities are divided into three principal business lines:
- - Investment Banking, which includes financial advisory services and
underwriting;
- - Trading and Principal Investments, which includes fixed income, currency and
commodities ("FICC"), equities and principal investments (principal
investments reflect primarily our investments in our merchant banking funds);
and
- - Asset Management and Securities Services, which includes asset management,
securities services and commissions.
All references to 1996, 1997 and 1998 refer to our fiscal year ended, or
the date, as the context requires, November 29, 1996, November 28, 1997 and
November 27, 1998, respectively, and all references to February 1998 and
February 1999 refer to our three-month fiscal period ended, or the date, as the
context requires, February 27, 1998 and February 26, 1999, respectively.
When we use the terms "Goldman Sachs", "we" and "our", we mean, prior to
the principal incorporation transactions that are described under "Certain
Relationships and Related Transactions -- Incorporation and Related
Transactions -- Incorporation Transactions", The Goldman Sachs Group, L.P., a
Delaware limited partnership, and its consolidated subsidiaries and, after the
incorporation transactions, The Goldman Sachs Group, Inc., a Delaware
corporation, and its consolidated subsidiaries.
BUSINESS ENVIRONMENT
Economic and market conditions can significantly affect our performance.
For a number of years leading up to the second half of 1998, we operated in a
generally favorable macroeconomic environment characterized by low inflation,
low interest rates and strong equity markets in the United States and many
international markets. This favorable economic environment provided a positive
climate for our investment banking activities, as well as for our
customer-driven and proprietary trading activities. Economic conditions were
also favorable for wealth creation which contributed positively to growth in our
asset management businesses.
From mid-August to mid-October 1998, the Russian economic crisis, the
turmoil in Asian and Latin American emerging markets and the resulting move to
higher credit quality fixed income securities by many investors led to
substantial declines in global financial markets. Investors broadly sold
credit-sensitive products, such as corporate and high-yield debt, and bought
higher-rated instruments, such as U.S. Treasury securities, which caused credit
spreads to widen dramatically. This market turmoil also caused a widespread
decline in global equity markets.
As a major dealer in fixed income securities, Goldman Sachs maintains
substantial inventories of corporate and high-yield debt. Goldman Sachs
regularly seeks to hedge the interest rate risk on these positions through,
among other strategies, short positions in U.S. Treasury securities. In the
second half of 1998, we suffered losses from both the decline in the prices of
corporate and high-yield debt instruments that we owned and the increase in the
prices of the U.S. Treasury securities in which we had short positions.
This market turmoil also led to trading losses in our fixed income relative
value trading positions. Relative value trading positions are intended to profit
from a perceived temporary dislocation in the relationship between the values of
different financial instruments. From mid-August to mid-October 1998, the
components of these relative value positions moved in directions that we did not
anticipate and the volatilities of some of our positions increased to three
times prior levels. When Goldman Sachs and other market participants with
similar positions simultaneously sought to reduce positions and exposures, this
caused a substantial reduction in market liquidity and a continuing decline in
prices.
38
<PAGE> 41
In the second half of 1998, we also experienced losses in equity arbitrage
and in the value of a number of merchant banking investments.
Later in the fourth quarter of 1998, market conditions improved as the U.S.
Federal Reserve cut interest rates, the International Monetary Fund finalized a
credit agreement with Brazil and a consortium of 14 financial institutions,
including Goldman Sachs, recapitalized Long-Term Capital Portfolio, L.P. For a
further discussion of Long-Term Capital Portfolio, L.P., see
"-- Liquidity -- The Balance Sheet" below.
Our earnings in the second half of 1998 were adversely affected by market
conditions from mid-August to mid-October. In this difficult business
environment, Trading and Principal Investments recorded net revenues of $464
million in the third quarter of 1998 and net revenues of negative $663 million
in the fourth quarter of 1998. As a result, Trading and Principal Investments
did not make a significant contribution to pre-tax earnings in 1998.
In the first quarter of 1999, we operated in a generally favorable
macroeconomic environment characterized by low inflation and low interest rates.
Global financial markets recovered from the turbulent conditions of the second
half of 1998, leading to narrowing credit spreads and an increase in mergers and
acquisitions and other corporate activity.
The macroeconomic environment in the first quarter of 1999 was particularly
favorable in the United States, where inflationary pressures were minimal and
interest rates were left unchanged by the U.S. Federal Reserve. Economic growth
in Europe was sluggish despite a simultaneous cut in interest rates by 11
European central banks in December and the successful establishment of the
European Economic and Monetary Union in January. Markets in Asia and Latin
America were generally characterized by continuing economic and financial
difficulties, particularly in Japan and Brazil. In a number of Asian emerging
markets, however, economic and market conditions stabilized in the first quarter
of 1999.
RESULTS OF OPERATIONS
Management believes that the best measure by which to assess Goldman Sachs'
historical profitability is pre-tax earnings because, as a partnership, we
generally were not subject to U.S. federal or state income taxes. See
"-- Provision for Taxes" below and Note 2 to the audited consolidated financial
statements for a further discussion of our provision for taxes.
Since historically we operated as a partnership, payments to our profit
participating limited partners were accounted for as distributions of partners'
capital rather than as compensation expense. As a result, our compensation and
benefits expense has not reflected any payments for services rendered by
managing directors who were profit participating limited partners and has
therefore understated the expected operating costs to be incurred by us after
our conversion to corporate form. As a corporation, we will include these
payments to managing directors who were profit participating limited partners in
compensation and benefits expense, as discussed under "Pro Forma Consolidated
Financial Information". See "Management -- The Partner Compensation Plan" for a
further discussion of the plan to be adopted for the purpose of compensating our
managing directors who were profit participating limited partners.
Moreover, in connection with our common stock offering, we recognized the
effect of the following non-recurring items in the second quarter of 1999:
- - the award of the restricted stock units to employees based on a formula;
- - the initial irrevocable contribution of shares of common stock to the defined
contribution plan;
- - the net tax assets; and
- - the contribution to the Goldman Sachs Fund, a charitable foundation.
We also expect to record additional expense in the second quarter of 1999 equal
to (i) 50% of the estimated compensation and benefits of the managing directors
who were profit participating limited partners in 1999 based on the annualized
results for the first half of 1999 offset by (ii) the effect of issuing
39
<PAGE> 42
restricted stock units to employees in lieu of cash compensation, for which
future service is required as a condition to the delivery of the underlying
shares of common stock. In accordance with Accounting Principles Board Opinion
No. 25, these restricted stock units will be recorded as compensation expense
over the four-year vesting period following the date of grant. As a result, we
expect to record a substantial pre-tax loss in the second quarter of 1999.
The composition of our historical net revenues has varied over time as
financial markets and the scope of our operations have changed. The composition
of net revenues can also vary over the shorter term due to fluctuations in
economic and market conditions. As a result, period-to-period comparisons may
not be meaningful. See "Risk Factors" for a discussion of factors that could
affect our future performance.
OVERVIEW
The following table sets forth our net revenues and pre-tax earnings:
FINANCIAL OVERVIEW
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues................................ $6,129 $7,447 $8,520 $2,472 $2,995
Pre-tax earnings............................ 2,606 3,014 2,921 1,022 1,188
</TABLE>
------------------------
FEBRUARY 1999 VERSUS FEBRUARY 1998. Our net revenues were $2.99 billion in
the three-month period ended February 1999, an increase of 21% compared to the
same period in 1998. Net revenue growth was strong in Investment Banking, which
increased 42%, primarily due to higher market levels of mergers and acquisitions
and underwriting activity. Net revenues in Trading and Principal Investments
increased 15% as higher net revenues in FICC and equities more than offset a
reduction in principal investments. Net revenues in Asset Management and
Securities Services increased 12% due to increased assets under management and
higher customer balances in securities services. Pre-tax earnings increased 16%
to $1.19 billion for the period.
1998 VERSUS 1997. Our net revenues were $8.52 billion in 1998, an increase
of 14% compared to 1997. Net revenue growth was strong in Investment Banking,
which increased 30%, due to higher levels of mergers and acquisitions activity,
and in Asset Management and Securities Services, which increased 43%, due to
increased commissions, higher customer balances in securities services and
increased assets under management. Net revenues in Trading and Principal
Investments decreased 19% compared to the prior year, due primarily to a 30%
reduction of net revenues in FICC. Pre-tax earnings in 1998 were $2.92 billion
compared to $3.01 billion in the prior year.
1997 VERSUS 1996. Our net revenues were $7.45 billion in 1997, an increase
of 22% compared to 1996. Net revenue growth was strong in Asset Management and
Securities Services, which increased 46%, due to increased commissions and asset
management fees and higher assets under management and customer balances in
securities services. Net revenues in Investment Banking increased 22% due to
increased levels of mergers and acquisitions and debt underwriting activity. Net
revenues in Trading and Principal Investments increased 9% over the prior year,
due to higher net revenues in FICC and principal investments. Pre-tax earnings
were $3.01 billion in 1997, an increase of 16% over the prior year.
40
<PAGE> 43
The following table sets forth the net revenues of our principal business
lines:
NET REVENUES BY PRINCIPAL BUSINESS LINE
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Investment Banking...................... $2,113 $2,587 $3,368 $ 633 $ 902
Trading and Principal Investments....... 2,693 2,926 2,379 1,182 1,357
Asset Management and Securities
Services.............................. 1,323 1,934 2,773 657 736
------ ------ ------ ------ ------
Total net revenues...................... $6,129 $7,447 $8,520 $2,472 $2,995
====== ====== ====== ====== ======
</TABLE>
------------------------
Net revenues in our principal business lines represent total revenues less
allocations of interest expense to specific securities, commodities and other
positions in relation to the level of financing incurred by each position.
Interest expense is allocated to Trading and Principal Investments and the
securities services component of Asset Management and Securities Services. Net
revenues may not be indicative of the relative profitability of any principal
business line.
INVESTMENT BANKING
Goldman Sachs provides a broad range of investment banking services to a
diverse group of corporations, financial institutions, governments and
individuals. Our investment banking activities are divided into two categories:
- - FINANCIAL ADVISORY. Financial advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense
activities, restructurings and spin-offs; and
- - UNDERWRITING. Underwriting includes public offerings and private placements of
equity and debt securities.
The following table sets forth the net revenues of our Investment Banking
business:
INVESTMENT BANKING NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
------------------------------ ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial advisory.................... $ 931 $1,184 $1,774 $363 $522
Underwriting.......................... 1,182 1,403 1,594 270 380
------ ------ ------ ---- ----
Total Investment Banking.............. $2,113 $2,587 $3,368 $633 $902
====== ====== ====== ==== ====
</TABLE>
------------------------
FEBRUARY 1999 VERSUS FEBRUARY 1998. The Investment Banking business
achieved net revenues of $902 million in the three-month period ended February
1999, an increase of 42% compared to the same period in 1998. Net revenue growth
was strong in both financial advisory and underwriting, particularly in the
communications, media and entertainment, healthcare and financial institutions
groups. Our Investment Banking business was particularly strong in Europe and
the United States.
41
<PAGE> 44
Financial advisory revenues increased 44% compared to the same period in
1998, primarily due to higher market levels of mergers and acquisitions activity
as the trend toward consolidation continued in various industries. Underwriting
revenues increased 41%, primarily due to increased levels of equity underwriting
activity in Europe.
1998 VERSUS 1997. The Investment Banking business achieved net revenues of
$3.37 billion in 1998, an increase of 30% compared to 1997. Net revenue growth
was strong in financial advisory and, to a lesser extent, in underwriting as
Goldman Sachs' global presence and strong client base enabled it to capitalize
on higher levels of activity in many industry groups, including communications,
media and entertainment, financial institutions, general industrials and retail.
Net revenue growth in our Investment Banking business was strong in all major
regions in 1998 compared to the prior year.
Financial advisory revenues increased 50% compared to 1997 due to increased
revenues from mergers and acquisitions advisory assignments, which principally
resulted from consolidation within various industries and generally favorable
U.S. and European stock markets. Despite a substantial decrease in the number of
industry-wide underwriting transactions in August and September of 1998,
underwriting revenues increased 14% for the year, primarily due to increased
revenues from equity and high-yield corporate debt underwriting activities.
1997 VERSUS 1996. The Investment Banking business achieved net revenues of
$2.59 billion in 1997, an increase of 22% compared to 1996. Net revenue growth
was strong in both financial advisory and underwriting, particularly in the
financial institutions, general industrials and real estate groups.
Financial advisory revenues increased 27% compared to 1996 primarily due to
increased revenues from mergers and acquisitions activity in the market as a
whole. Underwriting revenues increased 19% primarily due to increased revenues
from investment grade and high-yield debt underwriting, which resulted from
lower interest rates. Revenues from equity underwriting activities increased
modestly over 1996 levels.
TRADING AND PRINCIPAL INVESTMENTS
Our Trading and Principal Investments business facilitates customer
transactions and takes proprietary positions through market-making in and
trading of fixed income and equity products, currencies, commodities, and swaps
and other derivatives. The Trading and Principal Investments business includes
the following:
- - FICC. We make markets in and trade fixed income products, currencies and
commodities, structure and enter into a wide variety of derivative
transactions and engage in proprietary trading and arbitrage activities;
- - EQUITIES. We make markets in and trade equities and equity-related products,
structure and enter into equity derivative transactions and engage in
proprietary trading and equity arbitrage; and
- - PRINCIPAL INVESTMENTS. Principal investments primarily represents net
revenues from our investments in our merchant banking funds.
Net revenues from principal investments do not include management fees and
the increased share of the income and gains from our merchant banking funds to
which Goldman Sachs is entitled when the return on investments exceeds certain
threshold returns to fund investors. These management fees and increased shares
of income and gains are included in the net revenues of Asset Management and
Securities Services.
Substantially all of our inventory is marked-to-market daily and,
therefore, its value and our net revenues are subject to fluctuations based on
market movements. In addition, net revenues derived from our principal
investments in privately held concerns and in real estate may fluctuate
significantly depending on the revaluation or sale of these investments in any
given period.
42
<PAGE> 45
The following table sets forth the net revenues of our Trading and
Principal Investments business:
TRADING AND PRINCIPAL INVESTMENTS NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FICC..................................... $1,749 $2,055 $1,438 $ 741 $ 876
Equities................................. 730 573 795 365 455
Principal investments.................... 214 298 146 76 26
------ ------ ------ ------ ------
Total Trading and Principal
Investments............................ $2,693 $2,926 $2,379 $1,182 $1,357
====== ====== ====== ====== ======
</TABLE>
------------------------
FEBRUARY 1999 VERSUS FEBRUARY 1998. The Trading and Principal Investments
business achieved net revenues of $1.36 billion in the three-month period ended
February 1999, an increase of 15% compared to the same period in 1998. Strong
performances in FICC and equities more than offset a net revenue reduction in
principal investments.
Net revenues in FICC increased 18% compared to the same period in 1998,
primarily due to higher net revenues from market-making and trading of
currencies, corporate bonds and mortgage-backed securities, partially offset by
lower net revenues from fixed income derivatives.
Net revenues in equities increased 25% compared to the same period in 1998,
primarily due to increased market-making net revenues resulting from strong
over-the-counter transaction volume in Europe and the United States.
Net revenues from principal investments decreased 66%, due to lower gains
on the disposition of investments and a reduction in net revenues related to the
mark-to-market of our principal investments.
1998 VERSUS 1997. Net revenues in Trading and Principal Investments were
$2.38 billion in 1998, a decrease of 19% compared to 1997. This decrease in net
revenues was concentrated in the second half of the year. See "-- Business
Environment" above for a discussion of the losses suffered in Trading and
Principal Investments in the second half of 1998. For the full year, significant
net revenue reductions in FICC and principal investments were partially offset
by increased net revenues in equities.
Net revenues in FICC decreased 30% compared to 1997 due to an
extraordinarily difficult environment in the second half of 1998. The net
revenue reduction in FICC was concentrated in fixed income arbitrage and
high-yield debt trading, which experienced losses in 1998 due to a reduction in
liquidity and widening credit spreads in the second half of the year. An
increase in net revenues from market-making and trading in fixed income
derivatives, currencies and commodities partially offset this decline.
Net revenues in equities increased 39% compared to 1997 as higher net
revenues in derivatives and European shares were partially offset by losses in
equity arbitrage. The derivatives business generated significantly higher net
revenues due, in part, to strong customer demand for over-the-counter products,
particularly in Europe. Net revenues from European shares increased as Goldman
Sachs benefited from generally favorable equity markets and increased customer
demand. The equity arbitrage losses were due principally to the underperformance
of various equity positions versus their benchmark hedges, to widening of
spreads in a variety of relative value trades and to lower prices for
event-oriented securities resulting from a re-
43
<PAGE> 46
duction 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 and rapidly growing client base of
institutions and individuals;
- - SECURITIES SERVICES. Securities services includes prime brokerage, financing
services and securities lending and our matched book businesses, all of which
generate revenue primarily in the form of fees or interest rate spreads; and
- - COMMISSIONS. Commission-based businesses include agency transactions for
clients on major stock and futures exchanges. Revenues from the increased
share of the income and gains derived from our merchant banking funds are also
included in commissions.
The following table sets forth the net revenues of our Asset Management and
Securities Services business:
ASSET MANAGEMENT AND SECURITIES SERVICES NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- -------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Asset management............................. $ 242 $ 458 $ 675 $139 $202
Securities services.......................... 354 487 730 170 207
Commissions.................................. 727 989 1,368 348 327
------ ------ ------ ---- ----
Total Asset Management and Securities
Services................................... $1,323 $1,934 $2,773 $657 $736
====== ====== ====== ==== ====
</TABLE>
Goldman Sachs' assets under supervision are comprised of assets under
management and other client assets. Assets under management typically generate
fees based on
44
<PAGE> 47
a percentage of their value and include our mutual funds, separate accounts
managed for institutional and individual investors, our merchant banking funds
and other alternative investment funds. Other client assets are comprised of
assets in brokerage accounts of primarily high net worth individuals, on which
we earn commissions. The following table sets forth our assets under
supervision:
ASSETS UNDER SUPERVISION
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------------- --------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets under management.......... $ 94,599 $135,929 $194,821 $151,189 $206,380
Other client assets.............. 76,892 102,033 142,018 114,928 163,315
-------- -------- -------- -------- --------
Total assets under supervision... $171,491 $237,962 $336,839 $266,117 $369,695
======== ======== ======== ======== ========
</TABLE>
------------------------
FEBRUARY 1999 VERSUS FEBRUARY 1998. The Asset Management and Securities
Services business achieved net revenues of $736 million in the three-month
period ended February 1999, an increase of 12% compared to the same period in
1998. Strong performances in asset management and securities services more than
offset a net revenue reduction in commissions.
Asset management revenues increased 45% compared to the same period in
1998, primarily reflecting a 43% increase in average assets under management. In
the 1999 period, approximately half of the increase in assets under management
was attributable to net asset inflows, with the balance reflecting market
appreciation. Net revenues from securities services increased 22% during the
period, primarily due to growth in our securities borrowing and lending
businesses. Commission revenues decreased 6%, as an increase in equity
commissions was more than offset by a reduction in revenues from the increased
share of income and gains from our merchant banking funds compared to a
particularly strong period in the prior year.
1998 VERSUS 1997. The Asset Management and Securities Services business
achieved net revenues of $2.77 billion in 1998, an increase of 43% compared to
1997. All major components of the business line exhibited strong net revenue
growth.
Asset management revenues increased 47% during this period, reflecting a
41% increase in average assets under management over 1997. In 1998,
approximately 80% of the increase in assets under management was attributable to
net asset inflows, with the remaining 20% reflecting market appreciation. Net
revenues from securities services increased 50%, primarily due to growth in our
securities borrowing and lending businesses. Commission revenues increased 38%
as generally strong and highly volatile equity markets resulted in increased
transaction volumes in listed equity securities. Revenues from the increased
share of income and gains from our merchant banking funds also contributed
significantly to the increase in commission revenues.
1997 VERSUS 1996. The Asset Management and Securities Services business
achieved net revenues of $1.93 billion in 1997, an increase of 46% compared to
1996. All major components of the business line exhibited strong net revenue
growth.
Asset management revenues increased 89% during this period, reflecting a
73% increase in average assets under management due to strong net asset inflows,
market appreciation and assets added through the acquisitions of Liberty
Investment Management in January 1997 and Commodities 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 the
world's principal stock exchanges, includ-
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<PAGE> 48
ing those in the United States where industry-wide volumes increased
substantially in the third and fourth quarters of 1997. Revenues from the
increased share of income and gains from our merchant banking funds also
contributed significantly to the increase in commission revenues.
OPERATING EXPENSES
In recent years, our operating expenses have increased as a result of
numerous factors, including higher levels of compensation, expansion of our
asset management business, increased worldwide activities, greater levels of
business complexity and additional systems and consulting costs relating to
various technology initiatives.
Since we historically operated in partnership form, payments to our profit
participating limited partners were accounted for as distributions of partners'
capital rather than as compensation expense. As a result, our compensation and
benefits expense has not reflected any payments for services rendered by our
managing directors who were profit participating limited partners. Accordingly,
our historical compensation and benefits, the principal component of our
operating expenses, will increase significantly as a result of our conversion to
corporate form since, as a corporation, we will include these payments to our
managing directors who were profit participating limited partners in
compensation and benefits expense.
We expect to record additional expense in the second quarter of 1999 equal
to (i) 50% of the estimated compensation and benefits of the managing directors
who were profit participating limited partners in 1999 based on the annualized
results for the first half of 1999 offset by (ii) the effect of issuing
restricted stock units to employees, in lieu of cash compensation, for which
future service is required as a condition to the delivery of the underlying
shares of common stock. In accordance with Accounting Principles Board Opinion
No. 25, these restricted stock units will be recorded as compensation expense
over the four-year vesting period following the date of grant. In addition, we
expect to record non-cash compensation expense related to the amortization of
the restricted stock units awarded to employees on a discretionary basis over
the five-year period following the consummation of our common stock offering.
The non-cash expense related to these restricted stock units is a fixed amount
that is not dependent on our operating results in any given period. See "Pro
Forma Consolidated Financial Information" for a further discussion of these
items.
The following table sets forth our operating expenses and number of
employees:
OPERATING EXPENSES AND EMPLOYEES
($ in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
---------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Compensation and benefits............... $2,421 $ 3,097 $ 3,838 $ 1,100 $ 1,275
Brokerage, clearing and exchange fees... 278 357 424 93 111
Market development...................... 137 206 287 54 77
Communications and technology........... 173 208 265 58 78
Depreciation and amortization........... 172 178 242 42 97
Occupancy............................... 154 168 207 44 78
Professional services and other......... 188 219 336 59 91
------ ------- ------- ------- -------
Total operating expenses................ $3,523 $ 4,433 $ 5,599 $ 1,450 $ 1,807
====== ======= ======= ======= =======
Employees at period end(1).............. 8,977 10,622 13,033 10,899 12,878
</TABLE>
- ---------------
(1) Excludes employees of Goldman Sachs' two property management
subsidiaries, The Archon Group, L.P. and Archon Group (France) S.C.A.
Substantially all of the costs of these employees are reimbursed to
Goldman Sachs by the real estate investment funds to which the two
companies provide property management services. In addition, as of
February 1999, we had approximately 3,400 temporary staff and
consultants. For more detailed information regarding our employees, see
"Business -- Employees".
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<PAGE> 49
FEBRUARY 1999 VERSUS FEBRUARY 1998. Operating expenses were $1.81 billion
in the three-month period ended February 1999, an increase of 25% over the same
period in 1998, primarily due to increased compensation and benefits and higher
other operating expenses due to, among other things, Goldman Sachs' increased
worldwide activities.
Compensation and benefits decreased as a percentage of net revenues to 43%
from 44% in the same period in 1998. Employment levels increased 18% compared to
the same period in 1998, with particularly strong growth in investment banking
and asset management. Expenses associated with our temporary staff and
consultants were $98 million for the three-month period ended February 1999, an
increase of 55%, reflecting preparations for the Year 2000 and greater levels of
business activity.
Brokerage, clearing and exchange fees increased 19%, primarily due to
higher transaction volumes in fixed income derivatives and futures contracts.
Market development expenses increased 43% and professional services and other
expenses increased 54%, due to higher levels of business activity.
Communications and technology expenses increased 34%, reflecting higher
telecommunications and market data costs associated with higher employment
levels and additional spending on technology initiatives. Depreciation and
amortization increased significantly due to certain fixed asset write-offs and
to capital expenditures on telecommunications and technology-related equipment
and leasehold improvements in support of Goldman Sachs' increased worldwide
activities. Occupancy expenses increased 77%, reflecting additional office space
needed to accommodate higher employment levels.
1998 VERSUS 1997. Operating expenses were $5.60 billion in 1998, an
increase of 26% over 1997, primarily due to increased compensation and benefits
expense.
Compensation and benefits increased as a percentage of net revenues to 45%
from 42% in 1997, principally as a result of increases in employment levels and
in expenses associated with temporary staff and consultants. Employment levels
increased 23% during the year, with particularly strong growth in asset
management. Expenses associated with our temporary staff and consultants were
$330 million in 1998, an increase of 85% compared to 1997, reflecting greater
business activity, Goldman Sachs' global expansion and consulting costs
associated with various technology initiatives, including preparations for the
Year 2000 and the establishment of the European Economic and Monetary Union.
Brokerage, clearing and exchange fees increased 19%, primarily due to
higher transaction volumes in European and U.S. equities and futures contracts.
Market development expenses increased 39% and professional services and other
expenses increased 53%, due to higher levels of business activity and Goldman
Sachs' global expansion. Communications and technology expenses increased 27%,
reflecting higher telecommunications and market data costs associated with
higher employment levels and additional spending on technology initiatives.
Depreciation and amortization increased 36%, principally due to capital
expenditures on telecommunications and technology-related equipment and
leasehold improvements. Occupancy expenses increased 23%, reflecting additional
office space needed to accommodate higher employment levels.
1997 VERSUS 1996. Operating expenses were $4.43 billion in 1997, an
increase of 26% over 1996, primarily due to increased compensation and benefits
expense.
Compensation and benefits increased as a percentage of net revenues to 42%
from 40% in 1996. This increase primarily reflected higher compensation due to
higher profit levels and an 18% increase in employment levels across Goldman
Sachs due to higher levels of market activity and our global expansion into new
businesses and markets. Expenses associated with our temporary staff and
consultants also contributed to the increase in compensation and benefits as a
percentage of net revenues. These expenses were $178 million in 1997, an
increase of 55% compared to 1996, reflecting greater business
47
<PAGE> 50
activity, Goldman Sachs' global expansion and consulting costs associated with
various technology initiatives.
Brokerage, clearing and exchange fees increased 28%, primarily due to
higher transaction volumes in global equities, derivatives and currencies.
Market development expenses increased 50% and professional services and other
expenses increased 16%, due to higher levels of business activity and Goldman
Sachs' global expansion. Communications and technology expenses increased 20%,
reflecting higher telecommunications and market data costs associated with
higher employment levels and additional spending on technology initiatives.
Depreciation and amortization increased 3%. Occupancy expenses increased 9%,
reflecting additional office space needed to accommodate higher employment
levels.
PROVISION FOR TAXES
The Goldman Sachs Group, L.P., as a partnership, generally was not subject
to U.S. federal and state income taxes. The earnings of The Goldman Sachs Group,
L.P. and certain of its subsidiaries have been subject to the 4% New York City
unincorporated business tax. In addition, certain of our non-U.S. subsidiaries
have been subject to income taxes in their local jurisdictions. The amount of
our provision for income and unincorporated business taxes has varied
significantly from year to year depending on the mix of earnings among our
subsidiaries. For information on the pro forma effective tax rate of Goldman
Sachs under corporate form, see "Pro Forma Consolidated Financial Information".
GEOGRAPHIC DATA
For a summary of the total revenues, net revenues, pre-tax earnings and
identifiable assets of Goldman Sachs by geographic region, see Note 9 to the
audited consolidated financial statements.
CASH FLOWS
Our cash flows are primarily related to the operating and financing
activities undertaken in connection with our trading and market-making
transactions.
YEAR ENDED NOVEMBER 1998
Cash and cash equivalents increased to $2.84 billion in 1998. Cash of $62
million was provided by operating activities. Cash of $656 million was used for
investing activities, primarily for leasehold improvements and the purchase of
telecommunications and technology-related equipment and certain financial
instruments. Financing activities provided $2.10 billion of cash, reflecting an
increase in the net issuance of long-term and short-term borrowings, partially
offset by a decrease in net repurchase agreements, distributions to partners,
cash outflows related to partners' capital allocated for income taxes and
potential withdrawals and the termination of our profit participation plans. See
Note 8 to the audited consolidated financial statements for a discussion of the
termination of the profit participation plans.
YEAR ENDED NOVEMBER 1997
Cash and cash equivalents decreased to $1.33 billion in 1997. Operating
activities provided cash of $70 million. Cash of $693 million was used for
investing activities, primarily for the purchase of certain financial
instruments and technology-related equipment. Cash of $258 million was used for
financing activities, principally due to a decrease in net repurchase
agreements, distributions to partners and cash outflows related to partners'
capital allocated for income taxes and potential withdrawals, partially offset
by the net issuance of long-term and short-term borrowings.
YEAR ENDED NOVEMBER 1996
Cash and cash equivalents increased to $2.21 billion in 1996. Cash of
$14.63 billion was used for operating activities, primarily to fund higher net
trading assets due to increased levels of business activity. Cash of $218
million was used for investing activities, primarily for the purchase of
technology-related equipment and leasehold improvements. Financing activities
provided $16.10 billion of cash, reflecting an increase in net
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<PAGE> 51
repurchase agreements and the net issuance of long-term borrowings, partially
offset by distributions to partners and cash outflows related to partners'
capital allocated for income taxes and potential withdrawals.
LIQUIDITY
MANAGEMENT OVERSIGHT OF LIQUIDITY
Management believes that one of the most important issues for a company in
the financial services sector is access to liquidity. Accordingly, Goldman Sachs
has established a comprehensive structure to oversee its liquidity and funding
policies.
The Finance Committee has responsibility for establishing and assuring
compliance with our asset and liability management policies and has oversight
responsibility for managing liquidity risk, the size and composition of our
balance sheet and our credit ratings. See "-- Risk Management -- Risk Management
Structure" below for a further description of the committees that participate in
our risk management process. The Finance Committee meets monthly, and more often
when necessary, to evaluate our liquidity position and funding requirements.
Our Treasury Department manages the capital structure, funding, liquidity
and relationships with creditors and rating agencies on a global basis. The
Treasury Department works jointly with our global funding desk in managing our
borrowings. The global funding desk is primarily responsible for our
transactional short-term funding activity.
LIQUIDITY POLICIES
In order to maintain an appropriate level of liquidity, management has
implemented several liquidity policies as outlined below.
DIVERSIFICATION OF FUNDING SOURCES AND LIQUIDITY PLANNING. Goldman Sachs
maintains diversified funding sources with both banks and non-bank lenders
globally. Management believes that Goldman Sachs' relationships with its lenders
are critical to its liquidity. We maintain close contact with our primary
lenders to keep them advised of significant developments that affect us.
Goldman Sachs also has access to diversified funding sources with over 800
creditors, including banks, insurance companies, mutual funds, bank trust
departments and other asset managers. We monitor our creditors to maintain broad
and diversified credit, and no single creditor represented more than 5% of our
uncollateralized funding sources as of November 1998. Uncollateralized funding
sources principally include our short-term and long-term borrowings and letters
of credit.
We access liquidity in a variety of markets in the United States as well as
in Europe and Asia. In addition, we make extensive use of the repurchase
agreement market and have raised debt in the private placement, the SEC's Rule
144A and the commercial paper markets, as well as through Eurobonds, money
broker loans, commodity-based financings, letters of credit and promissory
notes. We also intend to begin raising debt in the public securities market,
including through this offering, our dollar debt offering and our new
medium-term note program. We seek to structure our liabilities to avoid
significant amounts of debt coming due on any one day or during any single week
or year. In addition, we maintain and update annually a liquidity crisis plan
that provides guidance in the event of a liquidity crisis. The annual update of
this plan is reviewed and approved by our Finance Committee.
ASSET LIQUIDITY. Goldman Sachs maintains a highly liquid balance sheet.
Many of our assets are readily funded in the repurchase agreement markets, which
generally have proven to be a consistent source of funding, even in periods of
market stress. Substantially all of our inventory turns over rapidly and is
marked-to-market daily. We maintain long-term borrowings and partners' capital
substantially in excess of our less liquid assets.
DYNAMIC LIQUIDITY MANAGEMENT. Goldman Sachs seeks to manage the composition
of its asset base and the maturity profile of its funding to ensure that it can
liquidate its assets prior to its liabilities coming due, even in times of
liquidity stress. We have traditionally been able to fund our liquidity needs
through collateralized funding, such
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<PAGE> 52
as repurchase transactions and securities lending, as well as short-term and
long-term borrowings and partners' capital. To further evaluate the adequacy of
our liquidity management policies and guidelines, we perform weekly "stress
funding" simulations of disruptions to our access to unsecured credit.
EXCESS LIQUIDITY. In addition to maintaining a highly liquid balance sheet
and a significant portion of longer-term liabilities to assure liquidity even
during adverse conditions, we seek to maintain a liquidity cushion that consists
principally of unencumbered U.S. government and agency obligations to ensure the
availability of immediate liquidity. This pool of highly liquid assets averaged
$14.17 billion during 1998 and $12.54 billion during 1997.
LIQUIDITY RATIO MAINTENANCE. It is Goldman Sachs' policy to further manage
its liquidity by maintaining a "liquidity ratio" of at least 100%. This ratio
measures the relationship between the loan value of our unencumbered assets and
our short-term unsecured liabilities. The maintenance of this liquidity ratio is
intended to ensure that we could fund our positions on a fully secured basis in
the event that we were unable to replace our unsecured debt maturing within one
year. Under this policy, we seek to maintain unencumbered assets in an amount
that, if pledged or sold, would provide the funds necessary to replace unsecured
obligations that are scheduled to mature (or where holders have the option to
redeem) within the coming year.
INTERCOMPANY FUNDING. Most of the liquidity of Goldman Sachs is raised by
the parent company, which, since our conversion to corporate form, is The
Goldman Sachs Group, Inc. The parent company then lends the necessary funds to
its subsidiaries and affiliates. We carefully manage our intercompany exposure
by generally requiring intercompany loans to have maturities equal to or shorter
than the maturities of the aggregate borrowings of the parent company. This
policy ensures that the subsidiaries' obligations to the parent company will
generally mature in advance of the parent company's third-party long-term
borrowings. In addition, many of the advances made to our subsidiaries and
affiliates are secured by marketable securities or other liquid collateral.
Prior to our conversion to corporate form, we generally funded our equity
investments in subsidiaries with partners' capital.
THE BALANCE SHEET
Goldman Sachs maintains a highly liquid balance sheet that fluctuates
significantly between financial statement dates. In the fourth quarter of 1998,
we temporarily decreased our total assets to reduce risk and increase liquidity
in response to difficult conditions in the global financial markets.
Our total assets were $230.62 billion as of February 1999 and $217.38
billion as of November 1998.
Our balance sheet size as of February 1999 and November 1998 increased by
$8.99 billion and $11.64 billion, respectively, due to the adoption of the
provisions of Statement of Financial Accounting Standards No. 125 that were
deferred by Statement of Financial Accounting Standards No. 127. For a
discussion of Statement of Financial Accounting Standards Nos. 125 and 127, see
"-- Accounting Developments" below and Note 2 to the audited consolidated
financial statements.
As of February 1999 and November 1998, we held approximately $999 million
and $1.04 billion, respectively, in high-yield debt securities and $1.39 billion
and $1.49 billion, respectively, in bank loans, all of which are valued on a
mark-to-market basis. These assets may be relatively illiquid during times of
market stress. We seek to diversify our holdings of these assets by industry and
by geographic location.
As of February 1999 and November 1998, we held approximately $1.04 billion
and $1.17 billion, respectively, of emerging market securities, and $103 million
and $109 million, respectively, in emerging market loans, all of which are
valued on a mark-to-market basis. Of the $1.14 billion and $1.28 billion in
emerging market securities and loans, as of February 1999 and November 1998,
respectively, approximately $778 million and $968 million were sovereign
obligations, many of
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<PAGE> 53
which are collateralized as to principal at stated maturity.
In September 1998, a consortium of 14 banks and brokerage firms, including
Goldman Sachs, made an equity investment in Long-Term Capital Portfolio, L.P., a
major market participant. The objectives of this investment were to provide
sufficient capital to permit Long-Term Capital Portfolio, L.P. to continue
active management of its positions and, over time, to reduce risk exposures and
leverage, to return capital to the participants in the consortium and ultimately
to realize the potential value of the portfolio. We invested $300 million in
Long-Term Capital Portfolio, L.P.
CREDIT RATINGS
Goldman Sachs relies upon the debt capital markets to fund a significant
portion of its day-to-day operations. The cost and availability of debt
financing is influenced by our credit ratings. Credit ratings are also important
to us when competing in certain markets and when seeking to engage in
longer-term transactions, including over-the-counter derivatives. A reduction in
our credit ratings could increase our borrowing costs and limit our access to
the capital markets. This, in turn, could reduce our earnings and adversely
affect our liquidity.
LONG-TERM DEBT
As of November 1998, our consolidated long-term borrowings were $19.91
billion. Substantially all of these borrowings were unsecured and consisted
principally of senior borrowings with maturities extending to 2024. The weighted
average maturity of our long-term borrowings as of November 1998 was
approximately four years. Substantially all of our long-term borrowings are
swapped into U.S. dollar obligations with short-term floating rates of interest
in order to minimize our exposure to interest rates and foreign exchange
movements. See Note 5 to the audited consolidated financial statements for
further information regarding our long-term borrowings.
REGULATED SUBSIDIARIES
Many of our principal subsidiaries are subject to extensive regulation in
the United States and elsewhere. Goldman, Sachs & Co., a registered U.S.
broker-dealer, is regulated by the SEC, the Commodity Futures Trading
Commission, the Chicago Board of Trade, the NYSE and the NASD. Goldman Sachs
International, a registered United Kingdom broker-dealer, is subject to
regulation by the Securities and Futures Authority Limited and the Financial
Services Authority. Goldman Sachs (Japan) Ltd., a Tokyo-based broker-dealer, is
subject to regulation by the Japanese Ministry of Finance, the Financial
Supervisory Agency, the Tokyo Stock Exchange, the Tokyo International Financial
Futures Exchange and the Japan Securities Dealers Association. Several other
subsidiaries of Goldman Sachs are regulated by securities, investment advisory,
banking and other regulators and authorities around the world. Compliance with
the rules of these regulators may prevent us from receiving distributions,
advances or repayment of liabilities from these subsidiaries. See Note 8 to the
audited consolidated financial statements and Note 5 to the unaudited condensed
consolidated financial statements for further information regarding our
regulated subsidiaries.
RISK MANAGEMENT
Goldman Sachs has a comprehensive risk management process to monitor,
evaluate and manage the principal risks assumed in conducting its activities.
These risks include market, credit, liquidity, operational, legal and
reputational exposures.
RISK MANAGEMENT STRUCTURE
Goldman Sachs seeks to monitor and control its risk exposure through a
variety of separate but complementary financial, credit, operational and legal
reporting systems. We believe that we have effective procedures for evaluating
and managing the market, credit and other risks to which we are exposed.
Nonetheless, the effectiveness of our policies and procedures for managing risk
exposure can never be completely or accurately predicted or fully assured. For
example, unex-
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<PAGE> 54
pectedly large or rapid movements or disruptions in one or more markets or other
unforeseen developments can have a material adverse effect on our results of
operations and financial condition. The consequences of these developments can
include losses due to adverse changes in inventory values, decreases in the
liquidity of trading positions, higher volatility in our earnings, increases in
our credit risk to customers and counterparties and increases in general
systemic risk. See "Risk Factors -- Market Fluctuations Could Harm Our
Businesses in Many Ways and, Consequently, Could Lower the Value of an
Investment in the Notes" for a discussion of the effect that market fluctuations
can have on our businesses.
Goldman Sachs has established risk control procedures at several levels
throughout the organization. Trading desk managers have the first line of
responsibility for managing risk within prescribed limits. These managers have
in-depth knowledge of the primary sources of risk in their individual markets
and the instruments available to hedge our exposures. In addition, a number of
committees described in the following table are responsible for establishing
trading limits, monitoring adherence to these limits and for general oversight
of our risk management process.
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<PAGE> 55
<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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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> 57
commodity products, as well as for our overall trading positions.
These VaR numbers include the underlying product positions and related
hedges, which may include positions in other product areas. For example, the
hedge of a foreign exchange forward may include an interest rate futures
position and the hedge of a long corporate bond position may include a short
position in the related equity.
VaR METHODOLOGY, ASSUMPTIONS AND LIMITATIONS. The modeling of the risk
characteristics of our trading positions involves a number of assumptions and
approximations. While management believes that these assumptions and
approximations are reasonable, there is no uniform industry methodology for
estimating VaR, and different assumptions and/or approximations could produce
materially different VaR estimates.
We use historical data to estimate our VaR and, to better reflect asset
volatilities and correlations, these historical data are weighted to give
greater importance to more recent observations. Given its reliance on historical
data, VaR is most effective in estimating risk exposures in markets in which
there are no sudden fundamental changes or shifts in market conditions. An
inherent limitation of VaR is that past changes in market risk factors, even
when weighted toward more recent observations, may not produce accurate
predictions of future market risk. For example, the asset volatilities to which
we were exposed in the second half of 1998 were substantially larger than those
reflected in the historical data used during that time period to estimate our
VaR. Moreover, VaR calculated for a one-day time horizon does not fully capture
the market risk of positions that cannot be liquidated or offset with hedges
within one day.
VaR also should be evaluated in light of the methodology's other
limitations. For example, when calculating the VaR numbers shown below, we
assume that asset returns are normally distributed. Non-linear risk exposures on
options and the potentially mitigating impact of intra-day changes in related
hedges would likely produce non-normal asset returns. Different distributional
assumptions could produce a materially different VaR.
The following table sets forth our daily VaR for substantially all of our
trading positions:
DAILY VaR
(in millions)
<TABLE>
<CAPTION>
AS OF
NOVEMBER
RISK CATEGORIES 1998
--------------- --------
<S> <C>
Interest rates.............................................. $ 27.3
Currency rates.............................................. 9.0
Equity prices............................................... 25.3
Commodity prices............................................ 7.0
Diversification effect(1)................................... (25.7)
------
Firmwide.................................................... $ 42.9
======
</TABLE>
- ---------------
(1) Equals the difference between firmwide daily VaR and the sum of the daily
VaRs for the four risk categories. This effect arises because the four
market risk categories are not perfectly correlated.
------------------------
The daily VaR for substantially all of our trading positions as of February
1999 was not materially different from our daily VaR as of November 1998.
For a discussion of what our daily VaR would have been as of November 1998
had we used our volatility and correlation data as of May 29, 1998, see
"Business -- Trading and Principal Investments -- Trading Risk
Management -- Risk Reduction".
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NON-TRADING RISK
The market risk associated with our non-trading financial instruments,
including investments in our merchant banking funds, is measured using a
sensitivity analysis that estimates the potential reduction in our net revenues
associated with hypothetical market movements. As of February 1999 and November
1998, non-trading market risk was not material.
RECENT ENHANCEMENTS TO RISK MANAGEMENT
While VaR continues to be a core tool in our risk management process,
management has increased its emphasis on the supplemental measures described
below:
- - CREDIT SPREAD LIMITS. In addition to VaR, the Firmwide Risk Committee now
sets market risk limits based on a scenario analysis of widening credit
spreads similar to those experienced in the second half of 1998; and
- - SCENARIO ANALYSES. Management is using scenario analyses that reflect more
extreme market conditions, such as large increases in market volatility as
well as substantial and sustained adverse movements in the volatility and
correlation of our relative value positions.
Notwithstanding these measures, we continue to hold trading positions that
are substantial in both number and size, and are subject to significant market
risk. In addition, management may choose to increase Goldman Sachs' risk levels
in the future. See "Risk Factors -- Market Fluctuations Could Harm Our
Businesses in Many Ways and, Consequently, Could Lower the Value of an
Investment in the Notes" and "-- Our Risk Management Policies and Procedures May
Leave Us Exposed to Unidentified or Unanticipated Risk" for a discussion of the
risks associated with our trading positions.
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)
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CREDIT RISK
Credit risk represents the loss that we would incur if a counterparty or
issuer of securities or other instruments we hold fails to perform its
contractual obligations to us. To reduce our credit exposures, we seek to enter
into netting agreements with counterparties that permit us to offset receivables
and payables with such counterparties. We do not take into account any such
agreements when calculating credit risk, however, unless management believes a
legal right of setoff exists under an enforceable master netting agreement.
For most businesses, counterparty credit limits are established by the
Credit Department, which is independent of the revenue-producing departments,
based on guidelines set by the Firmwide Risk and Credit Policy Committees. Our
global credit management systems monitor current and potential credit exposure
to individual counterparties and on an aggregate basis to counterparties and
their affiliates. The systems also provide management with information regarding
overall credit risk by product, industry sector, country and region.
RISK LIMITS
Business unit risk limits are established by the risk committees and may be
further segmented by the business unit managers to individual trading desks.
Market risk limits are monitored on a daily basis by the Firmwide Risk
Department and are reviewed regularly by the appropriate risk committee. Limit
violations are reported to the appropriate risk committee and the appropriate
business unit managers.
Inventory position limits are monitored by the Controllers Department and
position limit violations are reported to the appropriate business unit managers
and the Finance Committee. When inventory position limits are used to monitor
market risk, they are also monitored by the Firmwide Risk Department and
violations are reported to the appropriate risk committee.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments, such as futures, forwards,
swaps or option contracts, that derive their value from underlying assets,
indices, reference rates or a combination of these factors. Derivative
instruments may be entered into by Goldman Sachs in privately negotiated
contracts, which are often referred to as over-the-counter derivatives, or they
may be listed and traded on an exchange.
Most of our derivative transactions are entered into for trading purposes.
We use derivatives in our trading activities to facilitate customer
transactions, to take proprietary positions and as a means of risk management.
We also enter into non-trading derivative contracts to manage the interest rate
and currency exposure on our long-term borrowings.
Derivatives are used in many of our businesses, and we believe that the
associated market risk can only be understood relative to the underlying assets
or risks being hedged, or as part of a broader trading strategy. Accordingly,
the market risk of derivative positions is managed with all of our other
non-derivative risk.
Derivative contracts are reported on a net-by-counterparty basis on our
consolidated statements of financial condition where management believes a legal
right of setoff exists under an enforceable master netting agreement.
For an over-the-counter derivative, our credit exposure is directly with
our counterparty and continues until the maturity or termination of such
contract.
The following table sets forth the distribution, by credit rating, of
substantially all of our exposure with respect to over-the-counter derivatives
as of November 1998, after taking into consideration the effect of netting
agreements. The categories shown reflect our in-
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<PAGE> 60
ternally determined public rating agency equivalents.
OVER-THE-COUNTER DERIVATIVE CREDIT EXPOSURES
($ in millions)
<TABLE>
<CAPTION>
CREDIT RATING EQUIVALENT AMOUNT PERCENTAGE
- ------------------------ ------ ----------
<S> <C> <C>
AAA/Aaa............................................... $ 2,170 12%
AA/Aa2................................................ 5,571 30
A/A2.................................................. 4,876 26
BBB/Baa2.............................................. 3,133 17
BB/Ba2 or lower....................................... 1,970 11
Unrated(1)............................................ 730 4
------- ---
$18,450 100%
======= ===
</TABLE>
- ---------------
(1) In lieu of making an individual assessment of such counterparties' credit,
we make a determination that the collateral held in respect of such
obligations is sufficient to cover our exposure. In making this
determination, we take into account various factors, including legal
uncertainties and market volatility.
------------------------
As of November 1998, we held approximately $2.97 billion in collateral
against these over-the-counter derivative exposures. This collateral consists
predominantly of cash and U.S. government and agency securities and is usually
received by us under agreements entitling us to require additional collateral
upon specified increases in exposure or the occurrence of negative credit
events.
In addition to obtaining collateral and seeking netting agreements, we
attempt to mitigate default risk on derivatives by entering into agreements that
enable us to terminate or reset the terms of transactions after specified time
periods or upon the occurrence of credit-related events, and by seeking third-
party guarantees of the obligations of some counterparties.
Derivatives transactions may also involve the legal risk that they are not
authorized or appropriate for a counterparty, that documentation has not been
properly executed or that executed agreements may not be enforceable against the
counterparty. We attempt to minimize these risks by obtaining advice of counsel
on the enforceability of agreements as well as on the authority of a
counterparty to effect the derivative transaction.
OPERATIONAL AND YEAR 2000 RISKS
OPERATIONAL RISK. Goldman Sachs may face reputational damage, financial
loss or regulatory risk in the event of an operational failure or error. A
systems failure or failure to enter a trade properly into our records may result
in an inability to settle transactions in a timely manner or a breach of
regulatory requirements. Settlement errors or delays may cause losses due to
damages owed to counterparties or movements in prices. These operational and
systems risks may arise in connection with our own systems or as a result of the
failure of an agent acting on our behalf.
The Global Operations Department is responsible for establishing,
maintaining and approving policies and controls with respect to the accurate
inputting and processing of transactions, clearance and settlement of
transactions, the custody of securities and other instruments and the detection
and prevention of employee errors or improper or fraudulent activities. Its
personnel work closely with the Information Technology Department in creating
systems to enable appropriate supervision and management of its policies. The
Global Operations Department is also responsible, together with other areas of
Goldman Sachs, including the Legal and Compliance Departments, for ensuring com-
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pliance with applicable regulations with respect to the clearance and settlement
of transactions and the margining of positions. The Network Management
Department oversees our relationships with our clearance and settlement agents,
regularly reviews agents' performance and meets with these agents to review
operational issues.
YEAR 2000 READINESS DISCLOSURE. Goldman Sachs has determined that it will
be required to modify or replace portions of its information technology systems,
both hardware and software, and its non-information technology systems so that
they will properly recognize and utilize dates beyond December 31, 1999. We
presently believe that with modifications to existing software, conversions to
new software and replacement of some hardware, the Year 2000 issue will be
satisfactorily resolved in our own systems worldwide. However, if such
modifications and conversions are not made or are not completed on a timely
basis, the Year 2000 issue would have a material adverse effect on Goldman
Sachs. Moreover, even if these changes are successful, failure of third parties
to which we are financially or operationally linked to address their own Year
2000 problems would also have a material adverse effect on Goldman Sachs. For a
description of the Year 2000 issue and some of the related risks, including
possible problems that could arise, see "Risk Factors -- Our Computer Systems
and Those of Third Parties May Not Achieve Year 2000 Readiness -- Year 2000
Readiness Disclosure".
Recognizing the broad scope and complexity of the Year 2000 problem, we
have established a Year 2000 Oversight Committee to promote awareness and ensure
the active participation of senior management. This Committee, together with
numerous sub-committees chaired by senior managers throughout Goldman Sachs and
our Global Year 2000 Project Office, is responsible for planning, managing and
monitoring our Year 2000 efforts on a global basis. Our Management Controls
Department assesses the scope and sufficiency of our Year 2000 program and
verifies that the principal aspects of our Year 2000 program are being
implemented according to plan.
Our Year 2000 plans are based on a five-phase approach, which includes
awareness; inventory, assessment and planning; remediation; testing; and
implementation. The awareness phase (in which we defined the scope and
components of the problem, our methodology and approach and obtained senior
management support and funding) was completed in September 1997. We also
completed the inventory, assessment and planning phase for our systems in
September 1997. By the end of March 1999, we completed the remediation, testing
and implementation phases for 99% of our mission-critical systems, and we plan
to complete these three phases for the remaining 1% by the end of June 1999. In
March 1999, we completed the first cycle of our internal integration testing
with respect to critical securities and transaction flows. This cycle, which
related to U.S. products, was completed successfully with no material problem.
The remaining cycle, which will relate primarily to non-U.S. products, is to be
completed in June 1999. This testing is intended to validate that our systems
can successfully perform critical business functions beginning in January 2000.
With respect to our non-mission-critical systems, we expect to complete our Year
2000 efforts during calendar 1999.
For technology products that are supplied by third-party vendors, we have
completed an inventory, ranked products according to their importance and
developed a strategy for achieving Year 2000 readiness for substantially all
non-compliant versions of software and hardware. While this process included
collecting information from vendors, we are not relying solely on vendors'
verifications that their products are Year 2000 compliant or ready. As of March
31, 1999, we had substantially completed testing and implementation of
vendor-supplied technology products that we consider mission-critical. With
respect to telecommunications carriers, we are relying on information provided
by these vendors as to whether they are Year 2000 compliant because these
vendors have indicated that they will not test with individual companies.
We are also addressing Year 2000 issues that may exist outside our own
technology activities, including our facilities, external ser-
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vice providers and other third parties with which we interface. We have
inventoried and ranked our customers, business and trading partners, utilities,
exchanges, depositories, clearing and custodial banks and other third parties
with which we have important financial and operational relationships. We are
continuing to assess the Year 2000 preparedness of these customers, business and
trading partners and other third parties.
By the end of March 1999, we had participated in approximately 115
"external", i.e., industry-wide or point-to-point, tests with exchanges,
clearing houses and other industry utilities, as well as the "Beta" test
sponsored by the Securities Industry Association for its U.S. members in July
1998. We successfully completed all of these tests, as well as the Securities
Industry Association "Streetwide" test in April 1999, with no material problems.
By the end of June 1999, we expect to have participated in approximately 60
additional external tests, including major industry tests in those global
markets where we conduct significant business.
Acknowledging that a Year 2000 failure, whether internal or external, could
have an adverse effect on the ability to conduct day-to-day business, we are
employing a comprehensive and global approach to contingency planning. Our
contingency planning objective is to identify potential system failure points
that support processes that are critical to our mission and to develop
contingency plans for those failures that may reasonably be expected to occur,
with the general goal of ensuring, to the maximum extent practical, that minimum
acceptable levels of service can be maintained by us. In the event of system
failures, our contingency plans will not guarantee that existing levels of
service will be fully maintained, especially if these failures involve external
systems or processes over which we have little or no direct control or involve
multiple failures across a variety of systems.
We anticipate that contingency plans for our core business units will be
substantially completed during June 1999, and by September 30, 1999 for the rest
of our businesses. In addition, we are developing contingency plans for funding
and balance sheet management and other related activities. We expect our
contingency plans to include establishing additional sources of liquidity that
could be drawn upon in the event of systems disruption. We are also developing a
crisis management group to guide us through the transition period. We expect to
reduce trading activity in the period leading up to January 2000 to minimize the
impact of potential Year 2000-related failures. A reduction in trading activity
by us or by other market participants in anticipation of possible Year 2000
problems could adversely affect our results of operations, as discussed under
"Risk Factors -- Our Computer Systems and Those of Third Parties May Not Achieve
Year 2000 Readiness -- Year 2000 Readiness Disclosure".
We have incurred and expect to continue to incur expenses allocable to
internal staff, as well as costs for outside consultants, to complete the
remediation and testing of internally developed systems and the replacement and
testing of third-party products and services, including non-technology products
and services, in order to achieve Year 2000 compliance. We currently estimate
that these costs will total approximately $150 million, a substantial majority
of which has been spent to date. These estimates include the cost of technology
personnel but do not include the cost of most non-technology personnel involved
in our Year 2000 effort. The remaining cost of our Year 2000 program is expected
to be incurred in 1999 and early 2000. The Year 2000 program costs will continue
to be funded through operating cash flow. These costs are expensed as incurred.
We do not expect that the costs associated with implementing our Year 2000
program will have a material adverse effect on our results of operations,
financial condition, liquidity or capital resources.
The costs of the Year 2000 program and the date on which we plan to
complete the Year 2000 modifications are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of resources, the timing and effectiveness of third-party
remediation plans and other factors. We can give no assurance that these
estimates will be achieved, and
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actual results could differ materially from our plans. Specific factors that
might cause material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct relevant computer source codes and embedded chip technology, the
results of internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
In order to focus attention on the Year 2000 problem, management has
deferred several technology projects that address other issues. However, we do
not believe that this deferral will have a material adverse effect on our
results of operations or financial condition.
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities", effective for
transactions occurring after December 31, 1996. Statement of Financial
Accounting Standards No. 125 establishes standards for distinguishing transfers
of financial assets that are accounted for as sales from transfers that are
accounted for as secured borrowings.
The provisions of Statement of Financial Accounting Standards No. 125
relating to repurchase agreements, securities lending transactions and other
similar transactions were deferred by the provisions of Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", and became effective for transactions
entered into after December 31, 1997. This Statement requires that the
collateral obtained in certain types of secured lending transactions be recorded
on the balance sheet with a corresponding liability reflecting the obligation to
return such collateral to its owner. Effective January 1, 1998, we adopted the
provisions of Statement of Financial Accounting Standards No. 125 that were
deferred by Statement of Financial Accounting Standards No. 127. The adoption of
this standard increased our total assets and liabilities by $8.99 billion and
$11.64 billion as of February 1999 and November 1998, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", effective for
periods ending after December 15, 1997, with restatement required for all prior
periods. Statement of Financial Accounting Standards No. 128 establishes new
standards for computing and presenting earnings per share. This Statement
replaces primary and fully diluted earnings per share with "basic earnings per
share", which excludes dilution, and "diluted earnings per share", which
includes the effect of all potentially dilutive common shares and other dilutive
securities. Because we have not historically reported earnings per share, this
Statement will have no impact on our historical financial statements. This
Statement will, however, apply to our financial statements that are prepared
after our common stock offering. See "Pro Forma Consolidated Financial
Information" for a calculation of pro forma earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for fiscal years beginning after
December 15, 1997, with reclassification of earlier periods required for
comparative purposes. Statement of Financial Accounting Standards No. 131
establishes the criteria for determining an operating segment and establishes
the disclosure requirements for reporting information about operating segments.
We intend to adopt this standard at the end of fiscal 1999. This Statement is
limited to issues of reporting and presentation and, therefore, will not affect
our results of operations or financial condition.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits", effective for fiscal years
beginning after December 15, 1997, with restatement of disclosures for
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earlier periods required for comparative purposes. Statement of Financial
Accounting Standards No. 132 revises certain employers' disclosures about
pension and other post-retirement benefit plans. We intend to adopt this
standard at the end of fiscal 1999. This Statement is limited to issues of
reporting and presentation and, therefore, will not affect our results of
operations or financial condition.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", effective for fiscal years beginning after December 15, 1998.
Statement of Position No. 98-1 requires that certain costs of computer software
developed or obtained for internal use be capitalized and amortized over the
useful life of the related software. We currently expense the cost of all
software development in the period in which it is incurred. We intend to adopt
this Statement in fiscal 2000 and are currently assessing its effect.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", effective for fiscal years beginning after June 15,
1999. Statement of Financial Accounting Standards No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This Statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative instrument depends on its intended
use and the resulting designation. We intend to adopt this standard in fiscal
2000 and are currently assessing its effect.
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INDUSTRY AND ECONOMIC OUTLOOK
As a global provider of financial services, Goldman Sachs is affected by
overall macroeconomic and market conditions in various regions around the world.
For a number of years, we have operated in a generally favorable macroeconomic
environment characterized by low inflation, low and declining interest rates and
strong equity markets. In particular, the U.S. economy, the largest in the world
and an important influence on overall world economic activity, has been
undergoing one of the longest periods of post-war economic expansion. As of
March 1999, the current U.S. expansion had lasted 96 months compared to a
post-war average period of expansion of 46 months.
Recognizing that the favorable macroeconomic and market environments will
be subject to periodic reversals, which may significantly and adversely affect
our businesses, we believe that significant growth and profit opportunities
exist for financial intermediaries in the United States and abroad. These
opportunities derive from several long-term trends, including the following:
- - DEREGULATION. Financial market deregulation, including the elimination of
bank deposit interest rate ceilings and the expansion of commercial banks and
other financial institutions into securities underwriting activities, has
resulted in the creation of new and broader sources of credit, which have
reduced the variability and the cyclicality in the supply of credit. This, in
turn, has in the past reduced volatility in economic activity, leading to
longer economic expansions with increased investment spending, resulting in
higher levels of capital raising;
- - GLOBALIZATION. Heightened global competition has created a need for
cross-border capabilities and economies of scale, resulting in increased joint
venture and mergers and acquisitions activity;
- - FOCUS ON SHAREHOLDER VALUE. Increasing focus on shareholder value has fueled
an increase in restructuring and strategic initiatives, yielding additional
financial advisory and capital-raising opportunities;
- - CONSOLIDATION. Moderate growth, limited pricing flexibility and the need for
economies of scale have substantially increased consolidation opportunities in
certain industries, and record levels of profit have provided companies with
the resources to pursue strategic combinations, creating substantial demand
for mergers and acquisitions advisory services and subsequent capital raising;
- - DEMOGRAPHICS. Changing demographics in the United States and other developed
economies have increased the pool of savings available for private investment
and the need for increased funding of pension plans due to the aging of the
population, creating substantial demand for investment products and services;
and
- - FINANCIAL PRODUCT INNOVATION. Technology and financial expertise have led to
the development of new financial products better tailored to the risk/reward
requirements of investors, increasing trading flows and proprietary investment
opportunities.
We believe that over the last 15 years these trends, coupled with generally
declining interest rates and favorable market conditions, have contributed to a
substantially higher rate of growth in activity in the financial services
industry than the growth in overall economic activity. The future economic
environment may not be as favorable as that experienced in the last 15 years
and, in particular, the period of declining interest rates in the United States
may not continue. There may also be periods of adverse economic and market
conditions. Nonetheless, we believe that these trends should continue to affect
the financial services industry positively over the long term. However, see
"Risk Factors -- Market Fluctuations Could Harm Our Businesses in Many Ways and,
Consequently, Could Lower the Value of an Investment in the Notes" for a
discussion of the effect that adverse economic conditions and
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market fluctuations can have on our businesses.
The following table sets forth selected key industry indicators:
KEY INDUSTRY INDICATORS
($ in billions, except gross domestic product)
(volume in millions of shares)
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED DECEMBER 31,
-------------------------------------- CAGR(8)
1983 1988 1993 1998 '83-'98
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
GENERAL ECONOMIC ACTIVITY:
(in trillions)
Worldwide gross domestic product(1).............. $ 10 $ 18 $ 24 $ 29(9) 8%(9)
U.S. gross domestic product(2)................... 4 5 7 9 6
ADVISORY ACTIVITIES/FINANCING:
Worldwide mergers and acquisitions(3)............ 96 527 460 2,522 24
Worldwide equity issued(3)....................... 50 51 172 269 12
Worldwide debt issued(3)......................... 146 631 1,546 2,932 22
WORLD EQUITY MARKETS:
Worldwide equity market capitalization(4)........ 3,384 9,728 14,016 27,459 15
U.S. market capitalization(4).................... 1,898 2,794 5,136 13,451 14
FT/S&P Actuaries World Indices(TM) -- The World
Index(5)....................................... NA 129 178 359 11
Dow Jones Industrial Average..................... 1,259 2,169 3,754 9,181 14
S&P 500.......................................... 165 278 466 1,229 14
NYSE average daily volume........................ 85 162 265 674 15
INVESTED FUNDS:
Worldwide pension assets(6)...................... $1,900 $3,752 $ 6,560 $10,975 12
Number of U.S. mutual funds(7)................... 1,026 2,715 4,558 7,343 14
U.S. mutual fund assets(7)....................... $ 293 $ 810 $ 2,075 $ 5,530 22
</TABLE>
- ---------------
(1) Source: The Economist Intelligence Unit, January 1999.
(2) Source: U.S. Department of Commerce, Bureau of Economic Analysis.
(3) Source: Securities Data Company.
(4) Source: International Finance Corporation.
(5) Index is calculated on a local currency basis based on total returns. CAGR
is based on 1988-1998 data. The FT/S&P Actuaries World Indices are owned by
FTSE International Limited, Goldman, Sachs & Co. and Standard & Poor's
Ratings Services. The Indices are compiled by FTSE International and
Standard & Poor's Ratings Services in conjunction with the Faculty of
Actuaries and the Institute of Actuaries.
(6) Source: InterSec Research Corp.
(7) Source: Investment Company Institute.
(8) Compound annual growth rate.
(9) Data as of December 31, 1997; CAGR 1983-1997.
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We believe scale, global resources and leading market positions are
important competitive advantages for financial intermediaries in this
environment. In addition, we believe that circumstances in certain regions
should provide opportunities for financial intermediaries.
EUROPE
The European Economic and Monetary Union commenced on January 1, 1999 and
created a monetary union in Europe with a single currency. As a result, we
believe that over time a pan-European capital market will develop that is likely
to rival that of the United States in size and liquidity. We believe that
financial intermediaries generally are expected to benefit from a number of
anticipated developments, including:
- - pan-European consolidation and financial restructuring yielding an increase in
mergers and acquisitions activity;
- - an increase in third-party assets under management and a major shift towards
investments in equity securities due to an expected move to private pension
fund systems, changing demographics and the elimination of intra-European
Economic and Monetary Union currency risk;
- - a reallocation of equity portfolios to reflect pan-European indices;
- - the establishment of a European high-yield market to fund the growth of
emerging high-growth industries and to satisfy investors' demands for higher
yield; and
- - increased equity issuance and higher equity trading volumes.
ASIA
Since 1997, the currency weakness and disruptions, the deterioration in
certain of the region's banking systems, the weakness in the property sector in
many of the region's countries, as well as slowing consumer income growth, have
led to a significant and continuing weakening of these economies and their stock
markets. These developments have adversely affected the economic and market
conditions in the region and at times have affected economic and market
conditions elsewhere. We believe, however, that financial intermediaries could
have significant opportunities in this region if stability improves and the
economies, which represent approximately 60% of the world's population, resume
their growth. In the near term, these potential opportunities could include:
- - an increase in mergers and acquisitions and other financial advisory services
in connection with corporate restructurings;
- - an increase in trading opportunities as financial intermediaries meet the
liquidity needs of their clients; and
- - an increase in capital raising as Asian corporations and governments access
the international capital markets rather than the regional banking system to
refinance and to fund future growth.
In the longer term, these potential opportunities could include:
- - the emergence of corporate and real estate principal investment opportunities
as a result of corporate and government restructurings; and
- - an increase in third-party assets under management and a major shift towards
investments in equity securities due to an anticipated move to private
pension fund systems, changing demographics and the relaxation of foreign
exchange restrictions.
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BUSINESS
OVERVIEW
Goldman Sachs is a leading global investment banking and securities firm
with three principal business lines:
- - Investment Banking;
- - Trading and Principal Investments; and
- - Asset Management and Securities Services.
Our goal is to be the advisor of choice for our clients and a leading
participant in global financial markets. We provide services worldwide to a
substantial and diversified client base, which includes corporations, financial
institutions, governments and high net worth individuals.
Because we believe that the needs of our clients are global and that
international markets have high growth potential, we have built upon our
strength in the United States to achieve leading positions in other parts of the
world. Today, we have a strong global presence as evidenced by the geographic
breadth of our transactions, leadership in our core products and the size of our
international operations. As of February 1999, we operated offices in 23
countries and 36% of our 13,000 employees were based outside the United States.
We are committed to a distinctive culture and set of core values. These
values are reflected in our Business Principles, which emphasize placing our
clients' interests first, integrity, commitment to excellence and innovation,
and teamwork.
Goldman Sachs is managed by its principal owners. Simultaneously with the
closing of our common stock offering we granted restricted stock units, stock
options and interests in a defined contribution plan to substantially all of our
employees. Upon the closing of our common stock offering, our employees,
including former partners, owned approximately 65% of Goldman Sachs. None of our
employees sold shares in our common stock offering.
Goldman Sachs is the successor to a commercial paper business founded in
1869 by Marcus Goldman. Since then, we have grown our business as a participant
and intermediary in securities and other financial activities to become one of
the leading firms in the industry.
In 1989, The Goldman Sachs Group, L.P. was formed to serve as the parent
company of the Goldman Sachs organization. As of November 30, 1996, The Goldman
Sachs Group, L.P. was restructured. On that date, the non-retiring former
general partners of The Goldman Sachs Group, L.P. converted their general
partner interests into limited partner interests and became profit participating
limited partners of The Goldman Sachs Group, L.P. Concurrently, The Goldman
Sachs Corporation was admitted as The Goldman Sachs Group, L.P.'s sole general
partner. The common stock of The Goldman Sachs Corporation was owned by our
managing directors who were profit participating limited partners, all of whom
were active in our businesses.
The Goldman Sachs Group, Inc. was formed to succeed to the business of The
Goldman Sachs Group, L.P. Simultaneously with the closing of our common stock
offering, we completed a number of transactions in order to convert from
partnership to corporate form. See "Certain Relationships and Related
Transactions" for additional information concerning these transactions.
MARKET SHARE DATA
Except as otherwise indicated, all amounts with respect to the volume,
number and market share of mergers and acquisitions and underwriting
transactions and related ranking information have been derived from information
compiled and classified by Securities Data Company. Securities Data Company
obtains and gathers its information from sources it considers reliable, but
Securities Data Company does not guarantee the accuracy or completeness of the
information. In the case of mergers and acquisitions, data are based upon the
dollar value of announced transactions for the period indicated, taken as a
whole, with full credit to each of the advisors to each party in a transaction.
In the
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case of underwritings, data are based upon the dollar value of total proceeds
raised (exclusive of any option to purchase additional shares) with equal credit
to each bookrunner for the period indicated, taken as a whole. As a result of
this method of compiling data, percentages may add to more than 100%.
STRATEGY AND PRINCIPAL BUSINESS LINES
Our strategy is to grow our three core businesses -- Investment Banking,
Trading and Principal Investments, and Asset Management and Securities
Services -- in markets throughout the world. Our leadership position in
investment banking provides us with access to governments, financial
institutions and corporate clients globally. Trading and principal investing has
been an important part of our culture and earnings, and we remain committed to
these businesses irrespective of their volatility. Managing wealth is one of the
fastest growing segments of the financial services industry and we are
positioning our asset management and securities services businesses to take
advantage of that growth. Our assets under supervision, for example, have grown
from $92.7 billion as of November 1994 to $369.7 billion as of February 1999,
representing a compound annual growth rate of 38%.
Our business lines are comprised of various product and service offerings
that are set forth in the following chart:
PRIMARY PRODUCTS AND ACTIVITIES BY BUSINESS LINE
<TABLE>
<CAPTION>
TRADING AND PRINCIPAL ASSET MANAGEMENT AND
INVESTMENT BANKING INVESTMENTS SECURITIES SERVICES
------------------ --------------------- --------------------
<S> <C> <C>
- -- Equity and debt -- Bank loans -- Commissions
underwriting -- Commodities -- Institutional and high net
- -- Financial restructuring -- Currencies worth asset management
advisory services -- Equity and fixed income -- Margin lending
- -- Mergers and acquisitions derivatives -- Matched book
advisory services -- Equity and fixed income -- Merchant banking fees
- -- Real estate advisory securities -- Increased shares of
services -- Principal investments merchant banking fund income
-- Proprietary arbitrage and gains
-- Mutual funds
-- Prime brokerage
-- Securities lending
</TABLE>
------------------------
INVESTMENT BANKING
Investment Banking represented 39% of 1998 net revenues and 35% of 1997 net
revenues. We are a market leader in both the financial advisory and underwriting
businesses, serving over 3,000 clients worldwide. For the period January 1, 1994
to December 31, 1998, we had the industry-leading market share of 25.3% in
worldwide mergers and acquisitions advisory services, having advised on over
$1.7 trillion of transactions. Over the same period, we also achieved number one
market shares of 15.2% in underwriting worldwide initial public offerings and
14.4% in underwriting worldwide common stock issues.
TRADING AND PRINCIPAL INVESTMENTS
Trading and Principal Investments represented 28% of 1998 net revenues and
39% of 1997 net revenues. We make markets in equity and fixed income products,
currencies and commodities; enter into swaps and other derivative transactions;
engage in proprietary trading and arbitrage; and make principal investments. In
trading, we focus on building lasting relationships with our most active clients
while maintaining leadership positions in our key markets. We believe our
research, market-making and proprietary activities enhance our understanding of
markets and ability to serve our clients.
ASSET MANAGEMENT AND SECURITIES SERVICES
Asset Management and Securities Services represented 33% of 1998 net
revenues and 26% of 1997 net revenues. We provide global investment management
and advisory services; earn commissions on agency transactions; manage merchant
banking funds; and provide prime brokerage, securities lending and financing
services. Our asset management business has grown rapidly, with assets under
supervision increasing from $92.7 bil-
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lion as of November 25, 1994 to $369.7 billion as of February 26, 1999,
representing a compound annual growth rate of 38%. As of February 26, 1999, we
had $206.4 billion of assets under management. We manage merchant banking funds
that had $15.5 billion of capital commitments as of the end of 1998.
We pursue our strategy to grow our three core businesses through an
emphasis on:
EXPANDING HIGH VALUE-ADDED BUSINESSES
To achieve strong growth and high returns, we seek to build leadership
positions in high value-added services for our clients. For example, we have
substantially increased the number of professionals in investment banking to
improve and expand our ability to execute mergers and acquisitions, initial
public offerings and high-yield financings. In trading, we structure and execute
large and complex transactions for institutional investors, pension funds and
corporate clients around the world. In asset management, we emphasize equity and
alternative investment products and use our established international presence
to build a global asset management franchise.
INCREASING THE STABILITY OF OUR EARNINGS
We seek to balance the stability of our earnings with return on equity and
long-term earnings growth. We believe our trading businesses are key ingredients
to our success. While we plan to continue to grow our trading businesses, the
financial market shocks of the past year underscored the importance of our
strategy of emphasizing growth in our investment banking, asset management and
securities services businesses. Through a greater relative emphasis on these
businesses, our goal is to gradually increase the stability of our earnings.
PURSUING INTERNATIONAL OPPORTUNITIES
We believe that our global reach will allow us to take advantage of growth
in international markets. In Europe, for example, we anticipate that the recent
establishment of the European Economic and Monetary Union will, over time,
create a large pan-European market rivaling the U.S. capital markets in size and
liquidity. We believe this will generate increased activity across our
businesses in the region. In Asia, we believe that an increase in corporate
restructurings and in the need for liquidity will increase our mergers and
acquisitions and trading opportunities. In the longer term, we anticipate
additional opportunities in asset management activities due to a shift we
anticipate toward the privatization of pension systems and in demographics.
LEVERAGING THE FRANCHISE
We believe our various businesses are generally stronger and more
successful because they are part of the Goldman Sachs franchise. Our culture of
teamwork fosters cooperation among our businesses, which allows us to provide
our clients with a full range of products and services on a coordinated basis.
Our investment bankers, for example, refer clients who are selling their
businesses to those in Goldman Sachs who manage wealth. In addition, our
merchant banking investments in companies lead to future clients for investment
banking.
COMPETITIVE STRENGTHS
STRONG CLIENT RELATIONSHIPS
We focus on building long-term client relationships. In 1998, over 75% of
our Investment Banking revenues represented business from existing clients. We
also aggressively pursue new client relationships as evidenced by the over 400
investment banking transactions we completed for first-time clients in 1998. In
our trading businesses, we structure and execute transactions across a wide
array of markets and countries to meet our clients' needs. In our asset
management business, we managed assets for three of the five largest pension
pools in the United States as ranked as of September 30, 1998 by Pensions &
Investments and maintain accounts for 41% of the 1998 "Forbes 400 List of the
Richest Americans".
DISTINCTIVE PEOPLE AND CULTURE
Our most important asset is our people. We seek to reinforce our employees'
commitment to our culture and values through recruiting, training, a
comprehensive 360-degree review system and a compensation phi-
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losophy that rewards teamwork. We were ranked number seven in Fortune magazine's
"The 100 Best Companies to Work for in America" in January 1999 and were ranked
number three in Fortune magazine's 1999 "The Top 50 MBA Dream Companies", the
highest-ranked investment banking and securities firm in each case.
GLOBAL REACH
Over the past decade, we have made a significant commitment to building a
worldwide business. We have achieved leading positions in major international
markets by capitalizing on our product knowledge and global research, as well as
by building a local presence where appropriate. In doing so, we have become one
of the few truly global investment banking and securities firms with the ability
to execute large and complex cross-border transactions. We had the number one
market share of 23.2% in cross-border mergers and acquisitions for the period
January 1, 1994 to December 31, 1998. In addition, in Japan, we were the largest
non-Japanese mutual fund manager as of the end of February 1999, according to
The Investment Trusts Association.
------------------------
SUMMARY FINANCIAL DATA
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues:
Investment Banking................ $2,113 $2,587 $3,368 $ 633 $ 902
Trading and Principal
Investments.................... 2,693 2,926 2,379 1,182 1,357
Asset Management and Securities
Services....................... 1,323 1,934 2,773 657 736
------ ------ ------ ------ ------
Total net revenues.................. $6,129 $7,447 $8,520 $2,472 $2,995
====== ====== ====== ====== ======
</TABLE>
------------------------
INVESTMENT BANKING
Goldman Sachs provides a broad range of investment banking services to a
diverse group of over 3,000 clients worldwide, including corporations, financial
institutions, governments and individuals. Our investment banking activities are
divided into two categories:
- - FINANCIAL ADVISORY. Financial advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense
activities, restructurings and spin-offs; and
- - UNDERWRITING. Underwriting includes public offerings and private placements
of equity and debt securities.
The following table sets forth the net revenues of our Investment Banking
business:
INVESTMENT BANKING NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial advisory...................... $ 931 $1,184 $1,774 $363 $522
Underwriting............................ 1,182 1,403 1,594 270 380
------ ------ ------ ---- ----
Total Investment Banking................ $2,113 $2,587 $3,368 $633 $902
====== ====== ====== ==== ====
</TABLE>
69
<PAGE> 72
In Investment Banking, we provide our clients with quality advice and
execution as part of our effort to develop and maintain long-term relationships
as their lead investment bank.
ORGANIZATION
We have continuously adapted our organizational structure to meet changing
market dynamics and our clients' needs. Our current structure, which is
organized along regional, execution and industry groups, seeks to combine
client-focused investment bankers with execution and industry expertise. Because
our businesses are global, we have adapted our organization to meet the demands
of our clients in each geographic region. Through our commitment to teamwork, we
believe that we provide services in an integrated fashion for the benefit of our
clients.
We believe an important competitive advantage in our marketing effort is
Investment Banking Services, a core group of professionals who focus on
developing and maintaining strong client relationships. These bankers, who are
organized regionally and/or by industry group, work with senior executives of
our clients to identify areas where Goldman Sachs can provide capital-raising,
financial advisory or other products and services. The broad base of experience
and knowledge of our Investment Banking Services professionals enables them to
analyze our clients' objectives efficiently and to bring to bear the appropriate
resources of Goldman Sachs to satisfy those objectives.
Our Corporate Finance, Debt and Equity Capital Markets, Leveraged Finance
and Mergers and Acquisitions groups bring product expertise and innovation to
clients in a variety of industries. These groups are responsible for the
execution of specific client transactions as well as the building of strong
client relationships.
In an effort to serve our clients' needs in targeted industries, we have
established several industry focus groups. These include: Chemicals;
Communications, Media and Entertainment; Energy and Power; Financial
Institutions; Healthcare; High Technology; Hotels and Gaming; Real Estate;
Retailing; and Transportation. Drawing on specialized knowledge of
industry-specific trends, these groups provide the full range of investment
banking products and services to our clients.
Reflecting our commitment to innovation, Investment Banking has established
a New Products group whose professionals focus on creating new financial
products. These professionals have particular expertise in integrating finance
with accounting, tax and securities laws and work closely with other investment
banking teams to provide innovative solutions to difficult client problems. Our
structuring expertise has proven to be particularly valuable in addressing
client needs in areas such as complex cross-border mergers and acquisitions and
convertible and other hybrid equity financings.
FINANCIAL ADVISORY
Financial advisory includes a broad range of advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense activities,
restructurings and spin-offs. Goldman Sachs is a leading investment bank in
worldwide mergers and acquisitions. During calendar 1998, we advised on 340
mergers and acquisitions transactions with a combined value of $957 billion.
Our mergers and acquisitions capabilities are evidenced by our significant
share of assignments in large, complex transactions where we provide multiple
services, including "one-stop" acquisition financing, currency hedging and
cross-border structuring expertise. Goldman Sachs advised on seven of the ten
largest mergers and acquisitions transactions through December 31, 1998. We have
also been successful in Europe, including in intra-country transactions, and we
are a leading mergers and acquisitions advisor in France, Germany and Spain.
70
<PAGE> 73
The following table illustrates our leadership in the mergers and
acquisitions advisory market for the indicated period taken as a whole:
GOLDMAN SACHS' MERGERS AND ACQUISITIONS MARKET DATA
For the period January 1, 1994 through December 31, 1998
($ in billions)
<TABLE>
<CAPTION>
MARKET NUMBER OF
CATEGORY RANK(1) SHARE VOLUME TRANSACTIONS
-------- ------- ------ ------ ------------
<S> <C> <C> <C> <C>
Worldwide......................................... 1 25.3% $1,715 1,334
Worldwide, transactions over $500 million......... 1 34.8 1,593 470
Worldwide, transactions over $1 billion........... 1 38.4 1,470 297
United States..................................... 1 32.8 1,316 907
United States, transactions over $500 million..... 1 41.3 1,228 339
United States, transactions over $1 billion....... 1 44.3 1,142 221
</TABLE>
- ---------------
(1) Rank in any one year during the period presented may vary from the rank for
the period taken as a whole.
------------------------
Mergers and acquisitions is an example of how one activity can generate
cross-selling opportunities for other areas of Goldman Sachs. For example, a
client we are advising in a purchase transaction may seek our assistance in
obtaining financing and in hedging interest rate or foreign currency risks
associated with the acquisition. In the case of dispositions, owners and senior
executives of the acquired company often will seek asset management services. In
these cases, our high net worth relationship managers provide comprehensive
advice on investment alternatives and execute the client's desired strategy.
UNDERWRITING
From January 1, 1994 through March 31, 1999, Goldman Sachs has served as
lead manager in transactions that have raised more than $1 trillion of capital
for clients worldwide. We underwrite a wide range of securities and other
instruments, including common and preferred stock, convertible securities,
investment grade debt, high-yield debt, sovereign and emerging markets debt,
municipal debt, bank loans, asset-backed securities and real estate-related
securities, such as mortgage-backed securities and the securities of real estate
investment trusts.
71
<PAGE> 74
EQUITY UNDERWRITING. Equity underwriting has been a long-term core
strength of Goldman Sachs. The following table illustrates our leadership
position in equity underwriting for the indicated period taken as a whole:
GOLDMAN SACHS' EQUITY UNDERWRITING MARKET DATA
For the period January 1, 1994 through December 31, 1998
($ in billions)
<TABLE>
<CAPTION>
TOTAL
MARKET PROCEEDS NUMBER OF
CATEGORY RANK(1) SHARE RAISED ISSUES(2)
-------- ------- ------ -------- ---------
<S> <C> <C> <C> <C>
Worldwide initial public offerings....................... 1 15.2% $ 44 300
Worldwide initial public offerings, proceeds over $500
million................................................ 1 23.3 25 59
Worldwide public common stock offerings.................. 1 14.4 101 634
U.S. initial public offerings............................ 1 15.3 31 179
U.S. initial public offerings, proceeds over $500
million................................................ 1 30.1 16 29
U.S. public common stock offerings....................... 2 14.3 71 381
</TABLE>
- ---------------
(1) Rank in any one year during the period presented may vary from the rank for
the period taken as a whole.
(2) The number of issues reflects the number of tranches; an offering by a
single issuer could have multiple tranches.
------------------------
As with mergers and acquisitions, we have been particularly successful in
winning mandates for large, complex equity underwritings. As evidenced in the
chart above, our market share of initial public offerings with total proceeds
over $500 million is substantially higher than our market share of all initial
public offerings. We believe our leadership in large initial public offerings
reflects our expertise in complex transactions, research strengths, track record
and distribution capabilities. In the international arena, we have also acted as
lead manager on many of the largest initial public offerings. We were named the
Asian Equity House of the Year by International Financing Review in 1998.
We believe that a key factor in our equity underwriting success is the
close working relationship between the investment bankers, research analysts and
sales force as coordinated by our Equity Capital Markets group. Goldman Sachs'
equities sales force is one of the most experienced and effective sales
organizations in the industry. With 350 institutional sales professionals and
420 high net worth relationship managers located in every major market around
the world, Goldman Sachs has relationships with a large and diverse group of
investors.
Global Investment Research is critical to our ability to succeed in the
equity underwriting business. We believe that high quality equity research is a
significant competitive advantage in the market for new equity issues. In this
regard, Goldman Sachs' research has been consistently ranked among the
industry's global leaders. See "-- Global Investment Research" for detailed
information regarding our Global Investment Research Department.
DEBT UNDERWRITING. We engage in the underwriting and origination of
various types of debt instruments that we broadly categorize as follows:
investment grade debt for corporations, governments, municipalities and
agencies; leveraged finance, which includes high-yield debt and bank loans for
non-investment grade issuers; emerging market debt, which includes corporate and
sovereign issues; and asset-backed securities. We have employed a focused
approach in debt underwriting, emphasizing high value-added areas in servicing
our clients.
We believe that the leveraged finance market is a key growth opportunity
for our debt underwriting business. Over the last three years, we have more than
doubled the number of debt underwriting professionals dedicated to this area.
72
<PAGE> 75
The table below sets forth our rank, market position, our total proceeds
raised and the number of debt transactions in which we have acted as underwriter
in the following areas for the indicated period taken as a whole:
GOLDMAN SACHS' DEBT UNDERWRITING MARKET DATA
For the period January 1, 1994 through December 31, 1998
($ in billions)
<TABLE>
<CAPTION>
TOTAL
MARKET PROCEEDS NUMBER OF
CATEGORY(1) RANK(5) SHARE RAISED ISSUES(6)
----------- ------- ------ -------- ---------
<S> <C> <C> <C> <C>
Worldwide debt(2).................................. 3 8.4% $695 4,684
Worldwide straight debt(3)......................... 3 8.9 559 4,165
U.S. investment grade straight debt(3)............. 3 12.0 419 3,590
U.S. investment grade industrial straight
debt(3).......................................... 1 19.5 81 517
U.S. high-yield debt(4)............................ 5 8.0 33 184
</TABLE>
- ---------------
(1) All categories include publicly registered and Rule 144A issues.
(2) Includes non-convertible preferred stock, mortgage-backed securities,
asset-backed securities and taxable municipal debt.
(3) "Straight debt" excludes non-convertible preferred stock, mortgage-backed
securities, asset-backed securities and municipal debt.
(4) Excludes issues with both investment grade and non-investment grade ratings,
often referred to as "split-rated issues".
(5) Rank in any one year during the period presented may vary from the rank for
the period taken as a whole.
(6) The number of issues reflects the number of tranches; an offering by a
single issuer could have multiple tranches.
------------------------
TRADING AND PRINCIPAL INVESTMENTS
Our Trading and Principal Investments business facilitates customer
transactions and takes proprietary positions through market-making in and
trading of fixed income and equity products, currencies, commodities, and swaps
and other derivatives. In order to meet the needs of our clients, our Trading
and Principal Investments business is diversified across a wide range of
products. For example, we make markets in traditional investment grade debt
securities, structure complex derivatives and securitize mortgages and insurance
risk. A fundamental tenet of our approach is that we believe our willingness and
ability to take risk distinguishes us and substantially enhances our client
relationships. Our Trading and Principal Investments business includes the
following:
- - FIXED INCOME, CURRENCY AND COMMODITIES. Goldman Sachs makes markets in and
trades fixed income products, currencies and commodities, structures and
enters into a wide variety of derivative transactions and engages in
proprietary trading and arbitrage activities;
- - EQUITIES. Goldman Sachs makes markets in and trades equities and
equity-related products, structures and enters into equity derivative
transactions and engages in proprietary trading and equity arbitrage; and
- - PRINCIPAL INVESTMENTS. Principal investments primarily represents Goldman
Sachs' net revenues from its investments in its merchant banking funds.
73
<PAGE> 76
The following table sets forth the net revenues of our Trading and
Principal Investments business:
TRADING AND PRINCIPAL INVESTMENTS NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FICC................................ $1,749 $2,055 $1,438 $ 741 $ 876
Equities............................ 730 573 795 365 455
Principal investments............... 214 298 146 76 26
------ ------ ------ ------ ------
Total Trading and Principal
Investments....................... $2,693 $2,926 $2,379 $1,182 $1,357
====== ====== ====== ====== ======
</TABLE>
------------------------
FIXED INCOME, CURRENCY AND COMMODITIES
FICC is a large and diversified operation through which we engage in a
variety of customer-driven market-making and proprietary trading and arbitrage
activities. FICC's principal products are:
- - Bank loans
- - Commodities
- - Currencies
- - Derivatives
- - Emerging market debt
- - Global government securities
- - High-yield securities
- - Investment grade corporate securities
- - Money market instruments
- - Mortgage securities and loans
- - Municipal securities
We generate trading net revenues from our customer-driven business in three
ways. First, in large, highly liquid markets we undertake a high volume of
transactions for modest spreads. Second, by capitalizing on our strong market
relationships and capital position, we also undertake transactions in less
liquid markets where spreads are generally larger. Finally, we generate net
revenues from structuring and executing transactions that address complex client
needs.
In our proprietary activities, we assume a variety of risks and devote
substantial resources to identify, analyze and benefit from these exposures. We
leverage our strong research capabilities and capitalize on our proprietary
analytical models to analyze information and make informed trading judgments. We
seek to benefit from perceived disparities in the value of assets in the trading
markets and from macroeconomic and company-specific trends.
FICC has established itself as a leading market participant by using a
three-part approach to deliver high quality service to its clients. First, we
offer broad market-making, research and market knowledge to our clients on a
global basis. Second, we create innovative solutions to complex client problems
by drawing upon our structuring and trading expertise. Third, we use our
expertise to take positions in markets when we believe the return is at least
commensurate with the risk.
A core activity in FICC is market-making in a broad array of securities and
products. For example, we are a primary dealer in many of the largest government
bond markets around the world, including the United States, Japan, the United
Kingdom and Canada; we are a member of the major futures exchanges; and we have
interbank dealer status in the currency markets in New York, London, Tokyo and
Hong Kong. Our willingness to make markets in a broad range of fixed income,
currency and commodity products and their derivatives is crucial both to our
client relationships and to support our underwriting business by providing
secondary market liquidity. Our clients value counterparties that are active in
the marketplace and are willing to provide liquidity and research-based points
of view. In addition, we believe that our significant investment in research
capabilities
74
<PAGE> 77
and proprietary analytical models are critical to our ability to provide advice
to our clients. Our research capabilities include quantitative and qualitative
analyses of global economic, currency and financial market trends, as well as
credit analyses of corporate and sovereign fixed income securities.
Our clients often confront complex problems that require creative
approaches. We assist our clients who seek to hedge or reallocate their risks
and profit from expected price movements. To do this we bring to bear the
ability of our experienced professionals to understand the needs of our clients
and our ability to manage the risks associated with complex solutions to
problems. In recognition of our ability to meet these client needs, we were
ranked by Institutional Investor in February 1999 as the number two derivatives
dealer for the second straight year. In addition, we were named by Euroweek in
January 1999 as the "Best provider of swaps and other derivatives".
EQUITIES
Goldman Sachs engages in a variety of market-making, proprietary trading
and arbitrage activities in equity securities and equity-related products (such
as convertible securities and equity derivative instruments) on a global basis.
Goldman Sachs makes markets and positions blocks of stock to facilitate
customers' transactions and to provide liquidity in the marketplace. Goldman
Sachs is a member of most of the major stock exchanges, including New York,
London, Frankfurt, Tokyo and Hong Kong.
As agent, we execute brokerage transactions in equity securities for
institutional and individual customers that generate commission revenues.
Commissions earned on agency transactions are recorded in Asset Management and
Securities Services.
In equity trading, as in FICC, we generate net revenues from our
customer-driven business in three ways. First, in large, highly liquid principal
markets, such as the over-the-counter market for equity securities, we undertake
a high volume of transactions for modest spreads. In the Nasdaq National Market,
we were the second largest market maker by aggregate volume, among the top 100
most actively traded stocks in calendar 1998. Second, by capitalizing on our
strong market relationships and capital position, we also undertake large
transactions, such as block trades and positions in securities, in which we
benefit from spreads that are generally larger. Finally, we also benefit from
structuring complex transactions.
Goldman Sachs was a pioneer and is a leader in the execution of large block
trades (trades of 50,000 or more shares) in the United States and abroad. In
calendar 1998, we executed over 50 block trades of at least $100 million each.
We have been able to capitalize on our expertise in block trading, our global
distribution network and our willingness to commit capital to effect
increasingly large and complex customer transactions. We expect corporate
consolidation and restructuring and increased demand for certainty and speed of
execution by sellers and issuers of securities to increase both the frequency
and size of sales of large blocks of equity securities. We believe that we are
well positioned to benefit from this trend. Block transactions, however, expose
us to increased risks, including those arising from holding large and
concentrated positions and decreasing spreads. See "Risk Factors -- Market
Fluctuations Could Harm Our Businesses in Many Ways and, Consequently, Could
Lower the Value of an Investment in the Notes -- Holding Large and Concentrated
Positions May Expose Us to Large Losses" for a discussion of the risks
associated with holding a large position in a single issuer and "Risk
Factors -- The Financial Services Industry Is Intensely Competitive and Rapidly
Consolidating" for a discussion of the competitive risks that we face.
We are active in the listed options and futures markets, and we structure,
distribute and execute over-the-counter derivatives on market indices, industry
groups and individual company stocks to facilitate customer transactions and our
proprietary activities. We develop quantitative strategies and render advice
with respect to portfolio hedging and restructuring and asset allocation
transactions. We also create specially tailored instruments to enable
sophisticated investors to
75
<PAGE> 78
undertake hedging strategies and establish or liquidate investment positions. We
are one of the leading participants in the trading and development of equity
derivative instruments. We are an active participant in the trading of futures
and options on most of the major exchanges in the United States, Europe and
Asia.
Equity arbitrage has long been an important part of our equity franchise.
Our strategy is based on making investments on a global basis through a
diversified portfolio across different markets and event categories. This
business focuses on event-oriented special situations where we are not acting as
an advisor and on relative value trades. These special situations include
mergers and acquisitions, corporate restructurings, recapitalizations and legal
and regulatory events. Equity arbitrage leverages our global infrastructure and
network of research analysts to analyze carefully a broad range of trading and
investment strategies across a wide variety of markets. Investment decisions are
the product of rigorous fundamental, situational and, frequently, regulatory and
legal analysis. Although market conditions led us to decrease the number and
size of positions maintained by our equity arbitrage business during 1998, we
believe that over time, as opportunities present themselves, our equity
arbitrage business will likely increase its activity.
TRADING RISK MANAGEMENT
We believe that our trading and market-making capabilities are key
ingredients to our success. While these businesses have generally earned
attractive returns, we have in the past incurred significant trading losses in
periods of market turbulence, such as in 1994 and 1998. Our trading risk
management process seeks to balance our ability to profit from trading positions
with our exposure to potential losses. Risk management includes input from all
levels of Goldman Sachs, from the trading desks to the Firmwide Risk Committee.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Management" for a further discussion of our risk management
policies and procedures.
1998 EXPERIENCE. From mid-August to mid-October 1998, the Russian economic
crisis, the turmoil in Asian and Latin American emerging markets and the
resulting move to higher quality fixed income securities by many investors led
to substantial declines in global financial markets. Investors broadly sold
credit-sensitive products, such as corporate and high-yield debt, and bought
higher-rated instruments, such as U.S. Treasury securities, which caused credit
spreads to widen dramatically. This market turmoil also caused a widespread
decline in global equity markets.
As a major dealer in fixed income securities, we maintain substantial
inventories of corporate and high-yield debt. We regularly seek to hedge the
interest rate risk on these positions through, among other strategies, short
positions in U.S. Treasury securities. In the second half of 1998, we suffered
losses from both the decline in the prices of corporate and high-yield debt
instruments that we owned and the increase in the prices of the U.S. Treasury
securities in which we had short positions.
These market shocks also led to trading losses in our fixed income relative
value trading positions. Relative value trading positions are intended to profit
from a perceived temporary dislocation in the relationship between the values of
different financial instruments. From mid-August to mid-October 1998, the
components of these relative value positions moved in directions that we did not
anticipate and the volatilities of certain positions increased to three times
prior levels. When we and other market participants with similar positions
simultaneously sought to reduce positions and exposures, this caused a
substantial reduction in market liquidity and a continuing decline in prices.
In the second half of 1998, we also experienced losses in equity arbitrage
and in the value of a number of merchant banking investments.
RISK REDUCTION. Over the course of this period, we actively reduced our
positions and exposure to severe market disruptions of the type described above.
Our current scenario models estimate our exposure to a substantial widening in
credit spreads and adverse
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<PAGE> 79
movements in relative value trades of the type experienced in mid-August to
mid-October 1998. These models indicate that, as of November 1998, our exposure
to a potential reduction in net trading revenues as a result of these events was
over 40% lower than in August 1998. In addition, the daily VaR of substantially
all of our trading positions declined from $47 million as of May 29, 1998 to $43
million as of November 1998. The November 1998 daily VaR reflects the reduction
in positions discussed above, offset by the higher market volatility, changes in
correlation and other market conditions experienced in the second half of 1998.
If the daily VaR as of November 1998 had been determined using the volatility
and correlation data as of May 29, 1998, the daily VaR would have been $31
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Management" for a discussion of VaR and its
limitations.
As part of the continuous effort to refine our risk management policies and
procedures, we have recently made a number of adjustments to the way that we
evaluate risk and set risk limits. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Management -- Market Risk"
for a further discussion of our policies and procedures for evaluating market
risk and setting related limits.
Notwithstanding these actions, we continue to hold trading positions that
are substantial in both number and size, and are subject to significant market
risk. In addition, management may choose to increase our risk levels in the
future. See "Risk Factors -- Market Fluctuations Could Harm Our Businesses in
Many Ways and, Consequently, Could Lower the Value of an Investment in the
Notes" and "-- Our Risk Management Policies and Procedures May Leave Us Exposed
to Unidentified or Unanticipated Risk" for a discussion of the risks associated
with our trading positions.
PRINCIPAL INVESTMENTS
In connection with our merchant banking activities, we invest with our
clients by making principal investments in funds that we raise and manage. As of
November 1998, we had committed $2.8 billion, of which $1.7 billion had been
funded, of the $15.5 billion total equity capital committed for our merchant
banking funds. The funds' investments generate capital appreciation or
depreciation and, upon disposition, realized gains or losses. See "-- Asset
Management and Securities Services -- Merchant Banking" for a discussion of our
merchant banking funds. As of November 1998, our aggregate carrying value of
principal investments held directly or through our merchant banking funds was
approximately $1.4 billion, which was comprised of corporate principal
investments with an aggregate carrying value of approximately $609 million and
real estate investments with an aggregate carrying value of approximately $753
million.
ASSET MANAGEMENT AND SECURITIES SERVICES
Asset Management and Securities Services is comprised of the following:
- - ASSET MANAGEMENT. Asset management generates management fees by providing
investment advisory services to a diverse and rapidly growing client base of
institutions and individuals;
- - SECURITIES SERVICES. Securities services includes prime brokerage, financing
services and securities lending and our matched book businesses, all of which
generate revenue primarily in the form of fees or interest rate spreads; and
- - COMMISSIONS. Commission-based businesses include agency transactions for
clients on major stock and futures exchanges. Revenues from the increased
share of income and gains derived from our merchant banking funds are also
included in commissions.
77
<PAGE> 80
The following table sets forth the net revenues of our Asset Management and
Securities Services business:
ASSET MANAGEMENT AND SECURITIES SERVICES NET REVENUES
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED NOVEMBER FEBRUARY
-------------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Asset management........................ $ 242 $ 458 $ 675 $139 $202
Securities services..................... 354 487 730 170 207
Commissions............................. 727 989 1,368 348 327
------ ------ ------ ---- ----
Total Asset Management and Securities
Services.............................. $1,323 $1,934 $2,773 $657 $736
====== ====== ====== ==== ====
</TABLE>
------------------------
ASSET MANAGEMENT
Goldman Sachs is seeking to build a premier global asset management
business. We offer a broad array of investment strategies and advice across all
major asset classes: global equity; fixed income, including money markets;
currency; and alternative investment products (i.e., investment vehicles with
non-traditional investment objectives and/or strategies). Assets under
supervision are comprised of assets under management and other client assets.
Assets under management typically generate fees based on a percentage of their
value and include our mutual funds, separate accounts managed for institutional
and individual investors, our merchant banking funds and other alternative
investment funds. Other client assets are comprised of assets in brokerage
accounts of primarily high net worth individuals, on which we earn commissions.
Over the last five years, we have rapidly grown our assets under
supervision, as set forth in the graph below:
ASSETS UNDER SUPERVISION
(in billions)
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT OTHER CLIENT ASSETS 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
'February 1999' 207 163 $370
</TABLE>
78
<PAGE> 81
As of February 1999, equities and alternative investments represented 51%
of our total assets under management. Since 1996, these two asset classes have
been the primary drivers of our growth in assets under management.
The following table sets forth the amount of assets under management by
asset class:
ASSETS UNDER MANAGEMENT BY ASSET CLASS
(in billions)
<TABLE>
<CAPTION>
AS OF
AS OF NOVEMBER FEBRUARY
------------------------------------ --------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ASSET CLASS
Equity............................... $ 6 $ 9 $34 $ 52 $ 69 $ 73
Fixed income and currency............ 17 19 26 36 50 53
Money markets........................ 18 20 27 31 46 48
Alternative investment(1)............ 3 4 8 17 30 32
--- --- --- ---- ---- ----
Total................................ $44 $52 $95 $136 $195 $206
=== === === ==== ==== ====
</TABLE>
-----------------------
(1) Includes private equity, real estate, quantitative asset allocation
and other funds that we manage.
------------------------
Since the beginning of 1996, we have increased the resources devoted to our
asset management business, including adding over 850 employees. In addition,
over the past three years, Goldman Sachs has made three asset management
acquisitions in order to expand its geographic reach and broaden its global
equity and alternative investment portfolio management capabilities.
Our global reach has been important in growing assets under management.
From November 1996 to February 1999, our assets under management, excluding our
merchant banking funds, sourced from outside the United States grew by over $35
billion. As of February 1999, we managed approximately $46 billion sourced from
Europe.
In Japan, deregulation, high individual savings rates and low local rates
of return have been important drivers of growth for our asset management
business during the 1990s. Over the last three years, we have built a
significant asset management business in Japan, and, as of February 1999, we
managed $23 billion of assets sourced from Japan. In Japan, as of the end of
February 1999, we were the largest non-Japanese investment trust manager,
according to The Investment Trusts Association, and we managed four of the top
15 open-ended mutual funds ranked by mutual fund assets, according to IFIS Inc.
We believe that substantial opportunities exist to grow our asset management
business in Japan, by increasing our institutional client base and expanding the
third-party distribution network through which we offer our mutual funds.
CLIENTS. Our primary clients are institutions, high net worth individuals
and retail investors. We access clients through both direct and third-party
channels.
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The table below sets forth the amount of assets under supervision by
distribution channel and client category as of November 1998:
ASSETS UNDER SUPERVISION BY DISTRIBUTION CHANNEL
(in billions)
<TABLE>
<CAPTION>
ASSETS UNDER
SUPERVISION(1) PRIMARY INVESTMENT VEHICLES
-------------- ---------------------------
<S> <C> <C>
- - Directly distributed
-- Institutional....................... $ 121 Separate managed accounts
Commingled vehicles
-- High net worth individuals.......... 156 Brokerage accounts
Limited partnerships
Separate managed accounts
- - Third-party distributed
-- Institutional and retail............ 48 Mutual funds
------
Total.................................... $ 325
======
</TABLE>
- ---------------
(1) Excludes $12 billion in our merchant banking funds.
------------------------
Our institutional clients include corporations, insurance companies,
pension funds, foundations and endowments. We managed assets for three of the
five largest pension pools in the United States as ranked as of September 30,
1998 by Pensions & Investments, and we have 18 clients for whom we manage at
least $1 billion each.
In the individual high net worth area, we have established approximately
10,000 high net worth accounts worldwide, including accounts with 41% of the
1998 "Forbes 400 List of the Richest Americans". We believe this is a high
growth opportunity because this market (defined as the market for individual
investors with a net worth in excess of $5 million) is highly fragmented and
growing rapidly and accounts for approximately $10 trillion of investable assets
according to a study by McKinsey & Co. At the center of our effort is a team of
over 420 relationship managers, located in 12 U.S. and six international
offices. These professionals have an average of over seven years of experience
at Goldman Sachs and have exhibited low turnover and superior productivity
relative to the industry average.
In the third-party distribution channel, we distribute our mutual funds on
a worldwide basis through banks, brokerage firms, insurance companies and other
financial intermediaries. As of December 31, 1998, we were the third largest
manager in the U.S. institutional money market sector according to information
compiled by Strategic Insight. In Japan, we also utilize a third-party
distribution network consisting principally of the largest Japanese brokerage
firms.
MERCHANT BANKING
Goldman Sachs has an established successful record in the corporate and
real estate merchant banking business, having raised $15.5 billion of committed
capital for 15 private investment funds, as of November 1998, of which $9.0
billion had been funded. We have committed $2.8 billion and funded $1.7 billion
of these amounts; our clients, including pension plans, endowments, charitable
institutions and high net worth individuals, have provided the remainder. Some
of these investment funds pursue, on a global basis, long-term investments in
equity and debt securities in privately negotiated transactions, leveraged
buyouts and acquisitions. As of November 1998, these funds had total committed
capital of $7.7 billion, which includes two funds with $1.0 billion of committed
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capital that are in the process of being wound down. Other funds, with total
committed capital of $7.8 billion as of November 1998, invest in real estate
operating companies and debt and equity interests in real estate assets.
Our strategy with respect to each merchant banking fund is to invest
opportunistically to build a portfolio of investments that is diversified by
industry, product type, geographic region and transaction structure and type.
Our merchant banking funds leverage our long-standing relationships with
companies, investors, entrepreneurs and financial intermediaries around the
world to source potential investment opportunities. In addition, our merchant
banking funds and their portfolio companies have generated business for other
areas of Goldman Sachs, including equity underwriting, leveraged and other
financing fees and merger advisory fees.
Located in eight offices around the world, our investment professionals
identify, manage and sell investments on behalf of our merchant banking funds.
Goldman Sachs has two subsidiaries that manage real estate assets, The Archon
Group, L.P. and Archon Group (France) S.C.A. In addition, our merchant banking
professionals work closely with other departments and benefit from the expertise
of specialists in debt and equity research, investment banking, leveraged and
mortgage finance and equity capital markets.
Merchant banking activities generate three revenue streams. First, we
receive a management fee that is generally a percentage of a fund's committed
capital, invested capital, total gross acquisition cost or asset value. These
annual management fees, which are included in our asset management revenues,
have historically been a recurring source of revenue. Second, we receive from
each fund, after that fund has achieved a minimum return for fund investors, an
increased share of the fund's income and gains that is a percentage, typically
20%, of the capital appreciation and gains from the fund's investments. Revenues
from the increased share of the fund's income and gains are included in
commissions. Third, Goldman Sachs, as a substantial investor in these funds, is
allocated its proportionate share of the funds' unrealized appreciation or
depreciation arising from changes in fair value as well as gains and losses upon
realization. These items are included in Trading and Principal Investments.
SECURITIES SERVICES
Securities services consists predominantly of Global Securities Services,
which provides prime brokerage, financing services and securities lending to a
diversified U.S. and international customer base, including hedge funds, pension
funds and high net worth individuals. Securities services also includes our
matched book businesses.
We offer prime brokerage services to our clients, allowing them the
flexibility to trade with most brokers while maintaining a single source for
financing and portfolio reports. Our prime brokerage activities provide
multi-product clearing and custody in 50 markets, consolidated multi-currency
accounting and reporting and offshore fund administration and servicing for our
most active clients. Additionally, we provide financing to our clients through
margin loans collateralized by securities held in the client's account. In
recent years, we have significantly increased our prime brokerage client base.
Securities lending activities principally involve the borrowing and lending
of equity securities to cover customer and Goldman Sachs' short sales and to
finance Goldman Sachs' long positions. In addition, we are an active participant
in the securities lending broker-to-broker business and the third-party agency
lending business. Trading desks in New York, Boston, London, Tokyo and Hong Kong
provide 24-hour coverage in equity markets worldwide. We believe the rapidly
developing international stock lending market presents a significant growth
opportunity for us.
Lenders of securities include pension plan sponsors, mutual funds,
insurance companies, investment advisors, endowments, bank trust departments and
individuals. We have entered into exclusive relationships with certain lenders
that have given us access to large pools of securities, some of which are often
hard to locate in the general lender
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market, providing us with a competitive advantage. We believe that a significant
cause of the growth in short sales, which require the borrowing of securities,
has been the rapid increase in complex trading strategies, such as index
arbitrage, convertible bond and warrant arbitrage, option strategies, and sector
and market neutral strategies where shares are sold short to hedge exposure from
derivative instruments.
COMMISSIONS
Goldman Sachs generates commissions by executing agency transactions on
major stock and futures exchanges worldwide. We effect agency transactions for
clients located throughout the world. In recent years, aggregate commissions
have increased as a result of growth in transaction volume on the major
exchanges. As discussed above, commissions also include the increased share of
income and gains from merchant banking funds as well as commissions earned from
brokerage transactions for high net worth individuals. For a discussion
regarding our increased share of the income and gains from our merchant banking
funds, see "-- Merchant Banking" above, and for a discussion regarding high net
worth individuals, see "-- Asset Management -- Clients" above.
In anticipation of continued growth in electronic connectivity and online
trading, Goldman Sachs has made strategic investments in alternative trading
systems to gain experience and participate in the development of this market.
See "Risk Factors -- The Financial Services Industry Is Intensely Competitive
and Rapidly Consolidating -- Our Revenues May Decline Due to Competition from
Alternative Trading Systems" for a discussion of the competitive risks posed by
alternative trading systems generally.
GLOBAL INVESTMENT RESEARCH
Our Global Investment Research Department provides fundamental research on
economies, debt and equity markets, commodities markets, industries and
companies on a worldwide basis. For over two decades, we have committed the
resources on a global scale to develop an industry-leading position for our
investment research products. We believe that investment research is a
significant factor in our strong competitive position in debt and equity
underwritings and in our generation of commission revenues.
Major investors worldwide recognize Goldman Sachs for its value-added
research products, which are highly rated in client polls across the Americas,
Europe and Asia. Our Research Department is the only one to rank in the top
three in each of the last 15 calendar years in Institutional Investor's "All-
America Research Team" survey. In December 1998, the Research Department also
achieved top honors for global investment research from Institutional Investor.
In Europe, based on the Institutional Investor "1999 All-Europe Research Team"
survey, the Research Department ranked number one for coverage of pan-European
sectors and number three in European Strategy and Economics.
Global Investment Research employs a team approach that provides equity
research coverage of approximately 2,300 companies worldwide, 53 economies and
26 stock markets. This is accomplished through four groups:
- - the Economic Research group, which formulates macroeconomic forecasts for
economic activity, foreign exchange, and interest rates based on the globally
coordinated views of its regional economists;
- - the Portfolio Strategy group, which forecasts equity market returns and
provides recommendations on both asset allocation and industry representation;
- - the Company/Industry group, which provides fundamental analysis, forecasts and
investment recommendations for companies and industries worldwide. Equity
research analysts are organized regionally by sector and globally into more
than 20 industry teams, which allows for extensive collaboration and knowledge
sharing on important investment themes; and
- - the Commodities Research group, which provides research on the global
commodity markets.
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INTERNET STRATEGY
We believe that Internet technology and electronic commerce will, over
time, change the ways that securities are traded and distributed, creating both
opportunities and challenges for our businesses. In response, we have a program
of internal development and external investment.
Internally, we are extending our global electronic trading and information
distribution capabilities to our clients via the Internet. These capabilities
cover many of our fixed income, equities and mutual fund products in markets
around the world. We are also using the Internet to improve the ease and quality
of communication with our institutional and high net worth clients. For example,
investors have on-line access to our investment research, mutual fund data and
valuation models and our high net worth clients are increasingly accessing their
portfolio information over the Internet. We have also recently established
GS-Online(SM), which, in conjunction with Goldman, Sachs & Co., acts as an
underwriter of securities offerings via the Internet and other electronic means.
GS-Online(SM) will deal initially only with other underwriters and syndicate
members and not with members of the public.
Externally, we have invested in electronic commerce concerns such as Bridge
Information Systems, Inc., TradeWeb LLC, Archipelago L.L.C., The BRASS Utility,
L.L.C., OptiMark Technologies Inc. and, most recently, Wit Capital Group, Inc.
Through these investments, we gain an increased understanding of business
developments and opportunities in this emerging sector. For a discussion of how
Goldman Sachs could be adversely affected by these developments, see "Risk
Factors -- The Financial Services Industry Is Intensely Competitive and Rapidly
Consolidating -- Our Revenues May Decline Due to Competition from Alternative
Trading Systems".
INFORMATION TECHNOLOGY
Technology is fundamental to our overall business strategy. Goldman Sachs
is committed to the ongoing development, maintenance and use of technology
throughout the organization, with expenditures, including employee costs, of
approximately $970 million in 1998 and a budget of $1.2 billion in 1999. We have
developed significant software and systems over the past several years. Our
technology initiatives can be broadly categorized into three efforts:
- - enhancing client service through increased connectivity and the provision of
high value-added, tailored services;
- - risk management; and
- - overall efficiency and control.
We have tailored our services to our clients by providing them with
electronic access to our products and services. For example, we developed the GS
Financial Workbench(SM), an Internet web site that clients and employees can use
to download research reports, access earnings and valuation models, submit
trades, monitor accounts, build and view presentations, calculate derivative
prices and view market data. First made available in early 1995, the GS
Financial Workbench(SM) represents a joint effort among all of our business
areas to create one comprehensive site for clients and employees to access our
products and services.
We have also developed software that enables us to monitor and analyze our
market and credit risks. This risk management software not only analyzes market
risk on firmwide, divisional and trading desk levels, but also breaks down our
risk into its underlying exposures, permitting management to evaluate exposures
on the basis of specific interest rate, currency rate, equity price or commodity
price changes. To assist further in the management of our credit exposures, data
from many sources are aggregated daily into credit management systems that give
senior management and professionals in the Credit and Controllers Departments
the ability to receive timely information with respect to credit exposures
worldwide, including netting information, and the ability to analyze complex
risk situations effectively. Our software accesses these data, allows for quick
analysis at the level of individual trades and interacts with other Goldman
Sachs systems.
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Technology has been a significant factor in improving the overall
efficiency of many areas of Goldman Sachs. By automating many trading
procedures, we have substantially increased our efficiency and accuracy.
We currently have projects under way to ensure that our technology is Year
2000 compliant. See "Risk Factors -- Our Computer Systems and Those of Third
Parties May Not Achieve Year 2000 Readiness -- Year 2000 Readiness Disclosure"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Management -- Operational and Year 2000 Risks -- Year 2000
Readiness Disclosure" for a further discussion of the risks we face in achieving
Year 2000 readiness and our progress to date.
EMPLOYEES
Management believes that one of the strengths and principal reasons for the
success of Goldman Sachs is the quality and dedication of its people and the
shared sense of being part of a team. Goldman Sachs was ranked number seven in
Fortune magazine's "The 100 Best Companies to Work for in America" in January
1999 and was ranked number three in Fortune magazine's 1999 "The Top 50 MBA
Dream Companies", the highest ranking investment banking and securities firm in
each case. We strive to maintain a work environment that fosters
professionalism, excellence, diversity and cooperation among our employees
worldwide.
Instilling the Goldman Sachs culture in all employees is a continuous
process, of which training is an essential part. We recently opened a 34,000
square foot training center in New York City, near our world headquarters. All
employees are offered the opportunity to participate in education and periodic
seminars that we sponsor at various locations throughout the world. We also
sponsor off-site meetings for the various business units that are designed to
promote collaboration among co-workers.
Another important part of instilling the Goldman Sachs culture in all
employees is our employee review process. Employees are reviewed by supervisors,
co-workers and employees they supervise in a 360-degree review process that is
integral to our team approach. In 1998, over 140,000 reviews were completed,
evidencing the comprehensive nature of this process.
We also believe that good citizenship is an important part of being a
member of the Goldman Sachs team. To that end, we established our Community
TeamWorks initiative in 1997. As part of Community TeamWorks, all employees are
offered the opportunity to spend a day working at a charitable organization of
their choice while continuing to receive their full salary for that day. In
1998, approximately two-thirds of our employees participated in Community
TeamWorks. The commitment of our partners to the community is also demonstrated
by their having given over $90 million in each of the last two years to
charities, including private foundations.
As of February 1999, we had approximately 13,000 employees. In addition,
The Archon Group, L.P. and Archon Group (France) S.C.A., subsidiaries of Goldman
Sachs that provide real estate services for our real estate investment funds,
had a total of approximately 1,260 employees as of February 1999. Goldman Sachs
is reimbursed for substantially all of the costs of these employees by these
funds.
See "Management -- The Employee Initial Public Offering Awards" for a
discussion of the steps taken by Goldman Sachs to encourage the continued
service of its employees after our common stock offering and see "Risk
Factors -- Our Conversion to Corporate Form May Adversely Affect Our Ability to
Recruit, Retain and Motivate Key Employees".
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
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on the basis of a number of factors, including transaction execution, our
products and services, innovation, reputation and price.
Competition is also intense for the attraction and retention of qualified
employees. Our ability to continue to compete effectively in our businesses will
depend upon our ability to attract new employees and retain and motivate our
existing employees. See "-- Employees" for a discussion of our efforts in this
regard.
In recent years there has been substantial consolidation and convergence
among companies in the financial services industry. In particular, a number of
large commercial banks, insurance companies and other broad-based financial
services firms have established or acquired broker-dealers or have merged with
other financial institutions. Many of these firms have the ability to offer a
wide range of products, from loans, deposit-taking and insurance to brokerage,
asset management and investment banking services, which may enhance their
competitive position. They also have the ability to support investment banking
and securities products with commercial banking, insurance and other financial
services revenues in an effort to gain market share, which could result in
pricing pressure in our businesses.
This trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have had to commit capital to support our international
operations and to execute large global transactions.
We believe that some of our most significant challenges and opportunities
will arise outside the United States. See "Industry and Economic Outlook" for a
discussion of these challenges and opportunities. In order to take advantage of
these opportunities, we will have to compete successfully with financial
institutions based in important non-U.S. markets, particularly in Europe. Some
of these institutions are larger, better capitalized and have a stronger local
presence and a longer operating history in these markets.
We have experienced intense price competition in some of our businesses in
recent years. For example, equity and debt underwriting discounts have been
under pressure for a number of years and the ability to execute trades
electronically, through the Internet and other alternative trading systems may
increase the pressure on trading commissions. It appears that this trend toward
alternative trading systems will continue and perhaps accelerate. Similarly,
underwriting spreads in Latin American and other privatizations have been
subject to considerable pressure in the last year. We believe that we may
experience pricing pressures in these and other areas in the future as some of
our competitors seek to obtain market share by reducing prices.
See "Risk Factors -- The Financial Services Industry Is Intensely
Competitive and Rapidly Consolidating" for a discussion of the competitive risks
we face in our businesses.
REGULATION
Goldman Sachs' business is, and the securities and commodity futures and
options industries generally are, subject to extensive regulation in the United
States and elsewhere. As a matter of public policy, regulatory bodies in the
United States and the rest of the world are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets, not with protecting the
interests of Goldman Sachs' shareholders or creditors. In the United States, the
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 au-
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thorities in virtually all countries where we have offices.
Broker-dealers are subject to regulations that cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure, record-keeping, the financing of customers' purchases and the conduct
of directors, officers and employees. Additional legislation, changes in rules
promulgated by self-regulatory organizations or changes in the interpretation or
enforcement of existing laws and rules, either in the United States or
elsewhere, may directly affect the mode of operation and profitability of
Goldman Sachs.
The U.S. and non-U.S. government agencies and self-regulatory
organizations, as well as state securities commissions in the United States, are
empowered to conduct administrative proceedings that can result in censure,
fine, the issuance of cease-and-desist orders or the suspension or expulsion of
a broker-dealer or its directors, officers or employees. Occasionally, our
subsidiaries have been subject to investigations and proceedings, and sanctions
have been imposed for infractions of various regulations relating to our
activities, none of which has had a material adverse effect on us or our
businesses.
The commodity futures and options industry in the United States is subject
to regulation under the Commodity Exchange Act, as amended. The Commodity
Futures Trading Commission is the federal agency charged with the administration
of the Commodity Exchange Act and the regulations thereunder. Goldman, Sachs &
Co. is registered with the Commodity Futures Trading Commission as a futures
commission merchant, commodity pool operator and commodity trading advisor.
As a registered broker-dealer and member of various self-regulatory
organizations, Goldman, Sachs & Co. is subject to the SEC's uniform net capital
rule, Rule 15c3-1. This rule specifies the minimum level of net capital a
broker-dealer must maintain and also requires that at least a minimum part of
its assets be kept in relatively liquid form. Goldman, Sachs & Co. is also
subject to the net capital requirements of the Commodity Futures Trading
Commission and various securities and commodity exchanges. See Note 8 to the
audited consolidated financial statements and Note 5 to the unaudited condensed
consolidated financial statements for a discussion of our net capital.
The SEC and various self-regulatory organizations impose rules that require
notification when net capital falls below certain predefined criteria, dictate
the ratio of subordinated debt to equity in the regulatory capital composition
of a broker-dealer and constrain the ability of a broker-dealer to expand its
business under certain circumstances. Additionally, the SEC's uniform net
capital rule imposes certain requirements that may have the effect of
prohibiting a broker-dealer from distributing or withdrawing capital and
requiring prior notice to the SEC for certain withdrawals of capital.
In January 1999, the SEC adopted revisions to its uniform net capital rule
and related regulations that permit the registration of over-the-counter
derivatives dealers as broker-dealers. An over-the-counter derivatives dealer
can, upon adoption of a risk management framework in accordance with the new
rules, utilize a capital requirement based upon proprietary models for
estimating market risk exposures. We have established Goldman Sachs Financial
Markets, L.P. and are in the process of registering this company with the SEC as
an over-the-counter derivatives dealer to conduct in a more capital efficient
manner certain over-the-counter derivative businesses now conducted in other
affiliates.
Goldman Sachs is an active participant in the international fixed income
and equity markets. Many of our affiliates that participate in those markets are
subject to comprehensive regulations that include some form of capital adequacy
rule and other customer protection rules. For example, Goldman Sachs provides
investment services in and from the United Kingdom under a regulatory regime
that is undergoing comprehensive restructuring aimed at implementing the
Financial Services Authority as the United Kingdom's unified regulator. The
relevant
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Goldman Sachs entities in London are at present regulated by the Securities and
Futures Authority Limited in respect of their investment banking, individual
asset management, brokerage and principal trading activities, and the Investment
Management Regulatory Organization in respect of their institutional asset
management and fund management activities. Some of these Goldman Sachs entities
are also regulated by the London Stock Exchange and other United Kingdom
securities and commodities exchanges of which they are members. It is expected,
however, that commencing in 2000 the responsibilities of the Securities and
Futures Authority Limited and Investment Management Regulatory Organization will
be taken over by the Financial Services Authority. The investment services that
are subject to oversight by United Kingdom regulators are regulated in
accordance with European Union directives requiring, among other things,
compliance with certain capital adequacy standards, customer protection
requirements and conduct of business rules. These standards, requirements and
rules are similarly implemented, under the same directives, throughout the
European Union and are broadly comparable in scope and purpose to the regulatory
capital and customer protection requirements imposed under the SEC and Commodity
Futures Trading Commission rules. European Union directives also permit local
regulation in each jurisdiction, including those in which we operate, to be more
restrictive than the requirements of such directives and these local
requirements can result in certain competitive disadvantages to Goldman Sachs.
In addition, the Japanese Ministry of Finance and the Financial Supervisory
Agency in Japan as well as German, French and Swiss banking authorities, among
others, regulate various of our subsidiaries and also have capital standards and
other requirements comparable to the rules of the SEC.
Compliance with net capital requirements of these and other regulators
could limit those operations of our subsidiaries that require the intensive use
of capital, such as underwriting and trading activities and the financing of
customer account balances, and also could restrict our ability to withdraw
capital from our regulated subsidiaries, which in turn could limit our ability
to repay debt, including the notes. See "Risk Factors -- Legal and Regulatory
Risks Are Inherent and Substantial in Our Businesses and Could Lead to a
Reduction in Our Credit Ratings or in Our Ability to Repay the Notes",
"-- Investors in the Notes Face Additional Risk Because The Goldman Sachs Group,
Inc. Is a Holding Company" and "-- The Value of the Notes May Be Impaired
Because We Depend on Funds from Our Regulated Subsidiaries" for a discussion of
limitations on our ability to receive funds from regulated subsidiaries.
LEGAL MATTERS
We are involved in a number of judicial, regulatory and arbitration
proceedings (including those described below) concerning matters arising in
connection with the conduct of our businesses. We believe, based on currently
available information, that the results of such proceedings, in the aggregate,
will not have a material adverse effect on our financial condition, but might be
material to our operating results for any particular period, depending, in part,
upon the operating results for such period.
MOBILEMEDIA SECURITIES LITIGATION
Goldman, Sachs & Co. has been named as a defendant in a purported class
action lawsuit commenced on December 6, 1996 and pending in the U.S. District
Court for the District of New Jersey. This lawsuit was brought on behalf of
purchasers of common stock of MobileMedia Corporation in an underwritten
offering in 1995 and purchasers of senior subordinated notes of MobileMedia
Communications Inc. in a concurrent underwritten offering. Defendants are
MobileMedia Corporation, certain of its officers and directors, and the lead
underwriters, including Goldman, Sachs & Co. MobileMedia Corporation is
currently reorganizing in bankruptcy.
Goldman, Sachs & Co. underwrote 2,242,500 shares of common stock, for a
total price of approximately $53 million, and Goldman Sachs International
underwrote 718,750 shares, for a total price of approxi-
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mately $17 million. Goldman, Sachs & Co. underwrote approximately $38 million in
principal amount of the senior subordinated notes.
The consolidated class action complaint alleges violations of the
disclosure requirements of the federal securities laws and seeks compensatory
and/or rescissory damages. In light of MobileMedia Corporation's bankruptcy, the
action against it has been stayed. Defendants' motion to dismiss was denied in
October 1998.
ANTITRUST MATTERS RELATING TO UNDERWRITINGS
Goldman, Sachs & Co. is one of numerous financial services companies that
have been named as defendants in certain purported class actions brought in the
U.S. District Court for the Southern District of New York by purchasers of
securities in public offerings, who claim that the defendants engaged in
conspiracies in violation of federal antitrust laws in connection with these
offerings. The plaintiffs in each instance seek treble damages as well as
injunctive relief. One of the actions, which was commenced on August 21, 1998,
alleges that the defendants have conspired to discourage or restrict the resale
of securities for a period after the offerings, including by imposing "penalty
bids". Defendants moved to dismiss the complaint in November 1998. The
plaintiffs amended their complaint in February 1999, modifying their claims in
various ways, including limiting the proposed class to retail purchasers of
public offerings. Several other actions were commenced, beginning on November 3,
1998, that allege that the defendants, many of whom are also named in the other
action discussed above, have conspired to fix at 7% the discount that
underwriting syndicates receive from issuers of shares in certain offerings.
Goldman, Sachs & Co. received a Civil Investigative Demand on April 29,
1999 from the U.S. Department of Justice requesting information with respect to
its investigation of an alleged conspiracy among securities underwriters to fix
underwriting fees.
ROCKEFELLER CENTER PROPERTIES, INC. LITIGATION
Several former shareholders of Rockefeller Center Properties, Inc. brought
purported class actions in the U.S. District Court for the District of Delaware
and the Delaware Chancery Court arising from the acquisition of Rockefeller
Center Properties, Inc. by an investor group in July 1996. The defendants in the
actions include, among others, Goldman, Sachs & Co., Whitehall Real Estate
Partnership V, a fund advised by Goldman, Sachs & Co., a Goldman, Sachs & Co.
managing director and other members of the investor group. The federal court
actions, which have since been consolidated, were filed beginning on November
15, 1996, and the state court action was filed on May 29, 1998.
The complaints generally allege that the proxy statement disseminated to
former Rockefeller Center Properties, Inc. stockholders in connection with the
transaction was deficient, in violation of the disclosure requirements of the
federal securities laws. The plaintiffs are seeking, among other things,
unspecified damages, rescission of the acquisition, and/or disgorgement.
In a series of decisions, the federal court has granted summary judgment
dismissing all the claims in the federal action. The plaintiffs have appealed
those rulings.
The state action has been stayed pending disposition of the federal action.
REICHHOLD CHEMICALS LITIGATION
Reichhold Chemicals, Inc. and Reichhold Norway ASA brought a claim on March
30, 1998 in the Commercial Court in London against Goldman Sachs International
in relation to the plaintiffs' 1997 purchase of the polymer division of one of
Goldman Sachs International's Norwegian clients, Jotun A/S. The plaintiffs claim
that they overpaid by $40 million based upon misrepresentations concerning the
financial performance of the polymer division.
In November 1998, the Commercial Court granted Goldman Sachs
International's application for a stay of the action pending the outcome of
arbitration proceedings between
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Reichhold Chemicals, Inc. and Reichhold Norway ASA, on the one hand, and Jotun
A/S in Norway, on the other. The stay order is currently being reviewed by an
appellate court.
MATTERS RELATING TO MUNICIPAL SECURITIES
Goldman, Sachs & Co., together with a number of other firms active in the
municipal securities area, has received requests beginning in June 1995 for
information from the SEC and certain other federal and state agencies and
authorities with respect to the pricing of escrow securities sold by Goldman,
Sachs & Co. to certain municipal bond issuers in connection with the advanced
refunding of municipal securities. Goldman, Sachs & Co. understands that certain
municipal bond issuers to which Goldman, Sachs & Co. sold escrow securities have
also received such inquiries.
There have been published reports that an action under the Federal False
Claims Act was filed in February 1995 alleging unlawful and undisclosed
overcharges in certain advance refunding transactions by a private plaintiff on
behalf of the United States and that Goldman, Sachs & Co., together with a
number of other firms, is a named defendant in that action. The complaint was
reportedly filed under seal while the government determines whether it will
pursue the claims directly.
Goldman, Sachs & Co. is also one of many municipal underwriting firms that
have been named as defendants in a purported class action brought on November
24, 1998 in the U.S. District Court for the Middle District of Florida by the
Clerk of Collier County, Florida on behalf of municipal issuers which purchased
escrow securities since October 1986 in connection with advance refundings. The
amended complaint alleges that the securities were excessively "marked up" in
violation of the Investment Advisers Act and Florida law, and seeks to recover
the difference between the actual and alleged "fair" prices. The defendants
moved to dismiss the complaint on April 30, 1999.
AMF SECURITIES LITIGATION
The Goldman Sachs Group, L.P., Goldman, Sachs & Co. and a Goldman, Sachs &
Co. managing director have been named as defendants in a purported class action
lawsuit commenced on April 27, 1999 in the U.S. District Court for the Southern
District of New York. This lawsuit was brought on behalf of purchasers of stock
of AMF Bowling, Inc. in an underwritten initial public offering of 15,525,000
shares of common stock in November 1997 at a price of $19.50 per share.
Defendants are AMF Bowling, Inc., certain officers and directors of AMF Bowling,
Inc. (including the Goldman, Sachs & Co. managing director), and the lead
underwriters of the offering (including Goldman, Sachs & Co.). The complaint
alleges violations of the disclosure requirements of the federal securities laws
and seeks compensatory damages and/or rescission. The complaint asserts that The
Goldman Sachs Group, L.P. and the Goldman, Sachs & Co. managing director are
liable as controlling persons under the federal securities laws because certain
funds managed by Goldman Sachs owned a majority of the outstanding common stock
of AMF Bowling, Inc. and the managing director served as its chairman at the
time of the offering.
PROPERTIES
Our principal executive offices are located at 85 Broad Street, New York,
New York, and comprise approximately 969,000 square feet of leased space,
pursuant to a lease agreement expiring in June 2008 (with an option to renew for
up to 20 additional years). We also occupy over 500,000 square feet at each of 1
New York Plaza and 10 Hanover Square in New York, New York, pursuant to lease
agreements expiring in September 2004 (with an option to renew for ten years)
and June 2018, respectively. We also have a 15-year lease for approximately
590,000 square feet at 180 Maiden Lane in New York, New York, that expires in
March 2014. In total, we lease over 3.1 million square feet in the New York
area, having more than doubled our space since November 1996. We have additional
offices in the United States and elsewhere in the Americas. Together, these
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offices comprise approximately 650,000 square feet of leased space.
Consistent with Goldman Sachs' global approach to its business, we also
have offices in Europe, Asia, Africa and Australia. In Europe, we have offices
that total approximately 790,000 square feet. Our largest presence in Europe is
in London, where we lease approximately 639,000 square feet through various
leases, with the principal one, for Peterborough Court, expiring in 2016. An
additional 396,000 square feet of leased space in London is expected to be
occupied during 2001.
In Asia, we have offices that total approximately 360,000 square feet. Our
largest offices in these regions are in Tokyo and Hong Kong. In Tokyo, we
currently lease approximately 175,000 square feet under leases that expire
between November 1999 and June 2005. In Hong Kong, we currently lease
approximately 103,000 square feet under a lease that expires in May 2000. We
recently entered into a new 12-year lease in Hong Kong for approximately 190,000
square feet. There are also significant expansion efforts underway in Tokyo and
Singapore.
Our space requirements have increased significantly over the last several
years. Currently, Goldman Sachs is at or near capacity at most of its locations.
As a result, we have been actively leasing additional space to support our
anticipated growth. Based on our progress to date, we believe that we will be
able to acquire additional space to meet our anticipated needs.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning the directors and executive
officers of Goldman Sachs as of the date of this prospectus. We anticipate
appointing additional directors over time who are not employees of Goldman Sachs
or affiliated with management.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry M. Paulson, Jr. 53 Director, Chairman and Chief Executive Officer
Robert J. Hurst 53 Director and Vice Chairman
John A. Thain 43 Director, President and Co-Chief Operating Officer
John L. Thornton 45 Director, President and Co-Chief Operating Officer
Sir John Browne 51 Director
James A. Johnson 55 Director
John L. Weinberg 74 Director
Robert J. Katz 51 General Counsel
Gregory K. Palm 50 General Counsel
Robin Neustein 45 Chief of Staff
Leslie M. Tortora 42 Chief Information Officer
David A. Viniar 43 Chief Financial Officer
Barry L. Zubrow 46 Chief Administrative Officer
</TABLE>
------------------------
Executive officers are appointed by and serve at the pleasure of our board
of directors. A brief biography of each director and executive officer follows.
Mr. Paulson has been Co-Chairman and Chief Executive Officer or Co-Chief
Executive Officer of The Goldman Sachs Group, L.P. since June 1998 and served as
Chief Operating Officer from December 1994 to June 1998. From 1990 to November
1994, he was Co-Head of Investment Banking.
Mr. Hurst has been Vice Chairman of The Goldman Sachs Group, L.P. since
February 1997 and has served as Head or Co-Head of Investment Banking since
1990. He is also a director of VF Corporation and IDB Holding Corporation Ltd.
Mr. Thain has been President of The Goldman Sachs Group, L.P. since March
1999 and Co-Chief Operating Officer since January 1999. From December 1994 to
March 1999, he served as Chief Financial Officer and Head of Operations,
Technology and Finance. From July 1995 to September 1997, he was also Co-Chief
Executive Officer for European Operations. In 1990, Mr. Thain transferred from
FICC to Operations, Technology and Finance to assume responsibility for
Controllers and Treasury. From 1985 to 1990, Mr. Thain was in FICC where he
established and served as Co-Head of the Mortgage Securities Department. Mr.
Thain is a director of The Depository Trust Company.
Mr. Thornton has been President of The Goldman Sachs Group, L.P. since
March 1999 and Co-Chief Operating Officer of The Goldman Sachs Group, L.P. since
January 1999. From August 1998 until January 1999, he had oversight
responsibility for International Operations. From September 1996 until August
1998, he was Chairman, Goldman Sachs -- Asia, in addition to his senior
strategic responsibilities in Europe. From July 1995 to September 1997, he was
Co-Chief Executive Officer for European Operations. From 1994 to 1995, he was
Co-Head of Investment Banking in Europe and from 1992 to 1994 was Head of
European Investment Banking Services. Mr. Thornton is also a director of the
Ford Motor Company, BSkyB PLC, Laura Ashley PLC and the Pacific Century Group.
Sir John Browne has been Group Chief Executive of BP Amoco p.l.c. since
January
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1999. He was Group Chief Executive of The British Petroleum Company from 1995 to
1999, having served as a Managing Director since 1991. Sir John is also a
director of SmithKline Beecham p.l.c. and the Intel Corporation, a member of the
supervisory board of DaimlerChrysler AG and a trustee of the British Museum.
Mr. Johnson has been Chairman of the Executive Committee of the Board of
Directors of Fannie Mae since January 1999. He was Chairman and Chief Executive
Officer of Fannie Mae from February 1991 through December 1998. Mr. Johnson is
also a director of the Cummins Engine Company, Dayton Hudson Corporation,
UnitedHealth Group and Kaufman and Broad Home Corporation, Chairman of the John
F. Kennedy Center for the Performing Arts and Chairman of the Board of Trustees
of The Brookings Institution.
Mr. Weinberg has been Senior Chairman of The Goldman Sachs Group, L.P.
since 1990. From 1984 to 1990, he was Senior Partner and Chairman and, from 1976
to 1984, he served both as Senior Partner and Co-Chairman. Mr. Weinberg is also
a director of Knight-Ridder, Inc., Providian Financial Corp. and Tricon Global
Restaurants, Inc.
Mr. Katz has been General Counsel of The Goldman Sachs Group, L.P. or its
predecessor since 1988. From 1980 to 1988, Mr. Katz was a partner in Sullivan &
Cromwell.
Mr. Palm has been General Counsel of The Goldman Sachs Group, L.P. since
1992. He also has senior oversight responsibility for Compliance and Management
Controls, and is Co-Chairman of the Global Compliance and Control Committee.
From 1982 to 1992, Mr. Palm was a partner in Sullivan & Cromwell.
Ms. Neustein has been Chief of Staff to the senior partners of The Goldman
Sachs Group, L.P. since 1992. From 1991 to 1992, Ms. Neustein managed strategic
projects for the senior partners. Prior to then, she was in Investment Banking.
Ms. Tortora has been Chief Information Officer of The Goldman Sachs Group,
L.P. and the Head of Information Technology since March 1999. She has headed
Goldman Sachs' global technology efforts since 1994.
Mr. Viniar has been Chief Financial Officer of The Goldman Sachs Group,
L.P. and Co-Head of Operations, Finance and Resources since March 1999. From
July 1998 until then, he was Deputy Chief Financial Officer and from 1994 until
then, he was Head of Finance, with responsibility for Controllers and Treasury.
From 1992 to 1994, Mr. Viniar was Head of Treasury and immediately prior to then
was in the Structured Finance Department of Investment Banking.
Mr. Zubrow has been Chief Administrative Officer of The Goldman Sachs
Group, L.P. and Co-Head of Operations, Finance and Resources since March 1999.
From 1994 until then he was chief credit officer and Head of the Credit
Department. From 1992 to 1994, Mr. Zubrow was Head of the Midwest Group in the
Corporate Finance Department of Investment Banking.
In addition, Jon S. Corzine, 52, resigned his positions as a Director and
Co-Chairman of Goldman Sachs immediately prior to the date of our common stock
offering. After seeing through the completion of our common stock offering, a
project Mr. Corzine believes is of great importance to Goldman Sachs, he left
Goldman Sachs to pursue other interests. Mr. Corzine was Co-Chairman of The
Goldman Sachs Group, L.P. since June 1998 and served as Chairman and Chief
Executive Officer of The Goldman Sachs Group, L.P. from December 1994 to June
1998 and Co-Chief Executive Officer from June 1998 to January 1999. Mr. Corzine
is a member of the NASD's Board of Governors.
There are no family relationships between any of the executive officers or
directors of Goldman Sachs.
THE MANAGEMENT AND PARTNERSHIP
COMMITTEES
In January 1999, the Management and Partnership Committees were constituted
as part of Goldman Sachs' overall governance structure. The Management
Committee, which is chaired by Mr. Paulson, has responsibility for policy,
strategy and management of our
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businesses. In addition to Messrs. Paulson, Thain, Thornton and Hurst, Ms.
Neustein and Ms. Tortora, the members of this committee and their principal
positions within Goldman Sachs are: Lloyd C. Blankfein (Co-Head, FICC), Richard
A. Friedman (Co-Head, Merchant Banking), Steven "Mac" M. Heller (Co-Chief
Operating Officer, Investment Banking), Robert S. Kaplan (Co-Chief Operating
Officer, Investment Banking), John P. McNulty (Co-Head, Asset Management),
Michael P. Mortara (Co-Head, FICC), Daniel M. Neidich (Co-Head, Merchant
Banking), Mark Schwartz (President, Goldman Sachs -- Japan), Robert K. Steel
(Co-Head, Equities) and Patrick J. Ward (Co-Head, Equities and Deputy
Chairman -- Europe). Mr. Katz is counsel to the Management Committee.
The Partnership Committee, which is chaired by Messrs. Thain and Thornton,
oversees personnel development and career management issues. It focuses on such
matters as recruiting, training, performance evaluation, diversity, mobility and
succession planning and, together with the Management Committee, is expected to
become integral in the process of selecting and compensating managing directors.
In addition to Messrs. Thain and Thornton and Ms. Neustein, the members of this
committee and their principal positions within Goldman Sachs are: David W. Blood
(Head, Asset Management -- Europe), Gary D. Cohn (Head, FICC Commodities and
Emerging Markets), W. Mark Evans (Co-Head, Investment Research), Jacob D.
Goldfield (Head, FICC -- Europe), David B. Heller (Head, Equities Derivatives
Trading), Philip D. Murphy (President, Goldman Sachs -- Asia), Simon M.
Robertson (President, Goldman Sachs -- Europe), Esta E. Stecher (Head, Tax),
John S. Weinberg (Co-Head, Investment Banking Services), Peter A. Weinberg
(Co-Chief Operating Officer, Investment Banking and Deputy Chairman -- Europe)
and Jon Winkelried (Head, Leveraged Finance). Mr. Palm is counsel to the
Partnership Committee.
INFORMATION REGARDING THE BOARD OF DIRECTORS
Our charter provides for a classified board of directors consisting of
three classes. The term of the initial Class I directors will terminate on the
date of the 2000 annual meeting of shareholders, the term of the initial Class
II directors will terminate on the date of the 2001 annual meeting of
shareholders and the term of the initial Class III directors will terminate on
the date of the 2002 annual meeting of shareholders. Messrs. Thain and Thornton
are members of Class I, Sir John Browne and Messrs. Johnson and Weinberg are
members of Class II and Messrs. Hurst and Paulson are members of Class III.
Beginning in 2000, at each annual meeting of shareholders, successors to the
class of directors whose term expires at that annual meeting will be elected for
a three-year term and until their respective successors have been elected and
qualified. A director may be removed only for cause by the affirmative vote of
the holders of not less than 80% of the outstanding shares of capital stock
entitled to vote in the election of directors.
It is anticipated that our board of directors will meet at least quarterly.
Members of our board of directors who are employees of Goldman Sachs or any of
its subsidiaries will not be compensated for service on the board of directors
or any committee thereof.
Since the completion of our common stock offering, Mr. Weinberg has
continued in his role as Senior Chairman under an agreement pursuant to which he
will provide senior advisory services to Goldman Sachs, receive annual
compensation of $2 million and participate in various employee benefit plans.
The agreement expires November 24, 2000, unless earlier terminated by either
party on 90 days' notice. Mr. Weinberg has had similar arrangements with Goldman
Sachs since 1990.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors will have an Audit Committee, composed of directors
who are not employed by Goldman Sachs or affiliated with management. The Audit
Committee will review the results and scope of the audit and other services
provided by our independent auditors as well as review our accounting and
control procedures and policies.
Our board of directors will also have a Compensation Committee. The
Compensation
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Committee will oversee the compensation and benefits of the management and
employees of Goldman Sachs and will consist entirely of non-employee directors.
Our board of directors may from time to time establish other committees to
facilitate the management of Goldman Sachs.
EXECUTIVE COMPENSATION
Prior to our common stock offering, our business was carried on in
partnership form. As a result, meaningful individual compensation information
for directors and executive officers of Goldman Sachs based on operating in
corporate form is not available for periods prior to our common stock offering.
However, Goldman Sachs does not believe that the aggregate compensation that
will be paid in fiscal 1999 to the continuing named executive officers referred
to below will exceed levels that are customary for similarly situated executives
in the investment banking industry.
The following table sets forth compensation information for our Chief
Executive Officer, three of our continuing executive officers named under
"-- Directors and Executive Officers" and two former executive officers of The
Goldman Sachs Group, L.P. (the "named executive officers").
FISCAL 1998 COMPENSATION INFORMATION(1)
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION
- ---------------------------
<S> <C>
Henry M. Paulson, Jr.,...................................... $12,700,000
1998: Co-Chairman and Co-Chief Executive Officer
(1999: Director, Chairman and Chief Executive Officer)
Robert J. Hurst,............................................ 11,300,000
1998: Vice Chairman
(1999: Director and Vice Chairman)
John A. Thain,.............................................. 11,200,000
1998: Chief Financial Officer
(1999: Director, President and Co-Chief Operating Officer)
John L. Thornton,........................................... 9,900,000
1998: Chairman of International Operations
(1999: Director, President and Co-Chief Operating Officer)
Jon S. Corzine(2),.......................................... 12,800,000
1998: Co-Chairman and Co-Chief Executive Officer
Roy J. Zuckerberg(3),....................................... 11,000,000
1998: Vice Chairman
</TABLE>
-------------------------
(1) The amounts in the table represent compensation for fiscal 1998
only and do not include that portion of each named executive
officer's total partnership return from The Goldman Sachs Group,
L.P. in 1998 attributable to a return on his invested capital or
to his share of the income from investments made by Goldman Sachs
in prior years that was allocated to the individuals who were
partners in those years. The return on invested capital for each
named executive officer was determined using a rate of 12%, the
actual fixed rate of return that was paid in 1998 to our retired
limited partners on their long-term capital.
(2) Mr. Corzine resigned from Goldman Sachs prior to the consummation
of our common stock offering.
(3) Mr. Zuckerberg retired in November 1998.
----------------------
Aggregate compensation paid to key employees who are not named executive
officers may exceed that paid to the named executive officers. Each of Messrs.
Paulson, Hurst, Thain, Thornton, Corzine and Zuckerberg has accrued benefits
under the employees' pension plan entitling him to receive annual benefits upon
retirement at age 65 of $10,533, $10,533, $7,074, $11,801, $9,942 and $7,721,
respectively. These benefits had accrued prior to November 1992 and none of
these executive officers has earned additional benefits under the pension plan
since November 1992.
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EMPLOYMENT, NONCOMPETITION AND
PLEDGE AGREEMENTS
In connection with our common stock offering, Goldman Sachs 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.
The following are descriptions of the material terms of the employment,
noncompetition and pledge agreements with the managing directors who were profit
participating limited partners. You should, however, refer to the exhibits that
are a part of the registration statement for a copy of the form of each
agreement. See "Available Information".
EMPLOYMENT AGREEMENTS
Each employment agreement has an initial term extending through November
24, 2000 (thereafter no set term), requires each continuing managing director
who was a profit participating limited partner to devote his or her entire
working time to the business and affairs of Goldman Sachs and generally may be
terminated at any time by either that managing director or Goldman Sachs on 90
days' prior written notice.
Goldman Sachs has entered into similar employment agreements with all other
managing directors, except that they have no set term.
NONCOMPETITION AGREEMENTS
Each noncompetition agreement provides as follows:
CONFIDENTIALITY. Each managing director who was a profit participating
limited partner is required to protect and use "confidential information" in
accordance with the restrictions placed by Goldman Sachs on its use and
disclosure.
NONCOMPETITION. During the period ending 12 months after the date a
managing director who was a profit participating limited partner ceases to be
employed by Goldman Sachs, that managing director may not:
- - form, or acquire a 5% or greater ownership, voting or profit participation
interest in, any competitive enterprise; or
- - associate with any competitive enterprise and in connection with such
association engage in, or directly or indirectly manage or supervise personnel
engaged in, any activity that had a relationship to that managing director's
activities at Goldman Sachs.
When we refer to a "competitive enterprise", we are referring to any business
enterprise that engages in any activity, or owns a significant interest in any
entity that engages in any activity, that competes with any activity in which we
are engaged.
NONSOLICITATION. During the period ending 18 months after the date a
managing director who was a profit participating limited partner ceases to be
employed by Goldman Sachs, that managing director may not, directly or
indirectly, in any manner:
- - solicit any client with whom that managing director worked, or whose identity
became known to him or her in connection with his or her employment with
Goldman Sachs, to transact business with a competitive enterprise or reduce or
refrain from doing any business with Goldman Sachs;
- - interfere with or damage any relationship between Goldman Sachs and any client
or prospective client; or
- - solicit any employee of Goldman Sachs to apply for, or accept employment with,
any competitive enterprise.
TRANSFER OF CLIENT RELATIONSHIPS. Each managing director who was a profit
participating limited partner is required, upon termination of his or her
employment, to take all actions and do all things reasonably requested by
Goldman Sachs during a 90-day cooperation period to maintain for Goldman Sachs
the business, goodwill and business
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relationships with Goldman Sachs' clients with which he or she worked.
LIQUIDATED DAMAGES. In the case of any breach of the noncompetition or
nonsolicitation provisions prior to the fifth anniversary of the date of the
consummation of our common stock offering, the breaching managing director will
be liable for liquidated damages. The amount of liquidated damages for each
managing director who initially serves on the board of directors, the Management
Committee or the Partnership Committee of Goldman Sachs is $15 million, and the
amount of liquidated damages for each other managing director who was a profit
participating limited partner is $10 million. These liquidated damages are in
addition to the forfeiture of any future equity-based awards that may occur as a
result of the breach of any noncompetition or nonsolicitation provisions
contained in those awards.
PLEDGE AGREEMENT
The liquidated damages provisions of each noncompetition agreement are
secured by a pledge of stock or other assets with an initial value equal to 100%
of the applicable liquidated damages amount.
Each pledge agreement will terminate on the earliest to occur of:
- - the death of the relevant managing director;
- - the expiration of the 24-month period following the termination of the
employment of the relevant managing director; or
- - the fifth anniversary of the date of the consummation of our common stock
offering.
NONEXCLUSIVITY AND ARBITRATION
The liquidated damages and pledge arrangements discussed above are not
exclusive of any injunctive relief that Goldman Sachs may be entitled to for a
breach of a noncompetition agreement and, after the termination of the pledge
agreement, Goldman Sachs will be entitled to all available remedies for a breach
of a noncompetition agreement.
The employment, noncompetition and pledge agreements generally provide that
any disputes thereunder will be resolved by binding arbitration.
THE EMPLOYEE INITIAL PUBLIC OFFERING AWARDS
In connection with the consummation of our common stock offering, we
provided awards to our employees and a limited number of consultants and
advisors, other than managing directors who were profit participating limited
partners, in one or more of the following forms:
- - substantially all employees received a grant of restricted stock units awarded
based on a formula, with respect to which up to an aggregate of 30,025,946
shares of common stock will be deliverable;
- - certain senior employees, principally managing directors who were not profit
participating limited partners, were selected to participate in the defined
contribution plan described below, to which Goldman Sachs has made an initial
irrevocable contribution of 12,555,866 shares of common stock;
- - certain employees received a grant of restricted stock units awarded on a
discretionary basis, with respect to which up to an aggregate of 33,292,869
shares of common stock will be deliverable; and
- - certain employees received a grant of options to purchase shares of common
stock awarded on a discretionary basis, with respect to which up to an
aggregate of 40,127,592 shares of common stock will be deliverable.
The restricted stock units awarded to employees based on a formula, the
restricted stock units awarded to employees on a discretionary basis and the
options to purchase shares of common stock awarded to employees on a
discretionary basis were granted under the stock incentive plan described below.
The restricted stock units awarded to employees on a discretionary and a formula
basis described below confer only the rights of a general unsecured creditor of
Goldman Sachs and no rights as a shareholder of Goldman Sachs until the common
stock underlying such award is delivered. Any shares of common stock acquired by
a managing director pursuant to the awards will be
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subject to the shareholders' agreement described in "Certain Relationships and
Related Transactions -- Shareholders' Agreement".
FORMULA AWARDS
The common stock underlying the restricted stock units awarded based on a
formula generally will be deliverable in equal installments on or about the
first, second and third anniversaries of the date of the consummation of our
common stock offering, although the common stock may be deliverable earlier in
the event of certain terminations of employment following a change in control.
While no additional service will be required to obtain delivery of the
underlying common stock (i.e., the award is "vested"), delivery of the common
stock will be conditioned on the grantee's satisfying certain requirements,
including not being terminated under the circumstances described in the award
agreement prior to delivery of the common stock and not violating any policy of
Goldman Sachs (including in respect of confidentiality and hedging) or otherwise
acting in a manner detrimental to Goldman Sachs (including violating
noncompetition or nonsolicitation provisions of the award). While these
restricted stock units are outstanding, amounts equal to regular cash dividends
that would have been paid on the common stock underlying these units if the
common stock had been actually issued will be paid in cash at about the same
time that the dividends are paid generally to the shareholders. These amounts
will be recorded as compensation expense since the underlying shares of common
stock will not have been issued.
Pursuant to Accounting Principles Board Opinion No. 25, we recorded
non-cash compensation expense of $1,591 million related to the restricted stock
units awarded based on a formula on the date of grant, since future service is
not required as a condition to the delivery of the underlying shares of common
stock. For purposes of calculating both basic earnings per share (pursuant to
Statement of Financial Accounting Standards No. 128) and book value per share,
the shares of common stock underlying the restricted stock units awarded based
on a formula are included in common stock outstanding for the reason described
above.
DISCRETIONARY AWARDS
RESTRICTED STOCK UNITS AWARDED ON A DISCRETIONARY BASIS. The restricted
stock units awarded on a discretionary basis will vest, and the underlying
common stock will be delivered, in equal installments on or about the third,
fourth and fifth anniversaries of the date of consummation of our common stock
offering if the grantee has satisfied certain conditions and the grantee's
employment with Goldman Sachs has not been terminated, with certain exceptions
for terminations of employment due to death, retirement, extended absence or
following a change in control. While these restricted stock units are
outstanding, amounts equal to regular cash dividends that would have been paid
on the common stock underlying these units if the common stock had been actually
issued will be paid in cash at about the same time that the dividends are paid
generally to the shareholders. These amounts will be recorded as compensation
expense since the underlying shares of common stock will not have been issued.
Pursuant to Accounting Principles Board Opinion No. 25, we will record
non-cash compensation expense of $1,765 million related to the restricted stock
units awarded on a discretionary basis over the related service period. For
purposes of calculating both basic earnings per share (pursuant to Statement of
Financial Accounting Standards No. 128) and book value per share, the shares of
common stock underlying these restricted stock units are excluded from common
stock outstanding since future service is required as a condition to the
delivery of the underlying shares of common stock. The dilutive effect of these
restricted stock units is, however, included in diluted shares outstanding using
the treasury stock method.
DISCRETIONARY OPTIONS. The options to purchase shares of common stock
awarded on a discretionary basis have been granted with an exercise price
generally equal to the initial public offering price per share in our common
stock offering, although in certain non-U.S. jurisdictions certain employees may
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have been granted discretionary options with a lower exercise price. These
discretionary options will generally be exercisable in equal installments
commencing on or about the third, fourth and fifth anniversaries of the date of
the consummation of our common stock offering if the grantee has satisfied
certain conditions and the grantee's employment with Goldman Sachs has not been
terminated, with certain exceptions for terminations of employment due to death,
retirement, extended absence or following a change in control. These
discretionary options will thereafter generally remain exercisable, subject to
satisfaction of certain conditions, until the tenth anniversary of the date of
the consummation of our common stock offering or, if earlier, upon expiration of
a period, as specified in the award agreement, following termination of
employment.
These discretionary options will be accounted for pursuant to Accounting
Principles Board Opinion No. 25, as permitted by paragraph 5 of Statement of
Financial Accounting Standards No. 123. Since these options had no intrinsic
value on the date of grant, no compensation expense will be recognized.
CONTRIBUTION TO THE DEFINED CONTRIBUTION PLAN. On the date of the
consummation of our common stock offering, Goldman Sachs made an initial
irrevocable contribution of 12,555,866 shares of common stock to the defined
contribution plan. Certain senior employees, principally managing directors who
were not profit participating limited partners, have been selected to
participate in the defined contribution plan. The right to receive shares will
vest, and the underlying common stock will be distributable to participants in
the defined contribution plan, in equal installments on or about the third,
fourth and fifth anniversaries of the initial contribution if the participant
has satisfied certain conditions and the participant's employment with Goldman
Sachs has not been terminated, with certain exceptions for terminations of
employment due to death or following a change in control. Dividends paid on
shares allocated to participants will be distributed currently.
We recorded non-cash compensation expense of $666 million related to the
initial irrevocable contribution of shares of common stock to the defined
contribution plan. This non-cash expense has been recognized on the date it was
funded in accordance with Statement of Financial Accounting Standards No. 87.
CHANGE IN CONTROL
The restricted stock units awarded based on a formula, the restricted stock
units awarded on a discretionary basis, the options to purchase shares of common
stock awarded on a discretionary basis and the defined contribution plan provide
that (i) if a change in control occurs and (ii) within 18 months thereafter a
grantee's or participant's employment is terminated by Goldman Sachs other than
for cause or the grantee or participant terminates employment for good reason,
in each case, as determined by Goldman Sachs:
- - the common stock underlying any outstanding restricted stock units awarded
based on a formula will be delivered;
- - any outstanding restricted stock units awarded on a discretionary basis will
vest and the common stock underlying these restricted stock units will be
delivered;
- - any outstanding unexercised options to purchase shares of common stock awarded
on a discretionary basis will become exercisable and will be exercisable for a
period of one year following such termination of employment (but in no event
later than the tenth anniversary of the date of the consummation of our common
stock offering) and thereafter terminate; and
- - under the defined contribution plan, any unvested portion of the common stock
attributable to the initial contribution by Goldman Sachs to the defined
contribution plan will vest and be distributed.
"Change in control" means the consummation of a merger, consolidation,
statutory share exchange or similar form of corporate transaction involving The
Goldman Sachs Group, Inc. or sale or other disposition of all or substantially
all of the assets of The Goldman Sachs Group, Inc. to an entity that is not an
affiliate of The Goldman Sachs
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Group, Inc. that, in each case, requires shareholder approval under the law of
The Goldman Sachs Group, Inc.'s jurisdiction of organization, unless immediately
following such transaction, either:
- - at least 50% of the total voting power of the surviving entity or its parent
entity, if applicable, is represented by securities of The Goldman Sachs
Group, Inc. that were outstanding immediately prior to the transaction; or
- - at least 50% of the members of the board of directors of the surviving entity,
or its parent entity, if applicable, following the transaction were incumbent
directors (including directors whose election or nomination was approved by
the incumbent directors) of The Goldman Sachs Group, Inc. at the time of the
board of directors' approval of the execution of the initial agreement
providing for the transaction.
"Cause" includes, among other things, the grantee's or participant's
conviction of certain misdemeanors or felonies, violation of applicable laws and
violation of any policy of Goldman Sachs, including policies with respect to
hedging and confidentiality.
"Good reason" means a materially adverse alteration in the grantee's or
participant's position or in the nature or status of the grantee's or
participant's responsibilities from those in effect immediately prior to the
change in control, as determined by Goldman Sachs, or certain relocations by
Goldman Sachs of a grantee's or participant's principal place of employment.
THE STOCK INCENTIVE PLAN
The following is a description of the material terms of the stock incentive
plan. You should, however, refer to the exhibits that are a part of the
registration statement for a copy of the stock incentive plan. See "Available
Information".
TYPES OF AWARDS. The stock incentive plan provides for grants of incentive
stock options (within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended), nonqualified stock options, stock appreciation rights,
dividend equivalent rights, restricted stock, restricted stock units and other
awards. The stock incentive plan also permits the making of loans to purchase
shares of common stock.
SHARES SUBJECT TO THE STOCK INCENTIVE PLAN; OTHER LIMITATIONS ON
AWARDS. Subject to adjustment as described below, the total number of shares of
common stock of The Goldman Sachs Group, Inc. that may be issued under the stock
incentive plan through its fiscal year ending in 2002 may not exceed 300,000,000
shares and, in each fiscal year thereafter, may not exceed five percent (5%) of
the issued and outstanding shares of common stock, determined as of the last day
of the immediately preceding fiscal year, increased by the number of shares
available for awards in previous fiscal years but not covered by awards granted
in such years. These shares may be authorized but unissued common stock or
authorized and issued common stock held in Goldman Sachs' treasury or otherwise
acquired for the purposes of the stock incentive plan. If any award is forfeited
or is otherwise terminated or canceled without the delivery of shares of common
stock, if shares of common stock are surrendered or withheld from any award to
satisfy a grantee's income tax or other withholding obligations, or if shares of
common stock owned by a grantee are tendered to pay the exercise price of
awards, then such shares will again become available under the stock incentive
plan. No more than 200,000,000 shares of common stock may be available for
delivery in connection with the exercise of incentive stock options. The maximum
number of shares of common stock with respect to which options or stock
appreciation rights may be granted to an individual grantee in 1999 is 3,500,000
shares of common stock and, in each fiscal year that follows, is 110% of the
maximum number of shares of common stock applicable for the preceding 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
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stock split, stock dividend, spin-off, combination or reclassification of the
common stock, or any other event that the Stock Incentive Plan Committee
determines affects our capitalization.
ELIGIBILITY. Awards may be made to any director, officer or employee of
Goldman Sachs, including any prospective employee, and to any consultant or
advisor to Goldman Sachs selected by the Stock Incentive Plan Committee.
ADMINISTRATION. The stock incentive plan may be administered by our board
of directors or by the Stock Incentive Plan Committee, a committee to be
appointed by our board of directors.
The Stock Incentive Plan Committee 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 will be final and binding.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The Stock Incentive Plan
Committee may grant incentive stock options and nonqualified stock options to
purchase shares of common stock from Goldman Sachs (at the price set forth in
the award agreement), and stock appreciation rights in such amounts, and subject
to such terms and conditions, as the Stock Incentive Plan Committee may
determine. No grantee of an option or stock appreciation right will have any of
the rights of a shareholder of The Goldman Sachs Group, Inc. with respect to
shares subject to their award until the issuance of the shares.
RESTRICTED STOCK. The Stock Incentive Plan Committee may grant restricted
shares of common stock in amounts, and subject to terms and conditions, as the
Stock Incentive Plan Committee may determine. The grantee will have the rights
of a shareholder with respect to the restricted stock, subject to any
restrictions and conditions as the Stock Incentive Plan Committee may include in
the award agreement.
RESTRICTED STOCK UNITS. The Stock Incentive Plan Committee may grant
restricted stock units in amounts, and subject to terms and conditions, as the
Stock Incentive Plan Committee may determine. Recipients of restricted stock
units have only the rights of a general unsecured creditor of Goldman Sachs and
no rights as a shareholder of The Goldman Sachs Group, Inc. until the common
stock underlying the restricted stock units is delivered.
OTHER EQUITY-BASED AWARDS. The Stock Incentive Plan Committee may grant
other types of equity-based awards, including the grant of unrestricted shares,
in amounts, and subject to terms and conditions, as the Stock Incentive Plan
Committee may determine. These awards may involve the transfer of actual shares
of common stock, or the payment in cash or otherwise of amounts based on the
value of shares of common stock, and may include awards designed to comply with,
or take advantage of certain benefits of, the local laws of non-U.S.
jurisdictions.
CHANGE IN CONTROL. The Stock Incentive Plan Committee may provide in any
award agreement for provisions relating to a change in control of The Goldman
Sachs Group, Inc. or any of its subsidiaries or affiliates, including, without
limitation, the acceleration of the exercisability of, or the lapse of
restrictions with respect to, the award.
DIVIDEND EQUIVALENT RIGHTS. The Stock Incentive Plan Committee may in its
discretion include in the award agreement a dividend equivalent right entitling
the grantee to receive amounts equal to the dividends that would be paid, during
the time such award is outstanding, on the shares of common stock covered by
such award as if such shares were then outstanding.
NONASSIGNABILITY. Except to the extent otherwise provided in the award
agreement or approved by the Stock Incentive Plan Committee, no award or right
granted to any person under the stock incentive plan will be assignable or
transferable other than by will or by the laws of descent and distribution, and
all awards and rights will be exercisable during the life of the grantee only by
the grantee or the grantee's legal representative.
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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.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE STOCK INCENTIVE PLAN. The
following is a brief description of the material U.S. federal income tax
consequences generally arising with respect to awards.
The grant of an option or stock appreciation right will create no tax
consequences for the participant or Goldman Sachs. Upon exercising an option,
other than an incentive stock option, the participant will generally recognize
ordinary income equal to the difference between the exercise price and the fair
market value of the shares acquired on the date of exercise and Goldman Sachs
generally will be entitled to a tax deduction in the same amount. A participant
generally will not recognize taxable income upon exercising an incentive stock
option and Goldman Sachs will not be entitled to any tax deduction with respect
to an incentive stock option if the participant holds the shares for the
applicable periods specified in the Internal Revenue Code of 1986, as amended.
With respect to other awards, upon the payment of cash or the issuance of
shares or other property that is either not restricted as to transferability or
not subject to a substantial risk of forfeiture (e.g., delivery under the
restricted stock units), the participant will generally recognize ordinary
income equal to the cash or the fair market value of shares or other property
delivered. Goldman Sachs generally will be entitled to a deduction in an amount
equal to the ordinary income recognized by the participant.
THE DEFINED CONTRIBUTION PLAN
The defined contribution plan is not intended to be qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended, and is not subject to
the Employee Retirement Income Security Act of 1974, as amended.
The following is a description of the material terms of the defined
contribution plan. You should, however, refer to the exhibits that are a part of
the registration statement for a copy of the defined contribution plan. See
"Available Information".
ELIGIBILITY AND PARTICIPATION. Our board of directors or the Defined
Contribution Plan Committee, a committee to be appointed by our board of
directors, may select the employees to participate in the defined contribution
plan.
CONTRIBUTIONS. Goldman Sachs has made an initial irrevocable contribution
to the Defined Contribution Plan Trust, the trust underlying the defined
contribution plan, of 12,555,866 shares of common stock simultaneously with the
consummation of our common stock offering. Goldman Sachs may contribute
additional shares of common stock or cash to the Defined Contribution Plan Trust
from time to time in its sole discretion. We currently intend to make ongoing
contributions to the defined contribution plan and to reallocate forfeitures
under the defined contribution plan to participants.
ALLOCATION OF CONTRIBUTIONS. There will be established an account in the
name of each participant and a separate, unallocated account to which any
forfeitures of common stock will be credited pending reallocation to
participants. The Defined Contribution Plan Committee will designate the number
of shares of common stock allocable to the account of each participant. Any
common stock remaining in the unallocated account as of the last day of each
plan year due to forfeitures and any distributions received on common stock
credited to the unallocated account will be reallocated among the accounts of
participants who are employed by Goldman Sachs on the last day of each plan year
pro rata to each such participant's share of Goldman Sachs contributions, for
that plan 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
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and will be tendered by the trustee of the Defined Contribution Plan Trust in
accordance with confidential instructions provided by the participants if the
transfer restrictions under the shareholders' agreement are waived (and will not
be tendered if the transfer restrictions are not waived). See "Certain
Relationships and Related Transactions -- Shareholders' Agreement" for a
discussion of those provisions. Any shares of common stock allocated to accounts
of participants who are not subject to the shareholders' agreement will be voted
and tendered by the trustee of the Defined Contribution Plan Trust in accordance
with confidential instructions provided by the participant. Shares held in
participants' accounts with respect to which the trustee of the Defined
Contribution Plan Trust does not receive voting or tendering directions will not
be voted or tendered.
Shares of common stock held in the unallocated account will be voted or
tendered by the trustee in the same proportion as the shares of common stock
allocated to participants' accounts with respect to which voting or tendering
instructions are received.
DIVIDENDS. Any cash dividends on shares of common stock allocated to a
participant's account will be distributed to each participant after the end of
the calendar quarter in which such dividend is received.
VESTING AND DISTRIBUTION. With respect to the initial contribution of
common stock to the defined contribution plan, the right to receive shares of
common stock allocated to a participant's account generally will become vested,
and the common stock generally will be distributable, in equal installments on
or about the third, fourth and fifth anniversaries of the date of such
contribution if the participant satisfies certain conditions and the
participant's employment with Goldman Sachs has not been terminated, with
certain exceptions for termination due to death or following a change in
control.
With respect to contributions to the defined contribution plan (other than
the initial contribution), the Defined Contribution Plan Committee may determine
the dates on which the right to receive common stock (or cash) allocated to a
participant's account will vest and be distributable.
ADMINISTRATION OF THE DEFINED CONTRIBUTION PLAN. The defined contribution
plan will be administered by the Defined Contribution Plan Committee. Our board
of directors may, however, determine allocations of contributions or resolve to
otherwise administer the defined contribution plan.
AMENDMENTS. Subject to limitations with respect to contributions
previously made to the defined contribution plan, our board of directors
reserves the right to modify, alter, amend or terminate the defined contribution
plan or the Defined Contribution Plan Trust. No modification or amendment of the
defined contribution plan may be made which would cause or permit any part of
the assets of the Defined Contribution Plan Trust to be used for, or diverted
to, purposes other than for the exclusive benefit of participants or their
beneficiaries, or which would cause any part of the assets of the Defined
Contribution Plan Trust to revert to or become the property of Goldman Sachs.
LIMIT ON LIABILITY. All distributions under the defined contribution plan
will be paid or provided solely from the assets of the Defined Contribution Plan
Trust and Goldman Sachs will have no responsibility or liability to any
participant or beneficiary relating to the common stock or other assets of the
Defined Contribution Plan Trust. The agreement establishing the Defined
Contribution Plan Trust provides that no creditor of Goldman Sachs will have any
rights to the assets of the Defined Contribution Plan Trust.
U.S. FEDERAL INCOME TAX CONSEQUENCES. The following is a brief description
of the material U.S. federal income tax consequences generally arising with
respect to participation in the defined contribution plan. A participant in the
defined contribution plan will recognize ordinary income upon the vesting of
shares of common stock allocated to such participant's account in an amount
equal to the fair market value of the vested shares. Goldman Sachs will
generally be entitled to a deduction equal to the fair market value of the
shares at the time of the contribution in the taxable year in which the
participant recognizes income under the defined contribution plan in respect of
the vesting of shares of common stock.
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THE PARTNER COMPENSATION PLAN
OVERVIEW
To perpetuate the sense of partnership and teamwork that exists among our
senior professionals, and to reinforce the alignment of employee and shareholder
interests, our board of directors has adopted a partner compensation plan for
the purpose of compensating senior professionals. The partner compensation plan
may be administered by our board of directors or the Partner Compensation Plan
Committee, a committee to be appointed by our board of directors.
Individuals will be selected to participate in the partner compensation
plan for a one- or two-fiscal year cycle. Upon selection to the partner
compensation plan, participants will be allocated a percentage interest in a
pool for annual bonus payments in addition to base salaries. The size of the
pool will be established by the Partner Compensation Plan Committee annually,
taking into account our results of operations and other measures of financial
performance. The Partner Compensation Plan Committee may also retain an
unallocated percentage of the pool that it may allocate among participants at
fiscal year end in its sole discretion. By linking the participant's annual
bonus payments to our results as a whole, as opposed to the results of any
participant's individual business unit, we believe it will provide additional
incentives for teamwork. Further, we believe that the tying of the bonus
payments to overall financial results will more closely align the interests of
the participants with our shareholders. Finally, we believe that the retention
of a percentage of the pool for allocation among participants at fiscal year end
in amounts determined at the sole discretion of the Partner Compensation Plan
Committee will provide appropriate compensation flexibility.
The following is a description of the material terms of the partner
compensation plan. You should, however, refer to the exhibits that are a part of
the registration statement for a copy of the partner compensation plan. See
"Available Information".
ELIGIBILITY AND PARTICIPATION
Consistent with our historical practice of partnership elections, the
initial cycle will be through the end of fiscal 2000. It is expected that the
participants in the initial cycle will consist of the continuing managing
directors who were profit participating limited partners. Prior to the one- or
two-fiscal year cycle commencing with fiscal 2001, and on or before each
succeeding cycle, the Partner Compensation Plan Committee will determine the
participants in the partner compensation plan. Individual participants may also
be added from time to time outside the annual or biennial selection process.
DETERMINATION OF SALARY AND BONUS
The aggregate amount of compensation to be included in the partner
compensation plan for each fiscal year will be determined by the Partner
Compensation Plan Committee, taking into account measures of our financial
performance it deems appropriate (which in 1999 will include a full year's
results), including, but not limited to, earnings per share, return on average
common equity, pre-tax income, pre-tax operating income, net revenues, net
income, profits before taxes, book value per share, stock price, earnings
available to common shareholders and ratio of compensation and benefits to net
revenues.
Prior to the commencement of the first fiscal year in any one- or
two-fiscal year cycle, and prior to the consummation of our common stock
offering in the case of the initial cycle, the Partner Compensation Plan
Committee will determine both the salaries of and the percentage of the partner
compensation plan pool that may be allocable to any particular participant. The
percentage allocated to any particular participant is expected to be applicable
for each fiscal year within the applicable cycle. Any remaining portion of the
partner compensation plan pool not so allocated will be allocated to individual
participants at the end of the fiscal year in amounts determined by the Partner
Compensation Plan Committee.
Amounts payable under the partner compensation plan will be satisfied in
cash or as awards under the stock incentive plan, as determined by the Partner
Compensation Plan Committee and recommended to the Stock Incentive Plan
Committee.
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PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this prospectus certain
information regarding the beneficial ownership of our common stock by:
- - each person who is known to Goldman Sachs to be the beneficial owner of more
than 5% of our common stock;
- - each director and named executive officer of Goldman Sachs; and
- - all directors and executive officers of Goldman Sachs as a group.
This information gives effect to our common stock offering, and to the
incorporation transactions and the related transactions that are described and
defined under "Certain Relationships and Related Transactions -- Incorporation
and Related Transactions".
Except as otherwise indicated, the persons or entities listed below have
sole voting and investment power with respect to the shares beneficially owned
by them. None of our employees sold shares of common stock in our common stock
offering.
For purposes of this table, information as to the shares of common stock is
calculated based on 437,245,963 shares of common stock outstanding upon the
closing of our common stock offering. For purposes of this table, "beneficial
ownership" is determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, pursuant to which a person or group of persons is deemed
to have "beneficial ownership" of any shares of common stock that such person
has the right to acquire within 60 days after the date of this prospectus. For
purposes of computing the percentage of outstanding shares of common stock held
by each person or group of persons named below, any shares which such person or
persons has the right to acquire within 60 days after the date of this
prospectus are deemed to be outstanding but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
----------------------
NAME NUMBER PERCENT
- ---- ------ -------
<S> <C> <C>
5% Shareholder:
Kamehameha Activities Association(1)...................... 21,975,421 5.0%
Directors and named executive officers:
Henry M. Paulson, Jr.(2).................................. 4,132,235 *
Robert J. Hurst(2)........................................ 3,835,124 *
John A. Thain(2).......................................... 3,101,426 *
John L. Thornton(2)....................................... 3,012,541 *
Sir John Browne(2)........................................ 0 --
James A. Johnson(2)....................................... 0 --
John L. Weinberg(2)....................................... 444,444 *
Jon S. Corzine(3)......................................... 4,414,198 1.0
Roy J. Zuckerberg(4)...................................... 3,026,974 *
All directors and continuing executive officers as a group
(13 persons)(5)........................................... 26,152,648 6.0
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) 567 South King Street, Suite 150, Honolulu, Hawaii 96813. Kamehameha
Activities Association in the ordinary course of business is an investor in
a number of Goldman Sachs' merchant banking funds and from time to time is a
party to other transactions with Goldman Sachs. These investments and
transactions are negotiated on an arm's-length basis and contain customary
terms and conditions.
(2) c/o The Goldman Sachs Group, Inc., 85 Broad Street, New York, New York
10004. Excludes any shares of common stock subject to the shareholders'
agreement referred to below that are owned by 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
(Footnotes continued on following page)
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such person individually, and each disclaims beneficial ownership of the
shares of common stock subject to the voting agreements between Sumitomo
Bank Capital Markets, Inc. and Kamehameha Activities Association,
respectively, on the one hand, and Goldman Sachs, on the other hand. See
"Certain Relationships and Related Transactions -- Shareholders' Agreement"
for a discussion of the shareholders' agreement and the voting agreements.
(3) Mr. Corzine, who resigned from Goldman Sachs prior to the consummation of
our common stock offering, served as Chairman or Co-Chairman and Chief
Executive Officer or Co-Chief Executive Officer of The Goldman Sachs Group,
L.P. during fiscal 1998.
(4) Mr. Zuckerberg, who retired in November 1998, served as Vice Chairman of The
Goldman Sachs Group, L.P. during fiscal 1998.
(5) Total excludes the shares of common stock beneficially owned by Messrs.
Corzine and Zuckerberg, former executive officers of The Goldman Sachs
Group, L.P. Each continuing executive officer is a party to the
shareholders' agreement and each disclaims beneficial ownership of the
shares of common stock subject to the shareholders' agreement other than
those specified above, and each disclaims beneficial ownership of the shares
of common stock subject to the voting agreements between Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, respectively,
on the one hand, and Goldman Sachs, on the other hand. See "Certain
Relationships and Related Transactions -- Shareholders' Agreement" for a
discussion of the shareholders' agreement and the voting agreements.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following are descriptions of the material provisions of the agreements
and other documents discussed below. You should, however, refer to the exhibits
that are a part of the registration statement for a copy of each agreement and
document. See "Available Information".
INCORPORATION AND RELATED TRANSACTIONS
Simultaneously with the consummation of our common stock offering, we
completed a number of transactions in order to have The Goldman Sachs Group,
Inc. succeed to the business of The Goldman Sachs Group, L.P.
The principal incorporation transactions and related transactions are
summarized below.
INCORPORATION TRANSACTIONS
Pursuant to our plan of incorporation:
- - The Goldman Sachs Corporation, which was the general partner of The Goldman
Sachs Group, L.P., merged into The Goldman Sachs Group, Inc. In this
transaction, the managing directors who were profit participating limited
partners and who were shareholders of The Goldman Sachs Corporation received
common stock and the other shareholders of The Goldman Sachs Corporation
received common stock;
- - The managing directors who were profit participating limited partners
exchanged their interests in The Goldman Sachs Group, L.P. and certain
affiliates for 265,019,073 shares of common stock (these amounts include
shares issued in the merger of The Goldman Sachs Corporation into The Goldman
Sachs Group, Inc.);
- - The retired limited partners of Goldman Sachs exchanged their interests in The
Goldman Sachs Group, L.P. and certain affiliates for cash, junior subordinated
debentures or common stock (or a combination thereof). These transactions
resulted in the payment of approximately $891 million in cash and the issuance
of $295 million principal amount of junior subordinated debentures and of
47,270,551 shares of common stock (these amounts include the shares of common
stock and cash issued to the retired limited partners in the merger of The
Goldman Sachs Corporation into The Goldman Sachs Group, Inc.);
- - Sumitomo Bank Capital Markets, Inc. exchanged its interests in The Goldman
Sachs Group, L.P. and Goldman, Sachs & Co. for 30,425,052 shares of common
stock and 7,440,362 shares of nonvoting common stock;
- - Kamehameha Activities Association exchanged its interests in The Goldman Sachs
Group, L.P. for 30,975,421 shares of common stock; and
- - After all the interests of The Goldman Sachs Group, L.P. were transferred to
The Goldman Sachs Group, Inc., The Goldman Sachs Group, L.P. was merged into
The Goldman Sachs Group, Inc.
RELATED TRANSACTIONS
- - The restricted stock units awarded to employees based on a formula or on a
discretionary basis as well as options to purchase shares of common stock
awarded on a discretionary basis were granted, the initial irrevocable
contribution of shares of common stock to the defined contribution plan was
made and certain senior employees, principally managing directors who were not
profit participating limited partners, were selected to participate in the
defined contribution plan; and
- - In connection with our common stock offering, we will make a $200 million cash
contribution to the Goldman Sachs Fund, a charitable foundation. The Goldman
Sachs Fund, which has been in existence for over 30 years, is the entity that
has historically conducted charitable initiatives for Goldman Sachs. The
Goldman Sachs Fund is subject to United States federal tax rules that prohibit
it from engaging in any act of self-dealing or any activities that result in
an impermissible benefit to private persons. While the Goldman Sachs Fund has
no specific intention to contribute to organizations with which Goldman Sachs'
executive officers or directors are affiliated, the Goldman Sachs Fund may in
the future
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make contributions to educational and other organizations with which Goldman
Sachs' directors or executive officers are involved.
SHAREHOLDERS' AGREEMENT
PERSONS AND SHARES COVERED
Each former profit participating limited partner, other than Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, and each other
person who was a managing director on the date of the consummation of our common
stock offering became a party to the shareholders' agreement. In addition, each
person who becomes a managing director thereafter will become a party to the
shareholders' agreement. Not less than 281,000,000 shares of common stock are
subject to the shareholders' agreement.
The shares covered by the shareholders' agreement include generally all
shares of common stock acquired from Goldman Sachs by a party to the
shareholders' agreement, including:
- - any shares of common stock received by the managing directors who were profit
participating limited partners pursuant to the incorporation transactions,
except for certain shares that aggregate less than 140,000 shares;
- - any shares of common stock received from the defined contribution plan;
- - any shares of common stock received pursuant to the restricted stock units
awarded to employees based on a formula, the restricted stock units awarded on
a discretionary basis or the options to purchase shares of common stock
awarded on a discretionary basis; and
- - unless otherwise determined by our board of directors and the Shareholders'
Committee referred to below, any shares of common stock received from Goldman
Sachs through any other employee compensation, benefit or similar plan.
Shares of common stock purchased in the open market or in a subsequent
underwritten public offering will not be subject to the shareholders' agreement.
The Shareholders' Committee may also exclude from the application of all or part
of the shareholders' agreement all or any portion of the common stock acquired
by a managing director who is a new employee of Goldman Sachs.
TRANSFER RESTRICTIONS
Each party to the shareholders' agreement agrees, among other things, to:
- - have beneficial ownership while he or she is a managing director of at least
25% of the cumulative number of his or her shares that are beneficially owned
or acquired, and are or become subject to the shareholders' agreement; and
- - comply with the underwriters' 180-day lock-up arrangement in connection with
our common stock offering.
The former profit participating limited partners, other than Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, are subject to
additional restrictions on their ability to transfer shares received in
connection with the incorporation transactions described under "-- Incorporation
and Related Transactions -- Incorporation Transactions". Under these additional
restrictions, each of these persons has agreed that he or she will not transfer
any of these shares, other than up to 140,000 shares in the aggregate that will
be excluded from these restrictions, until the third anniversary of the date of
the consummation of our common stock offering. These restrictions will lapse in
equal installments on each of the third, fourth and fifth anniversaries of the
date of the consummation of our common stock offering.
All transfer restrictions applicable to a party to the shareholders'
agreement, except for the underwriters' 180-day lock-up, terminate upon death.
WAIVERS
Except in the case of a third-party tender or exchange offer, the
additional transfer restrictions applicable to profit participating limited
partners, other than Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association, may be waived or terminated at any time by the
Shareholders' Committee. The Shareholders' Committee also has the power to waive
the other transfer restrictions
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to permit parties to the shareholders' agreement to:
- - participate as sellers in underwritten public offerings of common stock and
tender and exchange offers and share repurchase programs by Goldman Sachs;
- - transfer shares to charities, including charitable foundations;
- - transfer shares held in employee benefit plans; and
- - transfer shares in specific transactions (for example, to immediate family
members and trusts) or circumstances.
In the case of a third-party tender or exchange offer, all transfer
restrictions may be waived or terminated:
- - if our board of directors is recommending acceptance or is not making any
recommendation with respect to acceptance of the tender or exchange offer, by
a majority of the voting interests referred to below; or
- - if our board of directors is recommending rejection of the tender or exchange
offer, by 66 2/3% of the outstanding voting interests referred to below.
In the case of a tender or exchange offer by Goldman Sachs, a majority of
the outstanding voting interests may also elect to waive or terminate the
transfer restrictions.
In any event, the underwriters' 180-day lock-up may not be waived without
the consent of the underwriters.
VOTING
Prior to any vote of the shareholders of Goldman Sachs, the shareholders'
agreement requires a separate, preliminary vote of the voting interests on each
matter upon which a vote of the shareholders is proposed to be taken. Each share
subject to the shareholders' agreement will be voted in accordance with the
majority of the votes cast by the voting interests in the preliminary vote. In
elections of directors, each share subject to the shareholders' agreement will
be voted in favor of the election of those persons receiving the highest numbers
of votes cast by the voting interests in the preliminary vote. Prior to January
1, 2001, "voting interests" means all shares that are subject to the
shareholders' agreement. Thereafter, "voting interests" means all shares subject
to the shareholders' agreement held by all managing directors.
OTHER RESTRICTIONS
The shareholders' agreement also prevents the persons subject to the
shareholders' agreement from engaging in the following activities relating to
any securities of Goldman Sachs with any person who is not a person subject to
the shareholders' agreement or a director or employee of Goldman Sachs:
- - participating in a proxy solicitation;
- - depositing any shares subject to the shareholders' agreement in a voting trust
or subjecting any of these shares to any voting agreement or arrangement;
- - forming, joining or in any way participating in a "group"; or
- - proposing certain transactions with Goldman Sachs or seeking the removal of
any of our directors or any change in the composition of our board of
directors.
TERM, AMENDMENT AND CONTINUATION
The shareholders' agreement is to continue in effect until the earlier of
January 1, 2050 and the time it is terminated by the vote of 66 2/3% of the
outstanding voting interests referred to above. The additional transfer
restrictions applicable to profit participating limited partners, other than
Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, will
not terminate upon the expiration or termination of the shareholders' agreement
unless previously waived or terminated or unless subsequently waived or
terminated by our board of directors. The shareholders' agreement may generally
be amended at any time by a majority of the outstanding voting interests
referred to above.
Unless otherwise terminated, in the event of any transaction in which a
third party succeeds to the business of Goldman Sachs and in which persons
subject to the shareholders' agreement hold securities of the third party, the
shareholders' agreement will remain in full force and effect as to the
securities of the third party, and the third party shall succeed to the rights
and obliga-
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tions of Goldman Sachs under the shareholders' agreement.
INFORMATION REGARDING THE SHAREHOLDERS' COMMITTEE
The terms and provisions of the shareholders' agreement are administered by
the Shareholders' Committee. The Shareholders' Committee initially consists of
the persons subject to the shareholders' agreement who are both employees of
Goldman Sachs and members of our board of directors. It is possible that over
time all or a majority of the members of the Shareholders' Committee will not be
members of our board of directors.
Members of the Shareholders' Committee are entitled to indemnification from
Goldman Sachs in their capacities as members of the Shareholders' Committee.
VOTING AGREEMENT
Both Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association have agreed to vote their shares of common stock in the same manner
as a majority of the shares of common stock held by the managing directors of
Goldman Sachs are voted. The obligations of Sumitomo Bank Capital Markets, Inc.
and Kamehameha Activities Association under the voting agreements are
enforceable by The Goldman Sachs Group, Inc. The managing directors have no
right to enforce the voting agreements.
INSTRUMENT OF INDEMNIFICATION
In connection with our common stock offering, Goldman Sachs entered into an
instrument of indemnification. The instrument of indemnification covers certain
former partners of Goldman Sachs, including the managing directors who were
profit participating limited partners, each current director and executive
officer of Goldman Sachs, the retired limited partners, Sumitomo Bank Capital
Markets, Inc. and Kamehameha Activities Association. Under the instrument of
indemnification, in the event any indemnitee is, or is threatened to be, made a
party to any action, suit or proceeding by reason of the fact that such
indemnitee was a general or limited partner, shareholder, member, director,
officer, employee or agent of The Goldman Sachs Group, L.P. or certain of its
affiliates or subsidiaries or is serving or served, at the request of The
Goldman Sachs Group, L.P. or certain of its affiliates or subsidiaries, in any
of these capacities in another enterprise, Goldman Sachs is, subject to certain
exceptions, obligated to indemnify and hold such indemnitee harmless from any
losses, damages or expenses incurred by such indemnitee in the action, suit or
proceeding. The instrument of indemnification does not duplicate the obligations
of Goldman Sachs under the tax indemnification agreement described below. The
indemnification obligation of Goldman Sachs under the instrument of
indemnification also extends to the indemnification obligations that certain
indemnitees, including each current director and executive officer of The
Goldman Sachs Group, Inc., may have to other indemnitees.
The instrument of indemnification also provides that Goldman Sachs will,
subject to certain exceptions, release each indemnitee from all actions, suits
or other claims that The Goldman Sachs Group, L.P. may have had or which Goldman
Sachs, as a successor to The Goldman Sachs Group, L.P., may have arising out of
an indemnitee's partnership or other interest in The Goldman Sachs Group, L.P.
or certain of its affiliates or subsidiaries or arising out of the conduct of
such indemnitee while engaged in the conduct of the business of The Goldman
Sachs Group, L.P. or its affiliates or subsidiaries.
DIRECTOR AND OFFICER INDEMNIFICATION
We have entered into an agreement that provides indemnification to our
directors and officers and to the directors and certain officers of the general
partner of The Goldman Sachs Group, L.P., members of our Management Committee or
our Partnership Committee or the former Executive Committee of The Goldman Sachs
Group, L.P. and all other persons requested or authorized by our board of
directors or the board of directors of the general partner of The Goldman Sachs
Group, L.P. to take actions on behalf of us, The Goldman Sachs Group, L.P. or
the general partner of The Goldman Sachs Group, L.P. in connection with the plan
of incorporation, the registration statement and certain
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other registration statements for all losses, damages, costs and expenses
incurred by the indemnified person arising out of the relevant registration
statements or the transactions contemplated by the plan of incorporation. This
agreement is in addition to our indemnification obligations under our by-laws.
TAX INDEMNIFICATION AGREEMENT AND
RELATED MATTERS
An entity that has historically operated in corporate form generally is
liable for any adjustments to the corporation's taxes for periods prior to its
initial public offering. In contrast, the former partners of The Goldman Sachs
Group, L.P., rather than Goldman Sachs, generally will be liable for adjustments
to taxes (including U.S. federal and state income taxes) attributable to the
operations of The Goldman Sachs Group, L.P. and its affiliates prior to our
common stock offering. In connection with our common stock offering, we entered
into a tax indemnification agreement to indemnify certain former limited
partners of The Goldman Sachs Group, L.P., including the managing directors who
were profit participating limited partners, each 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 common stock offering. We will be
required to make additional payments to offset any taxes payable by a tax
indemnitee in respect of payments made pursuant to the tax indemnification
agreement only to the extent the payments made to that tax indemnitee exceed a
fixed amount. Any such payment of additional taxes by Goldman Sachs will be
offset by any tax benefit received by the tax indemnitee.
The tax indemnification agreement includes provisions that permit Goldman
Sachs to control any tax proceeding or contest which might result in Goldman
Sachs being required to make a payment under the tax indemnification agreement.
The incorporation transactions described under "-- Incorporation and
Related Transactions -- Incorporation Transactions" were structured in a manner
that is not expected to result in a significantly disproportionate tax or other
burden to any former partner of The Goldman Sachs Group, L.P. If the
incorporation transactions have a disproportionate effect on any partner,
Goldman Sachs may, but is not required to, make special payments and
arrangements with any person who incurs a disproportionate tax or other burden.
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DESCRIPTION OF NOTES WE ARE OFFERING
Please note that in this section entitled "Description of Notes We Are
Offering", references to The Goldman Sachs Group, Inc., we, our and us refer
only to The Goldman Sachs Group, Inc. and not to its consolidated subsidiaries.
Also, in this section, references to Holders mean those who have notes
registered in their own names, on the books that we or the trustee maintain for
this purpose, and not those who own beneficial interests in notes issued in
book-entry form through Cedel or Euroclear, or in notes registered in street
name. Owners of beneficial interests in the notes should read the subsection
entitled "-- Legal Ownership of Notes".
FINANCIAL TERMS OF THE NOTES
The specific financial terms of the notes that we are offering are as
follows:
- - TITLE OF THE NOTES: % (euro) Notes due 2009
- - ISSUER OF THE NOTES: The Goldman Sachs Group, Inc.
- - CURRENCY OF THE NOTES: We will make all payments on the notes in euros
((euro)), the currency of the European Economic and Monetary Union, unless
euros are not available. In that case, we will make the payments in U.S.
dollars as described under "-- Payment Mechanics -- When Euros Are Not
Available".
- - TOTAL PRINCIPAL AMOUNT BEING ISSUED: (euro)1,000,000,000
- - DUE DATE FOR PRINCIPAL: May 15, 2009
- - INTEREST RATE: % annually
- - DATE INTEREST STARTS ACCRUING:
- - DUE DATES FOR INTEREST: every May 15 and November 15
- - FIRST DUE DATE FOR INTEREST: November 15, 1999
- - REGULAR RECORD DATES FOR INTEREST: every May 1 and November 1
- - ADDITIONAL AMOUNTS: We intend to pay principal and interest without deducting
U.S. withholding taxes. If we are required to deduct from payments to non-U.S.
investors, however, we will pay additional amounts on those payments, but only
to the extent described below under "-- Payment of Additional Amounts".
- - REDEMPTION: We will not have the option to redeem the notes before they
mature, unless we become obligated to pay additional amounts because of
changes in U.S. withholding tax requirements.
- - FORM OF NOTES: We will issue the notes only in global form, through the Cedel
and Euroclear book-entry clearing systems in Europe, and you will not be
permitted to withdraw notes from those systems except in the limited
situations we describe below under "-- We Will Issue the Notes in Global
Form".
ADDITIONAL INFORMATION
ABOUT YOUR NOTE
THE NOTES WILL BE ISSUED UNDER THE INDENTURE
As required by U.S. federal law for all bonds and notes of companies that
are publicly offered, the notes we are offering are governed by a document
called the indenture. The indenture is a contract between us and The Bank of New
York, which acts as trustee. The trustee has two main roles:
- - First, the trustee can enforce your rights against us if we default. There are
limitations on the extent to which the trustee acts on your behalf, which we
describe below under "-- Default, Remedies and Waiver of Default".
- - Second, the trustee performs administrative duties for us, such as sending you
interest payments and notices.
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WE MAY ISSUE OTHER SERIES OF DEBT SECURITIES
The indenture permits us to issue different series of debt securities from
time to time. The notes we are offering will be a single, distinct series of
debt securities. The specific terms of each other series may differ from those
of the notes we are offering. The indenture does not limit the aggregate amount
of debt securities that we may issue, nor does it limit the number of other
series or the aggregate amount of any particular series.
The indenture and the notes do not limit our ability to incur other debt or
to issue other securities. Also, we are not subject to financial or similar
restrictions by the terms of the notes, except as we describe below under "--
Restrictive Covenant".
When we refer to a series of debt securities, we mean a series, such as the
notes, issued under the indenture. When we refer to the notes, these notes or
the notes we are offering, we mean the notes we are offering by means of this
prospectus.
HOW THE NOTES RANK AGAINST OTHER DEBT
The notes we are offering will not be secured by any property or assets of
The Goldman Sachs Group, Inc. or its subsidiaries. Thus, by owning these notes,
you are one of our unsecured creditors. These notes will not be subordinated to
any of our other debt obligations. This means that, in a bankruptcy or
liquidation proceeding against us, these notes would rank equally in right of
payment with all other unsecured and unsubordinated debt of The Goldman Sachs
Group, Inc. The specific terms of other debt, including those of other series we
may issue under the indenture, however, will differ from those of the notes we
are offering. For example, other debt will have different due dates for
principal and interest and may permit holders to accelerate the maturity in
different circumstances.
An investment in the notes involves risks because we are a holding company
and because our principal U.S. subsidiary, Goldman, Sachs & Co., is a
partnership in which we are a general partner. We summarize these risks above
under "Risk Factors -- Investors in the Notes Face Additional Risk Because The
Goldman Sachs Group, Inc. Is a Holding Company", "-- The Value of the Notes May
Be Impaired Because We Depend on Funds from Our Regulated Subsidiaries" and
"-- We May Be Liable to Creditors of Our Partnership Subsidiaries".
STATED MATURITY AND MATURITY
The day on which the principal amount of the notes is scheduled to become
due is called the stated maturity of the principal. The principal may become due
sooner, by reason of redemption or acceleration after a default. The day on
which the principal actually becomes due, whether at the stated maturity or
earlier, is called the maturity of the principal.
We also use the terms stated maturity and maturity to refer to the dates
when interest payments become due. For example, we may refer to a regular
interest payment date when an installment of interest is scheduled to become due
as the "stated maturity" of that installment. When we refer to the "stated
maturity" or the "maturity" of the notes without specifying a particular
payment, we mean the stated maturity or maturity, as the case may be, of the
principal.
THIS SECTION IS ONLY A SUMMARY
The indenture and its associated documents, including the notes we are
offering, contain the full legal text of the matters described in this section.
The indenture and the notes are governed by New York law. A copy of the
indenture has been filed with the SEC as part of our registration statement. See
"Available Information" below for information on how to obtain a copy.
This section summarizes all the material terms of the notes and the
indenture. It does not, however, describe every aspect of the notes and the
indenture. For example, in this section, we use terms that have been given
special meaning in the indenture, but we describe the meaning for only the more
important of those terms.
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SPECIAL CURRENCY CONSIDERATIONS
The notes are denominated and payable in euros. This means that investors
must pay for the notes in euros and, unless euros are unavailable, we will make
all interest and principal payments on the notes in euros. Investors --
particularly those who reside in the United States or other countries outside
the EMU -- should carefully consider the currency risks of investing in the
notes. We describe these risks under "Risk Factors -- Because the Notes Are
Payable in Euros, They May Not Be an Appropriate Investment For All Investors".
The euro became the legal currency for the 11 countries participating in
the European Economic and Monetary Union on January 1, 1999. During a
transitional period from January 1, 1999 to December 31, 2001, and for a maximum
period of six months after 2001, the former national currencies of the eleven
EMU countries will continue to be legal tender in their country of issue, at
rates irrevocably fixed on December 31, 1998.
Dealers in the currency exchange markets provide bid and offer quotations
for the exchange rate of the euro for most of the world's currencies on a daily
basis. On May 10, 1999, the noon buying rate for cable transfers in New York
City was $1.0787 for one euro. During the first quarter of 1999, the noon buying
rate for euros fluctuated from a high of $1.1812 for one euro, to a low of
$1.0716 for one euro.
Investors in the notes will have to pay for the notes in euros. The
underwriters may arrange for the conversion of U.S. dollars and other currencies
into euros to enable U.S. and other non-EMU investors to pay for their notes.
Those conversions will be made, however, on terms and conditions selected by the
underwriters. Those conversions may also be subject to any applicable laws and
regulations. All costs of conversion will be borne by the investors.
LEGAL OWNERSHIP OF NOTES
We refer to those who have notes we are offering registered in their own
names, on the books that we or the trustee maintain for this purpose, as the
"Holders" of those notes. Those persons are the legal holders of those notes. We
refer to those who, indirectly through others, own beneficial interests in notes
that are not registered in their own names as indirect holders of those notes.
As we discuss below, indirect holders are not legal holders, and investors in
notes issued in book-entry form or in street name will be indirect holders.
BOOK-ENTRY HOLDERS
We will issue the notes in book-entry form. This means the notes will be
represented by one or more global notes registered in the name of a financial
institution that holds them as common depositary on behalf of two securities
clearing systems in Europe -- Cedel in Luxembourg and Euroclear in Brussels,
Belgium. Cedel and Euroclear maintain book-entry records of the beneficial
interests in the notes, for the benefit of other financial institutions that
participate in their book-entry systems. These participating institutions, in
turn, hold beneficial interests in the notes on behalf of themselves or their
customers.
Under the indenture, only the person in whose name a note is registered is
recognized as the Holder of that note. Consequently, for notes issued in global
form, we will recognize only the common depositary as the Holder of those notes
and we will make all payments on those notes to the common depositary. The
common depositary passes along the payments it receives to Cedel and Euroclear,
which in turn pass them to their participants. These participants then pass the
payments along to their customers who are the beneficial owners. The common
depositary, Cedel, Euroclear and their participants do so under agreements they
have made with one another or with their customers; they are not obligated to do
so under the terms of the notes.
As a result, investors will not own notes directly. Instead, they will own
beneficial interests in a global note, through a bank, broker or other financial
institution that participates in the Cedel or Euroclear system or holds an
interest through a participant. As long as the
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notes are issued in global form, investors will be indirect holders, and not
Holders, of the notes.
STREET NAME HOLDERS
If in the future we terminate the global notes, investors may choose to
hold their notes in their own names or in street name. Notes held by an investor
in street name would be registered in the name of a bank, broker or other
financial institution that the investor chooses, and the investor would hold
only a beneficial interest in those notes through an account he or she maintains
at that institution.
For notes held in street name, we will recognize only the intermediary
banks, brokers and other financial institutions in whose names the notes are
registered as the Holders of those notes and we will make all payments on those
notes to them. These institutions pass along the payments they receive to their
customers who are the beneficial owners, but only because they agree to do so in
their customer agreements or because they are legally required to do so.
Investors who hold notes in street name will be indirect holders, not Holders,
of those notes.
LEGAL HOLDERS
Our obligations, as well as the obligations of the trustee and those of any
third parties employed by us or the trustee, run only to the Holders of the
notes we are offering. We do not have obligations to investors who hold
beneficial interests in global notes, in street name or by any other indirect
means. This will be the case whether an investor chooses to be an indirect
holder of a note or has no choice because we are issuing the notes only in
global form.
For example, once we make a payment or give a notice to the Holder, we have
no further responsibility for the payment or notice even if that Holder is
required, under agreements with book-entry system participants or customers or
by law, to pass it along to the indirect holders but does not do so. Similarly,
if we want to obtain the approval of the Holders for any purpose -- e.g., to
amend the indenture or to relieve us of the consequences of a default or of our
obligation to comply with a particular provision of the indenture -- we would
seek the approval only from the Holders, and not the indirect holders, of the
notes. Whether and how the Holders contact the indirect holders is up to the
Holders.
When we refer to you, we mean those who invest in the notes being offered
by this prospectus, whether they are the Holders or only indirect holders of
those notes. When we refer to your notes, we mean the notes we are offering in
which you hold a direct or indirect interest.
SPECIAL CONSIDERATIONS FOR INDIRECT HOLDERS
If you hold notes through a bank, broker or other financial institution,
either in book-entry form or in street name, you should check with your own
institution to find out:
- - how it handles securities payments and notices;
- - whether it imposes fees or charges;
- - how it would handle a request for the Holders' consent, if ever required;
- - whether and how you can instruct it to send you notes registered in your own
name so you can be a Holder, if that is permitted in the future;
- - how it would exercise rights under the notes if there were a default or other
event triggering the need for Holders to act to protect their interests; and
- - if the notes are in book-entry form, how the depositary's rules and procedures
will affect these matters.
WE WILL ISSUE THE NOTES IN GLOBAL FORM
We have chosen to issue the notes in book-entry form. This means all the
notes will be represented, at least initially, by one or more global notes.
WHAT IS A GLOBAL NOTE?
A global note is a note that we deposit with and register in the name of a
financial
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institution, or its nominee, that acts as a depositary for the book-entry
clearing systems that we select for the notes. We have selected Cedelbank, S.A.,
of Luxembourg, known as Cedel, and Morgan Guaranty Trust Company of New York,
acting out of its Brussels, Belgium, office, as operator of the Euroclear
system, known as Euroclear, to be the only book-entry clearing systems for the
notes, at least initially. Cedel and Euroclear, in turn, have selected the
financial institution named on the inside back cover page of this prospectus to
act as their common depositary for the notes. Initially, therefore, we will
register the notes in the name of, and deposit them with, that financial
institution.
We refer to the financial institution that holds the notes as depositary
for a book-entry clearance system as the depositary. Cedel and Euroclear may
change the institution that acts as depositary on their behalf. We also may
change the depositary if we decide to have the notes held through book-entry
clearing systems other than Cedel or Euroclear.
As long as the notes are held through Cedel and Euroclear, no global note
may be transferred to or registered in the name of anyone other than a common
depositary or separate depositaries selected by Cedel and Euroclear, by Cedel
and Euroclear themselves or by nominees or successors of those organizations.
Any of those entities holding a global note as depositary for Cedel or Euroclear
would then be the depositary for that global note. Similarly, if we elected to
have the notes held through a book-entry system other than Cedel and Euroclear,
the global notes could not be transferred to or registered in the name of anyone
other than the financial institution that acted as the depositary for that
system, or its nominee or successor, which would then be the depositary for as
long as the notes were held through that system.
As a result of these arrangements, the depositary, or its nominee, will be
the sole registered owner and Holder of all the notes, and investors will be
permitted to own only beneficial interests in a global note. Beneficial
interests must be held by means of an account with a broker, bank or other
financial institution that in turn has an account with Cedel or Euroclear, or
with another institution that does. Thus, an investor whose note is represented
by a global note will not be a Holder of the note, but only an indirect holder
of a beneficial interest in the global note.
The notes we are offering will be represented by one or more global notes
at all times unless and until the global notes are terminated. We describe the
situations in which this can occur below under "-- When a Global Note Will Be
Terminated". If termination occurs, we may issue the notes through another
book-entry clearing system or decide that the notes may no longer be held
through any book-entry clearing system.
SPECIAL CONSIDERATIONS FOR GLOBAL NOTES
As an indirect holder, an investor's rights relating to a global note will
be governed by the account rules of the investor's financial institution and
those of Cedel, Euroclear and the depositary, as well as general laws relating
to securities transfers. We do not recognize this type of investor as a Holder
of notes and instead deal only with the depositary that holds the global note.
Because the notes will be issued only in the form of global notes, an
investor should be aware of the following:
- - An investor cannot cause the notes to be registered in his or her own name,
and cannot obtain non-global certificates for his or her interest in the
notes, except in the special situations we describe below.
- - An investor will be an indirect holder and must look to his or her own bank or
broker for payments on the notes and protection of his or her legal rights
relating to the notes, as we describe above under "-- Legal Ownership of
Notes".
- - An investor may not be able to sell interests in the notes to some insurance
companies and other institutions that are required by law to own their
securities in non-book-entry form.
- - An investor may not be able to pledge his or her interest in a global note in
circum-
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stances where certificates representing the notes must be delivered to the
lender or other beneficiary of the pledge in order for the pledge to be
effective.
- - The policies of Cedel or Euroclear, as applicable, and of the depositary,
which may change from time to time, will govern payments, transfers, exchanges
and other matters relating to an investor's interest in a global note. We and
the trustee have no responsibility for any aspect of the actions of Cedel or
Euroclear, or of the depositary, or for their records of ownership interests
in a global note. We and the trustee also do not supervise Cedel, Euroclear or
the depositary in any way.
- - Cedel and Euroclear will require that those who purchase and sell interests in
a global note within their book-entry systems use immediately available funds.
- - Financial institutions that participate in Cedel or Euroclear, and through
which investors hold their interests in the global notes, may also have their
own policies affecting payments, notices and other matters relating to the
notes. There may be more than one financial intermediary in the chain of
ownership for an investor. We do not monitor and are not responsible for the
actions of any of those intermediaries.
WHEN A GLOBAL NOTE WILL BE TERMINATED
In a few special situations described below, a global note will be
terminated and interests in it will be exchanged for certificates in non-global
form representing the notes it represented. After that exchange, the choice of
whether to hold the notes directly or in street name will be up to the investor.
Investors must consult their own banks or brokers to find out how to have their
interests in a global note transferred on termination to their own names, so
that they will be Holders. We have described the rights of Holders and street
name investors above under "-- Legal Ownership of Notes".
The special situations for termination of global notes are as follows:
- - if Cedel and Euroclear notify us that they are unwilling or unable to continue
acting as clearing systems for the global notes, and we do not appoint another
institution to act as a clearing system within 60 days;
- - if the depositary notifies us at any time that it is unwilling or unable to
continue as the common depositary for Cedel and Euroclear, and those systems
do not appoint another institution to act as their common depositary within 60
days;
- - if we notify the trustee that we wish to terminate the global notes; or
- - if an event of default has occurred and has not been cured or waived; we
discuss defaults later under "-- Default, Remedies and Waiver of Default".
If a global note is terminated, only the depositary, based on instructions from
Cedel or Euroclear, and not we or the trustee, is responsible for deciding the
names of the institutions in whose names the notes represented by the global
note will be registered and, therefore, who will be the Holders of those notes.
YOU CAN HOLD INTERESTS IN GLOBAL NOTES ONLY THROUGH CEDEL OR EUROCLEAR
As long as the depositary holds the global notes for Cedel and Euroclear,
you may hold an interest in a global note only through an organization that
participates, directly or indirectly, in Cedel or Euroclear. If you are a
participant in either of those systems, you may hold your interest directly in
that system. If you are not a participant, you may hold your interest indirectly
through organizations that are participants in that system. If you hold your
interest indirectly, you should note that Cedel and Euroclear will have no
record of you or of your relationship with the direct participant in their
systems. You will not be able to hold your interests through any securities
clearance systems in the United States.
Cedel and Euroclear are securities clearance systems in Europe. Cedel and
Euroclear will hold interests in the global notes on behalf of the participants
in their systems, through securities accounts they maintain in their own names
for their customers on their
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own books or on the books of the depositary. Cedel and Euroclear clear and
settle securities transactions between their participants through electronic,
book-entry delivery of securities against payment.
CEDEL AND EUROCLEAR RULES WILL APPLY TO THE GLOBAL NOTES
Cedel and Euroclear will credit the payments we make on your note to the
account of your Cedel or Euroclear participant in accordance with that system's
rules and procedures. The participant's account will be credited only to the
extent that the depositary passes along our payments to Cedel and Euroclear.
Payments, notices and other communications or deliveries relating to the notes
made through Cedel or Euroclear must comply with the rules and procedures of
those systems and of the depositary. We understand that, at present, those
systems' rules and procedures applicable to trades in conventional eurobonds
will apply to trades in the notes, with settlement in immediately available
funds.
The description of the clearing systems in this section reflects our
understanding of the rules and procedures of Cedel and Euroclear as currently in
effect. Those systems could change their rules and procedures at any time. We
have no control over those systems or their participants and we take no
responsibility for their activities.
SPECIAL TIMING CONSIDERATIONS FOR TRANSACTIONS IN CEDEL AND EUROCLEAR
Investors will be able to make and receive deliveries, payments and other
communications involving the notes through Cedel and Euroclear only on days when
those systems are open for business. Those systems may not be open for business
on days when banks, brokers and other institutions are open for business in the
United States. In addition, because of time-zone differences, U.S. investors who
wish to effect a transfer of their interests in the notes, or to receive or make
a payment or delivery with respect to the notes, on a particular day may find
that the transaction will not be effected until the next business day in
Luxembourg or Brussels, as applicable.
PAYMENT OF ADDITIONAL AMOUNTS
We intend to make all payments on the notes without deducting U.S.
withholding taxes. If we are required by law to do so on payments to non-U.S.
investors, however, we will pay additional amounts on those payments to the
extent described in this section.
We will pay additional amounts on a note only if the beneficial owner of
the note is a United States alien. The term United States alien means any person
who, for U.S. federal income tax purposes, is:
- - a nonresident alien individual;
- - a foreign corporation;
- - a foreign partnership; or
- - an estate or trust that is not subject to U.S. federal income tax on a net
income basis on income or gain from a note.
If the beneficial owner of a note is a United States alien, we will pay all
additional amounts that may be necessary so that every net payment of interest
or principal on that note will not be less than the amount provided for in that
note. By net payment we mean the amount we or our paying agent pay after
deducting or withholding an amount for or on account of any present or future
tax, assessment or other governmental charge imposed with respect to that
payment by a U.S. taxing authority.
Our obligation to pay additional amounts is subject to several important
exceptions, however. We will NOT pay additional amounts for or on account of any
of the following:
- - any tax, assessment or other governmental charge imposed solely because at any
time there is or was a connection between the beneficial owner -- or between a
fiduciary, settlor, beneficiary or member of the beneficial owner, if the
beneficial owner is an estate, trust or partnership -- and the United States
(other than the mere receipt of a payment or the ownership or holding of a
note), including because the beneficial owner -- or the fiduciary, settlor,
benefici-
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ary or member -- at any time, for U.S. federal income tax purposes:
-- is or was a citizen or resident or is or was treated as a resident of the
United States;
-- is or was present in the United States;
-- is or was engaged in a trade or business in the United States;
-- has or had a permanent establishment in the United States;
-- is or was a domestic or foreign personal holding company, a passive
foreign investment company or a controlled foreign corporation;
-- is or was a corporation that accumulates earnings to avoid U.S. federal
income tax; or
-- is or was a "ten percent shareholder" of The Goldman Sachs Group, Inc.;
- - any tax, assessment or other governmental charge imposed solely because of a
change in applicable law or regulation, or in any official interpretation or
application of applicable law or regulation, that becomes effective more than
15 days after the day on which the payment becomes due or is duly provided
for, whichever occurs later;
- - any estate, inheritance, gift, sales, excise, transfer, wealth or personal
property tax, or any similar tax, assessment or other governmental charge;
- - any tax, assessment or other governmental charge imposed solely because the
beneficial owner or any other person fails to comply with any certification,
identification or other reporting requirement concerning the nationality,
residence, identity or connection with the United States of the holder or any
beneficial owner of the note, if compliance is required by statute, by
regulation of the U.S. Treasury department or by an applicable income tax
treaty to which the United States is a party, as a precondition to exemption
from the tax, assessment or other governmental charge;
- - any tax, assessment or other governmental charge that can be paid other than
by deduction or withholding from a payment on the note;
- - any tax, assessment or other governmental charge imposed solely because the
payment is to be made by a particular paying agent (which term may include us)
and would not be imposed if made by another paying agent; or
- - any combination of the taxes, assessments or other governmental charges
described above.
In addition, we will not pay additional amounts with respect to any payment of
principal or interest to any United States alien who is a fiduciary or a
partnership, or who is not the sole beneficial owner of the payment, to the
extent that we would not have to pay additional amounts to any beneficiary or
settlor of the fiduciary or any member of the partnership, or to any beneficial
owner of the payment, if that person or entity were treated as the beneficial
owner of the note for this purpose.
When we refer to a U.S. taxing authority, we mean the United States of
America or any state, other jurisdiction or taxing authority in the United
States. When we refer to the United States in the discussion of additional
amounts above and in the discussion of redemption for tax reasons below, we mean
the United States of America, including the states and the District of Columbia,
together with the territories, possessions and all other areas subject to the
jurisdiction of the United States of America.
When we refer to any payment of interest or principal on a note, this
includes any additional amount that may be payable in respect of that payment.
WHEN WE CAN REDEEM THE NOTES
We will not be permitted to redeem the notes we are offering before their
stated maturity, except as described below. The notes will not be entitled to
the benefit of any sinking fund -- that is, we will not deposit money on a
regular basis into any separate custodial account to repay your note. In
addition, you will not be entitled to require us
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to buy your note from you before its stated maturity.
We will be entitled, at our option, to redeem the outstanding notes in
whole if at any time we become obligated to pay additional amounts on any notes
on the next interest payment date, but only if our obligation results from a
change in the laws or regulations of the United States of America, of any
jurisdiction in the United States or of any U.S. taxing authority, or from a
change in any official interpretation or application of those laws or
regulations, that becomes effective or is announced after the date of this
prospectus. If we redeem the notes, we will do so at a redemption price equal to
100% of the principal amount of the notes redeemed, plus accrued interest to the
redemption date.
If we become entitled to redeem the notes, we may do so at any time on a
redemption date of our choice. However, we must give the Holders of the notes
notice of the redemption not less than 30 days or more than 60 days before the
redemption date and not more than 90 days before the next date on which we would
be obligated to pay additional amounts. In addition, our obligation to pay
additional amounts must remain in effect when we give the notice of redemption.
We will give the notice in the manner described below in "-- Notices".
We or our affiliates may purchase notes from investors who are willing to
sell from time to time, either in the open market at prevailing prices or in
private transactions at negotiated prices. For example, we currently expect
Goldman Sachs International and Goldman, Sachs & Co. to make a market in the
notes by purchasing and reselling notes from time to time. Notes that we or our
subsidiaries purchase may, at our discretion, be held, resold or cancelled.
MERGERS AND SIMILAR TRANSACTIONS
We are generally permitted to merge or consolidate with another firm. We
are also permitted to sell substantially all our assets to another firm. We may
not take any of these actions, however, unless all the following conditions are
met:
- - If the successor firm in the transaction is not The Goldman Sachs Group, Inc.,
the successor firm must be organized as a corporation, partnership, trust,
limited liability company or other similar entity and must expressly assume
The Goldman Sachs Group, Inc.'s obligations under the notes and the indenture.
The successor firm may be organized under the laws of any jurisdiction,
whether in the United States or elsewhere.
- - Immediately after the transaction, no default under the notes has occurred and
is continuing. For this purpose, "default under the notes" means an event of
default or an event that would be an event of default if the requirements for
giving us default notice and for our default having to continue for a specific
period of time were disregarded. We describe these matters below under
"-- Default, Remedies and Waiver of Default".
If the conditions described above are satisfied, we will not need to obtain the
approval of the Holders in order to merge or consolidate or to sell all or
substantially all our assets. Also, these conditions will apply only if we wish
to merge or consolidate with another firm or sell all or substantially all our
assets. We will not need to satisfy these conditions if we enter into other
types of transactions, including any transaction in which we acquire the stock
or assets of another firm, any transaction that involves a change of control of
The Goldman Sachs Group, Inc. but in which we do not merge or consolidate and
any transaction in which we sell less than substantially all our assets.
Also, if we merge, consolidate or sell all or substantially all our assets
and the successor firm is a non-U.S. entity, neither we nor any successor would
have any obligation to compensate you for any resulting adverse tax consequences
relating to the notes, other than an obligation to pay additional amounts to
non-U.S. investors in respect of U.S. withholding tax requirements, to the
extent described above under "-- Payment of Additional Amounts".
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RESTRICTIVE COVENANT
In the indenture, we promise not to create or guarantee any debt for
borrowed money that is secured by a lien on the voting or profit participating
equity ownership interests that we or any of our subsidiaries own in Goldman,
Sachs & Co. (or in any subsidiary that beneficially owns or holds, directly or
indirectly, those interests in Goldman, Sachs & Co.), unless we also secure the
notes on an equal or priority basis with the other secured debt. Our promise,
however, is subject to an important exception: we may secure debt for borrowed
money with liens on those interests without securing the notes if our board of
directors determines that the liens do not materially detract from or interfere
with the then-present value or control of those interests.
Except as noted above, the indenture does not restrict our ability to put
liens on our interests in our subsidiaries other than Goldman, Sachs & Co., nor
does it restrict our ability to sell or otherwise dispose of our interests in
any of our subsidiaries, including Goldman, Sachs & Co. In addition, the
restriction on liens applies only to liens that secure debt for borrowed money.
For example, liens imposed by operation of law, such as liens to secure
statutory obligations for taxes or workers' compensation benefits, or liens we
create to secure obligations to pay legal judgments or surety bonds, would not
be covered by this restriction.
DEFAULT, REMEDIES AND WAIVER OF DEFAULT
You will have special rights if an event of default with respect to the
notes occurs and is not cured, as described in this subsection.
EVENTS OF DEFAULT
When we refer to an event of default with respect to the notes we are
offering, we mean any of the following:
- - We do not pay the principal on any of these notes on its due date.
- - We do not pay interest on any of these notes within 30 days after its due
date.
- - We remain in breach of our covenant described under "-- Restrictive Covenant"
above, or any other covenant we make in the indenture for the benefit of these
notes, for 60 days after we receive a notice of default stating that we are in
breach. The notice must be sent by the trustee or the Holders of not less than
10% in principal amount of these notes.
- - We file for bankruptcy or other events of bankruptcy, insolvency or
reorganization relating to The Goldman Sachs Group, Inc. occur. Those events
must arise under U.S. federal or state law, unless we merge, consolidate or
sell our assets as described above and the successor firm is a non-U.S.
entity. If that happens, then those events must arise under U.S. federal or
state law or the law of the jurisdiction in which the successor firm is
legally organized.
REMEDIES IF AN EVENT OF DEFAULT OCCURS
If an event of default has occurred and has not been cured or waived, the
trustee or the Holders of not less than 25% in principal amount of the notes we
are offering may declare the entire principal amount of all these notes to be
due immediately. If an event of default occurs because of events in bankruptcy,
insolvency or reorganization relating to The Goldman Sachs Group, Inc., the
entire principal amount of all these notes will be automatically accelerated,
without any action by the trustee or any Holder.
Each of the situations described above is called an acceleration of the
maturity of the notes we are offering. If the maturity of the notes is
accelerated and a judgment for payment has not yet been obtained, the Holders of
a majority in principal amount of the notes may cancel the acceleration for all
the notes.
If an event of default occurs, the trustee will have special duties. In
that situation, the trustee will be obligated to use those of its rights and
powers under the indenture, and to use the same degree of care and skill in
doing so, that a prudent person would use in that situation in conducting his or
her own affairs.
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Except as described in the prior paragraph, the trustee is not required to
take any action under the indenture at the request of any Holders unless the
Holders offer the trustee reasonable protection from expenses and liability.
This is called an indemnity. If the trustee receives an indemnity that is
reasonably satisfactory to it, the Holders of a majority in principal amount of
the notes we are offering may direct the time, method and place of conducting
any lawsuit or other formal legal action seeking any remedy available to the
trustee. These majority Holders may also direct the trustee in performing any
other action under the indenture with respect to these notes.
Before you bypass the trustee and bring your own lawsuit or other formal
legal action or take other steps to enforce your rights or protect your
interests relating to the notes, the following must occur:
- - The Holder of your note must give the trustee written notice that an event of
default has occurred and the event of default must not have been cured or
waived.
- - The Holders of not less than 25% in principal amount of these notes must make
a written request that the trustee take action because of the default and they
or other Holders must offer to the trustee indemnity reasonably satisfactory
to the trustee against the cost and other liabilities of taking that action.
- - The trustee must not have taken action for 60 days after the above steps have
been taken.
- - During those 60 days, the Holders of a majority in principal amount of these
notes must not have given the trustee directions that are inconsistent with
the written request of the Holders of not less than 25% in principal amount of
these notes.
You are entitled, however, at any time to bring a lawsuit for the payment of
money due on your note on or after its due date.
WAIVER OF DEFAULT
The Holders of not less than a majority in principal amount of the notes we
are offering may waive a default for all these notes. If this happens, the
default will be treated as if it has not occurred. No one can waive a payment
default on any note, however, without the approval of the particular Holder of
that note.
WE WILL GIVE THE TRUSTEE INFORMATION ABOUT DEFAULTS ANNUALLY
Each year, we will give the trustee a written statement of two of our
officers, certifying that to their knowledge we are in compliance with the
indenture and the notes, or else specifying any default known to them.
Book-entry and other indirect holders should consult their banks or
brokers for information on how to give notice or direction to or make a
request of the trustee and how to declare or cancel an acceleration of
the maturity.
MODIFICATION AND WAIVER OF COVENANTS
There are three types of changes we can make to the indenture and the notes
we are offering.
CHANGES REQUIRING EACH HOLDER'S APPROVAL
First, there are changes that cannot be made without the approval of each
Holder of a note affected by the change. Here is a list of those types of
changes:
- - change the stated maturity for any principal or interest payment on a note;
- - reduce the principal amount, the interest rate or the redemption price for a
note;
- - permit redemption of a note if not previously permitted;
- - change the currency of any payment on a note other than as permitted by the
note;
- - change the place of any payment on a note;
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- - impair the Holder's right to sue for payment of any amount due on its note;
- - reduce the percentage in principal amount of the notes we are offering and any
other affected series of debt securities, taken together, the approval of
whose Holders is needed to change the indenture or the notes;
- - reduce the percentage in principal amount of the notes we are offering and any
other affected series of debt securities, taken separately or together, as the
case may be, the approval of whose Holders is needed to waive our compliance
with the indenture or to waive defaults; and
- - change the provisions of the indenture dealing with modification and waiver in
any other respect, except to increase any required percentage referred to
above or to add to the provisions that cannot be changed or waived without
approval.
CHANGES NOT REQUIRING APPROVAL
The second type of change does not require any approval by Holders of the
notes we are offering. This type is limited to clarifications and changes that
would not adversely affect the notes in any material respect. Nor do we need any
approval to make changes that affect only debt securities to be issued under the
indenture after the changes take effect.
We may also make changes or obtain waivers that do not adversely affect a
particular note, even if they affect other notes or other debt securities. In
those cases, we do not need to obtain the approval of the Holder of that note;
we need only obtain any required approvals from the Holders of the affected
notes or other debt securities.
CHANGES REQUIRING MAJORITY APPROVAL
Any other change to the indenture and the notes we are offering would
require the following approval:
- - If the change affects only the notes we are offering, it must be approved by
the Holders of a majority in principal amount of the notes we are offering.
- - If the change affects the notes we are offering as well as one or more other
series of debt securities issued under the indenture, it must be approved by
the Holders of a majority in principal amount of the notes we are offering and
all other series affected by the change, with the notes we are offering and
the other series voting together as one class for this purpose.
In each case, the required approval must be given by written consent. Most
changes fall into this category.
The same majority approval would be required for us to obtain a waiver of
any of our covenants in the indenture. Our covenants include the promises we
make about merging and putting liens on our interests in Goldman, Sachs & Co.,
which we describe above under "-- Mergers and Similar Transactions" and
"-- Restrictive Covenant". If the Holders approve a waiver of a covenant, we
will not have to comply with it. The Holders, however, cannot approve a waiver
of any provision in a particular note, or in the indenture as it affects that
note, that we cannot change without the approval of the Holder of that note as
described above in "-- Changes Requiring Each Holder's Approval", unless that
Holder approves the waiver.
Book-entry and other indirect holders should consult their banks or brokers for
information on how approval may be granted or denied if we seek to change the
indenture or the notes or request a waiver.
SPECIAL RULES FOR ACTION BY HOLDERS
When Holders take any action under the indenture, such as giving a notice
of default, declaring an acceleration, approving any change or waiver or giving
the trustee an instruction, we will apply the following rules. We may apply
similar rules to other series of debt securities issued under the indenture.
ONLY OUTSTANDING NOTES ARE ELIGIBLE
Only Holders of outstanding notes will be eligible to participate in any
action by Holders of these notes. Also, we will count only outstanding notes in
determining whether the
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various percentage requirements for taking action have been met. For these
purposes, a note will not be "outstanding":
- - if it has been surrendered for cancellation;
- - if we have deposited or set aside, in trust for its Holder, money for its
payment or redemption; or
- - if we or one of our affiliates, such as Goldman Sachs International or
Goldman, Sachs & Co., is the beneficial owner.
In some situations, Holders of debt securities of other series may be eligible
to participate in an action by Holders of these notes. In that event, we may
follow special rules in calculating the principal amount of their debt
securities that is to be treated as outstanding for the purposes described
above. This may happen, for example, if the principal amount is payable in a
foreign currency, increases over time or is not to be fixed until maturity.
DETERMINING RECORD DATES FOR ACTION BY HOLDERS
We will generally be entitled to set any day as a record date for the
purpose of determining the Holders that are entitled to take action under the
indenture. In certain limited circumstances, only the trustee will be entitled
to set a record date for action by Holders. If we or the trustee set a record
date for an approval or other action to be taken by Holders, that vote or action
may be taken only by persons or entities who are Holders on the record date and
must be taken during the period that we specify for this purpose, or that the
trustee specifies if it sets the record date. We or the trustee, as applicable,
may shorten or lengthen this period from time to time. This period, however, may
not extend beyond the 180th day after the record date for the action. In
addition, record dates for any global note may be set in accordance with
procedures established by the depositary, Cedel or Euroclear from time to time.
FORM, EXCHANGE AND TRANSFER
If any notes cease to be issued in global form, they will be issued:
- - only in fully registered form;
- - without interest coupons; and
- - in denominations of (euro)1,000 and multiples of (euro)1,000.
Holders may exchange their notes for notes of smaller denominations or
combined into fewer notes of larger denominations, as long as the total
principal amount is not changed.
Holders may exchange or transfer their notes at the office of the trustee.
We have appointed the trustee to act as our agent for registering notes in the
names of Holders and transferring notes. If the global notes are terminated and
we issue notes in non-global form, Holders of the non-global notes can transfer
those notes at the offices of Banque Internationale a Luxembourg or its
successor as our transfer agent in Luxembourg, but only for as long as the notes
are listed on the Luxembourg Stock Exchange. We may appoint another entity to
perform these functions or perform them ourselves.
Holders will not be required to pay a service charge to transfer or
exchange their notes, but they may be required to pay for any tax or other
governmental charge associated with the exchange or transfer. The transfer or
exchange will be made only if our transfer agent is satisfied with the Holder's
proof of legal ownership.
We may appoint additional transfer agents or cancel the appointment of any
particular transfer agent. We may also approve a change in the office through
which any transfer agent acts.
As long as the notes are issued in global form, only the depositary, Cedel
and Euroclear will be entitled to transfer and exchange notes as described in
this subsection, since the depositary will be the sole Holder of the notes.
PAYMENT MECHANICS
WHO RECEIVES PAYMENT?
We will pay interest on the notes on the interest payment dates stated
above under "-- Financial Terms of the Notes", and at maturity. Each payment of
interest due on an
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interest payment date or at maturity will include interest accrued from and
including the last date to which interest has been paid or made available for
payment, or from the issue date, if none has been paid or made available for
payment, to but excluding the relevant payment date. We will compute interest on
the notes on the basis of a 360-day year of twelve 30-day months.
If interest is due on a note on an interest payment date, we will pay the
interest to the Holder in whose name the note is registered at the close of
business on the regular record date relating to the interest payment date. If
interest is due at maturity but on a day that is not an interest payment date,
we will pay the interest to the person or entity entitled to receive the
principal of the note. If principal is due on a note at maturity, we will pay
the amount to the Holder of the note against surrender of the note at the proper
place of payment.
REGULAR RECORD DATES FOR INTEREST
The regular record date relating to an interest payment date for any note
will be the May 1 or November 1 next preceding the interest payment date,
whether or not that preceding day is a business day. For the purpose of
determining the Holder at the close of business on a regular record date when
business is not being conducted, the close of business will mean 5:00 P.M., New
York City time, on that day.
HOW WE WILL MAKE PAYMENTS
PAYMENTS ON GLOBAL NOTES. As long as the notes are issued in global form,
we will make payments on the notes in accordance with the applicable policies of
the depositary, Cedel and Euroclear, as in effect from time to time. Under those
policies, we will pay directly to the depositary, or its nominee, and not to any
indirect holders who own beneficial interests in a global note. An indirect
holder's right to receive those payments will be governed by the rules and
practices of the depositary, Cedel and Euroclear, and their participants, as
described above under "-- We Will Issue the Notes in Global Form".
PAYMENTS ON NON-GLOBAL NOTES. If the global notes are terminated and we
issue notes in non-global form, we will make payments on the notes as follows.
Except as described in the next paragraph, we will pay any amount that becomes
due on a note by wire transfer of immediately available funds on the due date to
a euro account at a bank that is designated by the Holder and is acceptable to
us and the trustee. To request wire payment, the Holder must give the paying
agent appropriate wire transfer instructions at least five business days before
the requested wire payment is due. In the case of any interest payment due on an
interest payment date, the instructions must be given by the person or entity
who is the Holder on the relevant regular record date. In the case of any other
payment, payment will be made only after the note is surrendered to the paying
agent. Any wire instructions, once properly given, will remain in effect unless
and until new instructions are given in the manner described above.
If a Holder fails to give instructions as described above, we will notify
the Holder at the address in the trustee's records and will make the payment
within five business days after the Holder provides appropriate instructions.
Any late payment made in these circumstances will be treated under the indenture
as if made on the due date, and no interest will accrue on the late payment from
the due date to the date paid.
WHEN EUROS ARE NOT AVAILABLE. We will make all payments on the notes in
euros or any single currency that succeeds the euro in the EMU countries, except
as follows. If euros or any successor currency are not available to us on each
of the two business days before a payment is to be made on the notes due to
circumstances beyond our control -- such as the imposition of exchange controls
or a disruption in the currency markets -- we will be entitled to satisfy our
obligation to make the payment in euros by making the payment in U.S. dollars on
the basis of the most recently available exchange rate. The exchange rate we use
will be the noon buying rate for cable transfers in New York City for the euro
as quoted by the Federal Reserve Bank of New York on the
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then-most recent day on which that bank has quoted that rate.
The foregoing will apply to any note, whether in global or non-global form,
and to any payment, including a payment at maturity. Any payment made under the
circumstances and in the manner described above will not result in a default
under any note or the indenture.
Book-entry and other indirect holders should consult their banks or
brokers for information on how they will receive payments on the notes.
PAYMENT WHEN OFFICES ARE CLOSED
If any payment is due on a note on a day that is not a business day, we
will make the payment on the next day that is a business day. Payments postponed
to the next business day in this situation will be treated under the indenture
as if they were made on the original due date. Postponement of this kind will
not result in a default under the notes or the indenture, and no interest will
accrue on the postponed amount from the original due date to the next day that
is a business day.
When we refer to a business day, we mean each Monday, Tuesday, Wednesday,
Thursday and Friday that is not a day on which banking institutions in New York
City or any other relevant location generally are authorized or obligated by
law, regulation or executive order to close. By other relevant location, we mean
each of Brussels, Belgium, for as long as the notes are held through Euroclear,
and Luxembourg, for as long as the notes are held through Cedel or are listed on
the Luxembourg Stock Exchange and that exchange so requires. If the notes cease
to be held in global form, the reference to other relevant location will also
mean each office of a paying agent, but only with respect to a payment to be
made at that office, and each office of a transfer agent, but only with respect
to any actions to occur at that office.
PAYING AGENT
If we issue the notes in non-global form, we may appoint one or more
financial institutions to act as our paying agents, and at whose designated
offices the notes may be surrendered for payment at their maturity. We call each
of those offices a paying agent. We may add, replace or terminate paying agents
from time to time. We may also choose to act as our own paying agent. Initially,
we have appointed the trustee, at its corporate trust office in New York City,
as a paying agent. We must notify you of changes in the paying agents.
For as long as these notes are listed on the Luxembourg Stock Exchange, we
will also maintain a paying agent in Luxembourg. We have initially appointed
Banque Internationale a Luxembourg, acting out of its corporate office in
Luxembourg, or its successor, as that paying agent. We will notify you of any
change in our Luxembourg paying agent by publication in Luxembourg.
UNCLAIMED PAYMENTS
Regardless of who acts as paying agent, all money paid by us to a paying
agent that remains unclaimed at the end of two years after the amount is due to
a Holder will be repaid to us. After that two-year period, the Holder may look
only to us for payment and not to the trustee, any other paying agent or anyone
else.
NOTICES
As long as we issue the notes we are offering in global form, notices to be
given to Holders will be given to the depositary, in accordance with its
applicable policies as in effect from time to time. If we issue the notes in
non-global form, notices to be given to Holders will be sent by mail to the
respective addresses of the Holders as they appear in the trustee's records, and
will be deemed given when mailed.
As long as these notes are listed on the Luxembourg Stock Exchange and its
rules require, we will also give notices to Holders by publication in a daily
newspaper of general circulation in Luxembourg. We expect that
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<PAGE> 128
newspaper to be, but it need not be, the Luxemburger Wort. If publication in
Luxembourg is not practical, we will make the publication elsewhere in Western
Europe. By "daily newspaper" we mean a newspaper that is published on each day,
other than a Saturday, Sunday or holiday, in Luxembourg or, when applicable,
elsewhere in Western Europe. You will be presumed to have received these notices
on the date we first publish them. If we are unable to give notice as described
in this paragraph because the publication of any newspaper is suspended or it is
otherwise impractical for us to publish the notice, then we or the trustee,
acting on our instructions, will give Holders notice in another form. That
alternate form of notice will be sufficient notice to you.
Neither the failure to give any notice to a particular Holder, nor any
defect in a notice given to a particular Holder, will affect the sufficiency of
any notice given to another Holder.
Book-entry and other indirect holders should consult their banks or brokers for
information on how they will receive notices.
OUR RELATIONSHIP WITH THE TRUSTEE
The Bank of New York is initially serving as the trustee, for the notes and
all other series of debt securities to be issued under the indenture. The Bank
of New York has provided commercial banking and other services for us and our
affiliates in the past and may do so in the future. Among other things, The Bank
of New York provides us with a line of credit, holds debt securities issued by
us and serves as trustee or agent with regard to other debt obligations of The
Goldman Sachs Group, Inc. or its subsidiaries.
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UNITED STATES TAXATION
This section describes the material United States federal income tax
consequences of owning the notes we are offering and is the opinion of Sullivan
& Cromwell, counsel to The Goldman Sachs Group, Inc. It applies to you only if
you hold your notes as capital assets for tax purposes. This section does not
apply to you if you are a member of a class of holders subject to special rules,
such as:
- - a dealer in securities or currencies;
- - a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings;
- - a bank;
- - a life insurance company;
- - a tax-exempt organization;
- - a person that holds notes that are a hedge or that are hedged against interest
rate or currency risks;
- - a person that holds notes as part of a straddle or conversion transaction for
tax purposes; or
- - a person whose functional currency for tax purposes is not the U.S. dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed regulations under the Internal
Revenue Code, published rulings and court decisions, all as currently in effect.
These laws are subject to change, possibly on a retroactive basis.
Please consult your own tax advisor concerning the consequences of owning
these notes in your particular circumstances under the Internal Revenue Code
and the laws of any other taxing jurisdiction.
UNITED STATES HOLDERS
This subsection describes the tax consequences to a United States holder.
You are a United States holder if you are a beneficial owner of a note and you
are:
- - a citizen or resident of the United States;
- - a domestic corporation;
- - an estate whose income is subject to United States federal income tax
regardless of its source; or
- - a trust if a United States court can exercise primary supervision over the
trust's administration and one or more United States persons are authorized to
control all substantial decisions of the trust.
If you are not a United States holder, this subsection does not apply to you and
you should refer to "-- United States Alien Holders" below.
PAYMENTS OF INTEREST. You will be taxed on any interest on your note as
ordinary income at the time you receive the interest or it accrues, depending on
your method of accounting for tax purposes. If you are a taxpayer that uses the
cash receipts and disbursements method of accounting for tax purposes, you must
recognize income equal to the U.S. dollar value of the interest payment, based
on the exchange rate in effect on the date of receipt, regardless of whether you
actually convert the payment into U.S. dollars.
If you are a taxpayer that uses an accrual method of accounting for tax
purposes, you may determine the amount of income that you recognize by using one
of two methods. Under the first method, you will determine the amount of income
accrued based on the average exchange rate in effect during the interest accrual
period or, with respect to an accrual period that spans two taxable years, that
part of the period within the taxable year.
If you elect the second method, you would determine the amount of income
accrued on the basis of the exchange rate in effect on the last day of the
accrual period or, in the case of an accrual period that spans two taxable
years, the exchange rate in effect on the last day of the part of the period
within the taxable year. Additionally, under this second method, if you receive
a payment of
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interest within five business days of the last day of your accrual period or
taxable year, you may instead translate the interest accrued into U.S. dollars
at the exchange rate in effect on the day that you actually receive the interest
payment. If you elect the second method, it will apply to all debt instruments
that you hold at the beginning of the first taxable year to which the election
applies and to all debt instruments that you subsequently acquire. You may not
revoke this election without the consent of the Internal Revenue Service.
When you actually receive an interest payment, including a payment
attributable to accrued but unpaid interest upon the sale or retirement of your
note, you will recognize ordinary income or loss measured by the difference, if
any, between the exchange rate that you used to accrue interest income and the
exchange rate in effect on the date of receipt, regardless of whether you
actually convert the payment into U.S. dollars. However, you may not treat this
ordinary income gain or loss as an adjustment to the interest income you
receive.
In addition, if you acquire your note at a price other than the initial
offering price, the rules relating to market discount or amortizable bond
premium may also apply to your note. This may occur, for example, if you
purchase your note in a market-making transaction.
PURCHASE, SALE AND RETIREMENT OF NOTES. When you sell your note or your
note is retired, you will generally recognize gain or loss equal to the
difference between the amount you realize on the sale or retirement and the U.S.
dollar cost of your note. The amount you realize will be the U.S. dollar value
of such amount on:
- - the date payment is received, if you are a cash basis taxpayer and the notes
are not traded on an established securities market, as defined in the
applicable Treasury regulations;
- - the date of disposition, if you are an accrual basis taxpayer; or
- - the settlement date for the sale, if you are a cash basis taxpayer, or an
accrual basis United States holder that so elects, and the notes are traded on
an established securities market, as defined in the applicable Treasury
regulations.
The U.S. dollar cost of your note will generally be the U.S. dollar value
of the purchase price on the date of purchase. However, if you are a cash basis
taxpayer, or an accrual basis taxpayer if you so elect, and your note is traded
on an established securities market, as defined in the applicable Treasury
regulations, the U.S. dollar cost of your note will be the U.S. dollar value of
the purchase price on the settlement date of your purchase.
This gain or loss will be capital gain or loss, except to the extent
attributable to changes in exchange rates, as described in the next paragraph,
or to accrued but unpaid interest or described below under "-- Market Discount".
Capital gain of a non-corporate United States holder is generally taxed at a
maximum rate of 20% where the property is held for more than one year.
You must treat any portion of the gain or loss that you recognize on the
sale or retirement of a note as ordinary income or loss to the extent
attributable to changes in exchange rates. However, you only take exchange gain
or loss into account to the extent of the total gain or loss you realize on the
transaction.
MARKET DISCOUNT. You will be treated as if you purchased your note at a
market discount, and your note will be a market discount note, if the note's
principal amount exceeds the price you paid for your note by at least 1/4 of 1%
of your note's principal amount multiplied by the number of complete years to
the note's maturity.
If your note's principal amount does not exceed the price you paid for the
note by 1/4 of 1% multiplied by the number of complete years to the note's
maturity, the excess constitutes de minimis market discount, and the rules
discussed below are not applicable to you.
You must treat any gain you recognize on the maturity or disposition of
your market discount note as ordinary income to the
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<PAGE> 131
extent of the accrued market discount on your note. Alternatively, you may elect
to include market discount in income currently over the life of your note. If
you make this election, it will apply to all debt instruments with market
discount that you acquire on or after the first day of the first taxable year to
which the election applies. You may not revoke this election without the consent
of the Internal Revenue Service. If you own a market discount note and do not
make this election, you will generally be required to defer deductions for
interest on borrowings allocable to your note in an amount not exceeding the
accrued market discount on your note until maturity or disposition of your note.
You will accrue market discount on your market discount note on a
straight-line basis unless you elect to accrue market discount using a
constant-yield method. If you make this election, it will apply only to the note
with respect to which it is made and you may not revoke it.
If you are an accrual-basis taxpayer, you should be aware that the Clinton
administration has recently proposed legislation that would require you to
include market discount in income currently over the life of your note, subject
to certain limitations. If enacted, this proposal would only be effective if you
acquire your market discount note on or after the date of enactment. We do not
yet know whether this proposal will be enacted or when it will become effective
if enacted.
NOTES PURCHASED AT A PREMIUM. If you purchase your note for an amount in
excess of its principal amount, you may elect to treat the excess as amortizable
bond premium. If you make this election, you will reduce the amount required to
be included in your income each year with respect to interest on your note by
the amount of amortizable bond premium allocable to that year, based on your
note's yield to maturity. Gain or loss recognized that is attributable to
changes in exchange rates between the time your amortized bond premium offsets
interest income and the time of the acquisition of your note is generally
taxable as ordinary income or loss. If you make an election to amortize bond
premium, it will apply to all debt instruments, other than debt instruments the
interest on which is excludible from gross income, that you hold at the
beginning of the first taxable year to which the election applies or thereafter
acquire, and you may not revoke it without the consent of the Internal Revenue
Service.
EXCHANGE OF EUROS. Your tax basis in the euros received as interest on
your note or on the sale or retirement of your note will equal the U.S. dollar
value of the euros when the interest is received or at the time of the sale or
retirement. If you purchase euros, you generally will have a tax basis equal to
the U.S. dollar value of the euros on the date of your purchase. If you sell or
dispose of euros, including if you use euros to purchase notes or exchange euros
for U.S. dollars, any gain or loss will generally be ordinary income or loss.
BACKUP WITHHOLDING AND INFORMATION REPORTING. In general, if you are a
non-corporate United States holder, we and other payors are required to report
to the Internal Revenue Service all payments of principal and interest on your
note. In addition, the proceeds of the sale of your note before maturity within
the United States will be reported to the Internal Revenue Service.
Additionally, backup withholding at a rate of 31% will apply to any payments if
you fail to provide an accurate certified taxpayer identification number, or you
are notified by the Internal Revenue Service that you have failed to report all
interest and dividends required to be shown on your federal income tax returns.
UNITED STATES ALIEN HOLDERS
This subsection describes the tax consequences to a United States alien
holder. You are a United States alien holder if you are the beneficial owner of
a note and are, for United States federal income tax purposes:
- - a nonresident alien individual;
- - a foreign corporation;
- - a foreign partnership; or
- - an estate or trust that is not subject to United States federal income tax on
a net
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income basis on income or gain from a note.
Under present United States federal income and estate tax law, and subject
to the discussion of backup withholding below, if you are a United States alien
holder of a note:
- - we and other payors will not be required to deduct United States withholding
tax from payments of principal and interest to you if, in the case of
interest:
1. you do not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of The Goldman Sachs Group, Inc.
entitled to vote,
2. you are not a controlled foreign corporation that is related to us through
stock ownership, and
a. you certify to us or a U.S. payor under penalties of perjury, that you
are not a United States holder and provide your name and address, or
b. a non-U.S. securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of
its trade or business and holds the note certifies to us or a U.S. payor
under penalties of perjury that a similar statement has been received
from you by it or by a similar financial institution between it and you
and furnishes the payor with a copy thereof; and
- - no deduction for any United States federal withholding tax will be made from
any gain that you realize on the sale or exchange of your note.
Further, a note held by an individual, who at death is not a citizen or resident
of the United States will not be includible in the individual's gross estate for
United States federal estate tax purposes if:
- - the decedent did not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of The Goldman Sachs Group, Inc.
entitled to vote at the time of death; and
- - the income on the note would not have been effectively connected with a United
States trade or business of the decedent at the same time.
If you receive a payment after December 31, 2000, recently finalized
Treasury regulations will apply. Under these final withholding regulations,
after December 31, 2000, you may use an alternative method to satisfy the
certification requirement described above. Additionally, if you are a partner in
a foreign partnership, after December 31, 2000, you, in addition to the foreign
partnership, must provide the certification described above, and the partnership
must provide certain information, including a United States taxpayer
identification number. The Internal Revenue Service will apply a look-through
rule in the case of tiered partnerships.
You are generally exempt from backup withholding and information reporting
on Internal Revenue Service Form 1099 with respect to any payments of principal
or interest made by us and other payors, provided that you provide the
certification described above, and provided further that the payor does not have
actual knowledge that you are a United States person. We and other payors,
however, may report payments of interest on your notes on Internal Revenue
Service Form 1042-S.
In general, payment of the proceeds from the sale of notes to or through a
United States office of a broker is subject to both United States backup
withholding and information reporting. If, however, you are a United States
alien holder, you will not be subject to information reporting and backup
withholding if you certify as to your non-United States status under penalties
of perjury or otherwise establish an exemption. Payments of the proceeds from
the sale by a United States alien holder of a note made to or through a foreign
office of a broker will not be subject to information reporting or backup
withholding. However, information reporting, but not backup withholding, may
apply to a payment made outside the United States of the proceeds of a sale of a
note through an
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office outside the United States if the broker is:
- - a United States person;
- - a controlled foreign corporation for United States tax purposes;
- - a foreign person 50% or more of whose gross income is effectively connected
with a United States trade or business for a specified three-year period; or
- - with respect to payments made after December 31, 2000, a foreign partnership,
if at any time during its tax year:
1. one or more of its partners are "U.S. persons" as defined in U.S. Treasury
regulations who in the aggregate hold more than 50% of the income or
capital interest in the partnership, or
2. the foreign partnership is engaged in a United States trade or business
unless the broker has documentary evidence in its records that you are a
non-U.S. person and does not have actual knowledge that you are a U.S. person,
or you otherwise establish an exemption.
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EMPLOYEE RETIREMENT INCOME SECURITY ACT
This section is only relevant to you if you are an insurance company or the
fiduciary of a pension plan or an employee benefit plan proposing to invest in
the notes.
The Goldman Sachs Group, Inc. and certain of its affiliates may each be
considered a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended, or a "disqualified person" within the
meaning of the Internal Revenue Code with respect to many employee benefit
plans. Prohibited transactions within the meaning of ERISA or the Internal
Revenue Code may arise, for example, if the notes we are offering are acquired
by or with the assets of a pension or other employee benefit plan for which The
Goldman Sachs Group, Inc. or any of its affiliates is a service provider, unless
those notes are acquired pursuant to an exemption for transactions effected on
behalf of that plan by a "qualified professional asset manager" or an "in-house
asset manager" or pursuant to any other available exemption. The assets of a
pension or other employee benefit plan may include assets held in the general
account of an insurance company that are deemed to be "plan assets" under ERISA.
If you are an insurance company or the fiduciary of a pension plan or an
employee benefit plan, and propose to invest in the notes, you should consult
your legal counsel.
VALIDITY OF THE NOTES
The validity of the notes offered and sold in this offering will be passed
upon for The Goldman Sachs Group, Inc. by Sullivan & Cromwell, New York, New
York and for the underwriters by Cleary, Gottlieb, Steen & Hamilton, New York,
New York. Certain legal matters will be passed upon for The Goldman Sachs Group,
Inc. by one of its General Counsel, Robert J. Katz or Gregory K. Palm. Sullivan
& Cromwell has in the past represented, and continues to represent, one or more
of the underwriters and their affiliates in a variety of matters. Cleary,
Gottlieb, Steen & Hamilton has in the past represented, and continues to
represent, Goldman Sachs in a variety of matters.
EXPERTS
The financial statements of Goldman Sachs as of November 28, 1997 and
November 27, 1998 and for each of the three years in the period ended November
27, 1998 included in this prospectus and the financial statement schedule
included in the registration statement have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The historical consolidated income statement data and balance sheet data
set forth in "Selected Consolidated Financial Data" for each of the five years
in the period ended November 27, 1998 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
With respect to the unaudited condensed consolidated financial statements
of Goldman Sachs as of and for the three months ended February 26, 1999 and for
the three months ended February 27, 1998, included in this prospectus,
PricewaterhouseCoopers LLP reported that they have applied limited procedures in
accordance with professional standards for a review of such information.
However, their separate report dated April 9, 1999 appearing herein states that
they did not audit and they do not express an opinion on the unaudited condensed
consolidated financial statements. Accordingly, the degree of reliance on their
report on such information
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should be restricted in light of the limited nature of the review procedures
applied. PricewaterhouseCoopers LLP is not subject to the liability provisions
of Section 11 of the Securities Act of 1933 for their report on the unaudited
historical financial information because this report is not a "report" or a
"part" of the registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the
Securities Act of 1933.
Except as otherwise indicated, all amounts with respect to the volume,
number and market share of mergers and acquisitions and underwriting
transactions and related ranking information included in this prospectus have
been derived from information compiled and classified by Securities Data Company
and have been so included in reliance on Securities Data Company's authority as
experts in compiling and classifying information as to securities transactions.
AVAILABLE INFORMATION
As a result of its common stock offering, The Goldman Sachs Group, Inc. is
required to file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any documents filed by us
at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our filings with the SEC are also available to the public
through the SEC's Internet site at http://www.sec.gov and through the NYSE, 20
Broad Street, New York, New York 10005. As long as the notes are listed on the
Luxembourg Stock Exchange, copies of our filings with the SEC will also be
available free of charge from our listing agent in Luxembourg, Banque
Internationale a Luxembourg, 69, route d'Esch, L-1470 Luxembourg.
We have filed with the SEC a registration statement on Form S-1 relating to
the notes we are offering. This prospectus is a part of the registration
statement and does not contain all the information in the registration
statement. Whenever a reference is made in this prospectus to a contract or
other document, please be aware that the reference is not necessarily complete
and that you should refer to the exhibits that are part of the registration
statement for a copy of the contract or other document. You may review a copy of
the registration statement at the SEC's public reference room in Washington,
D.C., as well as through the SEC's Internet site noted above.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements as of November 27, 1998
and November 28, 1997 and for the three years in the
period ended November 27, 1998
Report of Independent Accountants........................... F-2
Consolidated Statements of Earnings......................... F-3
Consolidated Statements of Financial Condition.............. F-4
Consolidated Statements of Changes in Partners' Capital..... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Financial Statements as of February
26, 1999 and for the three months ended February 26, 1999
and February 27, 1998 (unaudited)
Review Report of Independent Accountants.................... F-24
Condensed Consolidated Statements of Earnings............... F-25
Condensed Consolidated Statement of Financial Condition..... F-26
Condensed Consolidated Statement of Changes in Partners'
Capital................................................... F-27
Condensed Consolidated Statements of Cash Flows............. F-28
Notes to Condensed Consolidated Financial Statements........ F-29
</TABLE>
F-1
<PAGE> 137
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 36 and 37 of this
prospectus) is fairly stated, in all material respects, in relation to the
consolidated financial statements from which it has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 22, 1999.
F-2
<PAGE> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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> 144
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> 145
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", effective for transactions occurring after
December 31, 1996. SFAS No. 125 establishes standards for distinguishing
transfers of financial assets that are accounted for as sales from transfers
that are accounted for as secured borrowings.
The provisions of SFAS No. 125 relating to repurchase agreements,
securities lending transactions and other similar transactions were deferred by
the provisions of SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", and became effective for transactions
entered into after December 31, 1997. This Statement requires that the
collateral obtained in certain types of secured lending transactions be recorded
on the balance sheet with a corresponding liability reflecting the obligation to
return such collateral to its owner. Effective January 1, 1998, the Firm adopted
the provisions of SFAS No. 125 that were deferred by SFAS No. 127. The adoption
of this standard increased the Firm's total assets and liabilities by $11.64
billion as of November 1998.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
("EPS"), effective for periods ending after December 15, 1997, with restatement
required for all prior periods. SFAS No. 128 establishes new standards for
computing and presenting EPS. This Statement replaces primary and fully diluted
EPS with "basic EPS", which excludes dilution, and "diluted EPS", which includes
the effect of all potentially dilutive common shares and other dilutive
securities. Because the Firm has not historically reported EPS, this Statement
will have no impact on the Firm's historical financial statements. This
Statement will, however, apply to financial statements of the Firm prepared
after its common stock offering.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997, with
reclassification of earlier periods required for comparative purposes. SFAS No.
130 establishes standards for the reporting and presentation of comprehensive
income and its components in the financial statements. The Firm intends to adopt
this standard in the first quarter of fiscal 1999. This Statement is limited to
issues of reporting and presentation and, therefore, will not affect the Firm's
results of operations or financial condition.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", effective for fiscal years beginning
after December 15, 1997, with reclassification of earlier periods required for
comparative purposes. SFAS No. 131 establishes the criteria for determining an
operating segment and establishes the disclosure requirements for reporting
information about operating segments. The Firm intends to adopt this standard at
the end of fiscal 1999. This Statement is limited to issues of reporting and
presentation and, therefore, will not affect the Firm's results of operations or
financial condition.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", effective for fiscal years
beginning after December 15, 1997, with restatement of disclosures for earlier
periods required for comparative purposes. SFAS No. 132 revises certain
employers' disclosures about pension and other post-retirement benefit plans.
The Firm intends to adopt this standard at the end of fiscal 1999. This
Statement is limited to issues of reporting and presentation and, therefore,
will not affect the Firm's results of operations or financial condition.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 98-1, "Accounting for
F-10
<PAGE> 146
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> 147
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> 148
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> 149
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> 150
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> 151
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 $19,906
======= ====== ======= ======= ====== =======
</TABLE>
F-16
<PAGE> 152
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Firm enters into non-trading derivative contracts, such as interest
rate and currency swap agreements, to effectively convert a substantial portion
of its fixed rate long-term borrowings into U.S. dollar-based floating rate
obligations. Accordingly, the aggregate carrying value of these long-term
borrowings and related hedges approximates fair value. The effective weighted
average interest rates for long-term borrowings, after hedging activities, are
set forth below:
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER 1997 NOVEMBER 1998
--------------- ----------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
($ in millions)
<S> <C> <C> <C> <C>
Long-term borrowings:
Fixed-rate obligations................ $ 291 7.76% $ 222 8.09%
Floating-rate obligations............. 15,376 5.84 19,684 5.63
------- -------
Total long-term
borrowings................ $15,667 5.88 $19,906 5.66
======= =======
</TABLE>
The notional amounts, fair value and carrying value of the related swap
agreements used for non-trading purposes are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
--------------
1997 1998
---- ----
(in millions)
<S> <C> <C>
Notional amount........................................ $8,708 $10,206
</TABLE>
<TABLE>
<CAPTION>
AS OF NOVEMBER
-----------------------------------------------
1997 1998
---------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(in millions)
<S> <C> <C> <C> <C>
Fair value.......................... $212 $4 $519 $7
Carrying value...................... 98 4 98 8
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Firm is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
businesses. Management believes, based on currently available information, that
the results of such proceedings, in the aggregate, will not have a material
adverse effect on the Firm's financial condition, but might be material to the
Firm's operating results for any particular period, depending, in part, upon the
operating results for such period.
LEASES
The Firm has obligations under long-term non-cancelable lease agreements,
principally for office space, expiring on various dates through 2016. Certain
agreements are subject to periodic escalation charges for increases in real
estate taxes and other charges. Minimum rental
F-17
<PAGE> 153
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commitments, net of minimum sublease rentals, under non-cancelable leases for
1999 and the succeeding four years and rent charged to operating expense for the
last three years are set forth below:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
MINIMUM RENTAL COMMITMENTS:
1999.......................................... $ 142
2000.......................................... 139
2001.......................................... 139
2002.......................................... 136
2003.......................................... 128
Thereafter.................................... 860
------
Total............................... $1,544
======
NET RENT EXPENSE:
1996.......................................... $ 83
1997.......................................... 87
1998.......................................... 104
</TABLE>
OTHER COMMITMENTS
The Firm acts as an investor in merchant banking transactions which
includes making long-term investments in equity and debt securities in privately
negotiated transactions, corporate acquisitions and real estate transactions,
and in connection with a bridge loan fund. In connection with these activities,
the Firm had commitments to invest up to $670 million and $1.39 billion in
corporate and real estate merchant banking investment and bridge loan funds as
of November 1997 and November 1998, respectively.
In connection with loan origination and participation, the Firm had loan
commitments of $5.23 billion and $1.51 billion as of November 1997 and November
1998, respectively. These commitments are agreements to lend to counterparties,
have fixed termination dates and are contingent on all conditions to borrowing
set forth in the contract having been met. Since these commitments may expire
unused, the total commitment amount does not necessarily reflect the actual
future cash flow requirements.
The Firm also had outstanding guarantees of $786 million and $790 million
relating to its fund management activities as of November 1997 and November
1998, respectively.
The Firm had pledged securities of $23.60 billion and $22.88 billion as
collateral for securities borrowed of approximately equivalent value as of
November 1997 and November 1998, respectively.
The Firm obtains letters of credit issued to counterparties by various
banks that are used in lieu of securities or cash to satisfy various collateral
and margin deposit requirements. Letters of credit outstanding were $10.13
billion and $8.81 billion as of November 1997 and November 1998, respectively.
NOTE 7. EMPLOYEE BENEFIT PLANS
The Firm sponsors various pension plans and certain other post-retirement
benefit plans, primarily health care and life insurance, which cover most
employees worldwide. The Firm also provides certain benefits to former or
inactive employees prior to retirement. Plan benefits are
F-18
<PAGE> 154
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
primarily based on the employee's compensation and years of service. Pension
costs are determined actuarially and are funded in accordance with the Internal
Revenue Code. Plan assets are held in a trust and consist primarily of listed
stocks and U.S. bonds. A summary of these plans is set forth below:
DEFINED BENEFIT PENSION PLANS
The components of pension expense/(income) are set forth below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost, benefits earned during the period............. $ 15 $ 15 $ 14
Interest cost on projected benefit obligation............... 8 10 11
Return on plan assets....................................... (24) (18) (14)
Net amortization............................................ 14 4 (1)
---- ---- ----
Total pension expense............................. $ 13 $ 11 $ 10
==== ==== ====
U.S. plans.................................................. $ (1) $ (3) $ (3)
International plans......................................... 14 14 13
---- ---- ----
Total pension expense............................. $ 13 $ 11 $ 10
==== ==== ====
</TABLE>
The weighted average assumptions used to develop net periodic pension cost
and the actuarial present value of the projected benefit obligation are set
forth below. The assumptions represent a weighted average of the assumptions
used for the U.S. and international plans and are based on the economic
environment of each applicable country.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
U.S. PLANS:
Discount rate............................................... 7.50% 7.50% 7.00%
Rate of increase in future compensation levels.............. 5.00 5.00 5.00
Expected long-term rate of return on plan assets............ 7.50 7.50 7.50
INTERNATIONAL PLANS:
Discount rate............................................... 5.70 5.70 5.00
Rate of increase in future compensation levels.............. 5.30 5.30 4.75
Expected long-term rate of return on plan assets............ 7.00 7.00 6.00
</TABLE>
F-19
<PAGE> 155
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> 156
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> 157
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. GEOGRAPHIC DATA
The Firm's activities as an investment banking and securities firm
constitute a single business segment pursuant to SFAS No. 14 "Financial
Reporting for Segments of a Business Enterprise".
Due to the highly integrated nature of international financial markets, the
Firm manages its business based on the profitability of the enterprise as a
whole, not by geographic region. Accordingly, management believes that
profitability by geographic region is not necessarily meaningful.
The total revenues, net revenues, pre-tax earnings and identifiable assets
of Group L.P. and its consolidated subsidiaries by geographic region are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
TOTAL REVENUES:
Americas(1)......................................... $12,864 $15,091 $15,972
Europe.............................................. 3,762 4,463 5,156
Asia................................................ 663 879 1,350
------- ------- -------
Total............................................... $17,289 $20,433 $22,478
======= ======= =======
NET REVENUES:
Americas(1)......................................... $ 4,397 $ 5,104 $ 5,436
Europe.............................................. 1,355 1,739 2,180
Asia................................................ 377 604 904
------- ------- -------
Total............................................... $ 6,129 $ 7,447 $ 8,520
======= ======= =======
PRE-TAX EARNINGS:
Americas(1)......................................... $ 1,963 $ 2,061 $ 1,527
Europe.............................................. 536 683 913
Asia................................................ 107 270 481
------- ------- -------
Total............................................... $ 2,606 $ 3,014 $ 2,921
======= ======= =======
</TABLE>
F-22
<PAGE> 158
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF NOVEMBER
-----------------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Americas(1).......................................... $ 171,345 $ 206,312 $ 229,412
Europe............................................... 62,172 80,551 106,721
Asia................................................. 6,894 13,240 19,883
Eliminations......................................... (88,365) (121,702) (138,636)
--------- --------- ---------
Total................................................ $ 152,046 $ 178,401 $ 217,380
========= ========= =========
</TABLE>
- ---------------
(1) Americas principally represents the United States.
NOTE 10. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 1996
------------------------------------
1ST 2ND 3RD 4TH
--- --- --- ---
(in millions)
<S> <C> <C> <C> <C>
Total revenues....................................... $4,030 $4,656 $4,313 $4,290
Interest expense, principally on short-term
funding............................................ 2,566 2,986 2,845 2,763
------ ------ ------ ------
Revenues, net of interest expense.................... 1,464 1,670 1,468 1,527
Operating expenses................................... 899 961 879 784
------ ------ ------ ------
Pre-tax earnings..................................... 565 709 589 743
Provision for taxes.................................. 21 23 31 132
------ ------ ------ ------
Net earnings.................................... $ 544 $ 686 $ 558 $ 611
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 1997
------------------------------------
1ST 2ND 3RD 4TH
--- --- --- ---
(in millions)
<S> <C> <C> <C> <C>
Total revenues....................................... $4,932 $4,608 $5,957 $4,936
Interest expense, principally on short-term
funding............................................ 2,975 2,934 3,727 3,350
------ ------ ------ ------
Revenues, net of interest expense.................... 1,957 1,674 2,230 1,586
Operating expenses................................... 1,052 1,064 1,298 1,019
------ ------ ------ ------
Pre-tax earnings..................................... 905 610 932 567
Provision for taxes.................................. 44 99 60 65
------ ------ ------ ------
Net earnings.................................... $ 861 $ 511 $ 872 $ 502
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 1998
------------------------------------
1ST 2ND 3RD 4TH
--- --- --- ---
(in millions)
<S> <C> <C> <C> <C>
Total revenues....................................... $5,903 $6,563 $5,735 $4,277
Interest expense, principally on short-term
funding............................................ 3,431 3,574 3,591 3,362
------ ------ ------ ------
Revenues, net of interest expense.................... 2,472 2,989 2,144 915
Operating expenses................................... 1,450 1,952 1,389 808
------ ------ ------ ------
Pre-tax earnings..................................... 1,022 1,037 755 107
Provision for taxes.................................. 138 190 102 63
------ ------ ------ ------
Net earnings.................................... $ 884 $ 847 $ 653 $ 44
====== ====== ====== ======
</TABLE>
F-23
<PAGE> 159
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners,
The Goldman Sachs Group, L.P.:
We have reviewed the condensed consolidated statement of financial condition of
The Goldman Sachs Group, L.P. and Subsidiaries (the "Firm") as of February 26,
1999, and the related condensed consolidated statements of earnings, and cash
flows for the three months ended February 26, 1999 and February 27, 1998 and the
related condensed consolidated statement of changes in partners' capital for the
three months ended February 26, 1999 (included on pages F-25 to F-33 of this
prospectus). These financial statements are the responsibility of the Firm's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
April 9, 1999.
F-24
<PAGE> 160
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY
------------------
1998 1999
------- -------
(unaudited)
(in millions)
<S> <C> <C>
REVENUES:
Investment banking.......................................... $ 633 $ 902
Trading and principal investments........................... 1,115 1,398
Asset management and securities services.................... 512 543
Interest income............................................. 3,643 3,013
------ ------
Total revenues.................................... 5,903 5,856
Interest expense, principally on short-term funding......... 3,431 2,861
------ ------
Revenues, net of interest expense................. 2,472 2,995
OPERATING EXPENSES:
Compensation and benefits................................... 1,100 1,275
Brokerage, clearing and exchange fees....................... 93 111
Market development.......................................... 54 77
Communications and technology............................... 58 78
Depreciation and amortization............................... 42 97
Occupancy................................................... 44 78
Professional services and other............................. 59 91
------ ------
Total operating expenses.......................... 1,450 1,807
Pre-tax earnings............................................ 1,022 1,188
Provision for taxes......................................... 138 181
------ ------
Net earnings................................................ $ 884 $1,007
====== ======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-25
<PAGE> 161
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF
FEBRUARY
1999
-------------
(unaudited)
(in millions)
<S> <C>
ASSETS:
Cash and cash equivalents................................... $ 3,345
Cash and securities segregated in compliance with U.S.
federal and other regulations (principally U.S. government
obligations).............................................. 7,361
Receivables from brokers, dealers and clearing
organizations............................................. 4,624
Receivables from customers and counterparties............... 19,311
Securities borrowed......................................... 74,036
Securities purchased under agreements to resell............. 41,776
Right to receive securities................................. 7,280
Financial instruments owned, at fair value:
Commercial paper, certificates of deposit and time
deposits............................................... 1,413
U.S. government, federal agency and sovereign
obligations............................................ 26,580
Corporate debt............................................ 9,080
Equities and convertible debentures....................... 11,298
State, municipal and provincial obligations............... 1,021
Derivative contracts...................................... 20,441
Physical commodities...................................... 688
Other assets................................................ 2,370
--------
$230,624
========
LIABILITIES AND NET WORTH:
Short-term borrowings, including commercial paper........... $ 33,863
Payables to brokers, dealers and clearing organizations..... 1,294
Payables to customers and counterparties.................... 32,143
Securities loaned........................................... 24,770
Securities sold under agreements to repurchase.............. 36,906
Obligation to return securities............................. 9,078
Financial instruments sold, but not yet purchased, at fair
value:
U.S. government, federal agency and sovereign
obligations............................................ 29,391
Corporate debt............................................ 1,579
Equities and convertible debentures....................... 8,238
Derivative contracts...................................... 22,677
Physical commodities...................................... 267
Other liabilities and accrued expenses...................... 3,022
Long-term borrowings........................................ 20,405
--------
223,633
Commitments and contingencies
Accumulated other comprehensive income...................... (37)
Partners' capital allocated for income taxes and potential
withdrawals............................................... 416
Partners' capital........................................... 6,612
--------
$230,624
========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-26
<PAGE> 162
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY
1999
--------
(unaudited)
(in millions)
<S> <C>
Partners' capital, beginning of period...................... $6,310
Additions:
Net earnings.............................................. 1,007
Capital contributions..................................... 48
------
Total additions................................... 1,055
Deductions:
Returns on capital and certain distributions to
partners............................................... (171)
Transfers to partners' capital allocated for income taxes
and potential withdrawals, net......................... (582)
------
Total deductions.................................. (753)
------
Partners' capital, end of period............................ $6,612
======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-27
<PAGE> 163
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY
-------------------
1998 1999
-------- -------
(unaudited)
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 884 $ 1,007
Non-cash items included in net earnings:
Depreciation and amortization.......................... 42 97
Deferred income taxes.................................. 8 5
Changes in operating assets and liabilities:
Cash and securities segregated in compliance with U.S.
federal and other regulations......................... (191) 526
Net receivables from brokers, dealers and clearing
organizations......................................... 233 260
Net payables to customers and counterparties........... 1,950 (8,394)
Securities borrowed, net............................... (12,579) (1,225)
Financial instruments owned, at fair value............. (51,461) (2,267)
Financial instruments sold, but not yet purchased, at
fair value............................................ 14,601 8,205
Other, net............................................. (759) (617)
-------- -------
Net cash used for operating activities............... (47,272) (2,403)
Cash flows from investing activities:
Property, leasehold improvements and equipment......... (63) (103)
Financial instruments owned, at fair value............. (45) 58
-------- -------
Net cash used for investing activities............... (108) (45)
-------- -------
Cash flows from financing activities:
Short-term borrowings, net............................. 11,500 2,567
Securities sold under agreements to repurchase, net.... 34,157 (3,643)
Issuance of long-term borrowings....................... 5,630 4,468
Repayment of long-term borrowings...................... (608) (105)
Capital contributions.................................. 6 48
Returns on capital and certain distributions to
partners.............................................. (157) (171)
Partners' capital allocated for income taxes and
potential withdrawals................................. (309) (207)
-------- -------
Net cash provided by financing activities............ 50,219 2,957
-------- -------
Net increase in cash and cash equivalents.............. 2,839 509
Cash and cash equivalents, beginning of period.............. 1,328 2,836
-------- -------
Cash and cash equivalents, end of period.................... $ 4,167 $ 3,345
======== =======
</TABLE>
- ---------------
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest approximated the related expense for each of the
fiscal periods presented. Payments of income taxes were not material.
The increases in total assets and liabilities related to the provisions of
Statement of Financial Accounting Standards No. 125 that were deferred under
Statement of Financial Accounting Standards No. 127 were excluded from the
consolidated statements of cash flows as they represented non-cash items.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-28
<PAGE> 164
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS
The Goldman Sachs Group, L.P., a Delaware limited partnership ("Group
L.P."), together with its consolidated subsidiaries (collectively, the "Firm"),
is a global investment banking and securities firm that provides a wide range of
services worldwide to a substantial and diversified client base.
The Firm's activities are divided into three principal business lines:
- Investment Banking, which includes financial advisory services and
underwriting;
- Trading and Principal Investments, which includes fixed income, currency
and commodities ("FICC"), equities and principal investments (principal
investments reflect primarily the Firm's investments in its merchant
banking funds); and
- Asset Management and Securities Services, which includes asset
management, securities services and commissions.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Group L.P.
and its U.S. and international subsidiaries including Goldman, Sachs & Co.
("GS&Co.") and J. Aron & Company in New York, Goldman Sachs International
("GSI") in London and Goldman Sachs (Japan) Ltd. ("GSJL") in Tokyo. The
consolidated financial statements are unaudited and should be read in
conjunction with the audited consolidated financial statements included
elsewhere in this prospectus.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles that require management to make
estimates and assumptions regarding trading inventory valuations, partner
retirements, the outcome of pending litigation and other matters that affect the
consolidated financial statements and related disclosures. These estimates and
assumptions are based on judgment and available information and, consequently,
actual results could be materially different from these estimates.
The unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, that are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. Interim period operating results may not be indicative of the
operating results for a full year.
Unless otherwise stated herein, all references to February 1998 and
February 1999 refer to the Firm's fiscal quarter ended, or the date, as the
context requires, February 27, 1998 and February 26, 1999, respectively.
F-29
<PAGE> 165
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting and presentation of comprehensive income
and its components in the financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997 and was adopted by the Firm in
the first quarter of 1999. The components of comprehensive income are set forth
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY
------------------
1998 1999
------- -------
(in millions)
<S> <C> <C>
Net earnings............................................. $ 884 $1,007
Other comprehensive loss
Foreign currency translation adjustment................ (5) (6)
------ ------
Total comprehensive income............................... $ 879 $1,001
====== ======
</TABLE>
NOTE 3. FINANCIAL INSTRUMENTS
Gains and losses on financial instruments and commission income and related
expenses are recorded on a trade date basis in the consolidated statements of
earnings. For purposes of the consolidated statement of financial condition
only, purchases and sales of financial instruments, including agency
transactions, are generally recorded on a settlement date basis. Recording such
transactions on a trade date basis would not result in a material adjustment to
the consolidated statement of financial condition.
Substantially all financial instruments used in the Firm's trading and
non-trading activities are carried at fair value or amounts that approximate
fair value and unrealized gains and losses are recognized in earnings. Fair
value is based generally on listed market prices or broker or dealer price
quotations. To the extent that prices are not readily available, fair value is
based on either internal valuation models or management's estimate of amounts
that could be realized under current market conditions, assuming an orderly
liquidation over a reasonable period of time. Certain over-the-counter
derivative instruments are valued using pricing models that consider, among
other factors, current and contractual market prices, time value, and yield
curve and/or volatility factors of the underlying positions.
The Firm's Trading and Principal Investments business facilitates customer
transactions and takes proprietary positions through market-making in and
trading of securities, currencies, commodities and swaps and other derivatives.
Derivative financial instruments are often used to hedge cash instruments or
other derivative financial instruments as an integral part of the Firm's
strategies. As a result, it is necessary to view the results of any activity on
a fully-integrated basis, including cash positions, the effect of related
derivatives and the financing of the underlying positions.
Net revenues represent total revenues less allocations of interest expense
to specific securities, commodities and other positions in relation to the level
of financing incurred by each.
F-30
<PAGE> 166
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table sets forth the net revenues of the Firm's Trading and
Principal Investments business:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY
------------------
1998 1999
------- -------
(in millions)
<S> <C> <C>
FICC..................................................... $ 741 $ 876
Equities................................................. 365 455
Principal investments.................................... 76 26
------ ------
Total Trading and Principal Investments.................. $1,182 $1,357
====== ======
</TABLE>
DERIVATIVE ACTIVITIES
Most of the Firm's derivative transactions are entered into for trading
purposes. The Firm uses derivatives in its trading activities to facilitate
customer transactions, to take proprietary positions and as a means of risk
management. The Firm also enters into non-trading derivative contracts to manage
the interest rate and currency exposure on its long-term borrowings.
Derivative contracts are financial instruments, such as futures, forwards,
swaps or option contracts, that derive their value from underlying assets,
indices, reference rates or a combination of these factors. Derivatives may
involve future commitments to purchase or sell financial instruments or
commodities, or to exchange currency or interest payment streams. The amounts
exchanged are based on the specific terms of the contract with reference to
specified rates, securities, commodities or indices.
Derivative contracts exclude certain cash instruments, such as
mortgage-backed securities, interest-only and principal-only obligations and
indexed debt instruments, that derive their values or contractually required
cash flows from the price of some other security or index. Derivatives also
exclude option features that are embedded in cash instruments, such as the
conversion features and call provisions embedded in bonds. The Firm has elected
to include commodity-related contracts in its derivative disclosure, although
not required to do so, as these contracts may be settled in cash or are readily
convertible into cash.
Derivatives used for trading purposes are reported at fair value and are
included in "Derivative contracts" on the consolidated statement of financial
condition. Gains and losses on derivatives used for trading purposes are
included in "Trading and Principal Investments" on the consolidated statements
of earnings.
The Firm utilizes replacement cost as its measure of derivative credit
risk. Replacement cost, as reported in financial instruments owned, at fair
value on the consolidated statement of financial condition, represents amounts
receivable from various counterparties, net of any unrealized losses owed where
management believes a legal right of setoff exists under an enforceable master
netting agreement. Replacement cost for purchased option contracts is the market
value of the contract. The Firm controls its credit risk through an established
credit approval process, by monitoring counterparty limits, obtaining collateral
where appropriate and, in some cases, using legally enforceable master netting
agreements.
F-31
<PAGE> 167
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The fair value of derivative financial instruments used for trading
purposes, computed in accordance with the Firm's netting policy, is set forth
below:
<TABLE>
<CAPTION>
AS OF
FEBRUARY 1999
----------------------
ASSETS LIABILITIES
------ -----------
(in millions)
<S> <C> <C>
Forward settlement contracts................................ $ 3,991 $ 3,725
Swap agreements............................................. 9,233 10,460
Option contracts............................................ 7,140 8,484
------- -------
Total....................................................... $20,364 $22,669
======= =======
</TABLE>
Derivatives used for non-trading purposes include interest rate futures
contracts and interest rate and currency swap agreements, which are primarily
utilized to convert a substantial portion of the Firm's fixed rate debt into
U.S. dollar-based floating rate obligations. Gains and losses on these
transactions are generally deferred and recognized as adjustments to interest
expense over the life of the derivative contract. Gains and losses resulting
from the early termination of derivatives used for non-trading purposes are
generally deferred and recognized over the remaining life of the underlying
debt. If the underlying debt is terminated prior to its stated maturity, gains
and losses on these transactions, including the associated hedges, are
recognized in earnings immediately. The fair value and carrying value of
derivatives used for non-trading purposes are set forth below:
<TABLE>
<CAPTION>
AS OF
FEBRUARY 1999
---------------------
ASSETS LIABILITIES
------ -----------
(in millions)
<S> <C> <C>
Fair value........................................ $319 $13
Carrying value.................................... 77 8
</TABLE>
NOTE 4. SHORT-TERM BORROWINGS
The Firm obtains secured short-term financing principally through the use
of repurchase agreements and securities lending agreements, collateralized
mainly by U.S. government, federal agency, investment grade foreign sovereign
obligations and equity securities. The Firm obtains unsecured short-term
borrowings through issuance of commercial paper, promissory notes and bank
loans. The carrying value of these short-term obligations approximates fair
value due to their short-term nature.
Short-term borrowings are set forth below:
<TABLE>
<CAPTION>
AS OF
FEBRUARY
1999
-------------
(in millions)
<S> <C>
Commercial paper............................................ $10,740
Promissory notes*........................................... 10,893
Bank loans and other*....................................... 12,230
-------
Total....................................................... $33,863
=======
</TABLE>
- ---------------
* As of February 1999, short-term borrowings included $6,285 million of
long-term borrowings maturing within one year.
F-32
<PAGE> 168
THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Firm maintains unencumbered securities with a market value in excess of
all uncollateralized short-term borrowings.
NOTE 5. REGULATED SUBSIDIARIES
GS&Co. is a registered U.S. broker-dealer subsidiary, which is subject to
the Securities and Exchange Commission's "Uniform Net Capital Rule", and has
elected to compute its net capital in accordance with the "Alternative Net
Capital Requirement" of that rule. As of February 1999, GS&Co. had regulatory
net capital, as defined, of $2.89 billion, which exceeded the amount required by
$2.40 billion.
GSI, a registered U.K. broker-dealer and subsidiary of Group L.P., is
subject to the capital requirements of the Securities and Futures Authority
Limited and GSJL, a Tokyo-based broker-dealer, is subject to the capital
requirements of the Japanese Ministry of Finance and the Financial Supervisory
Agency. As of February 1999, GSI and GSJL were in compliance with their local
capital adequacy requirements.
Certain other subsidiaries of the Firm are also subject to capital adequacy
requirements promulgated by authorities of the countries in which they operate.
As of February 1999, these subsidiaries were in compliance with their local
capital adequacy requirements.
NOTE 6. CONTINGENCIES
The Firm is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
businesses. Management believes, based on currently available information, that
the results of such proceedings, in the aggregate, will not have a material
adverse effect on the Firm's financial condition, but might be material to the
Firm's operating results for any particular period, depending, in part, upon the
operating results for such period.
F-33
<PAGE> 169
UNDERWRITING
The Goldman Sachs Group, Inc. and the underwriters for this offering named
below have entered into an underwriting agreement with respect to the notes.
Subject to certain conditions, each underwriter has severally agreed to purchase
the principal amount of notes indicated in the following table. Goldman Sachs
International is the representative of the underwriters.
<TABLE>
<CAPTION>
Underwriters Principal Amount of Notes
------------ -------------------------
<S> <C>
Goldman Sachs International.................... (euro)
-------------------
Total................................ (euro)1,000,000,000
===================
</TABLE>
------------------------
Notes sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
notes sold by the underwriters to securities dealers may be sold at a discount
from the initial public offering price of up to % of the principal amount
of the notes. Any such securities dealers may resell any notes purchased from
the underwriters to other brokers or dealers at a discount from the initial
public offering price of up to % of the principal amount of the notes. If
all the notes are not sold at the initial offering price, the underwriters may
change the offering price and the other selling terms.
The underwriters intend to offer the notes for sale primarily in Europe.
Goldman Sachs International, acting through Goldman, Sachs & Co. as its U.S.
selling agent, may also offer the notes for sale in the United States.
The offer and sale of the notes by the underwriters, including Goldman,
Sachs & Co., is subject to the underwriters having received and accepted the
notes from The Goldman Sachs Group, Inc. In addition, the underwriters,
including Goldman, Sachs & Co., may, in their sole discretion, reject all or any
part of any order for the notes that is received by them. The underwriters
expect to deliver the notes through Cedel and Euroclear on the date indicated on
the front cover page of this prospectus in exchange for payment for the notes,
in euros and in immediately available funds.
The notes are a new issue of securities with no established trading market.
The Goldman Sachs Group, Inc. cannot assure
U-1
<PAGE> 170
you that any trading market for the notes will develop. The Goldman Sachs Group,
Inc. has been advised by Goldman Sachs International and Goldman, Sachs & Co.
that they intend to make a market in the notes. Other affiliates of The Goldman
Sachs Group, Inc. may also do so. Neither Goldman Sachs International, Goldman,
Sachs & Co. nor any other affiliate, however, is obligated to do so and any of
them may discontinue market-making at any time without notice. No assurance can
be given as to the liquidity or the trading market for the notes.
In connection with this offering, the underwriters may purchase and sell
notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater principal
amount of notes than they are required to purchase in this offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the notes while this
offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased notes sold by
or for the account of that underwriter in stabilizing or short-covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the notes. As a result, the price of the notes may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may occur in the over-the-counter market or otherwise.
The Goldman Sachs Group, Inc. estimates that its share of the total
expenses of this offering, excluding underwriting discounts and commissions,
whether paid to Goldman Sachs International or any other underwriter, will be
approximately $2.75 million.
The Goldman Sachs Group, Inc. has agreed to indemnify the several
underwriters and Goldman, Sachs & Co. against certain liabilities, including
liabilities under the Securities Act of 1933.
Goldman, Sachs & Co. is a subsidiary of The Goldman Sachs Group, Inc. Rule
2720 of the Conduct Rules of the National Association of Securities Dealers,
Inc. imposes certain requirements when an NASD member such as Goldman, Sachs &
Co. distributes an affiliated company's debt securities. Goldman, Sachs & Co.
has advised The Goldman Sachs Group, Inc. that the portion of this offering made
through Goldman, Sachs & Co. will comply with the applicable requirements of
Rule 2720.
Certain of the underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, investment banking and general
financing and banking services to The Goldman Sachs Group, Inc. and its
affiliates, for which they have in the past received, and may in the future
receive, customary fees. The Goldman Sachs Group, Inc. and its affiliates have
in the past provided, and may in the future from time to time provide, similar
services to the underwriters and their affiliates on customary terms and for
customary fees.
Goldman, Sachs & Co. has also informed The Goldman Sachs Group, Inc. that
it does not expect sales made through it in this offering to accounts over which
it exercises discretionary authority to exceed five percent of the aggregate
initial offering price of the notes. No such sales will be made without the
prior written approval of the customer to which such account relates.
This prospectus may be used by Goldman, Sachs & Co. and other dealers in
connection with offers and sales of notes to persons located in the United
States. These offers and sales may involve notes initially sold by the
underwriters in this offering outside the United States.
Each underwriter has also agreed that: (a) it has not offered or sold and
prior to the date six months after the date of original
U-2
<PAGE> 171
issue of the notes will not offer or sell any notes to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances that have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (b) it
has complied, and will comply, with all applicable provisions of the Financial
Services Act of 1986 of Great Britain with respect to anything done by it in
relation to the notes in, from or otherwise involving the United Kingdom; and
(c) it has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issuance of the notes
to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great
Britain or is a person to whom the document may otherwise lawfully be issued or
passed on.
This prospectus has been approved for distribution in the United Kingdom by
Goldman Sachs International, a firm regulated by the Securities and Futures
Authority for the conduct of investment business in the United Kingdom. This
offer is being made to persons within applicable exemptions of the Public Offers
of Securities Regulations 1995 and, accordingly, no offer is being made to the
public pursuant to those regulations.
The Goldman Sachs Group, Inc. does not have a permanent place of business
in the United Kingdom and is not authorized under the Financial Services Act
1986. A different regulatory regime, including compensation arrangements, from
that applicable in the United Kingdom will be applicable for any dealings with
The Goldman Sachs Group, Inc. and its non-United Kingdom affiliates.
U-3
<PAGE> 172
GENERAL INFORMATION
The board of directors of The Goldman Sachs Group, Inc. authorized the
issuance of the notes by a resolution dated March 29, 1999.
Euroclear and Cedel have accepted the notes for clearance through their
systems. The Common Code for the notes is 9761292 and the International Security
Identification Number (ISIN) for the notes is XS0097612922.
The Goldman Sachs Group, Inc. has applied to list the notes on the
Luxembourg Stock Exchange. Prior to the listing, a legal notice relating to the
notes with The Goldman Sachs Group, Inc.'s certificate of incorporation and
by-laws will be registered with the Greffier en Chef du Tribunal
d'Arrondissement de et a Luxembourg, where copies may be obtained upon request.
As long as the notes are listed on the Luxembourg Stock Exchange, The
Goldman Sachs Group, Inc. will maintain a paying agent in Luxembourg. The
initial paying agent and listing agent in Luxembourg is Banque Internationale a
Luxembourg.
As long as any notes remain outstanding, you may obtain copies of our
certificate of incorporation, by-laws and most recent annual report on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K during
normal business hours on any weekday (except Saturdays, Sundays and public
holidays) at the specified office of, or upon written request to, the trustee
and, as long as the notes are listed on the Luxembourg Stock Exchange and its
rules require, free of charge at the office of the listing agent in Luxembourg.
In addition, a copy of the indenture will be available for inspection at those
offices during those hours.
The Goldman Sachs Group, Inc. has taken all reasonable care to ensure that
the information with regard to Goldman Sachs and the notes stated in this
prospectus is true and accurate in all material respects as of the date of this
prospectus and that there are no other material facts the omission of which
would make the information contained in this prospectus as of its date
misleading in any material respect, and The Goldman Sachs Group, Inc. accepts
responsibility accordingly.
Since February 26, 1999 to the date of this prospectus, there has been no
material change in our capitalization as set forth above in the table under
"Capitalization", other than as indicated in or contemplated by this prospectus.
As of the date of this prospectus and except as indicated in or
contemplated by this prospectus, there has been no material adverse change in
the financial position of Goldman Sachs as set forth in its audited financial
statements included in this prospectus since the date of those audited financial
statements.
Various legal actions and proceedings involving Goldman Sachs are currently
pending. Management does not anticipate that any losses resulting from those
actions and proceedings would be material with respect to Goldman Sachs.
U-4
<PAGE> 173
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.
U-5
<PAGE> 174
PRINCIPAL EXECUTIVE OFFICE OF THE ISSUER
The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
TRUSTEE, REGISTRAR, TRANSFER AGENT AND PRINCIPAL PAYING AGENT
The Bank of New York
101 Barclay Street
New York, New York 10286
COMMON DEPOSITARY
FOR CEDEL AND EUROCLEAR
The Bank of New York Depository (Nominees) Limited
3 Birchin Lane
London EC3 V9BY, England
LISTING AGENT, TRANSFER AGENT AND PAYING AGENT IN LUXEMBOURG
Banque Internationale a Luxembourg
69, route d'Esch
L-1470 Luxembourg
LEGAL ADVISORS
<TABLE>
<CAPTION>
TO THE ISSUER TO THE UNDERWRITERS
<S> <C>
Sullivan & Cromwell Cleary, Gottlieb, Steen & Hamilton
125 Broad Street One Liberty Plaza
New York, New York 10004 New York, New York 10006
</TABLE>
INDEPENDENT AUDITORS
FOR THE ISSUER
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
<PAGE> 175
[GOLDMAN SACHS LOGO]
<PAGE> 176
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
[Alternate Front Cover Page for Market-Making Prospectus]
Subject to Completion. Dated May 11, 1999.
THE GOLDMAN SACHS GROUP, INC.
[GOLDMAN SACHS LOGO]
% (euro) Notes due 2009
------------------------
The Goldman Sachs Group, Inc. will pay interest on the notes on May 15 and
November 15 of each year, beginning on November 15, 1999. If Goldman Sachs
becomes obligated to pay additional amounts to non-U.S. investors due to changes
in U.S. withholding tax requirements, Goldman Sachs may redeem the notes before
their stated maturity at a price equal to 100% of the principal amount redeemed
plus accrued interest to the redemption date.
The notes have been issued only in book-entry form through the Cedel and
Euroclear systems. Goldman Sachs has filed an application to list the notes on
the Luxembourg Stock Exchange.
See "Risk Factors" beginning on page 11 to read about factors you should
consider before investing in the notes.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
Goldman Sachs International and Goldman, Sachs & Co., subsidiaries of
Goldman Sachs, will use this prospectus in connection with offers and sales of
the notes in market-making transactions. Offers and sales in the United States
will be made by Goldman, Sachs & Co., acting on its own behalf or as U.S.
selling agent for Goldman Sachs International.
GOLDMAN SACHS INTERNATIONAL
------------------------
Prospectus dated , 1999.
<PAGE> 177
[Alternate Inside Front Cover Page for Market-Making Prospectus]
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell or a solicitation of an offer to buy the securities it
describes, but only under circumstances and in jurisdictions where it is lawful
to do so. The information contained in this prospectus is current only as of its
date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 11
Use of Proceeds............................................. 26
Pro Forma Consolidated Financial Information................ 27
Capitalization.............................................. 34
Selected Consolidated Financial Data........................ 36
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 38
Industry and Economic Outlook............................... 63
Business.................................................... 66
Management.................................................. 91
Principal Shareholders...................................... 104
Certain Relationships and Related Transactions.............. 106
Description of Notes We Are Offering........................ 111
United States Taxation...................................... 127
Employee Retirement Income Security Act..................... 132
Validity of the Notes....................................... 132
Experts..................................................... 132
Available Information....................................... 133
Index to Consolidated Financial Statements.................. F-1
Plan of Distribution........................................ U-1
General Information......................................... U-3
Our Business Principles..................................... U-4
</TABLE>
------------------
This prospectus does not constitute an offer to sell or the solicitation of
any offer to buy the notes offered in any jurisdiction in which such offer or
solicitation is unlawful. There are restrictions on the offer and sale of the
notes offered hereby in the United Kingdom. All applicable provisions of the
Financial Services Act of 1986 and Public Offers of Securities Regulations 1995
with respect to anything done by any person in relation to the notes offered
hereby, in, from or otherwise involving the United Kingdom must be complied
with. See "Underwriting".
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 178
[Alternate Page for Market-Making Prospectus]
PLAN OF DISTRIBUTION
Goldman Sachs International and Goldman, Sachs & Co., each subsidiaries of
The Goldman Sachs Group, Inc., will use this prospectus in connection with
offers and sales of the notes in market-making transactions from time to time.
These transactions may occur in the open market or may be privately negotiated,
at prices related to prevailing market prices at the time of sale or at
negotiated prices. In these transactions, Goldman Sachs International and
Goldman, Sachs & Co. may act as principal or agent, including as agent for the
counterparty in a transaction in which they act as principal or as agent for
both counterparties in a transaction in which they do not act as principal.
Goldman Sachs International and Goldman, Sachs & Co. may receive compensation in
the form of discounts and commissions, including from both counterparties in
some transactions. Market-making offers and sales in the United States will be
made by Goldman, Sachs & Co., acting either on its own behalf or as U.S. selling
agent for Goldman Sachs International.
Other affiliates of The Goldman Sachs Group, Inc. may also engage in
transactions of this kind and may use this prospectus for this purpose. Neither
Goldman Sachs International, Goldman, Sachs & Co. nor any other affiliate of The
Goldman Sachs Group, Inc., however, is obligated to make a market in the notes
and may stop doing so at any time without notice.
The Goldman Sachs Group, Inc. does not expect to receive the proceeds from
market-making transactions. The Goldman Sachs Group, Inc. does not expect
Goldman Sachs International, Goldman, Sachs & Co. or any other affiliate that
engages in these transactions to pay the proceeds from their market-making
resales to The Goldman Sachs Group, Inc.
Goldman, Sachs & Co. does not expect the amount of notes held, as a result
of market-making resales, by accounts over which it exercises discretionary
authority to exceed, at any time, five percent of the aggregate initial offering
price of the notes.
Goldman Sachs International acted as the lead underwriter, and Goldman,
Sachs & Co. acted as U.S. selling agent for the underwriters, in connection with
the original offering and sale of the notes and received underwriting
compensation in the form of a discount totaling approximately (euro) in
the aggregate.
In connection with the original offering and sale of the notes, each
underwriter has also agreed that (a) it has not offered or sold and prior to the
date six months after the date of original issue of the notes will not offer or
sell any notes to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (b) it has complied, and will comply,
with all applicable provisions of the Financial Services Act of 1986 of Great
Britain with respect to anything done by it in relation to the notes in, from or
otherwise involving the United Kingdom; and (c) it has only issued or passed on
and will only issue or pass on in the United Kingdom any document received by it
in connection with the issuance of the notes to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom
the document may otherwise lawfully be issued or passed on.
This prospectus has been approved for distribution in the United Kingdom by
Goldman Sachs International, a firm regulated by the Securities and Futures
Authority for the conduct of investment business in the United Kingdom. This
offer is being made to persons within applicable exemptions of the Public Offers
of Securities Regulations 1995
U-1
<PAGE> 179
and, accordingly, no offer is being made to the public pursuant to those
regulations.
The Goldman Sachs Group, Inc. does not have a permanent place of business
in the United Kingdom and is not authorized under the Financial Services Act
1986. A different regulatory regime, including compensation arrangements, from
that applicable in the United Kingdom will be applicable for any dealings with
The Goldman Sachs Group, Inc. and its non-United Kingdom affiliates.
In this prospectus the term "offering" means the initial offering of the
notes, which occurred in connection with their original issuance on or about
, 1999. This term does not refer to any subsequent resale of the
notes by Goldman Sachs International, Goldman, Sachs & Co. or our other
affiliates in market-making transactions.
U-2
<PAGE> 180
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the expenses (all of which are estimated
other than the SEC registration fee and the NASD fees), other than underwriting
discounts and commissions, to be incurred in connection with the distribution of
the securities registered under this registration statement.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Securities and Exchange Commission registration fee......... $ 294,402
NASD fees................................................... 30,500
Legal fees and expenses..................................... 600,000
Listing fees................................................ 8,400
Fees and expenses of qualification under state securities
laws (including legal fees)............................... 10,000
Accounting fees and expenses................................ 650,000
Printing fees............................................... 650,000
Rating agency fees.......................................... 15,000
Trustee's fees and expenses................................. 10,000
Miscellaneous............................................... 481,698
----------
Total.................................................. $2,750,000
==========
</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
II-1
<PAGE> 181
to the rights conferred in the by-laws of the registrant on directors and
officers of the registrant or any subsidiary or other enterprise. The by-laws do
not limit the power of the registrant or its board of directors to provide other
indemnification and expense reimbursement rights to directors, officers,
employees, agents and other persons otherwise than pursuant to the by-laws. The
registrant entered into agreements with certain directors, officers and
employees who are asked to serve in specified capacities at subsidiaries and
other entities.
The registrant entered into an agreement that provides indemnification to
its directors and officers and to the directors and certain officers of the
general partner of The Goldman Sachs Group, L.P., members of its Management
Committee or its Partnership Committee or the former Executive Committee of The
Goldman Sachs Group, L.P. and all other persons requested or authorized by the
registrant's board of directors or the board of directors of the general partner
of The Goldman Sachs Group, L.P. to take actions on behalf of the registrant,
The Goldman Sachs Group, L.P. or the general partner of The Goldman Sachs Group,
L.P. in connection with the plan of incorporation, this registration statement
and certain other registration statements for all losses, damages, costs and
expenses incurred by the indemnified person arising out of the relevant
registration statements or the transactions contemplated by the plan of
incorporation. This agreement is in addition to the registrant's indemnification
obligations under its by-laws.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The registrant's amended and restated certificate of incorporation
provides for such limitation of liability.
Policies of insurance are maintained by the registrant under which its
directors and officers are insured, within the limits and subject to the
limitations of the policies, against certain expenses in connection with the
defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.
Reference is also made to Section 9 of the underwriting agreement filed as
Exhibit 1.1 to the registration statement for information concerning the
underwriters' obligation to indemnify the Registrant and its officers and
directors in certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
As part of the incorporation transactions, the registrant issued: (i)
shares of the registrant's common stock, par value $0.01 per share, to certain
managing directors who were profit participating limited partners of The Goldman
Sachs Group, L.P. in exchange for all of the managing directors' interests in
The Goldman Sachs Group, L.P. and certain other entities; (ii) shares of common
stock and 12% junior subordinated debentures of the registrant to certain
retired limited partners of The Goldman Sachs Group, L.P. in exchange for all of
such limited partners' interests in The Goldman Sachs Group, L.P. and certain
other entities; (iii) shares of common stock and shares of the registrant's
nonvoting common stock, par value $0.01 per share, to Sumitomo Bank Capital
Markets, Inc.; and (iv) shares of common stock to Kamehameha Activities
Association. Also simultaneously with the registrant's common stock offering,
the registrant made awards of restricted stock units and/or options to
substantially all of its employees and made an irrevocable contribution of
common stock to a nonqualified defined contribution plan. The offering and sale
of the shares of common stock, junior subordinated debentures and nonvoting
common stock to the managing directors who were profit participating
II-2
<PAGE> 182
limited partners, retired limited partners, Sumitomo Bank Capital Markets, Inc.
and Kamehameha Activities Association were not registered under the Securities
Act of 1933, as amended, because the offering and sale (i) was made in reliance
on the exemption provided by Section 4(2) of the Securities Act of 1933 and Rule
506 thereunder for transactions by an issuer not involving a public offering
(with the recipients representing their intentions to acquire the securities for
their own accounts and not with a view to the distribution thereof and
acknowledging that the securities were issued in a transaction not registered
under the Securities Act of 1933) or (ii) was made outside the United States
pursuant to Regulation S under the Securities Act of 1933 to persons who were
not citizens or residents of the United States. The foregoing employee awards
and contribution of common stock were not registered under the Securities Act of
1933 because the awards and contribution either did not involve an offer or sale
for purposes of Section 2(a)(3) of the Securities Act of 1933, in reliance on
the fact that the awards were made to a relatively broad class of employees who
did not provide any consideration in exchange for their awards, or were offered
and sold in transactions not involving a public offering, exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) and in
compliance with Rule 506 thereunder.
On April 13, 1999, the registrant entered into an arrangement with a group
of 10 employees pursuant to which a portion of a performance-based bonus that is
payable to such employees in 2002 will be paid in shares of common stock of the
registrant valued at the initial public offering price per share in the
registrant's common stock offering. Under this arrangement, up to 386,500 shares
of common stock may be issued (based upon the midpoint of the range of initial
public offering prices set forth on the cover page of the prospectus included in
the registrant's registration statement on Form S-1 (No. 333-74449)). The
offering and sale of these 386,500 shares of common stock was made pursuant to
Rule 701 under the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Plan of Incorporation.**
2.2 Agreement and Plan of Merger of The Goldman Sachs
Corporation into The Goldman Sachs Group, Inc.*
2.3 Agreement and Plan of Merger of The Goldman Sachs Group,
L.P. into The Goldman Sachs Group, Inc.*
3.1 Amended and Restated Certificate of Incorporation of The
Goldman Sachs Group, Inc.*
3.2 Amended and Restated By-Laws of The Goldman Sachs Group,
Inc.*
4.1 Form of Indenture between The Goldman Sachs Group, Inc. and
The Bank of New York.***
4.2 Form of debt securities of The Goldman Sachs Group, Inc.
(included in Exhibit 4.1).***
5.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc.***
8.1 Opinion of Sullivan & Cromwell, United States tax counsel to
The Goldman Sachs Group, Inc., re tax matters.
10.1 Lease, dated June 11, 1985, between Metropolitan Life
Insurance Company and Goldman, Sachs & Co.**
10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank
(National Association) and The Goldman Sachs Group, L.P., as
amended.**
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and The Goldman Sachs Group, L.P.**
</TABLE>
II-3
<PAGE> 183
<TABLE>
<C> <S>
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.**
10.11 Lease, dated March 5, 1994, among Shine Hill Development
Limited, Shine Belt Limited, Fair Page Limited, Panhy
Limited, Maple Court Limited and Goldman Sachs (Asia)
Finance, as amended.**
10.12 Guarantee, dated November 17, 1993, between Shine Hill
Development Limited and The Goldman Sachs Group, L.P.**
10.13 Agreement for Lease, dated November 29, 1998, between Turbo
Top Limited and Goldman Sachs (Asia) Finance.**
10.14 Summary of Tokyo Leases.**
10.15 The Goldman Sachs 1999 Stock Incentive Plan.*
10.16 The Goldman Sachs Defined Contribution Plan.*
10.17 Letter Agreement with Mr. Weinberg.**
10.18 The Goldman Sachs Partner Compensation Plan.*
10.19 Form of Employment Agreement.*
10.20 Form of Agreement Relating to Noncompetition and Other
Covenants.*
10.21 Form of Pledge Agreement.*
10.22 Form of Award Agreement (Formula RSUs).*
10.23 Form of Award Agreement (Discretionary RSUs).*
10.24 Form of Option Agreement (Discretionary Options).*
10.25 Tax Indemnification Agreement, by and among The Goldman
Sachs Group, Inc. and various parties.*
</TABLE>
II-4
<PAGE> 184
<TABLE>
<C> <S>
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.*
10.36 Amendment to Sumitomo Letter Agreement (filed as Exhibit
10.33), dated April 30, 1999, among The Sumitomo Bank,
Limited, Sumitomo Bank Capital Markets, Inc., The Goldman
Sachs Group, L.P., The Goldman Sachs Group, Inc. and
Goldman, Sachs & Co.*
10.37 Voting Agreement, dated as of April 30, 1999, by and among
The Goldman Sachs Group, Inc., on the one hand, and The
Trustees of the Estate of Bernice Pauahi Bishop and
Kamehameha Activities Association, on the other hand.*
10.38 Voting Agreement, dated as of April 30, 1999, by and among
The Goldman Sachs Group, Inc., on the one hand, and The
Sumitomo Bank, Limited, and Sumitomo Bank Capital Markets,
Inc., on the other hand.*
12.1 Statement re computation of ratios of earnings to fixed
charges.***
15.1 Letter re Unaudited Interim Financial Information.
21.1 List of subsidiaries of The Goldman Sachs Group, L.P.**
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.1
above).***
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1
above).
23.4 Consent of Securities Data Company.
24.1 Powers of Attorney.***
25.1 Statement of Eligibility of Trustee.***
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated herein by reference to the corresponding exhibit to the
registrant's registration statement on Form S-1 (No. 333-75213).
** Incorporated herein by reference to the corresponding exhibit to the
registrant's registration statement on Form S-1 (No. 333-74449).
*** Previously filed.
II-5
<PAGE> 185
(b) FINANCIAL STATEMENT SCHEDULES
Condensed financial information of The Goldman Sachs Group, L.P. and report
of PricewaterhouseCoopers LLP thereon.
ITEM 17. UNDERTAKINGS
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(C) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted against the
registrant by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
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<PAGE> 186
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.
333-77541) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, New York on the 11th day of May, 1999.
THE GOLDMAN SACHS GROUP, INC.
By: /s/ GREGORY K. PALM
------------------------------------
Name: Gregory K. Palm
Title: General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement (No. 333-77541) has been signed by the
following persons in the capacities indicated on the 11th day of May, 1999:
<TABLE>
<CAPTION>
TITLE SIGNATURE
----- ---------
<S> <C>
Director, Co-Chairman of the Board and Chief
Executive Officer (Principal Executive Officer) *
----------------------------------------------
Henry M. Paulson, Jr.
Director and Vice Chairman *
----------------------------------------------
Robert J. Hurst
Director, President and Co-Chief Operating Officer *
----------------------------------------------
John A. Thain
Director, President and Co-Chief Operating Officer *
----------------------------------------------
John L. Thornton
Director
----------------------------------------------
Sir John Browne
Director
----------------------------------------------
James A. Johnson
Director
----------------------------------------------
John L. Weinberg
</TABLE>
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<PAGE> 187
<TABLE>
<CAPTION>
TITLE SIGNATURE
----- ---------
<S> <C>
Chief Financial Officer (Principal Financial Officer) *
----------------------------------------------
David A. Viniar
Principal Accounting Officer *
----------------------------------------------
Sarah G. Smith
</TABLE>
*By: /s/ GREGORY K. PALM
---------------------------------
Name: Gregory K. Palm
Attorney-in-Fact
II-8
<PAGE> 188
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners,
The Goldman Sachs Group, L.P.:
In connection with our audits of the consolidated financial statements of The
Goldman Sachs Group, L.P. and Subsidiaries as of November 27, 1998 and November
28, 1997, and for the three years in the period ended November 27, 1998, which
financial statements are included on pages F-3 to F-23 of this Form S-1, we have
also audited the financial statement schedule listed in Item 16(b) herein.
In our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 22, 1999.
S-1
<PAGE> 189
SCHEDULE IV
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE GOLDMAN SACHS GROUP, L.P.
CONDENSED STATEMENTS OF EARNINGS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
REVENUES:
Equity earnings of subsidiaries............................. $ 2,184 $ 2,378 $ 1,780
Principal investments....................................... 208 339 540
Interest income, principally from affiliates................ 2,602 2,943 4,369
------- ------- -------
Total revenues......................................... 4,994 5,660 6,689
Interest expense, principally on short-term funding......... 2,547 2,858 4,201
------- ------- -------
Revenues, net of interest expense...................... 2,447 2,802 2,488
OPERATING EXPENSES:
Compensation and benefits................................... 13 12 9
Other....................................................... 33 29 43
------- ------- -------
Total operating expenses............................... 46 41 52
Pre-tax earnings............................................ 2,401 2,761 2,436
Provision for unincorporated business taxes................. 2 15 8
------- ------- -------
Net earnings................................................ $ 2,399 $ 2,746 $ 2,428
======= ======= =======
</TABLE>
See note to condensed financial statements.
S-2
<PAGE> 190
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> 191
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> 192
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> 193
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
2.1 Plan of Incorporation.**
2.2 Agreement and Plan of Merger of The Goldman Sachs
Corporation into The Goldman Sachs Group, Inc.*
2.3 Agreement and Plan of Merger of The Goldman Sachs Group,
L.P. into The Goldman Sachs Group, Inc.*
3.1 Amended and Restated Certificate of Incorporation of The
Goldman Sachs Group, Inc.*
3.2 Amended and Restated By-Laws of The Goldman Sachs Group,
Inc.*
4.1 Form of Indenture between The Goldman Sachs Group, Inc. and
The Bank of New York.***
4.2 Form of debt securities of The Goldman Sachs Group, Inc.
(included in Exhibit 4.1).***
5.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc.***
8.1 Opinion of Sullivan & Cromwell, United States tax counsel to
The Goldman Sachs Group, Inc., re tax matters.
10.1 Lease, dated June 11, 1985, between Metropolitan Life
Insurance Company and Goldman, Sachs & Co.**
10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank
(National Association) and The Goldman Sachs Group, L.P., as
amended.**
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and The Goldman Sachs Group, L.P.**
10.4 Lease, dated as of July 16, 1998, between TCC Acquisition
Corp. and The Goldman Sachs Group, L.P.**
10.5 Agreement for Lease, dated April 2, 1998, among (i) JC No. 3
(UK) Limited and Fleet Street Square Management Limited
trading as Fleet Street Partnership, (ii) Goldman Sachs
International, (iii) Restamove Limited, (iv) The Goldman
Sachs Group, L.P. and (v) Itochu Corporation.**
10.6 Annexure 1 to Agreement for Lease, dated April 2, 1998,
among (i) JC No. 3 (UK) Limited and Fleet Street Square
Management Limited trading as Fleet Street Partnership, (ii)
Goldman Sachs International, (iii) Restamove Limited, (iv)
The Goldman Sachs Group, L.P. and (v) Itochu Corporation
(Form of Occupational Lease among (i) JC No. 3 (UK) Limited
and Fleet Street Square Management Limited trading as Fleet
Street Partnership, (ii) Goldman Sachs International and
(iii) The Goldman Sachs Group, L.P.).**
10.7 Agreement relating to Developer's Fit Out Works to be
carried out at 120 Fleet Street, London, dated April 2,
1998, among (i) JC No. 3 (UK) Limited and Fleet Street
Square Management Limited, (ii) Goldman Sachs Property
Management, (iii) Itochu Corporation and (iv) The Goldman
Sachs Group, L.P.**
</TABLE>
<PAGE> 194
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.8 Agreement relating to One Carter Lane, London EC4, dated
March 25, 1998, among Britel Fund Trustees Limited, Goldman
Sachs International, The Goldman Sachs Group, L.P., English
Property Corporation plc and MEPC plc.**
10.9 Fit Out Works Agreement relating to One Carter Lane, London
EC4, dated March 25, 1998, among Britel Fund Trustees
Limited, Goldman Sachs International, Goldman Sachs Property
Management, The Goldman Sachs Group, L.P., English Property
Corporation plc and MEPC plc.**
10.10 Underlease of premises known as One Carter Lane, London EC4,
dated September 9, 1998, among Britel Fund Trustees Limited,
Goldman Sachs International and The Goldman Sachs Group,
L.P.**
10.11 Lease, dated March 5, 1994, among Shine Hill Development
Limited, Shine Belt Limited, Fair Page Limited, Panhy
Limited, Maple Court Limited and Goldman Sachs (Asia)
Finance, as amended.**
10.12 Guarantee, dated November 17, 1993, between Shine Hill
Development Limited and The Goldman Sachs Group, L.P.**
10.13 Agreement for Lease, dated November 29, 1998, between Turbo
Top Limited and Goldman Sachs (Asia) Finance.**
10.14 Summary of Tokyo Leases.**
10.15 The Goldman Sachs 1999 Stock Incentive Plan.*
10.16 The Goldman Sachs Defined Contribution Plan.*
10.17 Letter Agreement with Mr. Weinberg.**
10.18 The Goldman Sachs Partner Compensation Plan.*
10.19 Form of Employment Agreement.*
10.20 Form of Agreement Relating to Noncompetition and Other
Covenants.*
10.21 Form of Pledge Agreement.*
10.22 Form of Award Agreement (Formula RSUs).*
10.23 Form of Award Agreement (Discretionary RSUs).*
10.24 Form of Option Agreement (Discretionary Options).*
10.25 Tax Indemnification Agreement, by and among The Goldman
Sachs Group, Inc. and various parties.*
10.26 Form of Shareholders' Agreement among The Goldman Sachs
Group, Inc. and various parties.*
10.27 Instrument of Indemnification.*
10.28 Form of Indemnification Agreement.*
10.29 Subscription Agreement, dated as of April 24, 1992, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and The Goldman Sachs Group, L.P.**
10.30 Subscription Agreement, dated as of November 21, 1994, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and The Goldman Sachs Group, L.P.**
</TABLE>
<PAGE> 195
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.31 Letter Agreement, dated March 15, 1999, among Kamehameha
Activities Association and The Goldman Sachs Group, L.P.
(the "Kamehameha Letter Agreement")**
10.32 Amended and Restated Subscription Agreement, dated as of
March 28, 1989, among The Sumitomo Bank, Limited, Sumitomo
Bank Capital Markets, Inc., Goldman, Sachs & Co. and The
Goldman Sachs Group, L.P.**
10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo
Bank, Limited, Sumitomo Bank Capital Markets, Inc. and The
Goldman Sachs Group, L.P. (the "Sumitomo Letter
Agreement").**
10.34 Lease, dated September 24, 1992, from LDT Partners to
Goldman Sachs International.**
10.35 Amendment to Kamehameha Letter Agreement (filed as Exhibit
10.31), dated April 30, 1999, among Kamehameha Activities
Association, the Trustees of the Estate of Bernice Pauahi
Bishop, The Goldman Sachs Group, L.P. and The Goldman Sachs
Group, Inc.*
10.36 Amendment to Sumitomo Letter Agreement (filed as Exhibit
10.33), dated April 30, 1999, among The Sumitomo Bank,
Limited, Sumitomo Bank Capital Markets, Inc., The Goldman
Sachs Group, L.P., The Goldman Sachs Group, Inc. and
Goldman, Sachs & Co.*
10.37 Voting Agreement, dated as of April 30, 1999, by and among
The Goldman Sachs Group, Inc., on the one hand, and The
Trustees of the Estate of Bernice Pauahi Bishop and
Kamehameha Activities Association, on the other hand.*
10.38 Voting Agreement, dated as of April 30, 1999, by and among
The Goldman Sachs Group, Inc., on the one hand, and The
Sumitomo Bank, Limited, and Sumitomo Bank Capital Markets,
Inc., on the other hand.*
12.1 Statement re computation of ratios of earnings to fixed
charges.***
15.1 Letter re Unaudited Interim Financial Information.
21.1 List of subsidiaries of The Goldman Sachs Group, L.P.**
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.1
above).***
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1
above).
23.4 Consent of Securities Data Company.
24.1 Powers of Attorney.***
25.1 Statement of Eligibility of Trustee.***
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated herein by reference to the corresponding exhibit to the
registrant's registration statement on Form S-1 (No. 333-75213).
** Incorporated herein by reference to the corresponding exhibit to the
registrant's registration statement on Form S-1 (No. 333-74449).
*** Previously filed.
<PAGE> 1
Exhibit 1.1
S&C Draft of May 10, 1999
THE GOLDMAN SACHS GROUP, INC.
__% (EURO) NOTES DUE 2009
------------------
UNDERWRITING AGREEMENT
May __, 1999
Goldman Sachs International,
[INSERT NAMES OF OTHER REPRESENTATIVES],
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman Sachs International,
Peterborough Court,
133 Fleet Street,
London EC4A 2BB, England
Ladies and Gentlemen:
The Goldman Sachs Group, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of (euro)1,000,000,000 principal amount of the Notes specified above (the
"Securities").
The Company succeeded to the business of The Goldman Sachs Group, L.P.,
a Delaware limited partnership ("Group"), in a series of transactions described
in the Prospectuses (as defined in Section 1(a) hereof) under the captions
"Certain Relationships and Related Transactions--Incorporation and Related
Transactions--Incorporation Transactions". Those transactions, which are
hereinafter referred to as the "Incorporation Transactions", were consummated on
May 7, 1999. For purposes of the representations and warranties set forth in
Section 1(d) and the conditions set forth in Section 8(g), references to the
Company with respect to any time before the consummation of the Incorporation
Transactions shall be deemed to be references to Group.
The Registration Statement (as defined in Section 1) contains two forms
of prospectus, one that relates to the initial distribution of the Securities by
the Underwriters in an underwritten public offering and another that relates to
offers and sales of Securities by Goldman Sachs International or any other
affiliates of the Company in secondary transactions. The Underwriters
acknowledge and agree that the Secondary Transactions Prospectus (as defined in
Section 1) and any amendment or supplement thereto will not be used by any
Underwriter except Goldman Sachs International, and Goldman Sachs International
and such other affiliates acknowledge and agree that they will use the Initial
Offering Prospectus (as defined in Section 1) and any amendment or supplement
thereto only in connection with offers and sales of the kind contemplated
therein to be made pursuant to such prospectus and will use the Secondary
Transactions Prospectus and any amendment or supplement thereto only in
connection with offers and sales of the kind contemplated therein to be made
pursuant to such prospectus. The
<PAGE> 2
Company acknowledges and agrees that Goldman Sachs International are under no
obligation to commence any offers or sales of the kind contemplated by the
Secondary Transactions Prospectus or any amendment or supplement thereto and, if
commenced, Goldman Sachs International may discontinue such offers and sales at
any time without providing any notice to the Company. The term "Underwriter"
includes Goldman Sachs International, whether acting in its capacity as an
Underwriter or acting as contemplated by the Secondary Transactions Prospectus.
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-77541)
(the "Initial Registration Statement") in respect of the Securities has
been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore delivered
to you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the U.S. Securities Act of 1933, as
amended (the "Act"), which became or will become effective upon filing,
no other document with respect to the Initial Registration Statement
has heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that purpose
has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with
the Commission pursuant to Rule 424(a) of the rules and regulations of
the Commission under the Act, is hereinafter called a "Preliminary
Prospectus"; the various parts of the Initial Registration Statement
and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto but excluding Form T-1 and including the information
contained in the two forms of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with
Sections 5(a) and 6(a) hereof and deemed by virtue of Rule 430A under
the Act to be part of the Initial Registration Statement at the time it
was declared effective, each as amended at the time such part of the
Initial Registration Statement became effective or such part of the
Rule 462(b) Registration Statement, if any, became or hereafter becomes
effective, are hereinafter collectively called the "Registration
Statement"; and the two forms of final prospectus relating to the
initial distribution of the Securities by the Underwriters in an
underwritten public offering and to offers and sales of Securities by
Goldman Sachs International or any other affiliates of the Company in
secondary transactions, each in the form first filed pursuant to Rule
424(b) under the Act, are hereinafter called the "Initial Offering
Prospectus" and the "Secondary Transactions Prospectus", respectively,
and each is also called, individually, a "Prospectus" and,
collectively, the "Prospectuses");
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the U.S. Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the
rules and regulations of the Commission thereunder, and did not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in
reliance upon
2
<PAGE> 3
and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman Sachs International expressly for use
therein;
(c) The Registration Statement conforms, and each Prospectus
and any further amendments or supplements to the Registration Statement
or any Prospectus will conform, in all material respects to the
requirements of the Act and the Trust Indenture Act and the rules and
regulations of the Commission thereunder and do not and will not, as of
the applicable effective date as to the Registration Statement and any
amendment thereto and as of the applicable filing date as to any
Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman Sachs International expressly for use
therein;
(d) Neither the Company nor any of its subsidiaries that are
listed or that are required to be listed pursuant to the requirements
of Form S-1 in Exhibit 21 to the Registration Statement (the
"Significant Subsidiaries") has sustained since the date of the latest
audited financial statements included in the Prospectuses any material
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, there has not been any change in the
partners' capital or capital stock, as applicable, or long-term debt of
the Company or any of its subsidiaries or any material adverse change,
or any development involving a prospective material adverse change, in
or affecting the general affairs, management, financial position,
stockholders' equity or partners' capital, as applicable, or results of
operations of the Company and its subsidiaries, otherwise than as set
forth or contemplated in the Prospectuses;
(e) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectuses or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(f) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectuses,
and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; each corporate subsidiary of the
Company that is a Significant Subsidiary (a "Corporate Significant
Subsidiary"), each partnership subsidiary of the Company in which the
Company or one of its subsidiaries is a general partner and that is a
Significant Subsidiary (a "Partnership Significant Subsidiary"), each
3
<PAGE> 4
unlimited liability company subsidiary of the Company that is a
Significant Subsidiary (a "ULLC Significant Subsidiary") and each
limited liability company in which the Company or one of its
subsidiaries is a managing member that is a Significant Subsidiary (an
"LLC Significant Subsidiary") has been duly incorporated or organized,
as the case may be, and is validly existing as a corporation,
partnership, unlimited liability company or limited liability company,
as the case may be, in good standing under the laws of its jurisdiction
of incorporation or organization, as the case may be, with the power
(corporate, partnership, unlimited liability company or limited
liability company, as the case may be) and authority to own its
properties and conduct its business as described in the Prospectuses;
and the Incorporation Transactions have been consummated and the
Company has succeeded to the business of Group as described in the
Prospectuses;
(g) The Company has an authorized capitalization as set forth
in the Prospectuses, all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued and are fully
paid and non-assessable; all of the issued shares of capital stock of
each Corporate Significant Subsidiary, all of the issued shares of each
ULLC Significant Subsidiary and all of the membership interests in each
LLC Significant Subsidiary have been duly and validly authorized and
issued, are fully paid and, in the case of any Corporate Significant
Subsidiaries and LLC Significant Subsidiaries, are non-assessable and
(except for (A) directors' qualifying shares and (B) interests in
Goldman Sachs Holdings L.L.C.) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or claims;
and all of the partnership interests in each Partnership Significant
Subsidiary have been duly and validly created and (except for interests
in Goldman Sachs Mitsui Marine Derivative Products, L.P.) are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(h) The Securities have been duly authorized and, when issued
and delivered pursuant to this Agreement, will have been duly executed,
authenticated, issued and delivered and will constitute valid and
legally binding obligations of the Company entitled to the benefits
provided by the indenture, dated as of May _____, 1999 (the
"Indenture") between the Company and The Bank of New York, as Trustee
(including any successor trustee, the "Trustee"), under which they are
to be issued, which will be substantially in the form filed as an
exhibit to the Registration Statement; the Indenture has been duly
authorized and duly qualified under the Trust Indenture Act and, when
executed and delivered by the Company and the Trustee, will constitute
a valid and legally binding instrument, enforceable in accordance with
its terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles; and the
Securities and the Indenture will conform to the descriptions thereof
in the Prospectuses;
(i) The issue and sale of the Securities and the compliance by
the Company with all of the provisions of the Securities, the Indenture
and this Agreement and the consummation of the transactions herein and
therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is bound
or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation
of the provisions of the Amended and Restated Certificate of
Incorporation or Amended and Restated By-laws of the Company or the
organizational documents of any of its Significant Subsidiaries or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
4
<PAGE> 5
subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any such
court or governmental agency or body is required for the issue and sale
of the Securities by the Company or the consummation by the Company of
the transactions contemplated by this Agreement or the Indenture,
except the registration under the Act of the Securities, such as have
been obtained under the Trust Indenture Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Securities by the Underwriters;
(j) Neither the Company nor any of its Significant
Subsidiaries is in violation of its organizational documents or in
default in the performance or observance of any material obligation,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which
it is a party or by which it or any of its properties may be bound;
(k) The statements set forth in each Prospectus under the
caption "Description of Notes We Are Offering", insofar as they purport
to constitute a summary of the terms of the Securities, and the
statements set forth in the Prospectuses under the caption "United
States Taxation", and in the Initial Offering Prospectus under the
caption "Underwriting", insofar as they purport to describe the
provisions of the laws and documents referred to therein, are accurate,
complete and fair;
(l) Other than as set forth in each Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the Company
or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, would individually
or in the aggregate have a material adverse effect on the current or
future financial position, stockholders' equity or partners' capital,
as applicable, or results of operations of the Company and its
subsidiaries; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(m) The Company is not and, after giving effect to the
offering and sale of the Securities, will not be an "investment
company", as such term is defined in the U.S. Investment Company Act of
1940, as amended (the "Investment Company Act");
(n) The Company and its Significant Subsidiaries possess all
concessions, permits, licenses, consents, exemptions, franchises,
authorizations, orders, registrations, qualifications and other
approvals (each, an "Authorization") issued by the appropriate Federal,
state and foreign governments, governmental or regulatory authorities,
self-regulatory organizations and all courts or other tribunals, and
are members in good standing of each Federal, state or foreign
exchange, board of trade, clearing house or association and
self-regulatory or similar organization necessary to conduct their
respective businesses as described in each Prospectus;
(o) The statements set forth in the Prospectuses under the
captions "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Management--Operational and Year 2000
Risks--Year 2000 Readiness Disclosure" and "Risk Factors--Our Computer
Systems and Those of Third Parties May Not Achieve Year 2000
Readiness--Year 2000 Readiness Disclosure" accurately and fairly set
forth the current state of the Company's efforts to address the Year
2000 Problem and the risks and costs relating to the
5
<PAGE> 6
Year 2000 Problem. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
transmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000; and
(p) PricewaterhouseCoopers LLP, who have certified certain
financial statements of Group and its subsidiaries, are independent
public accountants as required by the Act and the rules and regulations
of the Commission thereunder.
2. Subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price of .....% of the principal amount thereof, plus accrued
interest, if any, from May __, 1999 to the Time of Delivery hereunder, the
principal amount of Securities set forth opposite the name of such Underwriter
in Schedule I hereto.
3. Upon the authorization by you of the release of the Securities, the
several Underwriters propose to offer the Securities for sale upon the terms and
conditions set forth in the Initial Offering Prospectus.
4. (a) Securities to be purchased by each Underwriter hereunder shall
be delivered by or on behalf of the Company to you for the account of such
Underwriter at the office of Goldman Sachs International, Peterborough Court,
133 Fleet Street, London EC4A 2BB, England, against payment by such Underwriter
or on its behalf of the purchase price therefor in euros in immediately
available funds (to an account specified by the Company to Goldman Sachs
International at least forty-eight hours in advance), at 2:00 p.m., London time
(9:00 a.m., New York City time), on May__, 1999, or at such other time and date
as you and the Company may agree upon in writing, such time and date being
herein called the "Time of Delivery". The Securities will be delivered by the
Company to Goldman Sachs International in the form of one or more definitive
global Securities in book-entry form, which will be deposited on behalf of the
Underwriters with The Bank of New York Depository (Nominees) Limited, 3 Birchin
Lane, London EC3 V9BY, England, as a common depositary selected by Goldman Sachs
International for the benefit of Morgan Guaranty Trust Company of New York
(Brussels office) as operator of the Euroclear System ("Euroclear") or CEDEL
S.A. ("CEDEL"), or both, for credit to the respective accounts of the
Underwriters unless otherwise directed by Goldman Sachs International. The
Company will cause the certificates representing the Securities to be made
available to Goldman Sachs International for checking at least twenty-four hours
prior to the Time of Delivery at the office of Sullivan & Cromwell, St. Olave's
House, 9 Ironmonger Lane, London EC2V 8EY, England, or at the office of the
common depositary specified above (the "Designated Office").
(b) The documents to be delivered at the Time of Delivery by or on
behalf of the parties hereto pursuant to Section 8 hereof, including the
cross-receipt for the Securities and any additional documents requested by the
Underwriters pursuant to Section 8(k) hereof, will be delivered at the offices
of Sullivan & Cromwell, 125 Broad Street, New York, New York 10004 (the "Closing
Location"), and the Securities will be delivered at the Designated Office, all
at the Time of Delivery. A meeting will be held at the Closing Location at 2:30
p.m., New York City time, on the New York Business Day next preceding the Time
of Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 4, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which
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<PAGE> 7
is not a day on which banking institutions in New York City are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Initial Offering Prospectus in a form
approved by you and to file the Initial Offering Prospectus pursuant to
Rule 424(b) under the Act not later than the Commission's close of
business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as may
be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or the
Initial Offering Prospectus which shall be disapproved by you promptly
after reasonable notice thereof; to advise you, promptly after it
receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Initial Offering Prospectus or any amended Initial
Offering Prospectus has been filed and to furnish you with copies
thereof; to advise you, promptly after it receives notice thereof, of
the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Securities
for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request
by the Commission for the amending or supplementing of the Registration
Statement or Initial Offering Prospectus or for additional information;
and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, to promptly use its
best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Securities for offering and sale
under the securities laws of such jurisdictions as you may request and
to comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Securities, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Initial
Offering Prospectus in New York City in such quantities as you may
reasonably request, and, if the delivery of a prospectus is required at
any time prior to the expiration of nine months after the time of issue
of the Initial Offering Prospectus in connection with the offering or
sale of the Securities (other than any offering or sale by Goldman
Sachs International of the kind contemplated in the Secondary
Transactions Prospectus) and if at such time any event shall have
occurred as a result of which the Initial Offering Prospectus as then
amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made when such Initial Offering Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary during
such same period to amend or supplement the Initial Offering Prospectus
in order to comply with the Act or the Trust Indenture Act, to notify
you and upon your request to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as you may
from time to time reasonably request of an amended Initial Offering
Prospectus or a supplement to the Initial Offering Prospectus which
will correct such statement or omission or effect such compliance; and
in case any Underwriter is required to deliver a prospectus in
connection with sales of any of the Securities at any time nine
7
<PAGE> 8
months or more after the time of issue of the Initial Offering
Prospectus (other than any sales by Goldman Sachs International of the
kind contemplated in the Secondary Transactions Prospectus), upon your
request but at the expense of such Underwriter, to prepare and deliver
to such Underwriter as many copies as you may request of an amended or
supplemented Initial Offering Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after
the effective date of the Registration Statement (as defined in Rule
158(c) under the Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158 under the Act);
(e) During the period beginning from the date hereof and
continuing to and including the later of the Time of Delivery and such
earlier time as you may notify the Company, not to offer, sell,
contract to sell or otherwise dispose of, except as provided hereunder,
any securities of the Company that are substantially similar to the
Securities;
(f) To use the net proceeds received by it from the sale of
the Securities pursuant to this Agreement in the manner specified in
the Initial Offering Prospectus under the caption "Use of Proceeds";
(g) To use its best efforts to list, subject to notice of
issuance, the Securities on the Luxembourg Stock Exchange; and
(h) If the Company elects to rely upon Rule 462(b) under the
Act, to file a Rule 462(b) Registration Statement with the Commission
in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on
the date of this Agreement and, at the time of filing, either pay to
the Commission the filing fee for the Rule 462(b) Registration
Statement or give irrevocable instructions for the payment of such fee
pursuant to Rule 111(b) under the Act.
6. The Company agrees with Goldman Sachs International:
(a) (i) To prepare the Secondary Transactions
Prospectus in a form approved by Goldman Sachs International and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act;
(ii) to make no further amendment or any supplement
to the Registration Statement or the Secondary Transactions Prospectus
during the Secondary Transactions Period (as defined in the last
sentence of this Section 6(a)) which shall be disapproved by Goldman
Sachs International promptly after reasonable notice thereof, it being
understood that, when Form S-2 or S-3 under the Act is available to the
Company, the Company may amend the Registration Statement so as to be
on such form or may file a new registration statement on such form and
have it declared effective by the Commission, and thereafter any
information required to be included in the Registration Statement or
the Secondary Transactions Prospectus may be incorporated therein by
reference as permitted by such form, provided that:
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<PAGE> 9
(w) if a new registration statement is filed
and becomes effective, any reference herein to the
Registration Statement or the Secondary Transactions
Prospectus (including as one of the Prospectuses)
shall thereafter include, respectively, such new
registration statement and the prospectus contained
therein in the form first filed pursuant to Rule
424(b) under the Act;
(x) if a new registration statement is filed
and becomes effective, the Company shall be deemed to
have made the representations and warranties in
Sections 1(a) (excluding the last parenthetical
clause thereof) and 1(c) to Goldman Sachs
International with respect to such new registration
statement, as of its effective date, and such
prospectus contained therein in such form, as of its
date;
(y) if a new registration statement is filed
and becomes effective, any reference in this
Agreement to any Preliminary Prospectus or the
Secondary Transactions Prospectus (including as one
of the Prospectuses) shall thereafter be deemed to
refer to and include any documents filed after the
date of such Preliminary Prospectus or Prospectus, as
the case may be, under the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act") and
incorporated by reference in such Preliminary
Prospectus or Prospectus, as the case may be; and
(z) whether or not a new registration
statement is filed and becomes effective, any
reference in this Agreement to any amendment to the
Registration Statement shall thereafter be deemed to
refer to and include any annual report of the Company
filed pursuant to Section 13(a) or 15(d) of the
Exchange Act after the effective date of the
Registration Statement that is incorporated by
reference in the Registration Statement;
(iii) to advise Goldman Sachs International, promptly
after the Company receives notice thereof, of the time when the
Registration Statement, or any amendment thereto, has been filed or
becomes effective during the Secondary Transactions Period, or any
supplement to the Secondary Transactions Prospectus or any amended
Secondary Transactions Prospectus has been filed during such period,
and to furnish Goldman Sachs International with copies thereof;
(iv) to advise Goldman Sachs International, promptly
after the Company receives notice thereof during the Secondary
Transactions Period, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Securities for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for
any such purpose or of any request by the Commission for the amending
or supplementing of the Registration Statement or any Prospectus or for
additional information; and
(v) in the event of the issuance of any stop order or
of any order preventing or suspending the use of any Preliminary
Prospectus or prospectus or suspending any such qualification during
the Secondary Transactions Period, to use promptly its reasonable
efforts to obtain the withdrawal of such order.
As used in this Agreement, the term "Secondary Transactions Period"
means the period beginning on the date hereof and continuing for as
long as may be required under applicable law,
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<PAGE> 10
in the reasonable judgment of Goldman Sachs International after
consultation with the Company, in order to offer and sell the
Securities as contemplated by the Secondary Transactions Prospectus.
(b) Promptly from time to time to take such action as Goldman
Sachs International may reasonably request to qualify the Securities
for offering and sale during the Secondary Transactions Period under
the securities laws of such jurisdictions as Goldman Sachs
International may request and to comply with such laws so as to permit
the continuance of sale and dealings therein in such jurisdictions
during such period, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction; and to
comply with all applicable securities and other laws, rules and
regulations in each such jurisdiction;
(c) To furnish Goldman Sachs International with copies of the
Secondary Transactions Prospectus in such quantities as Goldman Sachs
International may from time to time reasonably request during the
Secondary Transactions Period, and, if at any time during such period
any event shall have occurred as a result of which the Secondary
Transactions Prospectus as then amended or supplemented would include
an untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus is to
be delivered during such period, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement
the Secondary Transactions Prospectus or to amend the Registration
Statement in order to comply with the Act or to file under the Exchange
Act any document incorporated by reference in such Prospectus in order
to comply with the Act or the Exchange Act, to notify Goldman Sachs
International and upon its request to file such document and to prepare
and furnish without charge to Goldman Sachs International as many
copies as it may from time to time during such period reasonably
request of an amended Secondary Transactions Prospectus or a supplement
to the Secondary Transactions Prospectus which will correct such
statement or omission or effect such compliance;
(d) During the Secondary Transactions Period, to furnish to
Goldman Sachs International copies of all reports or other
communications (financial or other) furnished to stockholders
generally, and to deliver to Goldman Sachs International (i) as soon as
they are available, copies of any reports and financial statements
furnished to or filed with the Commission or any national securities
exchange on which the Securities or any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as Goldman Sachs
International may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of
the Company and its subsidiaries are consolidated in reports furnished
to its stockholders generally or to the Commission); and
(e) Each time the Registration Statement or the Secondary
Transactions Prospectus shall be amended or supplemented during the
Secondary Transactions Period, to furnish or cause to be furnished to
Goldman Sachs International, upon its request, written opinions of
counsel for the Company, a letter from the independent accountants who
have certified the financial statements included in the Registration
Statement as then amended and certificates of officers of the Company,
in each case in form and substance reasonably satisfactory to you, all
to the effect specified in subsections (c), (d), (e), (f) and (k),
respectively, of Section 8 hereof (as
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<PAGE> 11
modified to relate to the Registration Statement and the Secondary
Transactions Prospectus as then amended or supplemented).
Notwithstanding the foregoing provisions, if at any time the Company
determines that it is in possession of material, non-public information
that it would not be required to disclose publicly in the absence of
registration of the Securities under the Act, the Company may, upon
notice to Goldman Sachs International, cease to comply with any of its
obligations under this Section 6, but only for a period or periods that
the Company reasonably determines are necessary in order to avoid such
premature disclosure and in any event not to exceed 90 days in the
aggregate during any period of 12 consecutive calendar months. Upon
receipt of any such notice, Goldman Sachs International shall cease
using the Secondary Transactions Prospectus or any amendment or
supplement thereto until it receives notice from the Company that it
may resume using such document.
7. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Securities under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectuses and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Indenture, closing
documents (including any compilations thereof) and any other documents in
connection with the offering, purchase, sale and delivery of the Securities;
(iii) all expenses in connection with the qualification of the Securities for
offering and sale under state securities laws as provided in Section 5(b) and
Section 6(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky and legal investment surveys; (iv) any fees charged by securities
rating services for rating the Securities; (v) the filing fees incident to, and
the fees and disbursements of counsel for the Underwriters in connection with,
any required review by the National Association of Securities Dealers, Inc. of
the terms of the sale of the Securities by the Underwriters pursuant to the
Initial Offering Prospectus; (vi) the cost of preparing the Securities; (vii)
the fees and expenses of the Trustee and any agent of the Trustee and the fees
and disbursements of counsel for the Trustee in connection with the Indenture
and the Securities; (viii) all reasonable fees, disbursements and expenses
incident to the performance of its obligations under Section 6(e); and (ix) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section. It
is understood, however, that, except as provided in this Section, and Sections 9
and 12 hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, transfer taxes on resale of any of the
Securities by them, and any advertising expenses connected with any offers they
may make.
8. The obligations of the several Underwriters hereunder shall be
subject, in their discretion, to the condition that all representations and
warranties and other statements of the Company herein are, at and as of the Time
of Delivery, true and correct, the condition that the Company shall have
performed all of its obligations hereunder theretofore to be performed and the
following additional conditions:
(a) The Initial Offering Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) within the applicable time
period prescribed for such filing by the rules and regulations under
the Act and in accordance with Section 5(a) hereof; if the Company has
elected to rely upon Rule 462(b) under the Act, the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop
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<PAGE> 12
order suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all
requests for additional information on the part of the Commission shall
have been complied with to your reasonable satisfaction;
(b) Cleary, Gottlieb, Steen & Hamilton, counsel for the
Underwriters, shall have furnished to you such written opinion and
letter (drafts of such opinion and letter are attached as Annex II(a)
hereto), dated the Time of Delivery, to the effect that the matters set
forth in the Prospectuses under the caption "United States Taxation",
insofar as they purport to describe the provisions of the laws referred
to therein, are accurate, complete and fair and with respect to the
matters covered in paragraphs (i), (ii), (vi), (vii), (viii), (xi) and
(xii) of subsection (d) below as well as such other related matters as
you may reasonably request, and such counsel shall have received such
papers and information as they may reasonably request to enable them to
pass upon such matters;
(c) Sullivan & Cromwell, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated the Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware;
(ii) All the shares of common stock of the Company
that were outstanding immediately after the closing of the
Company's initial public offering of common stock on May 7,
1999 have been duly authorized and validly issued and are
fully paid and non-assessable;
(iii) All regulatory consents, authorizations,
approvals and filings required to be obtained or made by the
Company under the Federal laws of the United States, the laws
of the State of New York and the General Corporation Law of
the State of Delaware for the issuance, sale and delivery of
the Securities by the Company to you have been obtained or
made;
(iv) The issuance of the Securities in accordance
with the Indenture and the sale of the Securities by the
Company to the Underwriters pursuant to this Agreement do not,
and the performance by the Company of its obligations under
the Securities, the Indenture and this Agreement will not, (a)
violate the Amended and Restated Certificate of Incorporation
or Amended and Restated By-laws of the Company, (b) result in
a default under or breach of the agreements listed in Part II,
Item 16(a), as Exhibits 2.1 and 10.1 through 10.34 of the
Registration Statement, (c) violate any court orders listed in
the certificate of Robert J. Katz, a General Counsel of the
Company, dated the Time of Delivery and delivered to you in
connection with the offering of the Securities or (d) violate
any Federal law of the United States or law of the State of
New York applicable to the Company; provided, however, that
for the purposes of this paragraph (iv), such counsel may
state that they express no opinion with respect to Federal or
state securities laws, fraudulent transfer laws, other
antifraud laws and the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") and related laws; and provided,
further, that such counsel may also state that insofar as
performance by the Company of its obligations under this
Agreement, the Indenture and the Securities is concerned, they
are
12
<PAGE> 13
expressing no opinion as to bankruptcy, insolvency,
reorganization, moratorium or similar laws of general
applicability relating to or affecting creditors' rights;
(v) This Agreement has been duly authorized, executed
and delivered by the Company;
(vi) The Indenture has been duly authorized, executed
and delivered by the Company and duly qualified under the
Trust Indenture Act; the Securities have been duly authorized,
executed, authenticated, issued and delivered; and the
Indenture and the Securities constitute valid and legally
binding obligations of the Company enforceable in accordance
with their terms, subject to bankruptcy, insolvency,
reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general
equity principles; and
(vii) The Company is not, and after giving effect to
the offering and sale of the Securities will not be, an
"investment company" as such term is defined in the Investment
Company Act.
Such counsel shall also furnish you with a letter to the
effect that, as counsel to the Company, they reviewed the Registration
Statement and the Prospectuses, participated in discussions with your
representatives and those of the Company and its accountants and
advised the Company as to the requirements of the Act and the
applicable rules and regulations thereunder; between the date of the
Prospectuses and the Time of Delivery, such counsel participated in
further discussions with your representatives and those of the Company
and its accountants in which the contents of certain portions of the
Prospectuses and related matters were discussed and reviewed certain
certificates of certain officers of the Company, an opinion of a
General Counsel of the Company and letters from the Company's
independent accountants delivered to you in connection with the initial
offering of the Securities; on the basis of the information that such
counsel gained in the course of the performance of the services
referred to above, considered in the light of such counsel's
understanding of the applicable law and the experience such counsel
have gained through their practice under the Act, they will confirm to
you that, in such counsel's opinion, the Registration Statement and the
Prospectuses, as of the effective date of the Registration Statement,
appeared on their face to be appropriately responsive in all material
respects to the requirements of the Act and the Trust Indenture Act and
the applicable rules and regulations of the Commission thereunder;
nothing that came to such counsel's attention in the course of such
review has caused such counsel to believe that the Registration
Statement, as of its effective date, contained any untrue statement of
a material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; nothing that came to the attention of such counsel in the
course of the procedures described in the second clause of this
paragraph has caused such counsel to believe that the Prospectuses, as
of their date or as of the Time of Delivery, contained or contain any
untrue statement of a material fact or omitted or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
such counsel may state that the limitations inherent in the independent
verification of factual matters and the character of determinations
involved in the registration process are such, however, that such
counsel does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectuses except for those made under
the captions "Description of Notes We Are Offering" in the Prospectuses
and "Underwriting" in the Initial Offering Prospectus, in each case,
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<PAGE> 14
insofar as they relate to provisions of documents therein described,
and except for those made under the caption "United States Taxation" in
the Prospectuses, insofar as they relate to provisions of U.S. Federal
income tax law therein described; such counsel need express no opinion
or belief as to the financial statements or other financial data
derived from accounting records contained in the Registration Statement
or the Prospectuses, or as to the statement of the eligibility and
qualification of the Trustee under the Indenture; and such counsel may
assume that any Rule 462(b) Registration Statement was filed with the
Commission prior to the time that any confirmations of the sale of any
of the Securities were sent or given to investors. In addition, such
counsel shall state that they do not know of any litigation instituted
or threatened against the Company that would be required to be
disclosed in the Prospectuses that is not so disclosed, provided that
such counsel may also state that they call to your attention that the
Company has an internal legal department and that, while such counsel
represents the Company and its affiliates on a regular basis, such
counsel's engagement has been limited to specific matters as to which
it was consulted and, accordingly, such counsel's knowledge with
respect to litigation instituted or threatened against the Company is
limited; and that they do not know of any documents that are required
to be filed as exhibits to the Registration Statement that are not so
filed.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
Federal laws of the United States, the laws of the State of New York
and the General Corporation Law of the State of Delaware; that, insofar
as such opinion involves factual matters, they have relied upon
certificates of officers of the Company and its subsidiaries and
certificates of public officials and other sources believed by such
counsel to be responsible; that such counsel have assumed that the
Indenture has been duly authorized, executed and delivered by the
Trustee, that the Securities conform to the form thereof examined by
them, that the Trustee's certificates of authentication of the
Securities have been manually signed by one of the Trustee's authorized
signatories and that the signatures on all documents examined by them
are genuine (assumptions that they have not independently verified);
and that a judgment for money in an action based on any Security
denominated in a foreign currency may not be enforced in such currency.
(d) Gregory K. Palm, Esq., a General Counsel for the Company,
shall have furnished to you his written opinion (a draft of such
opinion is attached as Annex II(c) hereto), dated the Time of Delivery,
in form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware, with corporate power and
authority to own its properties and conduct its business as
described in the Prospectuses;
(ii) The Company has an authorized capitalization as
set forth in the Prospectuses, and all of the issued shares of
capital stock of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable;
(iii) The Company has been duly qualified as a
foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in
which it owns or leases properties or conducts any business so
as to require such qualification, or is subject to no material
liability or disability by reason of failure to be so
qualified in any such jurisdiction; provided, however, that
for the purposes of this
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<PAGE> 15
paragraph (iii), such counsel may state that he expresses no
opinion as to the qualification of the Company as a foreign
corporation under the laws of the States of Texas or Illinois
(such counsel being entitled to rely in respect of the opinion
in this clause upon opinions of local counsel and in respect
of matters of fact upon certificates of officers of the
Company, provided that such counsel shall state that he
believes that you and he are justified in relying upon such
opinions and certificates);
(iv) Each of Goldman, Sachs & Co. and J. Aron &
Company has been duly organized and is validly existing as a
limited partnership and general partnership, respectively, in
good standing under the laws of its jurisdiction of formation;
and the general and limited partnership interests in Goldman,
Sachs & Co., and the general partnership interests in J. Aron
& Company, have been duly and validly created and are owned
directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities and claims (such counsel being
entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact
upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that he
believes that you and he are justified in relying upon such
opinions and certificates);
(v) To the best of such counsel's knowledge and other
than as set forth in the Prospectuses, there are no legal or
governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the
Company or any of its subsidiaries is the subject that is
reasonably likely, individually or in the aggregate, to have a
material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the
best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(vi) This Agreement has been duly authorized,
executed and delivered by the Company;
(vii) The Securities have been duly authorized,
executed, authenticated, issued and delivered and constitute
valid and legally binding obligations of the Company entitled
to the benefits provided by the Indenture; and the Securities
and the Indenture conform to the descriptions thereof in the
Prospectuses;
(viii) The Indenture has been duly authorized,
executed and delivered by the Company and constitutes a valid
and legally binding instrument enforceable in accordance with
its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and
to general equity principles; and the Indenture has been duly
qualified under the Trust Indenture Act.
(ix) The issue and sale of the Securities by the
Company, the compliance by the Company with all of the
provisions of the Securities, the Indenture and this Agreement
and the consummation by the Company of the transactions herein
and therein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any material indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument
known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or
assets of the Company or any of
15
<PAGE> 16
its subsidiaries is subject, nor will such action result in
any violation of the provisions of the Amended and Restated
Certificate of Incorporation or Amended and Restated By-laws
of the Company or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or
body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; provided, however,
that, for the purposes of this paragraph (ix), such counsel
need not express any opinion with respect to Federal or state
securities laws, fraudulent transfer laws, other antifraud
laws and ERISA and related laws; and provided, further, that
insofar as the compliance by the Company with all of the
provisions of the Securities, the Indenture and this Agreement
and the consummation of the transactions herein and therein
contemplated are concerned, such counsel need not express any
opinion as to bankruptcy, insolvency, reorganization,
moratorium and similar laws of general applicability relating
to or affecting creditors' rights;
(x) No consent, approval, authorization, order,
registration or qualification of or with any court or
governmental agency or body of the United States of America or
the State of New York is required for the issue and sale of
the Securities or the consummation by the Company of the
transactions contemplated by this Agreement, the Securities or
the Indenture, except the registration of the Securities under
the Act and the qualification of the Indenture under the Trust
Indenture Act, each of which has been obtained or made, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution
of the Securities by the Underwriters;
(xi) The statements set forth in the Prospectuses
under the caption "Description of Notes We Are Offering",
insofar as they purport to constitute a summary of the terms
of the Securities described therein, and in the Initial
Offering Prospectus under the caption "Underwriting", insofar
as they purport to describe the provisions of the documents
referred to therein, are accurate, complete and fair; and
(xii) The Registration Statement and the Prospectuses
and any further amendments and supplements thereto made by the
Company prior to the Time of Delivery (other than the
financial statements and related schedules therein, other
financial data therein derived from the Company's accounting
records and the statement of the eligibility and qualification
of the Trustee under the Indenture, as to which such counsel
need not express any opinion) comply as to form in all
material respects with the requirements of the Act and the
Trust Indenture Act and the rules and regulations thereunder;
although he does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained
in the Registration Statement or the Prospectuses, except for
those referred to in the opinion in paragraphs (ii) and (xi)
of this Section 8(d), he has no reason to believe (i) that, as
of its effective date, the Registration Statement or any
further amendment thereto made by the Company prior to the
Time of Delivery (other than the financial statements and
related schedules therein, other financial data therein
derived from the Company's accounting records and the
statement of the eligibility and qualification of the Trustee
under the Indenture, as to which such counsel need not express
any opinion) contained an untrue statement of a material fact
or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, (ii) that, as of their date, the Prospectuses or
any further amendment or supplement thereto made by the
Company prior to the Time of Delivery (other than the
financial statements and related schedules therein, other
financial data therein derived
16
<PAGE> 17
from the Company's accounting records and the statement of the
eligibility and qualification of the Trustee under the
Indenture, as to which such counsel need not express any
opinion) contained an untrue statement of a material fact or
omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading or (iii) that, as of the
Time of Delivery, either the Registration Statement or the
Prospectuses or any further amendment or supplement thereto
made by the Company prior to the Time of Delivery (other than
the financial statements and related schedules therein, other
financial data therein derived from the Company's accounting
records and the statement of the eligibility and qualification
of the Trustee under the Indenture, as to which such counsel
need not express any opinion) contains an untrue statement of
a material fact or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading; and he does not
know of any amendment to the Registration Statement required
to be filed or of any contracts or other documents of a
character required to be filed as an exhibit to the
Registration Statement or required to be described in the
Registration Statement or the Prospectuses which are not filed
or described as required. Such counsel may state that he
assumes that any Rule 462(b) Registration Statement was filed
with the Commission prior to the time that any confirmations
of the sale of any of the Securities were sent or given to
investors.
In rendering such opinion, such counsel may state that he
expresses no opinion as to the laws of any jurisdiction other than the
Federal laws of the United States, the laws of the State of New York
and the General Corporation Law of the State of Delaware; that, insofar
as such opinion involves factual matters, he has relied upon
certificates of officers of the Company and its subsidiaries and
certificates of public officials and other sources believed by such
counsel to be responsible; that he has assumed that the Indenture has
been duly authorized, executed and delivered by the Trustee, that the
Securities conform to the form thereof examined by him (or members of
the Company's legal department acting under his supervision), that the
Trustee's certificates of authentication of the Securities have been
manually signed by one of the Trustee's authorized signatories and that
the signatures on all documents examined by him (or members of the
Company's legal department acting under his supervision) are genuine
(assumptions that he has not independently verified); and that a
judgment for money in an action based on any Security denominated in a
foreign currency may not be enforced in such currency. In addition,
such counsel may state that he has examined, or has caused members of
the Company's legal department to examine, such corporate and
partnership records, certificates and other documents, and such
questions of law, as he has considered necessary or appropriate for the
purposes of such opinion;
(e) Linklaters & Paines, United Kingdom counsel for the
Company, shall have furnished to you their written opinion (a draft of
such opinion is attached as Annex II(d) hereto), dated the Time of
Delivery, in form and substance satisfactory to you, to the effect
that:
(i) Goldman Sachs International has been duly
incorporated and is validly existing as a private unlimited
company, in good standing under the laws of England; and
(ii) All of the issued shares of Goldman Sachs
International have been duly and validly authorized and
issued, are fully paid and are owned by Goldman Sachs Holdings
(U.K.), Goldman Sachs Investments Europe and Goldman Sachs
(U.K.) L.L.C.,
17
<PAGE> 18
which are themselves indirectly owned by the Company, free and
clear from all liens, encumbrances, equities or claims.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
Companies Act of England. Such counsel may also state that, insofar as
such opinion involves factual matters, they have relied upon
certificates of officers of the Company and certificates of public
officials and other sources believed by such counsel to be responsible;
(f) On the date of the Initial Offering Prospectus at a time
prior to the execution of this Agreement, at 9:30 a.m., New York City
time, on the effective date of any post-effective amendment to the
Registration Statement filed subsequent to the date of this Agreement
and also at the Time of Delivery, PricewaterhouseCoopers LLP shall have
furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the
effect set forth in Annex I hereto (the executed copy of the letter
delivered prior to the execution of this Agreement is attached as Annex
I(a) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex I(b)
hereto);
(g) (i) Neither the Company nor any of its Significant
Subsidiaries shall have sustained since the date of the latest audited
financial statements included in the Initial Offering Prospectus any
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Initial Offering Prospectus,
and (ii) since the respective dates as of which information is given in
the Initial Offering Prospectus there shall not have been any change in
the capital stock or partners' capital, as applicable, or long-term
debt of the Company or any of its Significant Subsidiaries or any
change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Initial Offering Prospectus, the effect of which, in any such case
described in clause (i) or (ii), is in the judgment of Goldman Sachs
International so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Securities on the terms and in the manner contemplated in the Initial
Offering Prospectus;
(h) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term
is defined by the Commission for purposes of Rule 436(g)(2) under the
Act, and (ii) no such organization shall have publicly announced that
it has under surveillance or review, with possible negative
implications, its rating of any of the Company's debt securities;
(i) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in
trading in securities generally on the New York Stock Exchange; (ii) a
suspension or material limitation in trading in the Company's
securities on the New York Stock Exchange; (iii) a general moratorium
on commercial banking activities declared by either Federal or New York
State authorities; (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of
a national emergency or war, if the effect of any such event specified
in this clause (iv) in the judgment of Goldman Sachs International
makes it impracticable or inadvisable to proceed with the public
offering or the
18
<PAGE> 19
delivery of the Securities on the terms and in the manner contemplated
in the Initial Offering Prospectus; or (v) the occurrence of any
material adverse change in the existing financial, political or
economic conditions in the United States or elsewhere which, in the
judgment of Goldman Sachs International, would materially and adversely
affect the financial markets or the market for the Securities and other
debt securities;
(j) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on
the New York Business Day next succeeding the date of this Agreement;
and
(k) The Company shall have furnished or caused to be furnished
to you at the Time of Delivery, certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of the Time of Delivery, as
to the performance by the Company of all of its obligations hereunder
to be performed at or prior to the Time of Delivery, as to the matters
set forth in subsections (a) and (g) of this Section and as to such
other matters as you may reasonably request.
9. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or any Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or any Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman Sachs International expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or any
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or any Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman Sachs
International expressly for use therein; and will reimburse the Company for any
legal or other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
19
<PAGE> 20
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought under
this Section 9 (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such settlement, compromise or judgment
(i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 9 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Securities contemplated by the Initial
Offering Prospectus. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Initial Offering Prospectus. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this subsection (d) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection
20
<PAGE> 21
(d) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section 9 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 9 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
10. (a) If any Underwriter shall default in its obligation to purchase
the Securities which it has agreed to purchase hereunder, you may in your
discretion arrange for you or another party or other parties to purchase such
Securities on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such
Securities, then the Company shall be entitled to a further period of thirty-six
hours within which to procure another party or other parties satisfactory to you
to purchase such Securities on such terms. In the event that, within the
respective prescribed periods, you notify the Company that you have so arranged
for the purchase of such Securities, or the Company notifies you that it has so
arranged for the purchase of such Securities, you or the Company shall have the
right to postpone the Time of Delivery for a period of not more than seven days,
in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Securities.
(b) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate principal amount of such
Securities which remains unpurchased does not exceed one-eleventh of the
aggregate principal amount of all the Securities, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the principal
amount of Securities which such Underwriter agreed to purchase hereunder and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the principal amount of Securities which such Underwriter agreed
to purchase hereunder) of the Securities of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate principal amount of Securities
which remains unpurchased exceeds one-eleventh of the aggregate
21
<PAGE> 22
principal amount of all the Securities, or if the Company shall not exercise the
right described in subsection (b) above to require non-defaulting Underwriters
to purchase Securities of a defaulting Underwriter or Underwriters, then this
Agreement shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 7 hereof and the
indemnity and contribution agreement in Section 9 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
11. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Securities.
Anything herein to the contrary notwithstanding, the indemnity
agreement of the Company in subsection (a) of Section 9 hereof, the
representations and warranties in subsections (b) and (c) of Section 1 hereof
and any representation or warranty as to the accuracy of the Registration
Statement or any Prospectus contained in any certificate furnished by the
Company pursuant to Section 8 hereof, insofar as they may constitute a basis for
indemnification for liabilities (other than payment by the Company of expenses
incurred or paid in the successful defense of any action, suit or proceeding)
arising under the Act, shall not extend to the extent of any interest therein of
a controlling person or partner of an Underwriter who is a director or officer
of the Company who signed the Registration Statement or a controlling person of
the Company when the Registration Statement has become effective, except in each
case to the extent that an interest of such character shall have been determined
by a court of appropriate jurisdiction as not against public policy as expressed
in the Act. Unless in the opinion of counsel for the Company the matter has been
settled by controlling precedent, the Company will, if a claim for such
indemnification is asserted, submit to a court of appropriate jurisdiction the
question of whether such interest is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
12. If this Agreement shall be terminated pursuant to Section 10
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 7 and 9 hereof; but, if for any other reason, the
Securities are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Securities, but the Company shall then be
under no further liability to any Underwriter except as provided in Sections 7
and 9 hereof.
13. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman Sachs International on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman Sachs
International, Peterborough Court, 133 Fleet Street, London EC4A 2BB, England,
Attention: Registration Department; and if to the Company shall be delivered or
sent
22
<PAGE> 23
by mail, telex or facsimile transmission to the address of the Company set forth
in the Registration Statement, Attention: Secretary; provided, however, that any
notice to an Underwriter pursuant to Section 9(c) hereof shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at its address
set forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company by you upon
request. Any such statements, requests, notices or agreements shall take effect
upon receipt thereof.
14. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 9 and 11 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Securities from any Underwriter shall be deemed a successor or assign
by reason merely of such purchase.
15. In respect of any judgment or order given or made for any amount
due hereunder that is expressed and paid in a currency (the "judgment currency")
other than United States dollars, the Company will indemnify each Underwriter
against any loss incurred by such Underwriter as a result of any variation as
between (i) the rate of exchange at which the United States dollar amount is
converted into the judgment currency for the purpose of such judgment or order
and (ii) the rate of exchange at which an Underwriter is able to purchase United
States dollars, as soon as is practicable after the date of such judgment, with
the amount of judgment currency actually received by such Underwriter. The
foregoing indemnity shall constitute a separate and independent obligation of
the Company and shall continue in full force and effect notwithstanding any such
judgment or order as aforesaid. The term "rate of exchange" shall include any
premiums and costs of exchange payable in connection with the purchase of or
conversion into United States dollars.
16. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
17. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
18. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such respective counterparts shall together constitute one and
the same instrument.
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<PAGE> 24
If the foregoing is in accordance with your understanding, please sign
and return to us_____ counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters and
the Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
The Goldman Sachs Group, Inc.
By:
--------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
Accepted as of the date hereof at ,
------------
Goldman Sachs International
[INSERT NAMES OF OTHER REPRESENTATIVES]
By:
----------------------------------------------------
(Goldman Sachs International)
On behalf of each of the Underwriters
24
<PAGE> 25
SCHEDULE I
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
SECURITIES
TO BE
UNDERWRITER PURCHASED
----------- ------------
<S> <C>
Goldman Sachs International (euro)
[INSERT NAMES OF OTHER REPRESENTATIVES]
[NAMES OF OTHER UNDERWRITERS]
--------------------
Total (euro) 1,000,000,000
====================
</TABLE>
25
<PAGE> 26
ANNEX I
Pursuant to Section 8(f) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to Group and its subsidiaries and the Company within the
meaning of the Act and the applicable rules and regulations adopted by
the Commission;
(ii) In their opinion, the financial statements, the Selected
Consolidated Financial Data with respect to the consolidated results of
operations and financial position of Group for the five most recent
fiscal years, management's discussion and analysis of financial
condition and results of operations and any supplementary financial
information and schedules (and, if applicable, financial forecasts
and/or pro forma financial information) examined by them and included
in the Prospectus or the Registration Statement comply as to form in
all material respects with the applicable accounting requirements of
the Act, Item 301 of Regulation S-K under the Act, Item 303 of
Regulation S-K under the Act and the related rules and regulations
adopted by the Commission; and, if applicable, they have made an
examination or a review in accordance with standards established by the
American Institute of Certified Public Accountants of the unaudited
consolidated interim financial statements, selected financial data, pro
forma financial information, financial forecasts, management's
discussion and analysis of financial condition and results of
operations and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have
been furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of earnings,
consolidated statements of financial condition, consolidated statements
of changes in partners' capital and consolidated statements of cash
flows included in the Prospectus as indicated in their reports thereon
copies of which have been furnished to the Representatives; and on the
basis of specified procedures including inquiries of officials of Group
who had responsibility for financial and accounting matters regarding
whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related rules and regulations adopted by the Commission,
nothing came to their attention that cause them to believe that the
unaudited condensed consolidated financial statements do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related rules and regulations adopted
by the Commission;
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of
Group for any interim period included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the
unaudited consolidated financial statements for such interim period(s);
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301, 302
and 402, respectively, of Regulation S-K;
<PAGE> 27
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of Group and its subsidiaries, inspection
of the minute books of the Management Committee of Group and of the
Board of Directors of the Company and of the general partner, of
Goldman, Sachs & Co. since the date of the latest audited financial
statements included in the Prospectus, inquiries of officials of Group
and its subsidiaries responsible for financial and accounting matters
and such other inquiries and procedures as may be specified in such
letter, nothing came to their attention that caused them to believe
that:
(A) (i) the unaudited consolidated statements of
earnings, consolidated statements of financial position,
consolidated statements of changes in partners' capital and
consolidated statements of cash flows included in the
Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the
related rules and regulations adopted by the Commission, or
(ii) any material modifications should be made to the
unaudited condensed consolidated statements of earnings,
consolidated statements of financial position, consolidated
statements of changes in partners' capital and consolidated
statements of cash flows included in the Prospectus for them
to be in conformity with generally accepted accounting
principles;
(B) any other unaudited statement of earnings data
and statement of financial position items included in the
Prospectus do not agree with the corresponding items in the
unaudited consolidated financial statements from which such
data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent
with the basis for the corresponding amounts in the audited
consolidated financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in clause
(A) and any unaudited statement of earnings data and statement
of financial position items included in the Prospectus and
referred to in clause (B) were not determined on a basis
substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply
as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes
in the partners' capital or any increase in the consolidated
long-term debt of the Company and its subsidiaries, or any
decreases in consolidated net current assets or other items
specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each
2
<PAGE> 28
case for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in clause (E) there were any
decreases in consolidated total revenues or consolidated
revenues, net of interest expense, or pre-tax earnings or
other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of Group and its subsidiaries, which appear in the Prospectus, or in
Part II of, or in exhibits and schedules to, the Registration Statement
specified by the Representatives, and have compared certain of such
amounts, percentages and financial information with the accounting
records of Group and its subsidiaries and have found them to be in
agreement.
3
<PAGE> 1
Exhibit 8.1
SULLIVAN & CROMWELL
NEW YORK TELEPHONE: (212) 558-4000
TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC)
CABLE ADDRESS: LADYCOURT, NEW YORK
FACSIMILE: (212) 558-3588
125 BROAD STREET, NEW YORK 10004-2498
------------------------------
1701 PENNSYLVANIA AVE, N.W. WASHINGTON, D.C. 20006-5805
1888 CENTURY PARK EAST, LOS ANGELES 90071-2901
8, PLACE VENDOME, 75001 PARIS
ST. OLAVE'S HOUSE, 9A IRONMONGER LANE, LONDON EC2V 8EY
101 COLLINS STREET, MELBOURNE 3000
2-1, MARUNOUCHI I-CHOME, CHIYODA-KU, TOKYO 100
NINE QUEEN'S ROAD, CENTRAL, HONG KONG
OBERLINDAU 54-56, 60323 FRANKFURT AM MAIN
May 11, 1999
The Goldman Sachs Group, Inc.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
As counsel to The Goldman Sachs Group, Inc. (the "Company") in connection
with the issuance of (euro)1,000,000,000 aggregate principal amount of %
(euro) Notes due 2009, we hereby confirm to you that the discussion set forth
under the heading "United States Taxation" in the Prospectus which forms a part
of the Registration Statement of the Company to which this opinion is filed as
an exhibit is our opinion, subject to the limitations set forth therein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "United
States Taxation" in the Prospectus. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ SULLIVAN & CROMWELL
<PAGE> 1
Exhibit 15.1
May 7, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: The Goldman Sachs Group, Inc.
Registration Statement on Form S-1
(File No. 333-77541)
Commissioners:
We are aware that our report dated April 9, 1999 on our review of the condensed
consolidated financial statements of The Goldman Sachs Group, L.P. and
Subsidiaries (the "Firm") as of February 26, 1999 and for the three months ended
February 26, 1999 and February 27, 1998 is included in the Firm's Prospectus
constituting part of this Registration Statement on Form S-1. Pursuant to Rule
436(c) under the Securities Act of 1933, that report should not be considered a
part of the Registration Statement prepared or certified by us within the
meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
------------------------
We consent to the inclusion in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated January 22, 1999, on our
audits of the consolidated financial statements, selected historical
consolidated income statement and balance sheet data and the financial statement
schedule of The Goldman Sachs Group, L.P. and Subsidiaries. We also consent to
the references to our firm under the captions "Experts", "Summary Consolidated
Financial Data", and "Selected Consolidated Financial Data".
/s/ PricewaterhouseCoopers LLP
New York, New York
May 7, 1999.
<PAGE> 1
Exhibit 23.4
SECURITIES DATA COMPANY
We hereby consent to the use of the information we provided for use in Amendment
No. 1 to the Registration Statement (No. 333-77541) relating to the offering of
Debt Securities denominated in euros by The Goldman Sachs Group, Inc. and to the
references to our name in Amendment No. 1 to the Registration Statement (No.
333-77541), including under the caption "Experts".
Securities Data Company,
A division of Thomson Information Services
/s/ Francine Falchook
- --------------------
Francine Falchook
Senior Vice President
May 7, 1999
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE AMOUNTS DISCLOSED IN THE FINANCIAL DATA SUMMARY SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-26-1999
<PERIOD-START> NOV-30-1998<F1>
<PERIOD-END> FEB-26-1999
<CASH> 10,706<F2>
<RECEIVABLES> 23,935
<SECURITIES-RESALE> 41,776
<SECURITIES-BORROWED> 74,036
<INSTRUMENTS-OWNED> 70,521
<PP&E> 962<F3>
<TOTAL-ASSETS> 230,624
<SHORT-TERM> 33,863
<PAYABLES> 33,437
<REPOS-SOLD> 36,906
<SECURITIES-LOANED> 24,770
<INSTRUMENTS-SOLD> 62,152
<LONG-TERM> 20,405
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 223,633<F4>
<TRADING-REVENUE> 1,398<F5>
<INTEREST-DIVIDENDS> 3,013
<COMMISSIONS> 327<F6>
<INVESTMENT-BANKING-REVENUES> 902
<FEE-REVENUE> 216<F6>
<INTEREST-EXPENSE> 2,861
<COMPENSATION> 1,275
<INCOME-PRETAX> 1,188
<INCOME-PRE-EXTRAORDINARY> 1,188
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,007
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>REPRESENTS THE FIRST MONDAY OF THE PERIOD.
<F2>INCLUDES CASH AND CASH EQUIVALENTS AND CASH AND SECURITIES SEGREGATED IN
COMPLIANCE WITH U.S. FEDERAL AND OTHER REGULATIONS AS DISCLOSED ON THE
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION.
<F3>INCLUDED IN OTHER ASSETS ON THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION.
<F4>EXCLUDES PARTNERS' CAPITAL AND PARTNERS' CAPITAL ALLOCATED FOR INCOME TAXES AND
POTENTIAL WITHDRAWALS AS DISCLOSED ON THE CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION.
<F5>INCLUDES REVENUES FROM PRINCIPAL INVESTMENTS, WHICH MAINLY REPRESENTS REVENUES
FROM INVESTMENTS IN MERCHANT BANKING FUNDS.
<F6>INCLUDED IN REVENUES FROM ASSET MANAGEMENT AND SECURITIES SERVICES ON THE
CONSOLIDATED STATEMENT OF EARNINGS.
</FN>
</TABLE>
