<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 2000
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
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:
RICARDO A. MESTRES, JR.
JOHN P. MEAD
DAVID B. HARMS
ROBERT W. REEDER III
SULLIVAN & CROMWELL
125 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 558-4000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER UNIT(3) PRICE(3) FEE(4)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medium-Term Notes............................ $7,000,000,000 100% $7,000,000,000 $1,848,000
- ---------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) The amount to be registered equals the aggregate principal amount of the
Medium-Term Notes. If any Medium-Term Notes are issued at an original issue
discount or with a principal amount that cannot be determined at issuance or
is denominated in a foreign currency or currency unit, the aggregate
principal amount of the Medium-Term Notes will be an amount that results in
an aggregate initial offering price for the Medium-Term Notes equivalent to
U.S.$7,000,000,000.
(2) This registration statement also covers an undeterminable amount of the
Medium-Term Notes that may be reoffered and resold on an ongoing basis after
their initial sale in market-making transactions by affiliates of the
registrant.
(3) Estimated solely for purposes of determining the registration fee.
(4) Pursuant to Rule 429 under the Securities Act of 1933, the prospectus filed
as part of this registration statement also relates to $5,203,255,004.25
aggregate principal amount (or initial offering price) of Medium-Term Notes
previously registered under a Form S-1 registration statement of the
registrant (File No. 333-75321), which have not yet been sold. A filing fee
of $4,170,000 was paid with respect to the $15,000,000,000 aggregate
principal amount (or initial offering price) of Medium-Term Notes registered
pursuant to registrant's said registration statement (File No. 333-75321).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This registration statement contains a prospectus relating to both of the
following:
- the offering of newly issued Medium-Term Notes, Series B, of The Goldman
Sachs Group, Inc. on an ongoing basis, at an aggregate initial public
offering price of up to $12,203,255,004.25; and
- market-making transactions that may occur on an ongoing basis in notes
that have been previously issued in the offering described above (or in
an offering made under the separate registration statement identified in
note 4 on the prior page).
When the prospectus is delivered to an investor in the initial offering
described above, the investor will be informed of that fact in the confirmation
of sale. When the prospectus is delivered to an investor who is not so informed,
it is delivered in a market-making transaction.
i
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion. Dated February 14, 2000.
$22,000,000,000
THE GOLDMAN SACHS GROUP, INC.
Medium-Term Notes, Series B
[GOLDMAN SACHS LOGO]
------------------------
TERMS OF SALE
The following terms may apply to the notes that The Goldman Sachs Group,
Inc. may sell from time to time. The final terms of each note will be included
in a prospectus supplement. Goldman Sachs will receive between $21,967,000,000
and $21,802,000,000 of the proceeds from the sale of the notes, after paying the
agents' commissions of between $33,000,000 and $198,000,000. As of the date of
this prospectus, Goldman Sachs has already issued notes having an aggregate
initial offering price of approximately $9.8 billion.
- stated maturity of 12 months or longer
- fixed or floating interest rate, zero-coupon or issued with original
issue discount; a floating interest rate may be based on:
- commercial paper rate
- prime rate
- LIBOR
- EURIBOR
- treasury rate
- CMT rate
- CD rate
- federal funds rate
- eleventh district cost of funds rate
- amount of principal or interest may be determined by reference to an
index or formula
- may be book-entry form only
- may be subject to redemption at the option of Goldman Sachs or repayment
at the option of the holder
- not amortized or subject to a sinking fund
- interest on fixed rate notes paid semi-annually
- interest on floating rate notes paid monthly, quarterly, semi-annually or
annually
- denominations of $1,000 and multiples of $1,000
- may be denominated in a currency other than U.S. dollars or in a
composite currency
- settlement in immediately available funds
Goldman Sachs does not plan to list the notes for trading on a securities
exchange.
See "Risk Factors" beginning on page 9 to read about factors you should
consider before investing in any notes.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY
OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
Goldman Sachs may sell the notes directly or through one or more agents or
dealers, including the agent listed below. The agents are not required to sell
any particular amount of the notes.
Goldman Sachs may use this prospectus in the initial sale of any note. In
addition, Goldman, Sachs & Co. or any other affiliate of Goldman Sachs may use
this prospectus in a market-making transaction in any note after its initial
sale. UNLESS GOLDMAN SACHS OR ITS AGENT INFORMS THE PURCHASER OTHERWISE IN THE
CONFIRMATION OF SALE, THIS PROSPECTUS IS BEING USED IN A MARKET-MAKING
TRANSACTION.
GOLDMAN, SACHS & CO.
------------------------
Prospectus dated February , 2000.
<PAGE> 4
OUR BUSINESS PRINCIPLES
1. Our clients' interests always come first. Our experience shows that if we
serve our clients well, our own success will follow.
2. Our assets are our people, capital and reputation. If any of these is ever
diminished, the last is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
3. Our goal is to provide superior returns to our shareholders. Profitability
is critical to achieving superior returns, building our capital and attracting
and keeping our best people. Significant employee stock ownership aligns the
interests of our employees and our shareholders.
4. We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
5. We stress creativity and imagination in everything we do. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
6. We make an unusual effort to identify and recruit the very best person for
every job. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.
7. We offer our people the opportunity to move ahead more rapidly than is
possible at most other places. We have yet to find the limits to the
responsibility that our best people are able to assume. Advancement depends
solely on ability, performance and contribution to the firm's success, without
regard to race, color, religion, sex, age, national origin, disability, sexual
orientation, or any other impermissible criterion or circumstance.
8. We stress teamwork in everything we do. While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of the
interests of the firm and its clients.
9. The dedication of our people to the firm and the intense effort they give
their jobs are greater than one finds in most other organizations. We think that
this is an important part of our success.
10. We consider our size an asset that we try hard to preserve. We want to be
big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to maintain the loyalty, the intimacy and the
esprit de corps that we all treasure and that contribute greatly to our success.
11. We constantly strive to anticipate the rapidly changing needs of our
clients and to develop new services to meet those needs. We know that the world
of finance will not stand still and that complacency can lead to extinction.
12. We regularly receive confidential information as part of our normal client
relationships. To breach a confidence or to use confidential information
improperly or carelessly would be unthinkable.
13. Our business is highly competitive, and we aggressively seek to expand our
client relationships. However, we must always be fair competitors and must never
denigrate other firms.
14. Integrity and honesty are at the heart of our business. We expect our
people to maintain high ethical standards in everything they do, both in their
work for the firm and in their personal lives.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the notes. You should read the entire prospectus carefully,
especially the risks of investing in the notes discussed under "Risk Factors" on
pages 9-23.
THE GOLDMAN SACHS GROUP, INC.
Goldman Sachs is a leading global investment banking and securities firm
that provides a wide range of financial services worldwide to a substantial and
diversified client base. Our activities are divided into two business segments:
- - Global Capital Markets; 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 seek to achieve this goal by
maintaining an intense commitment to our clients, focusing on our core
businesses and key opportunities, and operating as an integrated franchise.
For our fiscal year ended November 26, 1999, our net revenues were $13.3
billion and our net earnings were $2.7 billion. As of November 26, 1999, our
total assets were
$250.5 billion and our stockholders' equity was $10.1 billion.
Because we believe that the needs of our clients are global and that
international markets have high growth potential, we have built upon our
strength in the United States to achieve leading positions in other parts of the
world. Today, we have a strong global presence as evidenced by the geographic
breadth of our transactions, leadership in our core products and the size of our
international operations. As of November 26, 1999, we operated offices in over
20 countries and 37% of our 15,361 employees were based outside the United
States.
We are committed to a distinctive culture and set of core values. These
values are reflected in our Business Principles, which emphasize placing our
clients' interests first, integrity, commitment to excellence and innovation,
and teamwork.
3
<PAGE> 6
SUMMARY FINANCIAL DATA
($ in millions)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues
Global Capital Markets.................................... $5,513 $5,747 $10,132
Asset Management and Securities Services.................. 1,934 2,773 3,213
------ ------ -------
Total net revenues.......................................... $7,447 $8,520 $13,345
====== ====== =======
Ratio of earnings to fixed charges(1)(2).................... 1.23x 1.21x 1.16x
</TABLE>
- ---------------
Read the table above in conjunction with the footnotes to "Selected Consolidated
Financial Data" as well as the following footnotes:
(1) Our pre-tax earnings in 1999 reflect payments for services rendered by
managing directors who, prior to our conversion to corporate form, were
profit participating limited partners. In prior years these payments were
accounted for as distributions of partners' capital rather than as
compensation and benefits expense. As a result, these payments are not
reflected in operating expenses in 1997 or 1998 and, therefore, the pre-tax
earnings in these years are not comparable to 1999.
(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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Pro Forma Operating
Results".
----------------------------
STRATEGY AND PRINCIPAL BUSINESS LINES
Our strategy is to grow our three core businesses -- Investment Banking and
Trading and Principal Investments which together comprise Global Capital
Markets, 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.
GLOBAL CAPITAL MARKETS
INVESTMENT BANKING. Investment Banking represented 33% of fiscal 1999 net
revenues. We are a market leader in both the Financial Advisory and Underwriting
businesses, serving over 3,000 clients worldwide. Financial Advisory includes
advisory assignments with respect to mergers and acquisitions, divestitures,
corporate defense activities, restructurings and spin-offs. Underwriting
includes public offerings and private placements of equity and debt securities.
TRADING AND PRINCIPAL INVESTMENTS. Trading and Principal Investments
represented 43% of fiscal 1999 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.
4
<PAGE> 7
ASSET MANAGEMENT AND SECURITIES SERVICES
The Asset Management and Securities Services segment represented 24% of
fiscal 1999 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.
As of November 26, 1999, we had $258.0 billion of assets under management. We
manage merchant banking funds that had $17.3 billion of capital commitments as
of November 26, 1999.
Assets under supervision are comprised of assets under management and other
client assets. Assets under management typically generate fees based on a
percentage of their value. Other client assets are comprised of assets in
brokerage accounts of primarily high-net-worth individuals, on which we earn
commissions.
OUR HEADQUARTERS
Our headquarters are located at 85 Broad Street, New York, New York 10004,
telephone (212) 902-1000.
5
<PAGE> 8
THE OFFERING
If you purchase a note, we will describe the specific terms of that note in
a supplement to this prospectus. Please refer to "Description of Notes We May
Offer" in this prospectus for more information about the notes.
Notes offered................. Medium-Term Notes, Series B.
Issuer........................ The Goldman Sachs Group, Inc.
Stated maturity............... 12 months or more from original issue date, as
stated in the applicable prospectus supplement.
Amount initially offered...... Aggregate offering price of up to
$22,000,000,000 or its equivalent in any other
currencies or composite currencies. As of the
date of this prospectus, we have already issued
notes having an aggregate initial offering
price of approximately $9.8 billion.
Ranking....................... The notes will rank equally in right of payment
with all other senior, unsecured debt
obligations of The Goldman Sachs Group, Inc.
Interest features............. A note may bear interest at a fixed rate or a
floating rate, which may be determined by
reference to a formula or index, or may bear no
interest, as stated in the applicable
prospectus supplement.
Redemption/repayment
features...................... A note may be subject to redemption at our
option, repayment at your option or both, if
specified in the applicable prospectus
supplement.
Currency features............. Payments of principal or interest on a note may
be made in currencies or composite currencies
other than U.S. dollars, if specified in the
applicable prospectus supplement.
Index features................ The amount of principal or interest payable on
a note may be determined by reference to a
formula or index, if specified in the
applicable prospectus supplement.
Plan of distribution.......... In connection with their original issuance, we
will offer and sell the notes directly, through
our agents named in the applicable prospectus
supplement, or to our agents so named for
resale. After a note has been originally
issued, agents affiliated with us may acquire
and resell the note in market-making
transactions.
Book-entry issuance and
settlement.................. We will issue the notes only in book-entry
form -- i.e., as global notes registered in the
name of The Depository Trust Company, New York,
New York, or its nominee, unless otherwise
stated in the applicable prospectus supplement.
Each sale of a note in global form will settle
in immediately available funds through DTC.
Use of proceeds............... We intend to use the net proceeds from the
sales of notes to provide additional funds for
our operations and for other general corporate
purposes.
6
<PAGE> 9
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 public accountants, as of November 27,
1998 and November 26, 1999 and for the years ended November 28, 1997, November
27, 1998 and November 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 24, 1995, November 29, 1996 and November 28, 1997
and for the years ended November 24, 1995 and November 29, 1996 have been
derived from our consolidated financial statements that are not included in this
prospectus.
The pro forma data set forth below for the year ended November 26, 1999
have been derived from the pro forma data set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Pro Forma Operating Results".
The summary consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and their notes.
7
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED NOVEMBER
--------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net revenues........................................ $ 4,483 $ 6,129 $ 7,447 $ 8,520 $ 13,345
Pre-tax earnings(1)................................. 1,368 2,606 3,014 2,921 1,992(5)
BALANCE SHEET DATA
Total assets(2)..................................... $100,066 $152,046 $178,401 $217,380 $250,491
Long-term borrowings................................ 13,358 12,376 15,667 19,906 20,952
Partners' capital................................... 4,905 5,309 6,107 6,310 --
Stockholders' equity................................ -- -- -- -- 10,145
PRO FORMA DATA (UNAUDITED)(3)
Pro forma net earnings.............................. -- -- -- -- $ 2,550
Pro forma ratio of earnings to fixed charges(4)..... 1.35x
SELECTED DATA AND RATIOS (UNAUDITED)
Ratio of earnings to fixed charges(1)(4)............ 1.14x 1.23x 1.23x 1.21x 1.16x
Assets under supervision:
Assets under management........................... $ 52,358 $ 94,599 $135,929 $194,821 $258,045
Other client assets............................... 57,716 76,892 102,033 142,018 227,424
-------- -------- -------- -------- --------
Total assets under supervision...................... $110,074 $171,491 $237,962 $336,839 $485,469
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Our pre-tax earnings in 1999 reflect payments for services rendered by
managing directors who, prior to our conversion to corporate form, were
profit participating limited partners. In prior years, these payments were
accounted for as distributions of partners' capital rather than as
compensation and benefits expense. As a result, these payments are not
reflected in operating expenses in 1995, 1996, 1997 or 1998 and, therefore,
the pre-tax earnings in these years are not comparable to 1999.
(2) Total assets and liabilities were increased as of November 27, 1998 and
November 26, 1999 as a result of certain provisions of Statement of
Financial Accounting Standards No. 125.
(3) Reflects such adjustments as are necessary, in the opinion of management,
for a fair presentation of the results of operations of Goldman Sachs on a
pro forma basis. For more detailed information concerning these adjustments,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Pro Forma Operating Results".
(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 any offering of these medium-term notes subsequent
to November 26, 1999.
(5) Reflects nonrecurring expenses of $2.26 billion associated with our
conversion to corporate form and the charitable contribution to The Goldman
Sachs Foundation of $200 million made at the time of our initial public
offering.
8
<PAGE> 11
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
9
<PAGE> 12
conditions in the financial markets and economic conditions generally, both in
the United States and elsewhere around the world. The financial markets in the
United States and elsewhere have achieved record or near record levels, and the
favorable business environment in which we operate 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. 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, including
merchant banking investments, in the fixed income, currency, commodity and
equity markets and in real estate and other assets. 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. 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.
We May Generate Lower Revenues from Commissions and Asset Management Fees
A market downturn would likely 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.
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Even in the absence of a market downturn, below-market performance by our
mutual funds may result in increased withdrawals and reduced inflows, which
would reduce the revenue we receive from our asset management business.
Holding Large and Concentrated Positions May Expose Us to Large Losses
Concentration of risk in the past has increased the losses that we have
incurred in our arbitrage, market-making, block trading, underwriting and
lending businesses and may continue to do so in the future. Goldman Sachs has
committed substantial amounts of capital to these businesses, which often
require Goldman Sachs to take large positions in the securities of a particular
issuer or issuers in a particular industry, country or region. Moreover, the
trend in all major capital markets is towards larger and more frequent
commitments of capital in many of these activities. In particular, as described
under "Business -- Global Capital Markets -- 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. Unexpected
market developments may affect our hedging strategies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Management" for a discussion of the policies and procedures we use to identify,
monitor and manage the risks we assume in conducting our businesses.
A Prolonged Market Downturn Could Impair Our Operating Results
While we encountered extremely difficult market conditions in mid-August to
mid-October 1998, the financial markets rebounded late in the fourth quarter of
fiscal 1998. At some time in the future, there may be a more sustained period of
market decline or weakness that will leave us operating in a difficult market
environment and subject us to the risks that we describe in this section for a
longer period of time.
Market Risk May Increase the Other Risks That We Face
In addition to the potentially adverse effects on our businesses described
above, market risk could exacerbate other risks that we face. For example, if we
incur substantial trading losses, our need for liquidity could rise sharply
while our access to liquidity could be impaired. In addition, in conjunction
with a market downturn, our customers and counterparties could incur substantial
losses of their own, thereby weakening their financial condition and increasing
our credit risk to them. Our liquidity risk and credit risk are described below.
OUR RISK MANAGEMENT POLICIES AND
PROCEDURES MAY LEAVE US EXPOSED TO
UNIDENTIFIED OR UNANTICIPATED RISK
We have devoted significant resources to develop our risk management
policies and procedures and expect to continue to do so in the future.
Nonetheless, our hedging strategies and other risk management techniques may not
be fully effective in mitigating our risk exposure in all market environments or
against all types of risk, including risks that are unidentified or
unanticipated. 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
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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 -- Risk Management" for a
discussion of the policies and procedures we use to identify, monitor and manage
the risks we assume in conducting our businesses.
Other risk management methods depend upon evaluation of information
regarding markets, clients or other matters that is publicly available or
otherwise accessible by Goldman Sachs. This information may not in all cases be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risk requires, among other things, policies and procedures
to record properly and verify a large number of transactions and events, and
these policies and procedures may not be fully effective.
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 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 capital markets, or an inability to access the repurchase and
securities lending markets, could have a substantial negative effect on our
liquidity. Our access to debt in amounts adequate to finance our activities
could be impaired by factors that affect Goldman Sachs in particular or the
financial services industry in general. For example, lenders could develop a
negative perception of our long-term or short-term financial prospects if we
incurred large trading losses, if the level of our business activity decreased
due to a market downturn, if regulatory authorities took significant action
against us or if we discovered that one of our employees had engaged in serious
unauthorized or illegal activity. Our ability to borrow in the debt markets also
could be impaired by factors that are not specific to Goldman Sachs, such as a
severe disruption of the financial markets or negative views about the prospects
for the investment banking, securities or financial services industries
generally.
We also depend on banks to finance our day-to-day operations. As a result
of the recent consolidation in the banking industry,
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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
November 26, 1999, Goldman Sachs had $20.5 billion of outstanding commercial
paper and promissory notes with a weighted-average maturity of approximately 90
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 if other market participants
are 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 and competitive position. 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.
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
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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, we have also experienced, due to
competitive factors, 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, losses 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, and could adversely affect 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 foresee or 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.
OPERATIONAL RISKS MAY DISRUPT OUR
BUSINESSES, RESULT IN REGULATORY ACTION
AGAINST US OR LIMIT OUR GROWTH
We face operational risk arising from mistakes made in the confirmation or
settlement of transactions or from transactions not being properly recorded,
evaluated or accounted for. Our businesses are highly dependent on our ability
to process, on a daily basis, a large number of transactions across numerous and
diverse markets in many currencies, and the transactions we process have become
increasingly complex. Conse-
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quently, we rely heavily on our financial, accounting and other data processing
systems. If any of these systems do not operate properly or are disabled, we
could suffer financial loss, a disruption of our businesses, liability to
clients, regulatory intervention or reputational damage. The inability of our
systems to accommodate an increasing volume of transactions could also constrain
our ability to expand our businesses. In recent years, we have substantially
upgraded and expanded the capabilities of our data processing systems and other
operating technology, and we expect that we will need to continue to upgrade and
expand in the future to avoid disruption of, or constraints on, our operations.
If sufficiently severe and protracted, problems caused by our inability to
manage our operations effectively could lead the rating agencies to question our
controls and financial condition and to lower the credit ratings of the notes.
Problems of this kind could also reduce our profitability or make lenders less
willing to provide funding to us. If these two important sources of liquidity
were impaired, we could find it difficult to obtain the cash we need to make
payments on our debt, including payments on the notes.
LEGAL AND REGULATORY RISKS ARE INHERENT AND
SUBSTANTIAL IN OUR BUSINESSES AND COULD
LEAD TO A REDUCTION IN OUR CREDIT RATINGS
OR IN OUR ABILITY TO REPAY THE NOTES
Substantial legal liability or a significant regulatory action against
Goldman Sachs could have a material adverse 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 Proceedings" 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
Goldman Sachs, as a participant in the financial services industry, is
subject to extensive 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
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Goldman Sachs and are not designed to protect our shareholders or debtholders.
Consequently, these regulations often serve to limit our activities, including
through net capital, customer protection and market conduct requirements. We
face the risk of significant intervention by regulatory authorities, including
extended investigation and surveillance activity, adoption of costly or
restrictive new regulations and judicial or administrative proceedings that may
result in substantial penalties. Among other things, we could be fined or
prohibited from engaging in some of our business activities. See
"Business -- Regulation" for a further discussion of the regulatory environment
in which we conduct our businesses.
Legal Restrictions on Our Clients May Reduce the Demand for Our Services
New laws or regulations or changes in enforcement of existing laws or
regulations applicable to our clients may also adversely affect our businesses.
For example, changes in antitrust enforcement could affect the level of mergers
and acquisitions activity and changes in regulation could restrict the
activities of our clients and, therefore, the services we provide on their
behalf.
INVESTORS IN THE NOTES FACE ADDITIONAL RISK BECAUSE THE GOLDMAN SACHS GROUP,
INC. IS A HOLDING COMPANY
Because The Goldman Sachs Group, Inc. is a holding company, it depends on
dividends, distributions and other payments from its subsidiaries to fund all
payments on its debt obligations, including its obligations to make payments on
the notes. 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
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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
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 May Offer -- 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 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.
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. Recently enacted federal financial reform
legislation significantly expands the activities permissible for firms
affiliated with a U.S. bank. This legislation may accelerate consolidation and
increase competition in the financial services industry and will enable banking
organizations to compete
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more effectively across a broad range of activities.
Consolidation Has Increased Our Need for Capital
This trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have had to commit capital to support our international
operations and to execute large global transactions.
Our Ability to Expand Internationally Will
Depend on Our Ability to Compete Successfully with Local Financial Institutions
We believe that some of our most significant challenges and opportunities
will arise outside the United States. In order to take advantage of these
opportunities, we will have to compete successfully with financial institutions
based in important non-U.S. markets, particularly in Europe. Some of these
institutions are larger and 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. 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
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downturns and, as noted above, increasing liquidity and credit risks,
particularly in Japan where we have significant exposure.
Compliance with Local Laws and Regulations May Be Difficult
In many countries, the laws and regulations applicable to the securities
and financial services industries are uncertain and evolving, and it may be
difficult for us to determine the exact requirements of local laws in every
market. Our inability to remain in compliance with local laws in a particular
foreign market could have a significant and negative effect not only on our
businesses in that market but also on our reputation generally. We are also
subject to the risk that transactions we structure might not be 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 initial public offering and the conversion of
Goldman Sachs from partnership to corporate form, the managing directors who
were profit participating limited partners received substantial amounts of
common stock in exchange for their interests in Goldman Sachs. Because these
shares of common stock were received in exchange for partnership interests,
ownership of these shares is not dependent upon these partners' continued
employment. While these shares are subject to certain restrictions on transfer
under a shareholders' agreement and under our plan of incorporation, the
transfer restrictions under the shareholders' agreement and the plan of
incorporation may 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 initial public offering may not be effective. For a
description of the compensation plan for our senior professionals that we have
implemented in connection with our initial public offering, see
"Management -- The Partner Compensation Plan".
In connection with our initial public offering and conversion of Goldman
Sachs from partnership to corporate form, employees, other than the managing
directors who were profit participating limited partners, received grants of
restricted stock units, stock options or interests in a defined contribution
plan. The incentives to attract, retain and motivate employees provided by these
awards or by future arrangements may not be as effective as the opportunity,
which existed prior to conversion, to become a partner of Goldman Sachs. See
"Management -- The Employee Initial Public Offering Awards" for a description of
these awards.
AN INVESTMENT IN INDEXED NOTES
PRESENTS SIGNIFICANT RISKS NOT ASSOCIATED
WITH OTHER TYPES OF NOTES
Indexed notes may present a high level of risk, and investors in certain
indexed notes may lose their entire investment. In addition, the treatment of
indexed notes for U.S. federal income tax purposes is often unclear due to the
absence of any authority specifically addressing the issues presented by any
particular indexed note. Thus, if you are an investor in indexed notes, you
should be capable of independently evaluating the federal income tax
consequences of purchasing an indexed note that apply in your particular
circumstances. You should also read "United States Taxation" for a discussion of
U.S. tax matters.
19
<PAGE> 22
Investors in Indexed Notes Could Lose Principal or Interest
The principal amount of an indexed note payable at maturity, and/or the
amount of interest payable on an interest payment date, will be determined by
reference to one or more stocks, including baskets of stocks, and stock indices.
We refer to each of these as an "index". The direction and magnitude of the
change in the value of the relevant index will determine the principal amount of
an indexed note payable at maturity and/or the amount of interest payable on an
interest payment date. The terms of a particular indexed note may or may not
include a guaranteed return of a percentage of the face amount at maturity or a
minimum interest rate. Thus, if you purchase an indexed note, you may lose all
or a portion of the principal you invest and may receive no interest on your
investment.
The Issuer of Index Stock Could Take Actions That May Adversely Affect an
Indexed Note
The issuer of a stock that serves as an index or part of an index for an
indexed note will have no involvement in the offer and sale of the note and no
obligations to the holder of the note. The issuer may take actions, such as a
merger or sale of assets, without regard to the interests of the holder. Any of
these actions could adversely affect the value of a note indexed to that stock
or to an index of which that stock is a component.
An Indexed Note May Be Linked to a Volatile Index, Which Could Hurt Your
Investment
Some indices are highly volatile, which means that their value may change
significantly, up or down, over a short period of time. The amount of principal
or interest that can be expected to become payable on an indexed note may vary
substantially from time to time. Because the amount of principal or interest
payable on an indexed note is generally calculated based on the value of the
relevant index on a specified date or over a limited period of time, volatility
in the index increases the risk that the return on the indexed notes may be
adversely affected by a fluctuation in the level of the relevant index.
The volatility of an index may be affected by political or economic events,
including governmental actions, or by the activities of participants in the
relevant markets. Any of these events or activities could adversely affect the
value of an indexed note.
An Index to Which a Note Is Linked Could Be Changed or Become Unavailable
Some indices may consist of or refer to several or many different stocks.
The compiler of such an index typically reserves the right to alter the
composition of the index and the manner in which the value of the index is
calculated. An alteration may result in a decrease in the value of or return on
an indexed note that is linked to the index.
An index of this kind may become unavailable due to events such as war,
natural disasters, cessation of publication of the index or a suspension or
disruption of trading in any stock on which the index is based. If an index
becomes unavailable, we may delay determining the amount payable as principal or
interest on an indexed note or we may use an alternative method to determine the
value of the unavailable index. Alternative methods of valuation are generally
intended to produce a value similar to the value resulting from reference to the
relevant index. However, it is unlikely that any alternative method of valuation
we use will produce a value identical to the value that the actual index would
produce. If we use an alternative method of valuation for a note linked to an
index of this kind, the value of the note, or the rate of return on it, may be
lower than it otherwise would be.
Some indexed notes are linked to indices that are not commonly used or have
been developed only recently. The lack of a trading history may make it
difficult to anticipate the volatility or other risks associated with an indexed
note of this kind. In addition, trading in these indices or their underlying
stocks may be limited, which could increase their volatility and decrease the
value of the related indexed notes or the rates of returns on them.
Goldman Sachs May Engage in Hedging Activities that Could Adversely Affect an
Indexed Note
In order to hedge an exposure on a particular indexed note, we may,
directly or
20
<PAGE> 23
through our affiliates, enter into transactions involving the stocks that
underlie the index for that note, or derivative instruments, such as options, on
those stocks. Transactions of this kind could affect the value of the indexed
note in a manner adverse to the investor. It is possible that we could achieve
substantial returns from our hedging transactions while the value of the indexed
note may decline.
Information About Indices May Not Be Indicative of Future Performance
If we issue an indexed note, we may include historical information about
the relevant index in the applicable prospectus supplement. Any information
about indices that we may provide will be furnished as a matter of information
only, and you should not regard the information as indicative of the range of,
or trends in, fluctuations in the relevant index that may occur in the future.
Goldman Sachs May Have Conflicts of Interest Regarding an Indexed Note
Goldman, Sachs & Co. and our other affiliates may have conflicts of
interest with respect to some indexed notes. Goldman, Sachs & Co. and our other
affiliates may engage in trading, including trading for hedging purposes, for
their proprietary accounts or for other accounts under their management, in
indexed notes and in the stocks on which the index is based or in other
derivative instruments related to the index. These trading activities could
adversely affect the value of indexed notes. We and our affiliates may also
issue or underwrite securities or derivative instruments that are linked to the
same index as one or more indexed notes. By introducing competing products into
the marketplace in this manner, we could adversely affect the value of an
indexed note.
In addition to being the calculation agent, to the extent that Goldman,
Sachs & Co. or another of our affiliates calculates or compiles a particular
index, it may have considerable discretion in performing the calculation or
compilation. Exercising discretion in this manner could adversely affect the
value of an indexed note based on the index or the rate of return on the note.
NOTES DENOMINATED IN A FOREIGN CURRENCY
MAY NOT BE AN APPROPRIATE
INVESTMENT FOR ALL INVESTORS
If you intend to invest in a note whose principal and/or interest is
payable in a currency other than U.S. dollars, you should consult your own
financial and legal advisors as to the currency risks entailed by your
investment. Notes of this kind are not an appropriate investment for investors
who are unsophisticated with respect to foreign currency transactions.
The information in this prospectus is directed primarily to investors who
are U.S. residents. Investors who are not U.S. residents should consult their
own financial and legal advisors about currency-related risks particular to
their investment.
An Investment in a Non-Dollar Note Involves Currency-Related Risks
An investment in a note with a specified currency other than U.S. dollars
entails significant risks that are not associated with a similar investment in a
note payable solely in U.S. dollars. These risks include the possibility of
significant changes in rates of exchange between the U.S. dollar and the various
foreign currencies or composite currencies and the possibility of the imposition
or modification of foreign exchange controls or other conditions by either the
U.S. or foreign governments. These risks generally depend on factors over which
we have no control, such as economic and political events and the supply of and
demand for the relevant currencies in the global markets.
Changes in Currency Exchange Rates Can Be Volatile and Unpredictable
In recent years, rates of exchange between the U.S. dollar and many other
currencies have been highly volatile, and this volatility may be expected to
continue and perhaps spread to other currencies in the future. Fluctuations in
currency exchange rates could adversely affect an investment in a note with a
specified currency other than U.S. dollars. Depreciation of the specified
currency against the U.S. dollar could result in a decrease in the U.S.
dollar-equivalent value of payments on the note, including the princi-
21
<PAGE> 24
pal payable at maturity. That in turn could cause the market value of the note
to fall. Depreciation of the specified currency against the U.S. dollar could
result in a loss to the investor on a U.S. dollar basis.
Government Policy Can Adversely Affect Currency Exchange Rates and an Investment
in a Non-Dollar Note
Currency exchange rates can either float or be fixed by sovereign
governments. From time to time, governments use a variety of techniques, such as
intervention by a country's central bank or imposition of regulatory controls or
taxes, to affect the exchange rate of their currencies. Governments may also
issue a new currency to replace an existing currency or alter the exchange rate
or exchange characteristics by devaluation or revaluation of a currency. Thus, a
special risk in purchasing non-U.S. dollar-denominated notes is that their U.S.
dollar-equivalent yields or payouts 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 country issuing the specified currency for a non-dollar note or elsewhere
could lead to significant and sudden changes in the exchange rate between the
dollar and the specified currency. These changes could affect the U.S. dollar
equivalent value of the note as participants in the global currency markets move
to buy or sell the specified currency or U.S. dollars in reaction to these
developments.
Governments have imposed from time to time and may in the future impose
exchange controls or other conditions with respect to the exchange or transfer
of a specified currency that could affect exchange rates as well as the
availability of a specified currency for a note at its maturity or on any other
payment date. In addition, the ability of a holder to move currency freely out
of the country in which payment in the currency is received or to convert the
currency at a freely determined market rate could be limited by governmental
actions.
Non-Dollar Notes Will Permit Us to Make Payments in Dollars If We Are Unable to
Obtain the Specified Currency
Notes payable in a currency other than U.S. dollars will provide that, if
the other currency is not available to us at or about the time when 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 the other
currency because of a disruption in the currency markets. If we made 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 the other currency, as of whatever
date the exchange rate was 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 amount of dollars an
investor would receive on the payment date may not reflect currency market
conditions at the time of payment. We discuss these matters below under
"Description of Notes We May Offer -- Payment Mechanics".
We Will Not Adjust Non-Dollar Notes to Compensate for Changes in Currency
Exchange Rates
Except as described above, we will not make any adjustment or change in the
terms of a note payable in a currency other than U.S. dollars in the event of
any change in exchange rates for that currency, 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 that currency, the U.S.
dollar or any other currency. Consequently, investors in non-dollar notes will
bear the risk that their investment may be adversely affected by these types of
events.
In a Lawsuit for Payment on a Non-Dollar Note, an Investor 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 denominated in a currency other than
U.S. dollars
22
<PAGE> 25
would be required to render the judgment in the specified currency; 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 a
note denominated in a currency other than U.S. dollars, investors would bear
currency exchange risk until judgment is entered, which could be a long time.
In courts outside of New York, investors may not be able to obtain judgment
in a specified currency other than U.S. dollars. For example, a judgment for
money in an action based on a non-dollar note in many other U.S. federal or
state courts ordinarily would be enforced in the United States only in U.S.
dollars. The date used to determine the rate of conversion of the currency in
which any particular note is denominated into U.S. dollars will depend upon
various factors, including which court renders the judgment.
Information About Exchange Rates May Not Be Indicative of Future Performance
If we issue a note denominated in a specified currency other than U.S.
dollars, we may include in the applicable prospectus supplement a currency
supplement that provides information about historical exchange rates for the
specified currency. Any information about exchange rates that we may provide
will be furnished as a matter of information only and you should not regard the
information as indicative of the range of, or trends in, fluctuations in
currency exchange rates that may occur in the future. That rate will likely
differ from the exchange rate used under the terms that apply to a particular
note.
23
<PAGE> 26
USE OF PROCEEDS
We intend to use the net proceeds from the sales of notes to provide
additional funds for our operations and for other general corporate purposes,
although we have not yet determined a specific use.
We will receive the net proceeds only from sales of the notes made in
connection with their original issuance. We have not received, and do not expect
to receive, any proceeds from resales of the notes by Goldman, Sachs & Co. or
any of our other affiliates in market-making transactions. We expect our
affiliates to retain the proceeds of their market-making resales and not to pay
the proceeds to us.
24
<PAGE> 27
CAPITALIZATION
The following table sets forth the consolidated capitalization of Goldman
Sachs as of November 26, 1999 on an historical basis.
The table below does not give effect to any notes we have issued or may
issue after November 26, 1999 under this medium-term note program.
This table should be read in conjunction with the consolidated financial
statements and their notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
NOVEMBER 26,
1999
------------
(in millions)
<S> <C>
Short-term borrowings, including commercial paper(1)........ $37,756
=======
Long-term borrowings
Senior debt(2)............................................ $20,586
Junior subordinated debentures(3)......................... 366
-------
Total long-term borrowings......................... 20,952
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, 441,421,899 shares issued and
outstanding(4).......................................... 4
Restricted stock units; 76,048,404 units issued and
outstanding(5).......................................... 4,339
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized, and 7,440,362 shares
issued and outstanding.................................. --
Additional paid-in capital................................ 7,359
Retained earnings......................................... 444
Unearned compensation(6).................................. (2,038)
Accumulated other comprehensive income.................... 37
-------
Total stockholders' equity......................... $10,145
-------
Total capitalization............................. $31,097
=======
</TABLE>
- ---------------
(1) Includes $10.82 billion of long-term borrowings maturing within one year.
See Note 5 to the consolidated financial statements included elsewhere in
this prospectus for further information regarding Goldman Sachs' short-term
borrowings.
(2) Includes long-term subordinated debt of Goldman, Sachs & Co. of $150
million.
(3) Represents the carrying value of junior subordinated debentures issued to
the retired limited partners as part of the incorporation transactions. See
"Certain Relationships and Related Transactions -- Incorporation
Transactions" for further information regarding the issuance of the
debentures.
(4) Common stock outstanding includes 12,660,685 shares of common stock
irrevocably contributed to our defined contribution plan. Common stock
outstanding excludes 40,359,666 shares of common stock deliverable pursuant
to the options awarded to employees on a discretionary basis. See
"Management -- The Employee Initial Public Offering Awards" for more
detailed information regarding these awards.
(5) Restricted stock units include 35,703,923 shares of common stock underlying
the restricted stock units awarded to employees for which no future service
is required as a condition to delivery of the common stock and 40,344,481
shares of common stock underlying the restricted stock units awarded to
employees for which future service is required.
(6) Unearned compensation relates to the restricted stock units awarded to
employees for which future service is required.
25
<PAGE> 28
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 27, 1998 and November 26, 1999 and for the years
ended November 28, 1997, November 27, 1998 and November 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 24, 1995, November 29, 1996 and November 28,
1997 and for the years ended November 24, 1995 and November 29, 1996 have been
derived from consolidated financial statements of Goldman Sachs not included in
this prospectus.
The pro forma data set forth below for the year ended November 26, 1999
have been derived from the pro forma data set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Pro Forma Operating Results".
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and their notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED NOVEMBER
--------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenues............................ $ 14,324 $ 17,289 $ 20,433 $ 22,478 $ 25,363
Interest expense.......................... 9,841 11,160 12,986 13,958 12,018
-------- -------- -------- -------- --------
Net revenues.............................. 4,483 6,129 7,447 8,520 13,345
Compensation and benefits(1).............. 2,005 2,421 3,097 3,838 6,459
Other operating expenses.................. 1,110 1,102 1,336 1,761 4,894(6)
-------- -------- -------- -------- --------
Pre-tax earnings(1)....................... $ 1,368 $ 2,606 $ 3,014 $ 2,921 $ 1,992(6)
======== ======== ======== ======== ========
BALANCE SHEET DATA
Total assets(2)........................... $100,066 $152,046 $178,401 $217,380 $250,491
Long-term borrowings...................... 13,358 12,376 15,667 19,906 20,952
Total liabilities(2)...................... 94,686 145,753 171,864 210,996 240,346
Partners' capital......................... 4,905 5,309 6,107 6,310 --
Stockholders' equity...................... -- -- -- -- 10,145
PRO FORMA DATA (UNAUDITED)(3)
Pro forma net earnings.................... -- -- -- -- $ 2,550
Pro forma ratio of earnings to fixed
charges(4)............................. -- -- -- -- 1.35x
</TABLE>
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<PAGE> 29
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED NOVEMBER
--------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C>
SELECTED DATA AND RATIOS (UNAUDITED)
Ratio of earnings to fixed
charges(1)(4).......................... 1.14x 1.23x 1.23x 1.21x 1.16x
Employees
United States.......................... 5,356 5,818 6,879 8,349 9,746
International.......................... 2,803 3,159 3,743 4,684 5,615
-------- -------- -------- -------- --------
Total employees(5)........................ 8,159 8,977 10,622 13,033 15,361
======== ======== ======== ======== ========
Assets under supervision
Assets under management................ $ 52,358 $ 94,599 $135,929 $194,821 $258,045
Other client assets.................... 57,716 76,892 102,033 142,018 227,424
-------- -------- -------- -------- --------
Total assets under supervision............ $110,074 $171,491 $237,962 $336,839 $485,469
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Our pre-tax earnings in 1999 reflect payments for services rendered by
managing directors who, prior to our conversion to corporate form, were
profit participating limited partners. In prior years, these payments were
accounted for as distributions of partners' capital rather than as
compensation and benefits expense. As a result, these payments are not
reflected in operating expenses in 1995, 1996, 1997 or 1998 and, therefore,
the pre-tax earnings in these years are not comparable to 1999.
(2) Total assets and liabilities were increased as of November 27, 1998 and
November 26, 1999 as a result of certain provisions of Statement of
Financial Accounting Standards No. 125.
(3) Reflects such adjustments as are necessary, in the opinion of management,
for a fair presentation of the results of operations of Goldman Sachs on a
pro forma basis. For more detailed information concerning these adjustments,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Pro Forma Operating Results".
(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 any offering of these medium-term notes subsequent
to November 26, 1999.
(5) Excludes employees of Goldman Sachs' property management subsidiaries.
Substantially all of the costs of these employees are reimbursed to Goldman
Sachs by the real estate investment funds to which these subsidiaries
provide property management services. For more detailed information
regarding our employees, see "Business -- Employees".
(6) Reflects nonrecurring expenses of $2.26 billion associated with our
conversion to corporate form and the charitable contribution to The Goldman
Sachs Foundation of $200 million made at the time of our initial public
offering.
27
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Goldman Sachs is a global investment banking and securities firm that
provides a wide range of services worldwide to a substantial and diversified
client base.
Our activities are divided into two segments:
GLOBAL CAPITAL MARKETS. This segment comprises Investment Banking, which
includes Financial Advisory and Underwriting, and Trading and Principal
Investments, which includes Fixed Income, Currency and Commodities (FICC),
Equities and Principal Investments (Principal Investments primarily represents
net revenues from our merchant banking investments); and
ASSET MANAGEMENT AND SECURITIES SERVICES. This segment comprises Asset
Management, Securities Services and Commissions.
All references to 1999, 1998 and 1997 refer to our fiscal year ended, or
the date, as the context requires, November 26, 1999, November 27, 1998 and
November 28, 1997, respectively.
When we use the terms "Goldman Sachs", "we" and "our", we mean, prior to
our conversion to corporate form, The Goldman Sachs Group, L.P., a Delaware
limited partnership, and its consolidated subsidiaries and, after our conversion
to corporate form, The Goldman Sachs Group, Inc., a Delaware corporation, and
its consolidated subsidiaries.
INITIAL PUBLIC OFFERING
On May 7, 1999, we converted from a partnership to a corporation and
completed our initial public offering. In that offering, we sold 51,000,000
shares of common stock.
BUSINESS ENVIRONMENT
We operated in a particularly favorable business environment in 1999, as
global equity and many fixed income markets recovered from the turbulent
conditions of the second half of 1998, though government bond markets in the
United States and Europe experienced a significant rise in yields. The improved
business environment provided a positive climate for our investment banking
activities, as well as for our customer-driven and proprietary trading
activities. Economic and market conditions were also favorable for wealth
creation, which contributed positively to growth in our asset management
businesses.
The macroeconomic environment in 1999 was particularly healthy in the
United States, where strong economic growth and low unemployment continued to be
combined with low levels of inflation. Major U.S. equity markets reached record
levels during the year as corporate earnings growth was strong and activity in
the new issues and mergers and acquisitions arenas increased markedly. The pace
of economic growth and the restoration of more normal conditions in financial
markets prompted the Federal Reserve to raise interest rates three times during
the second half of 1999, returning interest rates to levels in existence before
the 1998 financial market crisis.
European equity markets posted solid gains in 1999 as economic growth
improved and cross-border business combinations increased to record levels
following the introduction of the European Economic and Monetary Union (EMU) in
January. The new European Central Bank held short-term interest rates at low
levels for most of the year, despite a weakening in the euro against the U.S.
dollar. In Asia, the economic recovery in Japan resulted in an appreciation of
the yen versus the U.S. dollar and led Japanese equity markets higher. Financial
markets throughout Asia benefited from renewed economic growth in the region.
RESULTS OF OPERATIONS
The composition of our 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
28
<PAGE> 31
U.S. and global economic and market conditions. As a result, period-to-period
comparisons may not be meaningful. In addition, Goldman Sachs' conversion to
corporate form has affected, and will continue to affect, our operating results
in several significant ways:
1. FORMER PARTNER COMPENSATION. As a corporation, payments for services
rendered by managing directors who, prior to our conversion to corporate form,
were profit participating limited partners are included in compensation and
benefits expense. In prior years, these payments were accounted for as
distributions of partners' capital rather than as compensation and benefits
expense. As a result, our 1998 and 1997 compensation and benefits expense
understate the cost of doing business in corporate form.
2. ONGOING STOCK-BASED COMPENSATION. As part of compensation, restricted stock
units and other forms of stock-based compensation can be awarded to employees.
Of the total restricted stock units that were granted at the end of 1999,
approximately 50% 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 generally be recorded as compensation expense over the
four-year service period following the date of grant as follows: 52%, 28%, 14%
and 6% in years one, two, three and four, respectively.
3. AMORTIZATION OF EMPLOYEE INITIAL PUBLIC OFFERING AWARDS. We have recorded,
and will continue to record over the five-year vesting period following the date
of grant, noncash expense related to the amortization of certain restricted
stock units awarded to employees in connection with our initial public offering.
These restricted stock units had a value of $1.76 billion on the date of grant,
approximately 26% of which will be amortized as a noncash expense, after giving
effect to forfeitures, in the 12 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. See "Management -- The Employee Initial Public
Offering Awards" for a discussion of restricted stock units awarded to our
employees in connection with our initial public offering.
4. INCOME TAXES. As a corporation, our operating results have become, and will
continue to be, subject to U.S. federal, state and local corporate income taxes
and, therefore, to a higher tax rate than we incurred as a partnership. Our
effective tax rate for the period from May 7, 1999 to the end of the fiscal
year, excluding the effect of nonrecurring items, was 40%.
For a further discussion of the effect of these items on our actual and pro
forma operating results, see "-- Operating Expenses" and "-- Pro Forma Operating
Results" below and the notes to the consolidated financial statements included
elsewhere in this prospectus.
29
<PAGE> 32
OVERVIEW
The following table sets forth a summary of our financial results:
FINANCIAL OVERVIEW
(in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-------------------------------
1999(5) 1998 1997
------- ---- ----
<S> <C> <C> <C>
Net revenues...................................... $13,345 $8,520 $7,447
Pre-tax earnings(1)(2)(3)......................... 1,992 2,921 3,014
Net earnings(2)................................... 2,708 2,428 2,746
Diluted earnings per share........................ 5.57 -- --
Pro forma pre-tax earnings(4)..................... 4,250 -- --
Pro forma net earnings(4)......................... 2,550 -- --
Pro forma diluted earnings per share(4)........... 5.27 -- --
</TABLE>
- ---------------
(1) Management believes that for periods prior to our conversion to corporate
form, the best measure by which to assess Goldman Sachs' profitability is
pre-tax earnings because, as a partnership, we generally were not subject to
U.S. federal or state income taxes.
(2) Our pre-tax earnings and net earnings in 1999 were reduced by nonrecurring
items recognized in connection with our conversion to corporate form. For a
further discussion of these nonrecurring items, see "-- Operating Expenses"
and "-- Provision for Taxes" below.
(3) Our pre-tax earnings in 1999 reflect payments for services rendered by
managing directors who, prior to our conversion to corporate form, were
profit participating limited partners. In prior years, these payments were
accounted for as distributions of partners' capital rather than as
compensation and benefits expense. As a result, these payments are not
reflected in our operating expenses in 1998 or 1997 and, therefore, the
pre-tax earnings in these years are not comparable with 1999.
(4) Pro forma disclosures reflect the results of Goldman Sachs as if our
conversion to corporate form and related transactions had taken place at the
beginning of 1999. See "-- Pro Forma Operating Results" below for a
discussion of the pro forma adjustments.
(5) Includes 23 weeks as a partnership and 29 weeks as a corporation.
------------------------
1999 VERSUS 1998. Net revenues were $13.35 billion, an increase of 57%
compared with 1998. Global Capital Markets experienced significant net revenue
growth in both Trading and Principal Investments, as substantially all
components of the business recovered from the global market turmoil of the
second half of 1998, and Investment Banking, where we benefited from
unprecedented levels of activity in mergers and acquisitions and equity new
issues worldwide. Net revenues in Asset Management and Securities Services
increased 16% compared with 1998, primarily due to growth in assets under
management, increased equities commissions and higher average customer balances
in securities lending and margin lending.
Our net earnings of $2.71 billion, or $5.57 per diluted share, in 1999 were
reduced by $672 million, or $1.38 per diluted share, due to nonrecurring items
recognized in connection with our conversion to corporate form. For a further
discussion of the nonrecurring charges and benefits affecting our operating
results in 1999, see "-- Operating Expenses" and "-- Provision for Taxes" below.
1998 VERSUS 1997. Our net revenues were $8.52 billion in 1998, an increase
of 14% compared with 1997. Net revenue growth was strong in Asset Management and
Securities Services, which increased 43%, primarily due to increased equities
commissions, higher customer balances in securities lending and margin lending
and growth in assets under management. Net revenues in Global Capital Markets
increased 4% as strong net revenue growth in Investment Banking, resulting from
higher levels of mergers and acquisitions
30
<PAGE> 33
activity, was substantially offset by lower net revenues in Trading and
Principal Investments, primarily due to a 30% reduction in FICC net revenues.
Pre-tax earnings in 1998 were $2.92 billion, a 3% decrease compared with
$3.01 billion in the prior year. This decrease was due to losses incurred in our
Trading and Principal Investments business during the global market turmoil of
the second half of 1998.
The following table sets forth the net revenues, operating expenses and
pre-tax earnings of our segments:
RESULTS BY SEGMENT
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Global Capital Markets
Net revenues............................................ $10,132 $5,747 $5,513
Operating expenses...................................... 6,232 3,978 3,228
------- ------ ------
Pre-tax earnings........................................ $ 3,900 $1,769 $2,285
======= ====== ======
Asset Management and Securities Services
Net revenues............................................ $ 3,213 $2,773 $1,934
Operating expenses...................................... 2,396 1,621 1,205
------- ------ ------
Pre-tax earnings........................................ $ 817 $1,152 $ 729
======= ====== ======
Total
Net revenues............................................ $13,345 $8,520 $7,447
Operating expenses...................................... 11,353(1) 5,599 4,433
------- ------ ------
Pre-tax earnings........................................ $ 1,992 $2,921 $3,014
======= ====== ======
</TABLE>
- ---------------
(1) Includes the following expenses that have not been allocated to our
segments: (i) nonrecurring employee initial public offering awards of $2.26
billion, (ii) the ongoing amortization of employee initial public offering
awards of $268 million and (iii) a charitable contribution to The Goldman
Sachs Foundation of $200 million made at the time of our initial public
offering.
------------------------
Net revenues in our segments include allocations of interest income and
expense to specific securities, commodities and other positions in relation to
the cash generated by, or funding requirements of, the underlying positions. Net
interest is allocated to the Trading and Principal Investments component of
Global Capital Markets and the Securities Services component of Asset Management
and Securities Services. See Note 13 to the consolidated financial statements
included elsewhere in this prospectus for further information regarding our
segments.
The pre-tax earnings of our segments in 1999 reflect payments for services
rendered by managing directors who, prior to our conversion to corporate form,
were profit participating limited partners. In prior years, these payments were
accounted for as distributions of partners' capital rather than as compensation
and benefits expense. As a result, these payments are not reflected in the
operating expenses of our segments in 1998 and 1997 and, therefore, the pre-tax
earnings of our segments in these years are not comparable with 1999.
GLOBAL CAPITAL MARKETS
The components of the Global Capital Markets segment are set forth below:
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
31
<PAGE> 34
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.
TRADING AND PRINCIPAL INVESTMENTS. Our Trading and Principal Investments
business facilitates transactions with a diverse group of corporations,
financial institutions, governments and individuals and takes proprietary
positions through market making in and trading of fixed income and equity
products, currencies, commodities, and swaps and other derivatives. Trading and
Principal Investments is divided into three categories:
- - FICC. We make markets in and trade fixed income products, currencies and
commodities, structure and enter into a wide variety of derivative
transactions, and engage in proprietary trading and arbitrage activities;
- - EQUITIES. We make markets in and trade equities and equity-related products,
structure and enter into equity derivative transactions, and engage in
proprietary trading and equity arbitrage; and
- - PRINCIPAL INVESTMENTS. Principal Investments primarily represents net
revenues from our merchant banking investments.
Net revenues from Principal Investments do not include management fees and
the increased share of the income and gains from our merchant banking funds to
which Goldman Sachs is entitled when the return on investments exceeds certain
threshold returns to fund investors. These management fees and increased shares
of income and gains are included in the net revenues of Asset Management and
Securities Services.
Substantially all of our inventory is marked-to-market daily and,
therefore, its value and our net revenues are subject to fluctuations based on
market movements. In addition, net revenues derived from our principal
investments in privately held concerns and in real estate may fluctuate
significantly depending on the revaluation or sale of these investments in any
given period.
The following table sets forth the net revenues of our Global Capital
Markets segment:
GLOBAL CAPITAL MARKETS NET REVENUES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Financial Advisory.................................... $ 2,270 $1,774 $1,184
Underwriting.......................................... 2,089 1,594 1,403
------- ------ ------
Investment Banking.................................... 4,359 3,368 2,587
------- ------ ------
FICC.................................................. 2,862 1,438 2,055
Equities.............................................. 1,961 795 573
Principal Investments................................. 950 146 298
------- ------ ------
Trading and Principal Investments..................... 5,773 2,379 2,926
------- ------ ------
Total................................................. $10,132 $5,747 $5,513
======= ====== ======
</TABLE>
------------------------
1999 VERSUS 1998. Net revenues in Global Capital Markets were $10.13
billion, an increase of 76% compared with 1998, reflecting substantial growth in
all major components of the business. Pre-tax earnings were $3.90 billion in
1999 compared with $1.77 billion in 1998. Operating expenses increased 57%,
principally due to the inclusion of compensation expense related to services
rendered by managing directors who, prior to our conversion to corporate form,
were profit participating limited partners, higher levels of incentive
compensation commensurate with growth in net revenues, and increased costs
32
<PAGE> 35
associated with global expansion and higher levels of business activity.
INVESTMENT BANKING. Investment Banking generated net revenues of $4.36
billion for the full year, a 29% increase over 1998. Net revenue growth was
strong in both Financial Advisory and Underwriting as our global presence and
strong client base enabled us to capitalize on record levels of global mergers
and acquisitions and new issue activity. Net revenue growth was driven by strong
performances across all regions, particularly in the communications, media and
entertainment, high technology, energy and power, and healthcare sectors.
Financial Advisory revenues increased 28% compared with 1998. Goldman Sachs
maintained its leading position in the advisory business and benefited from an
increase in mergers and acquisitions activity across many industry sectors, in
both Europe and the United States. Worldwide mergers and acquisitions activity
rose to record levels with transactions valued at over $3 trillion announced
during the period from January 1, 1999 to November 30, 1999.(1) Underwriting
revenues increased 31% compared with 1998. Equity underwriting revenues
benefited from favorable global economic conditions, which led major equity
market indices higher and new issue activity to record levels. Our debt
underwriting business generally benefited from a more stable economic
environment in 1999.
TRADING AND PRINCIPAL INVESTMENTS. Net revenues in Trading and Principal
Investments were $5.77 billion compared with $2.38 billion in 1998, as
substantially all components of the business recovered from the global market
turmoil of the second half of 1998.
Net revenues in FICC nearly doubled compared with 1998, primarily due to
growth in our credit-sensitive businesses and commodities that was partially
offset by lower net revenues in currencies. The credit-sensitive businesses
(which include high-yield debt, bank loans and investment-grade corporate debt)
benefited from improved economic conditions as credit spreads and market
liquidity returned to more normal levels following the dislocation experienced
during the second half of 1998. Net revenue growth in commodities benefited from
increased customer activity, while reduced activity and volatility in the global
foreign exchange markets contributed to a decline in net revenues from
currencies.
The significant net revenue growth in Equities was primarily due to
strength in arbitrage and convertibles and increased customer flow in
derivatives and global shares. Net revenue growth in arbitrage and convertibles
was driven by improved market conditions following the turmoil in global markets
during the second half of 1998 and by increased mergers and acquisitions and
other corporate activity. Equity derivatives net revenues were substantially
higher primarily as a result of increased customer activity worldwide. Increased
transaction volumes in global equity markets contributed to the net revenue
growth in our global shares businesses.
Net revenues from Principal Investments increased dramatically due to
mark-to-market gains on certain merchant banking investments, particularly in
the high technology and telecommunications sectors.
1998 VERSUS 1997. Net revenues in Global Capital Markets were $5.75
billion, an increase of 4% compared with 1997, as strong net revenue growth in
Investment Banking was substantially offset by a reduction in net revenues in
Trading and Principal Investments. Pre-tax earnings were $1.77 billion in 1998,
a 23% decrease compared with 1997, as many of our businesses were adversely
affected by market conditions from mid-August 1998 to mid-October 1998.
Operating expenses increased 23%, primarily due to increased compensation
related to growth in employment levels and additional expenses associated with
temporary staff and consultants.
INVESTMENT BANKING. Investment Banking achieved net revenues of $3.37
billion in 1998, an increase of 30% compared with 1997. Net revenue growth was
strong in
- ---------------
(1) Source: Thomson Financial Securities Data, formerly known as Securities Data
Company.
33
<PAGE> 36
Financial Advisory and, to a lesser extent, in Underwriting as we capitalized on
higher levels of activity in many industry groups, including communications,
media and entertainment, financial institutions, general industrials and retail.
Net revenue growth in Investment Banking was strong in all major regions in 1998
compared with the prior year.
Financial Advisory revenues increased 50% compared with 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.
TRADING AND PRINCIPAL INVESTMENTS. Net revenues in Trading and Principal
Investments were $2.38 billion in 1998, a decrease of 19% compared with 1997.
This decrease in net revenues was concentrated in the second half of the year,
when 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. 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 with 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 with 1997 as higher net
revenues in derivatives and European shares were partially offset by losses in
equity arbitrage. The derivatives business generated significantly higher net
revenues due, in part, to strong customer demand for over-the-counter products,
particularly in Europe. Net revenues from European shares increased as Goldman
Sachs benefited from generally favorable equity markets and increased customer
demand. The equity arbitrage losses were due principally to the underperformance
of various equity positions versus their benchmark hedges, to widening of
spreads in a variety of relative value trades, and to lower prices for
event-oriented securities resulting from a reduction in announced mergers and
acquisitions and other corporate activity in the second half of 1998.
Net revenues from Principal Investments declined 51% compared with 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 with the prior year.
ASSET MANAGEMENT AND SECURITIES SERVICES
The components of the Asset Management and Securities Services segment are
set forth below:
- - ASSET MANAGEMENT. Asset Management generates management fees by providing
investment advisory services to a diverse client base of institutions and
individuals;
- - SECURITIES SERVICES. Securities Services includes prime brokerage, financing
services and securities lending, and our matched book businesses, all of which
generate revenue primarily in the form of fees or interest rate spreads; and
- - COMMISSIONS. Commissions includes agency transactions for clients on major
stock and futures exchanges and revenues from the increased share of the
income and gains derived from our merchant banking funds.
34
<PAGE> 37
The following table sets forth the net revenues of our Asset Management and
Securities Services segment:
ASSET MANAGEMENT AND SECURITIES SERVICES NET REVENUES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Asset Management....................................... $ 919 $ 675 $ 458
Securities Services.................................... 772 730 487
Commissions............................................ 1,522 1,368 989
------ ------ ------
Total.................................................. $3,213 $2,773 $1,934
====== ====== ======
</TABLE>
------------------------
Our assets under supervision consist 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 consist of assets in
brokerage accounts of primarily high-net-worth individuals, on which we earn
commissions.
The following table sets forth our assets under supervision:
ASSETS UNDER SUPERVISION
(in millions)
<TABLE>
<CAPTION>
AS OF NOVEMBER
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Assets under management......................... $258,045 $194,821 $135,929
Other client assets............................. 227,424 142,018 102,033
-------- -------- --------
Total........................................... $485,469 $336,839 $237,962
======== ======== ========
</TABLE>
------------------------
1999 VERSUS 1998. Net revenues in Asset Management and Securities Services
were $3.21 billion, an increase of 16% compared with 1998. All major components
of the business contributed to the net revenue growth in 1999. Pre-tax earnings
in Asset Management and Securities Services were $817 million in 1999 compared
with $1.15 billion in 1998. Operating expenses increased, principally due to the
inclusion of compensation expense related to services rendered by managing
directors who, prior to our conversion to corporate form, were profit
participating limited partners and increased costs associated with the
continuing expansion of the business.
Asset Management revenues increased 36%, primarily reflecting a 32%
increase in average assets under management as well as favorable changes in the
composition of assets managed. In 1999, approximately 55% of the increase in
assets under management was attributable to net asset inflows, with the
remaining 45% reflecting market appreciation. Securities Services net revenues
increased 6%, due to higher average customer balances in securities lending and
margin lending, partially offset by reduced spreads in our fixed income matched
book. Commissions rose by 11% as fees earned on higher transaction volumes in
global equity markets were partially offset by a reduction in our increased
share of gains from our merchant banking funds.
1998 VERSUS 1997. Net revenues in Asset Management and Securities Services
were $2.77 billion in 1998, an increase of 43% compared with 1997. All major
components of
35
<PAGE> 38
the segment exhibited strong net revenue growth. Pre-tax earnings were $1.15
billion in 1998, an increase of 58% compared with 1997. Operating expenses
increased 35% as higher employment levels led to increased compensation and
benefits expenses.
Asset Management revenues increased 47% during this period, reflecting a
41% increase in average assets under management compared with 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. Commissions 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 Commissions.
OPERATING EXPENSES
In recent years, our operating expenses have increased as a result of
numerous factors, including higher levels of employment and 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.
Our operating expenses in 1999, excluding the nonrecurring charges
associated with our initial public offering, increased significantly in part
because, as a corporation, payments for services rendered by managing directors
who, prior to our conversion to corporate form, were profit participating
limited partners are included in compensation and benefits expense. In prior
years, these payments were accounted for as distributions of partners' capital
rather than as compensation and benefits expense. As a result, our 1998 and 1997
compensation and benefits expense understate the cost of doing business in
corporate form.
The following table sets forth our operating expenses and number of
employees:
OPERATING EXPENSES AND EMPLOYEES
($ in millions)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Compensation and benefits, excluding employee
initial public offering awards.................... $ 6,459 $3,838 $3,097
Nonrecurring employee initial public offering
awards(1)......................................... 2,257 -- --
Amortization of employee initial public offering
awards............................................ 268 -- --
Brokerage, clearing and exchange fees............... 446 424 357
Market development.................................. 364 287 206
Communications and technology....................... 306 265 208
Depreciation and amortization....................... 337 242 178
Occupancy........................................... 314 207 168
Professional services and other..................... 402 336 219
Charitable contribution............................. 200 -- --
------- ------- -------
Total operating expenses............................ $11,353 $5,599 $4,433
======= ======= =======
Employees at year end(2)............................ 15,361 13,033 10,622
</TABLE>
- ---------------
(1) Includes expense of $666 million related to the initial irrevocable
contribution of shares of common stock to a defined contribution plan.
(2) Excludes employees of Goldman Sachs' property management subsidiaries.
Substantially all of the costs of these employees are reimbursed to Goldman
Sachs by the real estate investment funds to which these subsidiaries
provide property management services. For more detailed information
regarding our employees, see "Business -- Employees".
36
<PAGE> 39
1999 VERSUS 1998. Operating expenses were $11.35 billion in 1999, a
substantial increase over 1998, primarily due to nonrecurring charges associated
with Goldman Sachs' conversion to corporate form and related transactions, the
inclusion of compensation expense related to services rendered by managing
directors who were profit participating limited partners, higher levels of
compensation commensurate with higher net revenues and amortization of employee
initial public offering awards. The nonrecurring charges included $2.26 billion
for employee initial public offering awards and $200 million for the charitable
contribution to The Goldman Sachs Foundation made at the time of our initial
public offering.
Compensation and benefits expense was $6.46 billion, an increase of 68%
compared with 1998. The ratio of compensation and benefits to net revenues was
48% in 1999. Employment levels increased 18% during the year, reflecting growth
in our core businesses. Expenses associated with our temporary staff and
consultants were $430 million in 1999, an increase of 30% compared with 1998,
reflecting increased global expansion and consulting costs associated with
technology initiatives, including preparations for the Year 2000.
Brokerage, clearing and exchange fees increased 5%, primarily due to higher
transaction volumes in equity derivatives, U.S. and European equities, and
commodities. Market development expenses increased 27%, principally due to
higher levels of business activity and increased spending on advertising.
Communications and technology expenses increased 15%, reflecting higher
telecommunications and market data costs associated with growth in employment
levels and additional spending on technology initiatives, including preparations
for the Year 2000. Depreciation and amortization increased 39%, due to
additional capital expenditures on leasehold improvements and technology-related
and telecommunications equipment in support of higher levels of business
activity. Occupancy expenses increased 52%, reflecting additional office space
needed to accommodate growth in employment levels. Professional services and
other expenses increased 20% due to Goldman Sachs' increased business activity.
1998 VERSUS 1997. Operating expenses were $5.60 billion in 1998, an
increase of 26% over 1997, primarily due to increased compensation and benefits
expense.
Compensation and benefits increased as a percentage of net revenues to 45%
from 42% in 1997, principally as a result of increases in employment levels and
in expenses associated with temporary staff and consultants. Employment levels
increased 23% during the year, with particularly strong growth in asset
management. Expenses associated with our temporary staff and consultants were
$330 million in 1998, an increase of 85% compared with 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 EMU.
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.
PROVISION FOR TAXES
The net tax benefit of $716 million in 1999 included nonrecurring net
benefits of $1.78 billion recognized during the second quarter. These
nonrecurring net benefits included $825 million related to our conversion to
corporate form, $880 million related to the granting of employee initial public
offering
37
<PAGE> 40
awards and $80 million related to the contribution of $200 million to The
Goldman Sachs Foundation made at the time of our initial public offering.
Goldman Sachs' effective tax rate for the period from May 7, 1999 to the end of
1999, excluding the effect of these nonrecurring items, was 40%. Our effective
tax rate can vary from year to year depending on, among other factors, the
geographic and business mix of our earnings. See Note 11 to the consolidated
financial statements included elsewhere in this prospectus for further
information regarding our provision for taxes.
Prior to our conversion to corporate form, we generally were not subject to
U.S. federal and state income taxes. As a partnership, we were primarily subject
to local unincorporated business taxes and taxes in non-U.S. jurisdictions on
certain of our operations.
PRO FORMA OPERATING RESULTS
The following table sets forth our pro forma condensed consolidated
statement of earnings for the year ended November 1999:
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 1999
---------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
<S> <C> <C> <C>
Total revenues............................. $25,363 $ -- $25,363
Interest expense........................... 12,018 7(a) 12,025
------- -------- -------
Revenues, net of interest expense........ 13,345 (7) 13,338
Compensation and benefits, excluding
employee initial public offering
awards................................... 6,459 -- 6,459
Nonrecurring employee initial public
offering awards.......................... 2,257 (2,257)(b) --
Amortization of employee initial public
offering awards.......................... 268 192(c) 460
Other operating expenses................... 2,369 (200)(d) 2,169
------- -------- -------
Total operating expenses......... 11,353 (2,265) 9,088
Pre-tax earnings........................... 1,992 2,258 4,250
(Benefit)/provision for taxes.............. (716) 2,416(e) 1,700
------- -------- -------
Net earnings............................... $ 2,708 $ (158) $ 2,550
======= ======== =======
Ratio of earnings to fixed charges......... 1.16x 1.35x
Average common shares outstanding
Basic.................................... 475,883,756 (505,283)(f) 475,378,473
Diluted.................................. 485,803,960 (1,877,905)(g) 483,926,055
Earnings per share
Basic.................................... $5.69 $5.36
Diluted.................................. 5.57 5.27
</TABLE>
------------------------
BASIS OF PRESENTATION. The pro forma condensed consolidated statement of
earnings was prepared as if our conversion to corporate form and related
transactions had taken place at the beginning of 1999.
For purposes of calculating 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.
The pro forma adjustments are based upon available information and certain
as-
38
<PAGE> 41
sumptions that management believes are reasonable. The pro forma condensed
consolidated statement of earnings and accompanying notes should be read in
conjunction with the consolidated financial statements and their notes.
The pro forma condensed consolidated statement of earnings is not
necessarily indicative of the results of operations that might have occurred had
our conversion to corporate form and related transactions actually taken place
at the beginning of 1999, or that may be expected to occur in the future.
NOTES TO PRO FORMA ADJUSTMENTS
(a) Adjustment to reflect the additional interest expense on junior
subordinated debentures issued to retired limited partners in exchange for their
interests in The Goldman Sachs Group, L.P. and certain affiliates.
(b) Adjustment to eliminate the nonrecurring effect of the expense related
to restricted stock units, awarded to employees in connection with our
conversion to corporate form, for which future service is not required as a
condition to the delivery of the underlying common stock, and the initial
irrevocable contribution of shares of common stock to our defined contribution
plan. For a description of the restricted stock units and the contribution to
our defined contribution plan, see "Management -- The Employee Initial Public
Offering Awards".
(c) Adjustment to reflect additional amortization for the full fiscal year
related to certain restricted stock units awarded to employees in connection
with our conversion to corporate form, which vest in equal installments in years
three, four and five following the date of grant (May 7, 1999). These restricted
stock units had a value of $1.76 billion at date of grant, approximately 26% of
which will be amortized as a noncash expense, after giving effect to
forfeitures, in the 12 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. For a description of the restricted stock units, see
"Management -- The Employee Initial Public Offering Awards".
(d) Adjustment to eliminate the expense related to the charitable
contribution to The Goldman Sachs Foundation made at the time of our initial
public offering.
(e) Adjustment to reflect a pro forma provision for taxes for Goldman Sachs
in corporate form at an effective tax rate of 40%.
(f) Adjustment to reflect the effect of share activity, primarily related
to the acquisition of The Hull Group in September 1999, which is averaged over
the period beginning on May 4, 1999 (the day trading in our common stock
commenced) for actual purposes, and over the entire year for pro forma purposes.
(g) Adjustment to diluted average common shares outstanding, which includes
both common stock and nonvoting common stock outstanding, to reflect the
additional dilutive effect of the common stock deliverable pursuant to the
restricted stock units and stock options, awarded to employees in connection
with our conversion to corporate form, for which future service is required as a
condition to the delivery of the underlying common stock. For purposes of
calculating pro forma diluted average common shares outstanding, we used the
initial public offering price of $53 per share from the beginning of 1999 until
May 4, 1999. Thereafter, we used actual daily closing prices.
GEOGRAPHIC DATA
For a summary of the net revenues, pre-tax earnings and identifiable assets
of Goldman Sachs by geographic region, see Note 13 to the consolidated financial
statements included elsewhere in this prospectus.
CASH FLOWS
Our cash flows are primarily related to the operating and financing
activities undertaken in connection with our trading and market-making
transactions.
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<PAGE> 42
YEAR ENDED NOVEMBER 1999. Cash and cash equivalents increased to $3.06
billion in 1999. Cash of $12.59 billion was used for operating activities,
primarily to fund higher net trading assets due to increased levels of business
activity. Cash of $654 million was used for investing activities, primarily for
the purchase of telecommunications and technology-related equipment, leasehold
improvements and the acquisition of The Hull Group in September 1999. Financing
activities provided $13.46 billion of cash, reflecting an increase in long-term
borrowings and net repurchase agreements, and proceeds from the issuance of
common stock.
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.
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.
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 our 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
seeks to maintain diversified funding sources with both banks and nonbank
lenders globally. Management believes that Goldman Sachs' relationships with its
lenders are critical to its liquidity.
Goldman Sachs also has access to diversified funding sources with numerous
creditors, including banks, insurance companies, mutual funds, bank trust
departments and other asset managers. We monitor our creditors to maintain broad
and diversified credit.
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<PAGE> 43
We access liquidity in a variety of markets in the United States as well as
in Europe and Asia. We make extensive use of the repurchase agreement markets
and have raised debt publicly as well as in the private placement and commercial
paper markets, and through Eurobonds, money broker loans, commodity-based
financings, letters of credit and promissory notes. We seek to structure our
liabilities to avoid significant amounts of debt coming due on any one day or
during any single week or year. In addition, we maintain and update annually a
liquidity crisis plan that provides guidance in the event of a liquidity crisis.
The annual update of this plan is reviewed and approved by our Finance
Committee.
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. A substantial portion of our inventory turns over rapidly and is
marked-to-market daily. We maintain long-term borrowings and stockholders'
equity substantially in excess of our less liquid assets.
DYNAMIC LIQUIDITY MANAGEMENT. Goldman Sachs seeks to manage the composition
of its asset base and the maturity profile of its funding to ensure that it can
liquidate its assets prior to its liabilities coming due, even in times of
liquidity stress. We have traditionally been able to fund our liquidity needs
through security-based and collateralized funding, such as repurchase
transactions and securities lending, as well as short-term and long-term
borrowings and equity capital. To further evaluate the adequacy of our liquidity
management policies and guidelines, we perform weekly "stress funding"
simulations of disruptions to our access to unsecured credit.
EXCESS LIQUIDITY. In addition to maintaining a highly liquid balance sheet
and a significant amount 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
$17.99 billion during 1999 and $14.17 billion during 1998.
LIQUIDITY RATIO MAINTENANCE. It is Goldman Sachs' policy to further manage
its liquidity by maintaining a "liquidity ratio" of at least 100%. This ratio
measures the relationship between the loan value of our unencumbered assets and
our short-term unsecured liabilities. The maintenance of this liquidity ratio is
intended to ensure that we could fund our positions on a fully secured basis in
the event that we were unable to replace our unsecured debt maturing within one
year. Under this policy, we seek to maintain unencumbered assets in an amount
that, if pledged or sold, would provide the funds necessary to replace unsecured
obligations that are scheduled to mature (or where holders have the option to
redeem) within the coming year.
INTERCOMPANY FUNDING. Most of the liquidity of Goldman Sachs is raised by
the parent company, The Goldman Sachs Group, Inc. The parent company then lends
the necessary funds to its subsidiaries and affiliates. We carefully manage our
intercompany exposure by generally requiring intercompany loans to have
maturities equal to or shorter than the maturities of the aggregate borrowings
of the parent company. This policy ensures that the subsidiaries' obligations to
the parent company will generally mature in advance of the parent company's
third-party long-term borrowings. In addition, many of the advances made to our
subsidiaries and affiliates are secured by marketable securities or other liquid
collateral. We generally fund our equity investments in subsidiaries with equity
capital.
THE BALANCE SHEET
Goldman Sachs maintains a highly liquid balance sheet that fluctuates
significantly between financial statement dates. In the fourth quarter of 1998,
we temporarily decreased our total assets to reduce risk and increase liquidity
in response to difficult conditions in the global financial markets.
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<PAGE> 44
The following table sets forth our total assets, adjusted assets, leverage
ratios and book value per share:
<TABLE>
<CAPTION>
AS OF NOVEMBER
----------------------
1999 1998
---- ----
($ in billions, except
per share amounts)
<S> <C> <C>
Total assets............................................. $ 250 $ 217
Adjusted assets(1)....................................... 188 145
Leverage ratio(2)........................................ 24.7x 34.5x
Adjusted leverage ratio(3)............................... 18.5x 23.0x
Book value per share(4).................................. $20.94 --
</TABLE>
- ---------------
(1) Adjusted assets represent total assets less securities purchased under
agreements to resell, certain securities borrowed transactions and the
increase in total assets related to certain provisions of Statement of
Financial Accounting Standards No. 125.
(2) Leverage ratio equals total assets divided by equity capital.
(3) Adjusted leverage ratio equals adjusted assets divided by equity capital.
(4) Book value per share was based on common shares outstanding, including
restricted stock units granted to employees with no future service
requirements, of 484,566,184 as of November 1999.
------------------------
As of November 1999 and November 1998, we held $2.62 billion and $2.21
billion, respectively, in high-yield debt and emerging market securities and
$1.80 billion and $1.59 billion, respectively, in bank loans. 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 November 1999, the aggregate carrying value of our principal
investments held directly or through our merchant banking funds was $2.88
billion, which consisted of corporate principal investments with an aggregate
carrying value of $1.95 billion and real estate investments with an aggregate
carrying value of $928 million.
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 1999, our consolidated long-term borrowings were $20.95
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 1999 was
approximately five 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 consolidated financial statements included
elsewhere in this prospectus 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 U.K. broker-dealer, is
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<PAGE> 45
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, such
as the Bundesbank of Germany. Compliance with the rules of these regulators may
prevent us from receiving distributions, advances or repayment of liabilities
from these subsidiaries. See "Business -- Regulation" and Note 12 to the
consolidated financial statements included elsewhere in this prospectus for
further information regarding our regulated subsidiaries.
RISK MANAGEMENT
Goldman Sachs has a comprehensive risk management process to monitor,
evaluate and manage the principal risks assumed in conducting its activities.
These risks include market, credit, liquidity, operational, legal and
reputational exposures.
RISK MANAGEMENT STRUCTURE
Goldman Sachs seeks to monitor and control its risk exposure through a
variety of separate but complementary financial, credit, operational and legal
reporting systems. We believe that we have effective procedures for evaluating
and managing the market, credit and other risks to which we are exposed.
Nonetheless, the effectiveness of our policies and procedures for managing risk
exposure can never be completely or accurately predicted or fully assured. For
example, unexpectedly large or rapid movements or disruptions in one or more
markets or other unforeseen developments can have a material adverse effect on
our results of operations and financial condition. The consequences of these
developments can include losses due to adverse changes in inventory values,
decreases in the liquidity of trading positions, higher volatility in our
earnings, increases in our credit exposure 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 are responsible for establishing
trading limits, for monitoring adherence to these limits and for general
oversight of our risk management process. These committees, which are described
below, meet regularly and consist of senior members of both our
revenue-producing units and departments that are independent of our
revenue-producing units.
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:
- - 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
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<PAGE> 46
- - 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 analyses. The Asset Management Control Oversight
and the Asset Management Risk committees oversee various operational, credit,
pricing and business practice issues.
GLOBAL COMPLIANCE AND CONTROL COMMITTEE. The Global Compliance and Control
Committee provides 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.
Segregation of duties and management oversight are fundamental elements of
our risk management process. In addition to the committees described above,
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. Furthermore,
the Controllers Department, in conjunction with the Firmwide Risk Department,
independently reviews, on a regular basis, internal valuation models and the
pricing of positions determined by individual business units.
RISK LIMITS
Business unit risk limits are established by the various risk committees
and may be further allocated 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.
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.
Categories of market risk include exposures to interest rates, currency
rates, equity prices and commodity prices.
A description of each market risk category is set forth below:
- - 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.
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<PAGE> 47
- - 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 (VaR);
- - risk limits based on a scenario analysis that measures the potential effect on
our trading net revenues of a significant widening of credit spreads;
- - inventory position limits for selected business units and country exposures;
and
- - scenario analyses that measure the potential effect on our trading net
revenues of abnormal market movements.
We also estimate the broader potential impact of certain macroeconomic
scenarios, including a sustained 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 market movements 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 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.
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
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<PAGE> 48
accurate predictions of future market risk.
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. Nonlinear risk exposures on
options and the potentially mitigating impact of intraday changes in related
hedges would likely produce nonnormal asset returns. Different distributional
assumptions could produce a materially different VaR.
The following table sets forth the daily VaR for substantially all of our
trading positions:
DAILY VaR
(in millions)
<TABLE>
<CAPTION>
AS OF NOVEMBER YEAR ENDED NOVEMBER 1999
--------------- ------------------------
RISK CATEGORIES 1999 1998 AVERAGE HIGH LOW
- --------------- ---- ---- ------- ---- ---
<S> <C> <C> <C> <C> <C>
Interest rates.......................... $ 13 $ 27 $ 23 $35 $10
Currency rates.......................... 4 9 9 25 4
Equity prices........................... 18 25 23 37 18
Commodity prices........................ 12 7 9 13 3
Diversification effect(1)............... (22) (25) (25) -- --
---- ---- ----
Firmwide................................ $ 25(2) $ 43 $ 39 56 23
==== ==== ====
</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.
(2) Not necessarily indicative of future VaR levels.
------------------------
The following chart sets forth the daily VaR for substantially all of our
trading positions during 1999:
FIRMWIDE VAR
[CHART APPEARS HERE]
Description of VaR Chart: Depicted on page 46 of the registration statement
is a chart setting forth the daily VaR for substantially all of our trading
positions during 1999. The horizontal axis is marked to indicate the start of
each fiscal quarter. The vertical axis is marked to indicate VaR in millions of
dollars. The values displayed in the chart start the fiscal year at $43 million,
and end the fiscal year at $25 million. The maximum VaR, of approximately $56
million, was reached on February 16, 1999, and the minimum VaR, of approximately
$23 million, was reached on November 24, 1999.
------------------------
The general decline in our VaR during 1999 reflects lower levels of market
volatility and a decrease in trading exposures, particularly with respect to
interest rates. As described above, the historical data used to estimate VaR is
weighted to give greater
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importance to more recent observations and,
accordingly, our VaR levels in the beginning of 1999 were significantly affected
by the market turmoil of the second half of 1998.
TRADING NET REVENUES DISTRIBUTION
Substantially all of our inventory positions are marked-to-market on a
daily basis and changes are recorded in net revenues.
The following chart sets forth the frequency distribution for substantially
all of our daily trading net revenues for the year ended November 1999:
DAILY TRADING REVENUES
<TABLE>
<CAPTION>
DAILY TRADING NET REVENUES ($ IN MILLIONS) NUMBER OF DAYS
- ------------------------------------------ --------------
<S> <C>
Less than (20).............................................. 2
(20)-(10)................................................... 6
(10)-0...................................................... 19
0-10........................................................ 40
10-20....................................................... 58
20-30....................................................... 60
30-40....................................................... 40
40-50....................................................... 17
Greater than 50............................................. 9
</TABLE>
------------------------
As part of our overall risk control process, daily trading net revenues are
compared with the VaR calculated as of the end of the prior business day. During
1999, trading losses incurred on a single day exceeded our 95% one-day VaR on
only one occasion.
NONTRADING RISK
The market risk on our nontrading financial instruments, including our
merchant banking investments, is measured using a sensitivity analysis that
estimates the potential reduction in our net revenues associated with a 10%
decline in the S&P 500. This sensitivity analysis is based on certain
assumptions regarding the relationship between changes in the S&P 500 and
changes in the fair value of the individual nontrading financial instruments.
Different assumptions could produce materially different risk estimates. As of
November 1999, our nontrading market risk was approximately $200 million.
CREDIT RISK
Credit risk represents the loss that we would incur if a counterparty, or
an issuer of securities or other instruments we hold, fails to perform under 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. In addition, we attempt to further reduce
credit risk by entering into agreements that enable us to obtain collateral from
a counterparty or to terminate or reset the terms of transactions after
specified time periods or upon the occurrence of credit-related events, by
seeking third-party guarantees of the counterparty's obligations, and through
the use of credit derivatives.
For most businesses, counterparty credit limits are established by the
Credit Department, which is independent of the revenue-producing departments,
based on guidelines
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<PAGE> 50
set by the Firmwide Risk and Credit Policy committees. For most products, we
measure and limit credit exposures by reference to both current and potential
exposure. We measure potential exposure based on projected worst-case market
movements over the life of a transaction within a 95% confidence interval. We
further seek to measure credit exposure through the use of scenario analyses and
other quantitative tools. 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, including the Firmwide Risk and Credit Policy committees, with
information regarding overall credit risk by product, industry sector, country
and region.
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 nontrading 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
nonderivative 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 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 credit exposure with respect to over-the-counter
derivatives as of November 1999, after taking into consideration the effect of
netting agreements. The categories shown reflect our internally determined
public rating agency equivalents.
OVER-THE-COUNTER DERIVATIVE CREDIT EXPOSURES
($ in millions)
<TABLE>
<CAPTION>
PERCENTAGE OF
COLLATERAL EXPOSURE EXPOSURE
CREDIT RATING EQUIVALENT EXPOSURE HELD(2) NET OF COLLATERAL NET OF COLLATERAL
- ------------------------ -------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
AAA/Aaa............................... $ 2,603 $ 452 $ 2,151 11%
AA/Aa2................................ 5,132 557 4,575 24
A/A2.................................. 9,663 2,211 7,452 39
BBB/Baa2.............................. 3,246 516 2,730 14
BB/Ba2 or lower....................... 2,618 625 1,993 11
Unrated(1)............................ 2,486 2,228 258 1
------- ------ ------- ---
$25,748 $6,589 $19,159 100%
======= ====== ======= ===
</TABLE>
- ---------------
(1) In lieu of making an individual assessment of the credit of unrated
counterparties, we make a determination that the collateral held in respect
of such obligations is sufficient to cover a substantial portion of our
exposure. In making this determination, we take into account various
factors, including legal uncertainties and market volatility.
(2) Collateral consists predominantly of cash and U.S. government and agency
securities and is usually received under agreements entitling Goldman Sachs
to require additional collateral upon specified increases in exposure or the
occurrence of adverse credit events.
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<PAGE> 51
Derivative 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 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 Information Technology in creating systems to enable
appropriate supervision and management of its policies. The Global Operations
Department is also responsible, together with other areas of Goldman Sachs,
including the Legal and Compliance departments, for ensuring compliance with
applicable regulations with respect to the clearance and settlement of
transactions and the margining of positions. The Network Management Department
oversees our relationships with our clearance and settlement agents, regularly
reviews agents' performance and meets with these agents to review operational
issues.
YEAR 2000. Goldman Sachs has dedicated resources over the past several
years to address the potential hardware, software, and other computer and
technology issues and related concerns associated with the transition to the
Year 2000 and to confirm that our service providers took similar measures. As a
result of those efforts, we have not experienced any material disruptions in our
operations in connection with, or following, the transition to the Year 2000. We
currently estimate that our Year 2000 costs will total approximately $185
million, of which $170 million had been spent through November 1999.
ACCOUNTING DEVELOPMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of Financial Accounting
Standards Board Statement No. 133 -- an amendment of Financial Accounting
Standards Board Statement No. 133", which deferred to fiscal years beginning
after June 15, 2000 the effective date of the accounting and reporting
requirements of Statement of Financial Accounting Standards No. 133. 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 the provisions of Statement of
Financial Accounting Standards No. 133 deferred by Statement of Financial
Accounting Standards No. 137 in fiscal 2001 and are currently assessing their
effect.
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
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<PAGE> 52
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 previously expensed
the cost of all software development in the period it was incurred. The adoption
of Statement of Position No. 98-1 is not expected to have a material effect on
our results of operations or financial condition. We intend to adopt the
provisions of Statement of Position No. 98-1 in fiscal 2000.
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<PAGE> 53
BUSINESS
OVERVIEW
Goldman Sachs is a leading global investment banking and securities firm
that provides a wide range of services worldwide to a substantial and
diversified client base that includes corporations, financial institutions,
governments and high-net-worth individuals. As of November 1999, we operated
offices in over 20 countries and 37% of our 15,361 employees were based outside
the United States.
Goldman Sachs is the successor to a commercial paper business founded in
1869 by Marcus Goldman. Since then, we have expanded 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. On May 7, 1999, The Goldman Sachs
Group, Inc. succeeded to the business of The Goldman Sachs Group, L.P. and
completed an initial public offering of its common stock.
Financial information concerning our business segments and geographic
regions for each of 1999, 1998 and 1997 is set forth in Note 13 of the
consolidated financial statements included elsewhere in this prospectus.
BUSINESS SEGMENTS
Our activities are divided into two segments:
- - Global Capital Markets; and
- - Asset Management and Securities Services.
These segments consist of various product and service offerings that are
set forth in the following chart:
PRIMARY PRODUCTS AND ACTIVITIES BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
ASSET MANAGEMENT AND
GLOBAL CAPITAL MARKETS SECURITIES SERVICES
- ------------------------------------------------------------ ----------------------------
TRADING AND PRINCIPAL
INVESTMENT BANKING INVESTMENTS
- ---------------------------- ----------------------------
<S> <C> <C>
- -- Equity and debt -- Bank loans -- Commissions
underwriting -- Commodities -- Institutional and
- -- Financial restructuring -- Currencies high-net- worth asset
advisory services -- Equity and fixed income management
- -- Mergers and acquisitions derivatives -- Margin lending
advisory services -- Equity and fixed income -- Matched book
- -- Real estate advisory securities -- Merchant banking fees
services -- Principal investments -- Increased share of
-- Proprietary arbitrage merchant banking fund income
and gains
-- Mutual funds
-- Prime brokerage
-- Securities lending
</TABLE>
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<PAGE> 54
GLOBAL CAPITAL MARKETS
The Global Capital Markets segment, which represented 76% of 1999 net
revenues, consists of the following:
- - INVESTMENT BANKING. Investment Banking consists of our Financial Advisory and
Underwriting businesses; and
- - TRADING AND PRINCIPAL INVESTMENTS. Trading and Principal Investments consists
of our Fixed Income, Currency and Commodities ("FICC"), Equities and Principal
Investments businesses.
INVESTMENT BANKING
Investment Banking represented 33% of 1999 net revenues. We provide a broad
range of investment banking services to a diverse group of corporations,
financial institutions, governments and individuals and seek to develop and
maintain long-term relationships with these clients as their lead investment
bank.
Our current structure, which is organized along regional, product 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.
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.
FINANCIAL ADVISORY. Goldman Sachs is a leading investment bank in
worldwide mergers and acquisitions. Our mergers and acquisitions capabilities
are evidenced by our significant share of assignments in large, complex
transactions for which we provide multiple services, including "one-stop"
acquisition financing, currency hedging and cross-border structuring expertise.
UNDERWRITING. 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.
Equity Underwriting. Equity underwriting has been a long-term core
strength of Goldman Sachs. As with mergers and acquisitions, we have been
particularly successful in winning mandates for large, complex equity
underwritings. We believe our leadership in large initial public offerings
reflects our expertise in complex transactions, research strengths, track record
and distribution capabilities. We have also acted as lead manager on many of the
largest initial public offerings in the international arena.
We believe that a key factor in our equity underwriting success is the
close working relationship among the investment bankers, research analysts and
sales force as coordinated by our Equity Capital Markets group. With
institutional sales professionals and high-net-worth relationship managers
located in every major market around the world, Goldman Sachs has relationships
with a large and diverse group of investors.
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.
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<PAGE> 55
We have employed a focused approach in debt underwriting, emphasizing high
value-added areas in servicing our clients.
TRADING AND PRINCIPAL INVESTMENTS
Trading and Principal Investments represented 43% of 1999 net revenues. Our
Trading and Principal Investments business facilitates transactions with a
diverse group of corporations, financial institutions, governments and
individuals 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. We
believe our willingness and ability to take risk distinguishes us and
substantially enhances our client relationships.
Trading and Principal Investments is divided into three categories:
- - 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 net
revenues from our merchant banking investments.
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 uses 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
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<PAGE> 56
are a member of the major futures exchanges, and also 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 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.
EQUITIES. Goldman Sachs engages in a variety of market-making, proprietary
trading and arbitrage activities in equity securities and equity-related
products (such as convertible securities and equity derivative instruments) on a
global basis. Goldman Sachs makes markets and positions blocks of stock to
facilitate customers' transactions and to provide liquidity in the marketplace.
Goldman Sachs is a member of most of the major stock exchanges, including New
York, London, Frankfurt, Tokyo and Hong Kong.
As agent, we execute brokerage transactions in equity securities for
institutional and individual customers that generate commission revenues.
Commissions earned on agency transactions are recorded in Asset Management and
Securities Services.
In equity trading, as in FICC, we generate net revenues from our
customer-driven business in three ways. First, in large, highly liquid principal
markets, such as the over-the-counter market for equity securities, we undertake
a high volume of transactions for modest spreads. Second, by capitalizing on our
strong market relationships and capital position, we also undertake large
transactions, such as block trades and positions in securities, in which we
benefit from spreads that are generally larger. Finally, we also benefit from
structuring complex transactions.
Goldman Sachs was a pioneer and is currently active in the execution of
large block trades (trades of 50,000 or more shares) in the United States and
abroad. We have been able to capitalize on our expertise in block trading, our
global distribution network and our willingness to commit capital to effect
increasingly large and complex customer transactions. We expect corporate
consolidation and restructuring and increased demand for certainty and speed of
execution by sellers and issuers of securities to increase both the frequency
and size of sales of large blocks of equity securities. 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 undertake hedging strategies and establish or
liquidate investment positions. We are one of the leading participants in the
trading and development of equity derivative instruments. We are an active
participant in the trading of futures and options on most of the major exchanges
in the United States, Europe and Asia.
We remain committed to being at the forefront of technological innovation
in the global capital markets. To pursue our strategy of expanding our
electronic market-making capabilities, on September 24, 1999, Goldman Sachs
completed its acquisition of The Hull Group, a leading global electronic market
maker in exchange-traded equity derivatives
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<PAGE> 57
and an active market maker in equity securities worldwide.
In addition, equity arbitrage has long been an important part of our equity
franchise. Our strategy is based on making investments on a global basis through
a diversified portfolio across different markets and event categories. This
business focuses on event-oriented special situations where we are not acting as
an advisor and on relative value trades. These special situations include
mergers and acquisitions, corporate restructurings, recapitalizations and legal
and regulatory events.
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 the second
half of 1998.
Our trading risk management process seeks to balance our ability to profit
from trading positions with our exposure to potential losses. Risk management
includes input from all levels of Goldman Sachs, from the trading desks to the
Firmwide Risk Committee. For a further discussion of our risk management
policies and procedures, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Management".
PRINCIPAL INVESTMENTS. In connection with our merchant banking activities,
we invest by making principal investments directly and through funds that we
raise and manage. As of November 1999, we had committed $3.06 billion, of which
$2.33 billion had been funded, of the $17.27 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 1999, the
aggregate carrying value of our principal investments held directly or through
our merchant banking funds was approximately $2.88 billion, which consisted of
corporate principal investments with an aggregate carrying value of
approximately $1.95 billion and real estate investments with an aggregate
carrying value of approximately $928 million.
ASSET MANAGEMENT AND
SECURITIES SERVICES
The components of the Asset Management and Securities Services segment,
which represented 24% of 1999 net revenues, are set forth below:
- - ASSET MANAGEMENT. Asset Management generates management fees by providing
investment advisory services to a diverse client base of institutions and
individuals;
- - SECURITIES SERVICES. Securities Services includes prime brokerage, financing
services and securities lending, and our matched book businesses, all of which
generate revenue primarily in the form of fees or interest rate spreads; and
- - COMMISSIONS. Commissions includes agency transactions for clients on major
stock and futures exchanges and revenues from the increased share of the
income and gains derived from our merchant banking funds.
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 consist 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 consist of assets in brokerage accounts of
primarily high-net-worth individuals, on which we earn commissions.
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<PAGE> 58
Our growth in assets under supervision is set forth in the graph below:
ASSETS UNDER SUPERVISION
(in billions)
<TABLE>
<CAPTION>
YEAR ASSETS UNDER MANAGEMENT OTHER CLIENT ASSETS TOTAL
- ---- ----------------------- ------------------- -----
<S> <C> <C> <C>
1995.......................................... $ 52 $ 58 $110
1996.......................................... 94 77 171
1997.......................................... 136 102 238
1998.......................................... 195 142 337
1999.......................................... 258 227 485
</TABLE>
- ------------------------
As of November 1999, equities and alternative investments represented 59%
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 NOVEMBER
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
ASSET CLASS
Equity...................................................... $ 98 $ 69 $ 52
Fixed income and currency................................... 58 50 36
Money markets............................................... 48 46 31
Alternative investment(1)................................... 54 30 17
---- ---- ----
Total....................................................... $258 $195 $136
==== ==== ====
</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 the addition of over 1,000 employees. In
addition, Goldman Sachs has made three asset management acquisitions in order to
expand its geographic reach and broaden its global equity and alternative
investment portfolio management capabilities.
CLIENTS. Our primary clients are institutions, high-net-worth individuals
and retail investors. We access clients through both direct and third-party
channels. Our institutional clients include corporations, insurance companies,
pension funds, foundations and
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<PAGE> 59
endowments. 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.
The table below sets forth the amount of assets under supervision by
distribution channel and client category as of November 1999:
ASSETS UNDER SUPERVISION BY DISTRIBUTION CHANNEL
(in billions)
<TABLE>
<CAPTION>
ASSETS UNDER
SUPERVISION(1) PRIMARY INVESTMENT VEHICLES
-------------- ---------------------------
<S> <C> <C>
- Directly distributed
-- Institutional.......................... $151 Separate managed accounts
-- High-net-worth individuals............. 262 Commingled vehicles
Brokerage accounts
Limited partnerships
Separate managed accounts
- Third-party distributed
-- Institutional and retail............... 56 Mutual funds
----
Total....................................... $469
====
</TABLE>
- ---------------
(1) Excludes $16 billion in our merchant banking funds.
------------------------
MERCHANT BANKING
Goldman Sachs has established a successful record in the corporate and real
estate merchant banking business, with $17.27 billion of committed capital as of
November 1999, of which $13.03 billion has been funded. We have committed $3.06
billion and funded $2.33 billion of these amounts. Our clients, including
pension plans, endowments, charitable institutions and high-net-worth
individuals, have provided the remainder.
Our strategy with respect to each merchant banking fund is to invest
opportunistically to build a portfolio of investments that is diversified by
industry, product type, geographic region and transaction structure and type.
Some of these investment funds pursue, on a global basis, long-term investments
in equity and debt securities in privately negotiated transactions, leveraged
buyouts and acquisitions. As of November 1999, our corporate merchant banking
funds had total committed capital of $9.50 billion. Other funds, with total
committed capital of $7.77 billion as of November 1999, invest in real estate
operating companies and debt and equity interests in real estate assets.
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 are included in our Asset Management revenues. Second,
after that fund has achieved a minimum return for fund investors, we receive an
increased share of the fund's income and gains that is a percentage, typically
20%, of the capital appreciation and gains from the fund's investments. Revenues
from the increased share of the funds' income and gains are included in
Commissions. Finally, 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 the Trading and Principal Investments
component of Global Capital Markets.
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SECURITIES SERVICES
Securities Services consists predominantly of Global Securities Services,
which provides prime brokerage, financing services and securities lending to a
diversified U.S. and international customer base, including hedge funds, pension
funds and high-net-worth individuals. Securities Services also includes our
matched book businesses.
We offer prime brokerage services to our clients, allowing them the
flexibility to trade with most brokers while maintaining a single source for
financing and portfolio reports. Our prime brokerage activities provide
multi-product clearing and custody in 50 markets, consolidated multi-currency
accounting and reporting and offshore fund administration and also provide
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.
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.
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 includes the increased share of
income and gains from merchant banking funds as well as commissions earned from
brokerage transactions. For a discussion regarding our increased share of the
income and gains from our merchant banking funds, see "-- Merchant Banking"
above.
In anticipation of continued growth in electronic connectivity and on-line
trading, Goldman Sachs has made strategic investments in alternative trading
systems to gain experience and participate in the development of this market.
See "-- Internet Strategy" below for a further discussion of these investments,
and see "Risk Factors -- The Financial Services Industry Is Intensely
Competitive and Rapidly Consolidating -- Our Revenues May Decline Due to
Competition from Alternative Trading Systems" for a discussion of the
competitive risks posed by alternative trading systems generally.
GLOBAL INVESTMENT RESEARCH
Our Global Investment Research Department provides fundamental research on
economies, debt and equity markets, commodities markets, industries and
companies on a worldwide basis. For over two decades, we have committed
resources on a global scale to develop a leading position in the industry for
our investment research products.
Global Investment Research employs a team approach that as of November 1999
provided research coverage of approximately 2,400 companies worldwide, 52
economies and 26 stock markets. This is accomplished by four groups:
- - the Commodities Research group, which provides research on the global
commodity markets;
- - 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;
- - 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; and
- - the Portfolio Strategy group, which forecasts equity market returns and
provides recommendations on both asset allocation and industry representation.
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INTERNET STRATEGY
We believe that Internet technology and electronic commerce will, over
time, change the ways that securities and other financial products are traded
and distributed, creating both opportunities and challenges for our businesses.
In response, we have established 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, currency, commodity, 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. In addition, 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.
Recently, we established an internal working group to focus primarily on
utilizing the Internet to enhance and support our wealth management business.
Externally, we have invested in electronic commerce concerns such as Bridge
Information Systems, Inc., TradeWeb LLC, Archipelago, L.L.C., The BRASS Utility,
L.L.C., OptiMark Technologies, Inc. and Wit Capital Group, Inc. Through these
investments, we gain an increased understanding of business developments and
opportunities in this emerging sector. For a discussion of how Goldman Sachs
could be adversely affected by these developments, see "Risk Factors -- The
Financial Services Industry Is Intensely Competitive and Rapidly
Consolidating -- Our Revenues May Decline Due to Competition from Alternative
Trading Systems".
INFORMATION TECHNOLOGY
Technology is fundamental to our overall business strategy. Goldman Sachs
is committed to the ongoing development, maintenance and use of technology
throughout the organization. We have developed significant software and systems
over the past several years. Our technology initiatives can be broadly
categorized into three efforts:
- - enhancing client service through increased connectivity and the provision of
high value-added, tailored services;
- - risk management; and
- - overall efficiency and control.
We have tailored our services to our clients by providing them with
electronic access to our products and services. For example, we developed the GS
Financial Workbench(SM), an Internet Web site that clients and employees can use
to download research reports, access earnings and valuation models, submit
trades, monitor accounts, build and view presentations, calculate derivative
prices and view market data. First made available in 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
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information, and the ability to analyze complex risk situations effectively.
Our software accesses this data, allows for quick analysis at the level of
individual trades and interacts with other Goldman Sachs systems.
Technology has also been a significant factor in improving the overall
efficiency of many areas of Goldman Sachs. By automating many trading procedures
and operational and accounting processes, we have substantially increased our
efficiency and accuracy.
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. 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, in which training plays an important part. All employees are offered
the opportunity to participate in education and periodic seminars that we
sponsor at various locations throughout the world. Another important part of
instilling the Goldman Sachs culture 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.
As of November 1999, we had 15,361 employees, which excludes employees of
Goldman Sachs' two property management subsidiaries. Substantially all of the
costs of these property management employees are reimbursed to Goldman Sachs by
the real estate investment funds to which these subsidiaries provide property
management services.
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 others on a
regional, product or niche basis. Our competition is based on a number of
factors, including transaction execution, our products and services, innovation,
reputation and price.
We also face intense competition in attracting and retaining qualified
employees. Our ability to continue to compete effectively in our businesses will
depend upon our ability to attract new employees and retain and motivate our
existing employees.
In recent years, there has been substantial consolidation and convergence
among companies in the financial services industry. In particular, a number of
large commercial banks, insurance companies and other broad-based financial
services firms have established or acquired broker-dealers or have merged with
other financial institutions. Many of these firms have the ability to offer a
wide range of products, from loans, deposit taking and insurance to brokerage,
asset management and investment banking services, which may enhance their
competitive position. They also have the ability to support investment banking
and securities products with commercial banking, insurance and other financial
services revenues in an effort to gain market share, which could result in
pricing pressure in our businesses.
Recently enacted federal financial modernization legislation significantly
expands the activities permissible for firms affiliated with a U.S. bank. The
legislation, among other things, enables U.S. banks and insurance firms to
affiliate, facilitates affiliations between U.S. banks and securities firms, and
expands the permissible principal investing activities of U.S. banking
organizations. See "Risk Factors -- The Financial Services Industry Is Intensely
Competitive and Rapidly Consolidating -- We Face Increased Competition Due to a
Trend Toward Consolidation" for a discussion of the potential impact of this
legislation.
The trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our
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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. 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 and 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 through other alternative trading
systems may increase the pressure on trading commissions. It appears that this
trend toward alternative trading systems will continue and probably accelerate.
Similarly, underwriting spreads in certain privatizations have been subject to
considerable pressure. We believe that we may experience pricing pressures in
these and other areas in the future as some of our competitors seek to obtain
market share by reducing prices.
See "Risk Factors -- The Financial Services Industry Is Intensely
Competitive and Rapidly Consolidating" for a discussion of the competitive risks
we face in our businesses.
REGULATION
Goldman Sachs, as a participant in the securities and commodity futures and
options industries, is 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. They are not, however, charged 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 Chicago Board of Trade, the NYSE and the NASD, adopt rules and
examine broker-dealers such as Goldman, Sachs & Co. In addition, state
securities and other regulators also have regulatory or oversight authority over
Goldman, Sachs & Co. Similarly, our businesses are also subject to regulation by
various non-U.S. governmental and regulatory bodies and self-regulatory
authorities in virtually all countries where we have offices.
Broker-dealers are subject to regulations that cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure, record-keeping, the financing of customers' purchases, and the
conduct of directors, officers and employees. Additional legislation, changes in
rules promulgated by self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, either in the United
States or 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
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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 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 12 to the consolidated financial statements
included elsewhere in this prospectus, for a discussion of our net capital.
The SEC and various self-regulatory organizations impose rules that require
notification when net capital falls below certain predefined criteria, dictate
the ratio of subordinated debt to equity in the regulatory capital composition
of a broker-dealer and constrain the ability of a broker-dealer to expand its
business under certain circumstances. Additionally, the SEC's uniform net
capital rule imposes certain requirements that may have the effect of
prohibiting a broker-dealer from distributing or withdrawing capital and
requiring prior notice to the SEC for certain withdrawals of capital.
In January 1999, the SEC adopted revisions to its uniform net capital rule
and related regulations that permit the registration of over-the-counter
derivatives dealers as broker-dealers. An over-the-counter derivatives dealer
can, upon adoption of a risk management framework in accordance with the new
rules, utilize a capital requirement based upon proprietary models for
estimating market risk exposures. We have established Goldman Sachs Financial
Markets, L.P. and registered this company with the SEC as an over-the-counter
derivatives dealer to conduct in a more capital-efficient manner certain
over-the-counter derivative businesses previously conducted in other affiliates.
Goldman Sachs is an active participant in the international fixed income
and equity markets. Many of our affiliates that participate in those markets are
subject to comprehensive regulations that include some form of capital adequacy
rule and other customer protection rules. 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 financial services regulator.
The relevant Goldman Sachs entities in London are at present regulated by the
Securities and Futures Authority Limited in respect of their investment banking,
individual asset management, brokerage and principal trading activities, and the
Investment Management Regulatory Organization in respect of their institutional
asset management and fund management activities. Some of these Goldman Sachs
entities are also regulated by the London Stock Exchange and other U.K.
securities and commodities exchanges of which they are members. It is expected,
however, that during 2000, the responsibilities of the Securities and Futures
Authority Limited and Investment Management Regulatory Organization will be
taken over by the Financial Services Authority. The investment services that are
subject to oversight by U.K. regulators are regulated in accordance with
European Union directives requiring, among other things, compliance with certain
capital adequacy standards, customer protection requirements and conduct of
business rules. These standards, requirements and rules are similarly
implemented, under the same directives, throughout the European Union and are
broadly comparable in scope and purpose to the regulatory capital and customer
protection requirements imposed under the SEC and Commodity Futures Trading
Commission rules. European Union directives also permit local regulation in each
jurisdiction, including those in which we operate, to be more restrictive than
the requirements of such directives and these local requirements can result in
certain competitive disadvantages to
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Goldman Sachs. In addition, 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 in Japan, the
Securities and Futures Commission in Hong Kong, the Bundesbank in Germany, as
well as French and Swiss banking authorities, among others, regulate various of
our subsidiaries and also have capital standards and other requirements
comparable to the rules of the SEC.
Compliance with net capital requirements of these and other regulators
could limit those operations of our subsidiaries that require the intensive use
of capital, such as underwriting and trading activities and the financing of
customer account balances, and also could restrict our ability to withdraw
capital from our regulated subsidiaries, which in turn could limit our ability
to repay debt or pay dividends on our common stock.
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. Additionally, we have a 15-year lease for
approximately 605,000 square feet at 180 Maiden Lane in New York, New York, that
expires in March 2014. In total, we lease over 3.6 million square feet in the
New York area. We have additional offices in the United States and elsewhere in
the Americas. Together, these offices comprise approximately 680,000 square feet
of leased space.
In the first quarter of 2000, we executed a contract to purchase
approximately six acres of unimproved land in Jersey City, New Jersey. We expect
to develop this land to complement our offices in lower Manhattan. The initial
phase of development is expected to include approximately 1.4 million usable
square feet of office space, with occupancy planned for early 2003.
We also have offices in Europe, Asia, Africa and Australia. In Europe, we
have offices that totaled approximately 788,000 square feet as of the end of
January 2000. Our largest presence in Europe is in London, where we leased
approximately 609,000 square feet through various leases as of the end of
January 2000, with the principal one for Peterborough Court expiring in 2016. An
additional 453,000 square feet of leased space in London is expected to be
occupied during 2000 and 2001.
In Asia, we have offices that total approximately 563,000 square feet. Our
largest offices in this region are in Tokyo and Hong Kong. In Tokyo, we
currently lease approximately 234,000 square feet under renewable leases with
current terms extending, in some cases, to June 2005. In Hong Kong, we currently
lease approximately 222,000 square feet under a lease that expires in 2012.
There are significant expansion efforts underway in Tokyo and Singapore.
Our space requirements have increased significantly over the last several
years. Currently, Goldman Sachs is at or near capacity at most of its locations.
As a result, we have been actively leasing additional space to support our
anticipated growth. Based on our progress to date, we believe that we will be
able to acquire additional space to meet our anticipated needs.
LEGAL PROCEEDINGS
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.
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MOBILEMEDIA SECURITIES LITIGATION
Goldman, Sachs & Co. has been named as a defendant in a purported class
action lawsuit commenced on December 6, 1996 and pending in the U.S. District
Court for the District of New Jersey. This lawsuit was brought on behalf of
purchasers of common stock of MobileMedia Corporation in an underwritten
offering in 1995 and purchasers of senior subordinated notes of MobileMedia
Communications Inc. in a concurrent underwritten offering. Defendants are
MobileMedia Corporation, certain of its officers and directors, and the lead
underwriters, including Goldman, Sachs & Co. MobileMedia Corporation is
currently reorganizing in bankruptcy.
Goldman, Sachs & Co. underwrote 2,242,500 shares of common stock, for a
total price of approximately $53 million, and Goldman Sachs International
underwrote 718,750 shares, for a total price of approximately $17 million.
Goldman, Sachs & Co. underwrote approximately $38 million in principal amount of
the senior subordinated notes.
The consolidated class action complaint alleges violations of the
disclosure requirements of the federal securities laws and seeks compensatory
and/or rescissory damages. In light of MobileMedia Corporation's bankruptcy, the
action against it has been stayed. Defendants' motion to dismiss was denied in
October 1998.
The parties have entered into a stipulation of settlement, which was
approved by the court on February 7, 2000, but the time to appeal has yet to
expire.
ANTITRUST MATTERS
Goldman, Sachs & Co. is one of numerous financial services companies that
have been named as defendants in certain purported class actions brought in the
U.S. District Court for the Southern District of New York by purchasers of
securities in public offerings, who claim that the defendants engaged in
conspiracies in violation of federal antitrust laws in connection with these
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. On May 7, 1999, the defendants moved to dismiss the amended
complaint.
Several other actions were commenced, beginning on November 3, 1998, that
allege that the defendants, many of whom are also named in the other action
discussed above, have conspired to fix at 7% the discount that underwriting
syndicates receive from issuers of shares in certain offerings. On March 15,
1999, the plaintiffs filed a consolidated amended complaint. The defendants
moved to dismiss the consolidated amended complaint on April 29, 1999.
Goldman, Sachs & Co. received a Civil Investigative Demand on April 29,
1999 from the U.S. Department of Justice requesting information with respect to
its investigation of an alleged conspiracy among securities underwriters to fix
underwriting fees.
Hull Trading Co. L.L.C., an affiliate of The Goldman Sachs Group, Inc., is
one of numerous market makers in listed equity options which have been named as
defendants, together with five national securities exchanges, in a purported
class action brought in the U.S. District Court for the Southern District of New
York on behalf of persons who purchased or sold listed equity options. The
consolidated class action complaint, filed on October 4, 1999 (which
consolidated certain previously pending actions and added Hull Trading Co.
L.L.C. and other market makers as defendants), generally alleges that the
defendants engaged in a conspiracy to preclude the multiple listing of certain
equity options on the exchanges and seeks treble damages under the antitrust
laws as well as injunctive relief. On January 28, 2000, the defendants moved to
dismiss the consolidated class action complaint.
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ROCKEFELLER CENTER PROPERTIES, INC. LITIGATION
Several former shareholders of Rockefeller Center Properties, Inc. brought
purported class actions in the U.S. District Court for the District of Delaware
and the Delaware Court of Chancery arising from the acquisition of Rockefeller
Center Properties, Inc. by an investor group in July 1996. The defendants in the
actions include, among others, Goldman, Sachs & Co., Whitehall Real Estate
Partnership V, a fund advised by Goldman, Sachs & Co., a Goldman, Sachs & Co.
managing director and other members of the investor group. The federal court
actions, which have since been consolidated, were filed beginning on November
15, 1996, and the state court action was filed on May 29, 1998.
The complaints generally allege that the proxy statement disseminated to
former Rockefeller Center Properties, Inc. stockholders in connection with the
transaction was deficient, in violation of the disclosure requirements of the
federal securities laws. The plaintiffs are seeking, among other things,
unspecified damages, rescission of the acquisition, and/or disgorgement.
In a series of decisions, the federal district court granted summary
judgment dismissing all the claims in the federal action. The plaintiffs
appealed those rulings.
On July 19, 1999, the U.S. Court of Appeals for the Third Circuit rendered
its decision affirming in part and vacating in part the lower court's entry of
summary judgment dismissing the action. With respect to the claim as to which
summary judgment was vacated, the appellate court held that the district court
had committed a procedural error in converting the defendants' motion to dismiss
into a motion for summary judgment and remanded for the district court to
reconsider that claim under appropriate standards applicable to motions to
dismiss. Plaintiffs have since sought leave to amend the complaint as to the
remanded claim. The defendants have moved to dismiss the remanded claim and are
opposing the plaintiffs' motion to amend it further.
The state action has been stayed pending disposition of the federal action.
REICHHOLD CHEMICALS LITIGATION
Reichhold Chemicals, Inc. and Reichhold Norway ASA brought a claim on March
30, 1998 in the Commercial Court in London against Goldman Sachs International
in relation to the plaintiffs' 1997 purchase of the polymer division of one of
Goldman Sachs International's Norwegian clients, Jotun A/S. The plaintiffs claim
that they overpaid by $40 million based upon misrepresentations concerning the
financial performance of the polymer division.
In November 1998, the Commercial Court granted Goldman Sachs
International's application for a stay of the action pending the outcome of
arbitration proceedings between Reichhold Chemicals, Inc. and Reichhold Norway
ASA, on the one hand, and Jotun A/S in Norway, on the other. That stay order was
upheld by an appellate court on June 28, 1999.
MATTERS RELATING TO MUNICIPAL SECURITIES
Goldman, Sachs & Co., together with a number of other firms active in the
municipal securities area, has received requests beginning in June 1995 for
information from the SEC and certain other federal and state agencies and
authorities with respect to the pricing of escrow securities sold by Goldman,
Sachs & Co. to certain municipal bond issuers in connection with the advanced
refunding of municipal securities. Goldman, Sachs & Co. understands that certain
municipal bond issuers to which Goldman, Sachs & Co. sold escrow securities have
also received such inquiries.
There have been published reports that an action under the Federal False
Claims Act was filed in February 1995 alleging unlawful and undisclosed
overcharges in certain advance refunding transactions by a private plaintiff on
behalf of the United States and that Goldman, Sachs & Co., together with a
number of other firms, is a named defendant in that action. The complaint was
reportedly filed under seal while the government deter-
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mines whether it will pursue the claims directly.
Goldman, Sachs & Co. is also one of many municipal underwriting firms that
have been named as defendants in a purported class action brought on November
24, 1998 in the U.S. District Court for the Middle District of Florida by the
Clerk of Collier County, Florida on behalf of municipal issuers which purchased
escrow securities since October 1986 in connection with advance refundings. The
amended complaint alleges that the securities were excessively "marked up" in
violation of the Investment Advisers Act and Florida law, and that the
defendants violated the federal antitrust laws in connection with the prices at
which escrow securities were sold to municipal issuers. The complaint seeks to
recover the difference between the actual and alleged "fair" prices of the
escrow securities and to treble the alleged damages with respect to the
antitrust claim. On October 29, 1999, the defendants moved to dismiss the
complaint.
AMF SECURITIES LITIGATION
The Goldman Sachs Group, L.P., Goldman, Sachs & Co. and a Goldman, Sachs &
Co. managing director have been named as defendants in several purported class
action lawsuits beginning on April 27, 1999 in the U.S. District Court for the
Southern District of New York. The lawsuits, which have been consolidated, were
brought on behalf of purchasers of stock of AMF Bowling, Inc. in an underwritten
initial public offering of 15,525,000 shares of common stock in November 1997 at
a price of $19.50 per share. Defendants are AMF Bowling, Inc., certain officers
and directors of AMF Bowling, Inc. (including the Goldman, Sachs & Co. managing
director), and the lead underwriters of the offering (including Goldman, Sachs &
Co.). The consolidated amended complaint alleges violations of the disclosure
requirements of the federal securities laws and seeks compensatory damages
and/or rescission. The complaint asserts that The Goldman Sachs Group, L.P. and
the Goldman, Sachs & Co. managing director are liable as controlling persons
under the federal securities laws because certain funds managed by Goldman Sachs
owned a majority of the outstanding common stock of AMF Bowling, Inc. and the
managing director served as its chairman at the time of the offering. On
December 22, 1999, the defendants moved to dismiss the complaint.
IRIDIUM SECURITIES LITIGATION
Goldman, Sachs & Co. has been named as a defendant in two purported class
action lawsuits commenced, beginning on May 26, 1999, in the U.S. District Court
for the District of Columbia. These lawsuits were brought on behalf of
purchasers of Class A common stock of Iridium World Communications, Ltd. in a
January 1999 underwritten secondary offering of 7,500,000 shares of Class A
common stock at a price of $33.40 per share, as well as in the secondary market.
The defendants in the actions include Iridium, certain of its officers and
directors, Motorola, Inc. (an investor in Iridium) and the lead underwriters in
the offering, including Goldman, Sachs & Co.
The complaints in both actions allege violations of the disclosure
requirements of the federal securities laws and seek compensatory and/or
rescissory damages. Goldman, Sachs & Co. underwrote 996,500 shares of common
stock and Goldman Sachs International underwrote 320,625 shares of common stock
for a total offering price of approximately $44 million.
On August 13, 1999, Iridium World Communications, Ltd. filed for protection
under the U.S. bankruptcy laws.
HUD LITIGATION
In September 1999, Goldman, Sachs & Co. was notified by the civil division
of the United States Attorney's Office for the District of Columbia that it is a
named defendant, along with other unidentified entities, in a civil action
brought by a private party in the U.S. District Court for the District of
Columbia under the qui tam provisions of the federal False Claims Act in
connection with certain auctions of competitive loans on behalf of the U.S.
Department of Housing and Urban Development. Goldman, Sachs & Co. has not been
provided with the complaint, which has
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been filed under seal, but has been informed that the complaint alleges, among
other things, that (i) Goldman, Sachs & Co. and its bidding partners improperly
directed approximately $4.7 billion of government-owned notes for prices below
that which would have been obtained in full and fair competition, (ii) the U.S.
Department of Housing and Urban Development's financial advisor in connection
with such auctions provided Goldman, Sachs & Co. and its bidding partners with
information not available to competing bidders relating to the details of
competing bids, the value of the assets being sold and the structure of the
sales, and (iii) in one instance, Goldman, Sachs & Co. and its bidding partners
were awarded assets despite not being the highest bidder. Pursuant to the False
Claims Act, the complaint remains under seal pending the government's
investigation and consideration as to whether to intervene in the action. The
complaint does not state a monetary amount of damages. Under the False Claims
Act, any damage award could be trebled.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our directors and executive
officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Henry M. Paulson, Jr. 53 Director, Chairman and Chief Executive Officer
Robert J. Hurst 54 Director and Vice Chairman
John A. Thain 44 Director, President and Co-Chief Operating
Officer
John L. Thornton 46 Director, President and Co-Chief Operating
Officer
Sir John Browne 51 Director
John H. Bryan 63 Director
James A. Johnson 56 Director
Ruth J. Simmons 54 Director
John L. Weinberg 75 Director
Robert J. Katz 52 General Counsel and Executive Vice President
Gregory K. Palm 51 General Counsel and Executive Vice President
Leslie C. Tortora 43 Chief Information Officer and Executive Vice
President
David A. Viniar 44 Chief Financial Officer and Executive Vice
President
Barry L. Zubrow 46 Chief Administrative Officer and Executive Vice
President
</TABLE>
------------------------
Executive officers are appointed by and serve at the pleasure of our board
of directors. A brief biography of each director and executive officer follows.
Mr. Paulson has been a director of The Goldman Sachs Group, Inc. since
August 1998, and has been its Chairman and Chief Executive Officer since May
1999. He was Co-Chairman and Chief Executive Officer or Co-Chief Executive
Officer of The Goldman Sachs Group, L.P. from June 1998 to May 1999 and served
as Chief Operating Officer from December 1994 to June 1998. From December 1990
to November 1994, he was Co-Head of Investment Banking. Mr. Paulson is a member
of the Board of Directors of the New York Stock Exchange. He is also Chairman of
the Board of Directors of the Peregrine Fund, Inc. and Co-Chairman of the
Asia/Pacific Council of The Nature Conservancy. Mr. Paulson also serves on the
Advisory Board of the J.L. Kellogg Graduate School of Management at Northwestern
University, is a member of the Board of Directors of the Associates of Harvard
Business School and is Chairman of the Advisory Board of the Tsinghua University
School of Economics and Management.
Mr. Hurst has been a director of The Goldman Sachs Group, Inc. since August
1998, and has been its Vice Chairman since May 1999. He was Vice Chairman of The
Goldman Sachs Group, L.P. from February 1997 to May 1999 and served as Head or
Co-Head of Investment Banking from December 1990 to November 1999. He is also a
director of VF Corporation and IDB Holding Corporation Ltd. Mr. Hurst is a
member of the Board of Overseers of the Wharton School. He is also a member of
the Council on Foreign Relations and a member of the Committee for Economic
Development. He is Chairman of the Board of the Jewish Museum and a Trustee and
Vice President of the Whitney Museum of American Art.
Mr. Thain has been a director of The Goldman Sachs Group, Inc. since August
1998, and has been its President and Co-Chief Operating Officer since May 1999.
He was President of The Goldman Sachs Group, L.P. from March 1999 to May 1999
and Co-Chief Operating Officer from January 1999 to May 1999. From December 1994
to March 1999, he served as Chief Financial Officer and Head of Operations,
Technology and Finance, the predecessor to the current Operations, Finance &
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Resources and Information Technology divisions. From July 1995 to September
1997, he was also Co-Chief Executive Officer for European Operations. In 1990,
Mr. Thain transferred from the Fixed Income Division, where he established and
served as Co-Head of the Mortgage Securities Department, to Operations,
Technology and Finance to assume responsibility for Controllers and Treasury.
Mr. Thain is also a member of the Federal Reserve Bank of New York's
International Capital Markets Advisory Committee, a member of the INSEAD -- U.S.
National Advisory Board, and a member of the Dean's Advisory
Council -- MIT/Sloan School of Management.
Mr. Thornton has been a director of The Goldman Sachs Group, Inc. since
August 1998, and has been its President and Co-Chief Operating Officer since May
1999. He was President of The Goldman Sachs Group, L.P. from March 1999 to May
1999 and Co-Chief Operating Officer from January 1999 to May 1999. From August
1998 until January 1999, he had oversight responsibility for International
Operations. From September 1996 until August 1998, he was Chairman, Goldman
Sachs -- Asia, in addition to his senior strategic responsibilities in Europe.
From July 1995 to September 1997, he was Co-Chief Executive Officer for European
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
Holdings PLC and the Pacific Century Group, Inc. In addition, he is a member of
the Council on Foreign Relations, the Hotchkiss School Board of Trustees, the
Asia Society Board of Trustees, the Yale University Investment Committee and the
Advisory Board of the Yale School of Management.
Sir John Browne has been a director of The Goldman Sachs Group, Inc. since
May 1999. He has been Group Chief Executive of BP Amoco p.l.c. since January
1999. He was Group Chief Executive of The British Petroleum Company from 1995 to
1999, having served as a Managing Director since 1991. Sir John is also a
director of the Intel Corporation, a member of the supervisory board of
DaimlerChrysler AG and a trustee of the British Museum.
Mr. Bryan has been a director of The Goldman Sachs Group, Inc. since
November 1999. He has been Chairman of the Board and Chief Executive Officer of
Sara Lee Corporation since 1976. He is a director of Bank One Corporation, BP
Amoco p.l.c. and General Motors Corporation. Mr. Bryan is a past Chairman and a
director of the Grocery Manufacturers of America, Inc., a member of The Business
Council and the Business Roundtable and a director and past national Chairman of
the Business Committee for the Arts. He is a past Chairman of Catalyst and a
trustee of the University of Chicago, Chairman of the Board of Trustees of The
Art Institute of Chicago and former Chairman of the Chicago Council on Foreign
Relations.
Mr. Johnson has been a director of The Goldman Sachs Group, Inc. since May
1999. Mr. Johnson is Chairman and Chief Executive Officer of Johnson Capital
Partners, a private investment company. From January through December 1999, he
was Chairman of the Board of Directors of Fannie Mae. 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, United Health 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.
Dr. Simmons has been a director of The Goldman Sachs Group, Inc. since
January 2000. She has been President since 1995 of Smith College, a private
liberal arts college for women located in Northampton, Massachusetts. She was
Vice Provost of Princeton University from 1992 to 1995 and Provost of Spelman
College from 1990 to 1991. Dr. Simmons is a director of Metropolitan Life
Insurance Company, Pfizer Inc. and Texas Instruments Inc., a member of The
Conference Board, a fellow of the American Academy of Arts and Sciences and a
member of the Council on Foreign Relations. She is a member of the Advisory
Council to the Bill and Melinda Gates Millennium Scholars Foundation.
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Mr. Weinberg has been a director of The Goldman Sachs Group, Inc. since May
1999. He was Senior Chairman of The Goldman Sachs Group, L.P. from December 1990
to May 1999. From 1984 to 1990, he was Senior Partner and Chairman of Goldman,
Sachs & Co. and (from its inception in May 1989) of The Goldman Sachs Group,
L.P. From 1976 to 1984, he served both as Senior Partner and Co-Chairman of
Goldman, Sachs & Co. Mr. Weinberg is also a director of Knight-Ridder, Inc.,
Providian Financial Corp. and Tricon Global Restaurants, Inc. He is a member of
The Conference Board, the Council on Foreign Relations and The Business Council,
and is a fellow of the American Academy of Arts and Sciences. Mr. Weinberg is a
Life Governor of The New York-Presbyterian Hospital.
Mr. Katz has been General Counsel, Secretary to the Board of Directors and
an Executive Vice President of The Goldman Sachs Group, Inc. since May 1999. He
was General Counsel of The Goldman Sachs Group, L.P. or its predecessor from
1988 to May 1999. From 1980 to 1988, Mr. Katz was a partner in Sullivan &
Cromwell. Mr. Katz is Chairman-elect of the Board of Trustees of Horace Mann
School, a member of the University Council and of the College of Arts and
Sciences, Advisory Council of Cornell University, a Trustee of Prep for Prep, a
Trustee emeritus of the Allen-Stevenson School and a member of the National
Campaign Board of the Shoah Foundation.
Mr. Palm has been General Counsel and an Executive Vice President of The
Goldman Sachs Group, Inc. since May 1999. He was General Counsel of The Goldman
Sachs Group, L.P. from 1992 to May 1999. He has senior oversight responsibility
for Legal, Compliance and Management Controls, and is Co-Chairman of the Global
Compliance and Control Committee. Mr. Palm also is a member of the American Law
Institute and the Legal Advisory Committee of the New York Stock Exchange. From
1982 to 1992, Mr. Palm was a partner in Sullivan & Cromwell.
Ms. Tortora has been Chief Information Officer and an Executive Vice
President of The Goldman Sachs Group, Inc. since May 1999 and has been Head of
Information Technology since March 1999. She was Chief Information Officer of
The Goldman Sachs Group, L.P. from March 1999 to May 1999. She headed Goldman
Sachs' global technology efforts from 1994 to March 1999. Prior to joining
Goldman Sachs in 1994, she was a director of Technical Services at General
Electric Company.
Mr. Viniar has been Chief Financial Officer and an Executive Vice President
of The Goldman Sachs Group, Inc. since May 1999 and has been Co-Head of
Operations, Finance and Resources since March 1999. He was Chief Financial
Officer of The Goldman Sachs Group, L.P. from March 1999 to May 1999. From July
1998 until March 1999, he was Deputy Chief Financial Officer and from 1994 until
July 1998, he was Head of Finance, with responsibility for Controllers and
Treasury. From 1992 to 1994, Mr. Viniar was Head of Treasury and immediately
prior to then was in the Structured Finance Department of Investment Banking.
Mr. Viniar is a member of the Board of Trustees of Children's Aid and Family
Services, and serves on the Board of Trustees of Union College.
Mr. Zubrow has been Chief Administrative Officer and an Executive Vice
President of The Goldman Sachs Group, Inc. since May 1999 and has been Co-Head
of Operations, Finance and Resources since March 1999. He was Chief
Administrative Officer of The Goldman Sachs Group, L.P. from March 1999 to May
1999. From 1994 until then, he was chief credit officer and Head of the Credit
Department. From 1992 to 1994, Mr. Zubrow was Head of the Midwest Group in the
Corporate Finance Department of Investment Banking. Mr. Zubrow is a
Vice-Chairman of the Board of Managers of Haverford College. He is also a member
of the Board of Directors of the Juvenile Law Center and a member of the
Visiting Committee of The Law School of the University of Chicago.
There are no family relationships among any directors or executive officers
of Goldman Sachs.
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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
and Dr. Simmons are members of Class I, Sir John Browne and Messrs. Johnson and
John L. Weinberg are members of Class II and Messrs. Bryan, Hurst and Paulson
are members of Class III. Beginning in 2000, at each annual meeting of
shareholders, successors to the class of directors whose term expires at that
annual meeting will be elected for a three-year term and until their respective
successors have been elected and qualified. A director may be removed only for
cause by the affirmative vote of the holders of not less than 80% of the
outstanding shares of capital stock entitled to vote in the election of
directors.
Our board of directors meets at least quarterly.
DIRECTOR COMPENSATION
Directors who are not employees of or advisors to Goldman Sachs or an
affiliate receive the annual retainer and committee and meeting fees as follows:
<TABLE>
<S> <C>
Annual Retainer................... $35,000
Committee Chair (in addition to
Committee Member Fee)........... $10,000
Committee Member.................. $15,000
Attendance at Board or Committee
Meeting......................... $ 1,000
Annual Restricted Stock Unit Grant
(beginning in 2000) (number of
units).......................... 2,000
</TABLE>
For the 1999 calendar year, the annual retainer was payable in our common
stock and the committee fees were payable at the election of the non-employee
director in either cash or common stock; all of the non-employee directors
elected to receive common stock. Beginning with the 2000 calendar year, the
annual retainer and the committee fees will be paid in fully vested restricted
stock units issued under our 1999 stock incentive plan, based upon the closing
sales price of the common stock as of the dates on which the annual retainer or
committee fees would otherwise be paid, unless we elect to pay cash instead. The
meeting fees are payable in cash. Each non-employee director was also awarded an
initial grant of 3,000 fully vested restricted stock units under our 1999 stock
incentive plan upon becoming a director, and, as indicated in the table above,
has been awarded an additional grant of 2,000 such restricted stock units in
2000. Restricted stock units awarded to non-employee directors generally will
provide for delivery of the underlying shares of common stock on the last
business day in May in the year following the non-employee director's retirement
from the board.
Directors who are also employees of or advisors to Goldman Sachs or an
affiliate receive no compensation for serving as a director of Goldman Sachs.
Mr. John L. Weinberg provides senior advisory services to Goldman Sachs,
receives annual compensation of $2 million and participates in various employee
benefit plans. The agreement under which Mr. Weinberg performs these services
expires November 24, 2000, unless earlier terminated on 90-days' notice.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has an Audit Committee, composed of directors who
are not employed by Goldman Sachs or affiliated with management. Sir John
Browne, Messrs. John H. Bryan and James A. Johnson, and Dr. Simmons are the
current members of our Audit Committee. Our Audit Committee, chaired by Sir John
Browne, is responsible for recommending for approval by our board of directors a
firm of independent auditors whose duty it is to audit our consolidated
financial statements for the fiscal year in which they are appointed. The Audit
Committee, among other things, also monitors the activities of our internal
auditors and our independent accountants, reviews the results and scope of the
audit services provided by our independent auditors and reviews the results of
the internal and external audit work
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to assess the adequacy and appropriateness of our financial and accounting
controls.
Our board of directors also has a Compensation Committee, composed of
directors who are not employed by Goldman Sachs or affiliated with management.
Sir John Browne, Messrs. John H. Bryan and James A. Johnson, and Dr. Simmons are
the current members of our Compensation Committee. Our Compensation Committee,
chaired by Mr. Johnson, is responsible for reviewing and approving compensation
levels for all of our senior executives. The Compensation Committee is also
responsible for overseeing the committees appointed by our board of directors to
administer our 1999 stock incentive plan, our partner compensation plan and our
defined contribution plan.
Our board of directors does not have a nominating committee.
Our board of directors may from time to time establish other committees to
facilitate the management of Goldman Sachs.
EXECUTIVE COMPENSATION
The following table sets forth for the period May 7, 1999, the date of
completion of our initial public offering, through the end of fiscal 1999, the
compensation for such period for Goldman Sachs' chief executive officer and for
each of the five most highly compensated executive officers of Goldman Sachs,
other than the chief executive officer, serving as executive officers at the end
of fiscal 1999. These six persons are referred to collectively as the "named
executive officers".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION Awards(c)
----------------------- ----------------
RESTRICTED STOCK ALL OTHER
EXECUTIVE YEAR SALARY(B) BONUS UNIT AWARDS Compensation(d)
- --------- ---- --------- ----- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Henry M. Paulson, Jr......... 1999 $300,000 $16,062,153 $8,828,701 $ 8,332
Director, Chairman and 1998(a)
Chief Executive Officer
John A. Thain................ 1999 $300,000 $13,755,986 $7,513,538 $20,077
Director, President and 1998(a)
Co-Chief Operating Officer
John L. Thornton............. 1999 $300,000 $13,755,986 $7,513,538 $20,119
Director, President and 1998(a)
Co-Chief Operating Officer
Robert J. Hurst.............. 1999 $300,000 $12,248,193 $6,644,391 $11,778
Director and Vice Chairman 1998(a)
Leslie C. Tortora............ 1999 $300,000 $ 7,347,523 $3,840,035 $20,077
Chief Information Officer
David A. Viniar.............. 1999 $300,000 $ 7,347,523 $3,840,035 $20,077
Chief Financial Officer
</TABLE>
- ---------------
(a) We previously reported aggregate compensation for the fiscal year ended
November 27, 1998 for the following named executive officers: Mr.
Paulson -- $12,700,000; Mr. Hurst -- $11,300,000; Mr. Thain -- $11,200,000;
and Mr. Thornton -- $9,900,000. We also reported aggregate compensation of
$12,800,000 for fiscal 1998 for Jon S. Corzine, who served as Co-Chairman
and Co-Chief Executive Officer of The Goldman Sachs Group, L.P. during
fiscal 1998 to January 1999. This compensation did not include that portion
of each such person's total partnership return from The Goldman Sachs Group,
L.P. in fiscal 1998 attributable to a return on his share of invested
capital or to his share of the income from investments made by The Goldman
Sachs Group, L.P. in prior years that was allocated to the individuals who
were partners in those years. The return on invested capital for each such
person was determined using a rate of 12%, the actual fixed rate of return
that was paid in fiscal 1998 to The Goldman Sachs Group, L.P.'s retired
limited partners on their long-term capital.
(Footnotes continued on following page)
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(b) Salary for a full fiscal year for each named executive officer is $600,000.
The salary for fiscal 1999 has been adjusted to reflect the salary actually
paid to the named executive officers for the period that Goldman Sachs was a
public company in fiscal 1999.
(c) The value of the restricted stock units shown in the table was determined by
multiplying the number of restricted stock units awarded to each named
executive officer by the closing price-per-share of common stock on the New
York Stock Exchange on November 26, 1999, the date the restricted stock
units were granted ($77.3125). The number of restricted stock units awarded
to each named executive officer was determined by dividing a dollar amount
determined for each named executive officer pursuant to a formula based on
the named executive officer's total compensation by the average of the
closing price-per-share of the common stock on the New York Stock Exchange
over the ten trading-day period up to and including the last day of the
fiscal year ($79.21). The dollar amounts on which the awards of restricted
stock units to the named executive officers were based and the number of
restricted stock units awarded were: Mr. Paulson -- $9,045,374 (114,195
restricted stock units); Mr. Thain -- $7,697,921 (97,184 restricted stock
units); Mr. Thornton -- $7,697,921 (97,184 restricted stock units); Mr.
Hurst -- $6,807,453 (85,942 restricted stock units); Ms.
Tortora -- $3,934,220 (49,669 restricted stock units); Mr.
Viniar -- $3,934,220 (49,669 restricted stock units). Each restricted stock
unit generally constitutes an unfunded, unsecured promise to deliver a share
of common stock in January 2004 (although delivery may be accelerated in
certain circumstances). 50% of the restricted stock units granted to the
named executive officers were vested when they were granted and the
remaining 50% will vest ratably over the next four years (although vesting
may be accelerated in certain circumstances). In general, non-vested
restricted stock units are forfeited on termination of employment, except in
limited cases such as retirement. All restricted stock units, whether or not
vested, may be forfeited if the holder's employment is terminated for
"cause" and in certain other circumstances. Each restricted stock unit
includes a "dividend equivalent right", pursuant to which the holder of the
restricted stock unit is entitled to receive with respect to each restricted
stock unit an amount equal to any ordinary cash dividends paid to the holder
of a share of common stock approximately when such dividends are paid to
shareholders.
(d) Includes contributions of $2,500 on behalf of each named executive officer
to The Employees' Profit Sharing Retirement Income Plan, contributions to
the Money Purchase Pension Plan and a premium paid in respect of Term Life
Insurance. The Money Purchase Pension Plan contribution and the Term Life
Insurance premium are respectively listed as follows: Mr. Paulson -- $5,646,
$186; Mr. Thain -- $17,500, $77; Mr. Thornton -- $17,500, $119; Mr.
Hurst -- $9,092, $186; Ms. Tortora -- $17,500, $77; and Mr.
Viniar -- $17,500, $77.
----------------------
In addition to the amounts disclosed in the table above, each of Messrs.
Paulson, Hurst, Thain, Thornton and Viniar and Ms. Tortora has accrued benefits
under the employees' pension plan entitling him or her to receive annual
benefits upon retirement at age 65 of $10,533, $10,533, $7,074, $11,801, $6,906
and $3,744, respectively. These benefits had accrued prior to November 1992, and
none of the named executive officers has earned additional benefits under the
pension plan since November 1992.
Aggregate compensation paid to key employees who are not named executive
officers may exceed that paid to the named executive officers.
EMPLOYMENT, NONCOMPETITION AND
PLEDGE AGREEMENTS
In connection with our initial public offering, we entered into employment
agreements with each profit participating limited partner who continued as a
managing director and pledge agreements and agreements relating to
noncompetition and other covenants with all of the managing directors who were
profit participating limited partners, whether or not they retired, including,
in both cases, each managing director who is a member of our board of directors
or is an executive officer.
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
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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 for any reason by either that managing director or
Goldman Sachs on 90 days' prior written notice.
Goldman Sachs entered into similar employment agreements with all other
managing directors, except that they have no set term.
NONCOMPETITION AGREEMENTS
Each noncompetition agreement provides as follows:
CONFIDENTIALITY. Each managing director who was a profit participating
limited partner is required to protect and use "confidential information" in
accordance with the restrictions placed by Goldman Sachs on its use and
disclosure.
NONCOMPETITION. During the period ending 12 months after the date a
managing director who was a profit participating limited partner ceases to be
employed by Goldman Sachs, that managing director may not:
- - form, or acquire a 5% or greater ownership, voting or profit participation
interest in, any competitive enterprise; or
- - associate with any competitive enterprise and in connection with such
association engage in, or directly or indirectly manage or supervise personnel
engaged in, any activity that had a relationship to that managing director's
activities at Goldman Sachs.
When we refer to a "competitive enterprise", we are referring to any business
enterprise that engages in any activity, or owns a significant interest in any
entity that engages in any activity, that competes with any activity in which we
are engaged.
NONSOLICITATION. During the period ending 18 months after the date a
managing director who was a profit participating limited partner ceases to be
employed by Goldman Sachs, that managing director may not, directly or
indirectly, in any manner:
- - solicit any client with whom that managing director worked, or whose identity
became known to him or her in connection with his or her employment with
Goldman Sachs, to transact business with a competitive enterprise or reduce or
refrain from doing any business with Goldman Sachs;
- - interfere with or damage any relationship between Goldman Sachs and any client
or prospective client; or
- - solicit any employee of Goldman Sachs to apply for, or accept employment with,
any competitive enterprise.
TRANSFER OF CLIENT RELATIONSHIPS. Each managing director who was a profit
participating limited partner is required, upon termination of his or her
employment, to take all actions and do all things reasonably requested by
Goldman Sachs during a 90-day cooperation period to maintain for Goldman Sachs
the business, goodwill and business relationships with Goldman Sachs' clients
with which he or she worked.
LIQUIDATED DAMAGES. In the case of any breach of the noncompetition or
nonsolicitation provisions prior to May 2004, the breaching managing director
will be liable for liquidated damages. The amount of liquidated damages for each
managing director who initially served on the board of directors, the Management
Committee or the Partnership Committee of Goldman Sachs is $15 million, and the
amount of liquidated damages for each other managing director who was a profit
participating limited partner is $10 million. These liquidated damages are in
addition to the forfeiture of any future equity-based awards that may occur as a
result of the breach of any noncompetition or nonsolicitation provisions
contained in those awards.
PLEDGE AGREEMENT
The liquidated damages provisions of each noncompetition agreement are
secured
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by a pledge of stock or other assets with an initial value equal to 100% of the
applicable liquidated damages amount.
Each pledge agreement will terminate on the earliest to occur of:
- - the death of the relevant managing director;
- - the expiration of the 24-month period following the termination of the
employment of the relevant managing director; or
- - May 2004.
NONEXCLUSIVITY AND ARBITRATION
The liquidated damages and pledge arrangements discussed above are not
exclusive of any injunctive relief that Goldman Sachs may be entitled to for a
breach of a noncompetition agreement and, after the termination of the pledge
agreement, Goldman Sachs will be entitled to all available remedies for a breach
of a noncompetition agreement.
The employment, noncompetition and pledge agreements generally provide that
any disputes thereunder will be resolved by binding arbitration.
THE EMPLOYEE INITIAL PUBLIC OFFERING AWARDS
BACKGROUND
In connection with our initial public offering, we provided awards to our
employees and a limited number of consultants and advisors, other than managing
directors who were profit participating limited partners, in one or more of the
following forms:
- - substantially all employees received a grant of restricted stock units awarded
based on a formula with respect to an aggregate of 30,025,946 shares of common
stock;
- - certain senior employees, principally managing directors who were not profit
participating limited partners, were selected to participate in the defined
contribution plan described below, to which Goldman Sachs made an initial
irrevocable contribution of 12,555,866 shares of common stock;
- - certain employees received a grant of restricted stock units awarded on a
discretionary basis with respect to an aggregate of 33,292,869 shares of
common stock; and
- - certain employees received a grant of options to purchase shares of common
stock awarded on a discretionary basis with respect to an aggregate of
40,127,592 shares of common stock.
The restricted stock units awarded to employees on a discretionary and a
formula basis confer only the rights of a general unsecured creditor of Goldman
Sachs and no rights as a shareholder of Goldman Sachs until the common stock
underlying such award is delivered. While these restricted stock units are
outstanding, amounts equal to regular cash dividends that would have been paid
on the common stock underlying these units if the common stock had been actually
issued are paid in cash at about the same time that the dividends are paid
generally to the shareholders. These amounts are recorded as compensation
expense since the underlying shares of common stock have not been issued.
Any shares of common stock acquired by a managing director pursuant to the
awards will be subject to the shareholders' agreement described in "Certain
Relationships and Related Transactions -- Shareholders' Agreement".
See Note 10 to the consolidated financial statements included elsewhere in
this prospectus for further information regarding these awards.
CHANGE IN CONTROL
If a change in control occurs and within 18 months thereafter a grantee's
or participant's employment is terminated by Goldman Sachs other than for cause
(as defined in the applicable award agreement) or the grantee or participant
terminates employment for good reason (as defined in the applicable award
agreement):
- - the common stock underlying any outstanding restricted stock units will be
delivered;
- - any outstanding unexercised options to purchase shares of common stock will
become exercisable; and
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- - under the defined contribution plan, any unvested portion of the common stock
attributable to the initial contribution by Goldman Sachs to the defined
contribution plan will vest and be distributed.
"Change in control" means the consummation of a business combination
involving The Goldman Sachs Group, Inc., unless immediately following the
business combination, either:
- - at least 50% of the total voting power of the surviving entity or its parent
entity, if applicable, is represented by securities of The Goldman Sachs
Group, Inc. that were outstanding immediately prior to the transaction; or
- - at least 50% of the members of the board of directors of the surviving entity,
or its parent entity, if applicable, following the transaction were incumbent
directors (including directors whose election or nomination was approved by
the incumbent directors) of The Goldman Sachs Group, Inc. at the time of the
board of directors' approval of the execution of the initial agreement
providing for the transaction.
THE STOCK INCENTIVE PLAN
The following is a description of the material terms of the 1999 stock
incentive plan. See also Note 10 to the consolidated financial statements
included elsewhere in this prospectus for further information regarding 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 2000 is 3,850,000
shares of common stock and, in each fiscal year that follows, is 110% of the
maximum number of shares of common stock applicable for the preceding fiscal
year.
Our Stock Incentive Plan Committee has the authority to adjust the terms of
any outstanding awards and the number of shares of common stock issuable under
the stock incentive plan for any increase or decrease in the number of issued
shares of common stock resulting from a stock split, reverse stock split, stock
dividend, spin-off, combination or reclassification of the common stock, or any
other event that the Stock Incentive
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Plan Committee determines affects our capitalization.
ELIGIBILITY. Awards may be made to any director, officer or employee of
Goldman Sachs, including any prospective employee, and to any consultant or
advisor to Goldman Sachs selected by the Stock Incentive Plan Committee.
ADMINISTRATION. The Stock Incentive Plan Committee, consisting of Messrs.
Paulson, Hurst, Thain and Thornton, administers the stock incentive plan. Our
Compensation Committee oversees the Stock Incentive Plan Committee and makes
awards to our executive officers.
The Stock Incentive Plan Committee has the authority to construe, interpret
and implement the stock incentive plan, and prescribe, amend and rescind rules
and regulations relating to the stock incentive plan. The determination of the
Stock Incentive Plan Committee on all matters relating to the stock incentive
plan or any award agreement is final and binding.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The Stock Incentive Plan
Committee may grant incentive stock options and nonqualified stock options to
purchase shares of common stock from Goldman Sachs (at the price set forth in
the award agreement), and stock appreciation rights in such amounts, and subject
to such terms and conditions, as the Stock Incentive Plan Committee may
determine. No grantee of an option or stock appreciation right will have any of
the rights of a shareholder of The Goldman Sachs Group, Inc. with respect to
shares subject to their award until the issuance of the shares.
RESTRICTED STOCK. The Stock Incentive Plan Committee may grant restricted
shares of common stock in amounts, and subject to terms and conditions, as the
Stock Incentive Plan Committee may determine. The grantee will have the rights
of a shareholder with respect to the restricted stock, subject to any
restrictions and conditions as the Stock Incentive Plan Committee may include in
the award agreement.
RESTRICTED STOCK UNITS. The Stock Incentive Plan Committee may grant
restricted stock units in amounts, and subject to terms and conditions, as the
Stock Incentive Plan Committee may determine. Recipients of restricted stock
units have only the rights of a general unsecured creditor of Goldman Sachs and
no rights as a shareholder of The Goldman Sachs Group, Inc. until the common
stock underlying the restricted stock units is delivered.
OTHER EQUITY-BASED AWARDS. The Stock Incentive Plan Committee may grant
other types of equity-based awards, including the grant of unrestricted shares,
in amounts, and subject to terms and conditions, as the Stock Incentive Plan
Committee may determine. These awards may involve the transfer of actual shares
of common stock, or the payment in cash or otherwise of amounts based on the
value of shares of common stock, and may include awards designed to comply with,
or take advantage of certain benefits of, the local laws of non-U.S.
jurisdictions.
CHANGE IN CONTROL. The Stock Incentive Plan Committee may provide in any
award agreement for provisions relating to a change in control of The Goldman
Sachs Group, Inc. or any of its subsidiaries or affiliates, including, without
limitation, the acceleration of the exercisability of, or the lapse of
restrictions with respect to, the award.
DIVIDEND EQUIVALENT RIGHTS. The Stock Incentive Plan Committee may, in its
discretion, include in the award agreement a dividend equivalent right entitling
the grantee to receive amounts equal to the dividends that would be paid, during
the time such award is outstanding, on the shares of common stock covered by
such award as if such shares were then outstanding.
NONASSIGNABILITY. Except to the extent otherwise provided in the award
agreement or approved by the Stock Incentive Plan Committee, no award or right
granted to any person under the stock incentive plan is assignable or
transferable other than by will or by the laws of descent and distribution, and
all awards and rights are exercisable during the life of the grantee only by the
grantee or the grantee's legal representative.
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AMENDMENT AND TERMINATION. Except as otherwise provided in an award
agreement, the board of directors may from time to time suspend, discontinue,
revise or amend the stock incentive plan and the Stock Incentive Plan Committee
may amend the terms of any award in any respect.
THE DEFINED CONTRIBUTION PLAN
The defined contribution plan is not intended to be qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended, and is not subject to
the Employee Retirement Income Security Act of 1974, as amended.
The following is a description of the material terms of the defined
contribution plan. See also Note 9 to the consolidated financial statements,
included elsewhere in this prospectus, for further information regarding the
defined contribution plan. You should, however, refer to the exhibits that are a
part of the registration statement for a copy of the defined contribution plan.
See "Available Information".
ELIGIBILITY AND PARTICIPATION. Our board of directors or the Defined
Contribution Plan Committee, a committee appointed by our board of directors,
select the employees to participate in the defined contribution plan.
CONTRIBUTIONS. Goldman Sachs made an initial irrevocable contribution to
the Defined Contribution Plan Trust, the trust underlying the defined
contribution plan, of 12,555,866 shares of common stock simultaneously with the
consummation of our initial public offering. Goldman Sachs may contribute
additional shares of common stock or cash to the Defined Contribution Plan Trust
from time to time in its sole discretion. We made an additional contribution of
111,181 shares of common stock in calendar year 1999, and we currently intend to
make ongoing contributions to the defined contribution plan.
ALLOCATION OF CONTRIBUTIONS. Each participant has an account in his or her
name. There is also a separate, unallocated account to which any forfeitures of
common stock are credited pending reallocation to participants. The Defined
Contribution Plan Committee designates the number of shares of common stock
allocable to the account of each participant. Any common stock remaining in the
unallocated account as of the last day of each plan year due to forfeitures and
any distributions received on common stock credited to the unallocated account
will be reallocated among the accounts of participants who are employed by
Goldman Sachs on the last day of each plan year pro rata to each such
participant's share of Goldman Sachs contributions, for that plan year, or on
such other formulaic basis as the Defined Contribution Plan Committee may
determine.
VOTING AND TENDERING OF COMMON STOCK. Shares of common stock allocated to
participants who are parties to the shareholders' agreement referred to below
will be voted in accordance with the shareholders' agreement and will be
tendered by the trustee of the Defined Contribution Plan Trust in accordance
with confidential instructions provided by the participants if the transfer
restrictions under the shareholders' agreement are waived (and will not be
tendered if the transfer restrictions are not waived). See "Certain
Relationships and Related Transactions -- Shareholders' Agreement" for a
discussion of those provisions. Any shares of common stock allocated to accounts
of participants who are not subject to the shareholders' agreement will be voted
and tendered by the trustee of the Defined Contribution Plan Trust in accordance
with confidential instructions provided by the participant. Shares held in
participants' accounts with respect to which the trustee of the Defined
Contribution Plan Trust does not receive voting or tendering directions will not
be voted or tendered.
Shares of common stock held in the unallocated account will be voted or
tendered by the trustee in the same proportion as the shares of common stock
allocated to participants' accounts with respect to which voting or tendering
instructions are received.
DIVIDENDS. Any cash dividends on shares of common stock allocated to a
participant's account are distributed to each participant after the end of the
calendar quarter in which such dividend is received.
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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 in
June 2002, June 2003 and June 2004 if the participant satisfies certain
conditions and the participant's employment with Goldman Sachs has not been
terminated, with certain exceptions for termination due to death or following a
change in control.
With respect to contributions to the defined contribution plan (other than
the initial contribution), the Defined Contribution Plan Committee may determine
the dates on which the right to receive common stock (or cash) allocated to a
participant's account will vest and be distributable.
ADMINISTRATION OF THE DEFINED CONTRIBUTION PLAN. The defined contribution
plan is administered by the Defined Contribution Plan Committee, consisting of
Messrs. Paulson, Hurst, Thain and Thornton. Our Compensation Committee oversees
the Defined Contribution Plan Committee and makes awards to our executive
officers.
AMENDMENTS. Subject to limitations with respect to contributions
previously made to the defined contribution plan, our board of directors
reserves the right to modify, alter, amend or terminate the defined contribution
plan or the Defined Contribution Plan Trust. No modification or amendment of the
defined contribution plan may be made which would cause or permit any part of
the assets of the Defined Contribution Plan Trust to be used for, or diverted
to, purposes other than for the exclusive benefit of participants or their
beneficiaries, or which would cause any part of the assets of the Defined
Contribution Plan Trust to revert to or become the property of Goldman Sachs.
LIMIT ON LIABILITY. All distributions under the defined contribution plan
are paid or provided solely from the assets of the Defined Contribution Plan
Trust and Goldman Sachs has no responsibility or liability to any participant or
beneficiary relating to the common stock or other assets of the Defined
Contribution Plan Trust. The agreement establishing the Defined Contribution
Plan Trust provides that no creditor of Goldman Sachs will have any rights to
the assets of the Defined Contribution Plan Trust.
THE PARTNER COMPENSATION PLAN
OVERVIEW
To perpetuate the sense of partnership and teamwork that exists among our
senior professionals, and to reinforce the alignment of employee and shareholder
interests, our board of directors adopted a partner compensation plan for the
purpose of compensating senior professionals. The partner compensation plan is
administered by the Partner Compensation Plan Committee, consisting of Messrs.
Paulson, Hurst, Thain and Thornton. Our Compensation Committee oversees the
Partner Compensation Plan Committee.
Individuals are selected to participate in the partner compensation plan
for a one- or two-fiscal year cycle. Upon selection to the partner compensation
plan, participants are allocated a percentage interest in a pool for annual
bonus payments in addition to base salaries. The size of the pool is established
by the Partner Compensation Plan Committee annually, taking into account our
results of operations and other measures of financial performance. The Partner
Compensation Plan Committee may also retain an unallocated percentage of the
pool that it may allocate among participants at fiscal year end in its sole
discretion. By linking the participant's annual bonus payments to our results as
a whole, as opposed to the results of any participant's individual business
unit, we believe it provides additional incentives for teamwork. Further, we
believe that the tying of the bonus payments to overall financial results more
closely aligns the interests of the participants with our shareholders. Finally,
we believe that the retention of a percentage of the pool for allocation among
participants at fiscal year end in amounts determined at the sole discretion of
the Partner Compensation Plan Committee provides appropriate compensation
flexibility.
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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 is through the end of fiscal 2000. The participants in this
initial cycle consist of the continuing managing directors who were profit
participating limited partners. Prior to the one- or two-fiscal year cycle
commencing with fiscal 2001, and on or before each succeeding cycle, the Partner
Compensation Plan Committee will determine the participants in the partner
compensation plan. Individual participants may also be added from time to time
outside the annual or biennial selection process.
DETERMINATION OF SALARY AND BONUS
The aggregate amount of compensation to be included in the partner
compensation plan for each fiscal year is determined by the Partner Compensation
Plan Committee, taking into account measures of our financial performance it
deems appropriate, including, but not limited to, earnings per share, return on
average common equity, pre-tax income, pre-tax operating income, net revenues,
net income, profits before taxes, book value per share, stock price, earnings
available to common shareholders and ratio of compensation and benefits to net
revenues.
Prior to the commencement of the first fiscal year in any one- or
two-fiscal year cycle, the Partner Compensation Plan Committee determines both
the salaries of and the percentage of the partner compensation plan pool that
may be allocable to any particular participant. (This determination was made
prior to the consummation of our initial public offering in the case of the
initial cycle.) The percentage allocated to any particular participant is
expected to be applicable for each fiscal year within the applicable cycle. Any
remaining portion of the partner compensation plan pool not so allocated is
allocated to individual participants at the end of the fiscal year in amounts
determined by the Partner Compensation Plan Committee.
Amounts payable under the partner compensation plan are satisfied in cash
or as awards under the stock incentive plan, as determined by the Partner
Compensation Plan Committee and recommended to the Stock Incentive Plan
Committee.
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PRINCIPAL SHAREHOLDERS
The following table sets forth as of January 21, 2000 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.
For purposes of this table, information as to the shares of common stock is
calculated based on 441,429,384 shares of common stock outstanding as of January
21, 2000. 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. As a result, this table excludes
shares of common stock underlying the restricted stock units awarded to our
executive officers as described under "Management -- Executive Compensation".
For purposes of computing the percentage of outstanding shares of common stock
held by each person or group of persons named above, any shares which such
person or persons has the right to acquire within 60 days after the date of this
prospectus are deemed to be outstanding but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AS OF
JANUARY 21, 2000(1)
----------------------
NAME NUMBER PERCENT
- ---- ------ -------
<S> <C> <C>
5% Shareholders:
Parties to Shareholders' Agreement........................ 275,764,110(2) 62.5%
c/o The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
Kamehameha Activities Association(3)...................... 21,975,421 5.0
Sumitomo Bank Capital Markets, Inc.(4).................... 21,425,052 4.9
Directors and named executive officers:
Henry M. Paulson, Jr.(5).................................. 3,943,939 *
Robert J. Hurst(5)........................................ 3,769,357 *
John A. Thain(5).......................................... 3,050,659 *
John L. Thornton(5)....................................... 2,969,389 *
Sir John Browne(6)........................................ 5,535 *
John H. Bryan(6).......................................... 8,053 *
James A. Johnson(6)....................................... 7,535 *
Ruth J. Simmons(6)........................................ 5,000 *
John L. Weinberg(7)....................................... 444,444 *
Leslie C. Tortora(5)...................................... 1,726,550 *
David A. Viniar(5)........................................ 1,649,902 *
All directors and executive officers as a group
(14 persons)(8)........................................... 23,977,212 5.4
</TABLE>
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<PAGE> 84
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Except as discussed in footnotes (5), (7) and (8) below, all directors,
named executive officers and other executive officers have sole voting power
and sole dispositive power over all shares of common stock beneficially
owned by them. No individual director, named executive officer or other
executive officer beneficially owned in excess of 1% of the outstanding
common stock.
(2) Each party to the shareholders' agreement referred to below disclaims
beneficial ownership of the shares subject to the shareholders' agreement
held by any other party to the agreement and disclaims beneficial ownership
of the 21,425,052 shares of common stock and 7,440,362 shares of nonvoting
common stock owned by Sumitomo Bank Capital Markets, Inc. and the 21,975,421
shares of common stock owned by Kamehameha Activities Association, which
amounts have been excluded from the amount set forth above. See "Certain
Relationships and Related Transactions -- Shareholders' Agreement" and
" -- Voting Agreement" for a discussion of the shareholders' agreement and
the voting agreement. 273,584,282 of the shares of common stock that are
subject to the shareholders' agreement are entitled to vote in the
preliminary vote described under "Certain Relationships and Related
Transactions -- Shareholders' Agreement -- Voting".
Sumitomo Bank Capital Markets, Inc. in the ordinary course of business
enters into derivative contracts and other transactions with Goldman Sachs.
These contracts and other transactions are negotiated on an arm's-length
basis and contain customary terms and conditions.
(3) This information has been derived from Amendment No. 1 to the Schedule 13D
of Kamehameha Activities Association filed with the SEC on December 22,
1999. 567 South King Street, Suite 150, Honolulu, Hawaii 96813. Kamehameha
Activities Association in the ordinary course of business is an investor in
a number of Goldman Sachs' merchant banking funds and from time to time is a
party to other transactions with Goldman Sachs. These investments and
transactions are negotiated on an arm's-length basis and contain customary
terms and conditions.
(4) This information has been derived from Amendment No. 1 to the Schedule 13D
of Sumitomo Bank Capital Markets, Inc., filed with the SEC on December 20,
1999. The 21,425,052 shares held by Sumitomo Bank Capital Markets, Inc.
exclude 7,440,362 shares of nonvoting common stock held by Sumitomo Bank
Capital Markets, Inc., which, although immediately convertible into common
stock, cannot currently be converted by Sumitomo Bank Capital Markets, Inc.
due to restrictions imposed under the Bank Holding Company Act of 1956, as
amended. Please see Amendment No. 1 to the Schedule 13D filed by Sumitomo
Bank Capital Markets, Inc. and any amendments thereto for information
relating to such shares.
(5) 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,
Thornton and Viniar and Ms. Tortora is a party to the shareholders'
agreement and each of Messrs. Paulson, Hurst, Thain and Thornton is a member
of the Shareholders' Committee, each disclaims beneficial ownership of the
shares of common stock that are subject to the shareholders' agreement other
than those specified for each such person individually, and each disclaims
beneficial ownership of the shares of common stock subject to the voting
agreements between Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association, respectively, on the one hand, and Goldman Sachs, on
the other hand. See "Certain Relationships and Related
Transactions -- Shareholders' Agreement" and "-- Voting Agreement" for a
discussion of the shareholders' agreement and the voting agreements.
Includes shares of common stock beneficially owned by the private charitable
foundations of our named executive officers, as follows: Mr.
Hurst -- 83,302; Mr. Thain -- 65,610; Mr. Thornton -- 86,303; Ms.
Tortora -- 26,152; and Mr. Viniar -- 13,077. Each of these named executive
officers disclaims beneficial ownership of these shares.
(6) Includes 5,000 fully vested restricted stock units awarded to each of Sir
John Browne, Messrs. Bryan and Johnson and Dr. Simmons under our 1999 stock
incentive plan, as described under "Management -- Information Regarding the
Board of Directors -- Director Compensation". Since these re-
(Footnotes continued on following page)
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<PAGE> 85
stricted stock units are fully vested, we have included the shares of common
stock underlying these restricted stock units in the foregoing table even
though these shares are not deliverable within 60 days.
(7) Includes 13,076 shares of common stock beneficially owned by Mr. Weinberg's
private charitable foundation. Mr. Weinberg disclaims beneficial ownership
of these shares.
(8) Each executive officer is a party to the shareholders' agreement and each
disclaims beneficial ownership of the shares of common stock subject to the
shareholders' agreement that are owned by other parties to the shareholders
agreement, and each disclaims beneficial ownership of the shares of common
stock subject to the voting agreements between Sumitomo Bank Capital
Markets, Inc. and Kamehameha Activities Association, respectively, on the
one hand, and Goldman Sachs, on the other hand. See "Certain Relationships
and Related Transactions -- Shareholders' Agreement" and "-- Voting
Agreement" for a discussion of the shareholders' agreement and the voting
agreements.
Includes 347,520 shares of common stock beneficially owned by the private
charitable foundations of certain of our executive officers. Each of these
executive officers disclaims beneficial ownership of these shares.
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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 TRANSACTIONS
Simultaneously with the consummation of our initial public offering, we
completed a number of transactions in order to have The Goldman Sachs Group,
Inc. succeed to the business of The Goldman Sachs Group, L.P. The principal
incorporation transactions are summarized below.
Pursuant to our plan of incorporation:
- - The managing directors who were profit participating limited partners
exchanged their interests in The Goldman Sachs Group, L.P. and certain
affiliates for 265,019,073 shares of common stock;
- - The retired limited partners of Goldman Sachs exchanged their interests in The
Goldman Sachs Group, L.P. and certain affiliates for $891 million in cash,
$295 million principal amount of junior subordinated debentures and 47,270,551
shares of common stock;
- - Sumitomo Bank Capital Markets, Inc. exchanged its interests in The Goldman
Sachs Group, L.P. and Goldman, Sachs & Co. for 30,425,052 shares of common
stock and 7,440,362 shares of nonvoting common stock, and sold 9,000,000
shares of common stock in our initial public offering; and
- - Kamehameha Activities Association exchanged its interests in The Goldman Sachs
Group, L.P. for 30,975,421 shares of common stock, and sold 9,000,000 shares
of common stock in our initial public offering.
SHAREHOLDERS' AGREEMENT
PERSONS AND SHARES COVERED
Each former profit participating limited partner, other than Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, and each other
person who was a managing director on May 7, 1999 or has become a managing
director since that date is a party to the shareholders' agreement. In addition,
each new managing director will become a party to the shareholders' agreement.
The shares covered by the shareholders' agreement include generally all
shares of common stock acquired from Goldman Sachs by a party to the
shareholders' agreement, including:
- - any shares of common stock that were received by the managing directors who
were profit participating limited partners pursuant to the incorporation
transactions, except for certain shares that aggregate less than 140,000
shares;
- - any shares of common stock received from the defined contribution plan;
- - any shares of common stock received pursuant to the restricted stock units
awarded to employees based on a formula, the restricted stock units awarded on
a discretionary basis or the options to purchase shares of common stock
awarded on a discretionary basis;
- - any shares of common stock received pursuant to the restricted stock units
awarded in 1999 and described under "Management -- Executive Compensation";
and
- - unless otherwise determined by our board of directors and the Shareholders'
Committee referred to below, any shares of common stock received from Goldman
Sachs through any other employee compensation, benefit or similar plan.
Shares of common stock purchased in the open market or in an underwritten
public offering are not subject to the shareholders' agreement. The
Shareholders' Committee may also exclude from the application of all or part of
the shareholders' agreement all or any portion of the common stock acquired by a
managing director who is a new employee of Goldman Sachs.
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<PAGE> 87
TRANSFER RESTRICTIONS
Each party to the shareholders' agreement agrees, among other things, to
have sole beneficial ownership while he or she is a managing director of at
least 25% of the cumulative number of his or her shares that are beneficially
owned or acquired, and are or become subject to the shareholders' agreement.
The former profit participating limited partners, other than Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, are subject to
additional restrictions on their ability to transfer shares received in
connection with the incorporation transactions described under "-- Incorporation
Transactions". Under these additional restrictions, each of these persons agreed
that he or she will not transfer any of these shares, other than up to 140,000
shares in the aggregate that are excluded from these restrictions, until May
2002. These restrictions will lapse in equal installments in May 2002, May 2003
and May 2004.
All transfer restrictions applicable to a party to the shareholders'
agreement terminate upon death.
WAIVERS
Except in the case of a third-party tender or exchange offer, the
additional transfer restrictions applicable to profit participating limited
partners, other than Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association, may be waived or terminated at any time by the
Shareholders' Committee. The Shareholders' Committee also has the power to waive
the other transfer restrictions to permit parties to the shareholders' agreement
to:
- - participate as sellers in underwritten public offerings of common stock and
tender and exchange offers and share repurchase programs by Goldman Sachs;
- - transfer shares to charities, including charitable foundations;
- - transfer shares held in employee benefit plans; and
- - transfer shares in specific transactions (for example, to immediate family
members and trusts) or circumstances.
In December 1999, the Shareholders' Committee waived the restrictions on
transfer pursuant to the second bullet point above in order to permit our former
profit participating limited partners to donate up to 8,000,000 shares of common
stock to charitable foundations and public charities.
In the case of a third-party tender or exchange offer, all transfer
restrictions may be waived or terminated:
- - if our board of directors is recommending acceptance or is not making any
recommendation with respect to acceptance of the tender or exchange offer, by
a majority of the voting interests referred to below; or
- - if our board of directors is recommending rejection of the tender or exchange
offer, by 66 2/3% of the outstanding voting interests referred to below.
In the case of a tender or exchange offer by Goldman Sachs, a majority of
the outstanding voting interests may also elect to waive or terminate the
transfer restrictions.
VOTING
Prior to any vote of the shareholders of Goldman Sachs, the shareholders'
agreement requires a separate, preliminary vote of the voting interests on each
matter upon which a vote of the shareholders is proposed to be taken. Each share
subject to the shareholders' agreement will be voted in accordance with the
majority of the votes cast by the voting interests in the preliminary vote. In
elections of directors, each share subject to the shareholders' agreement will
be voted in favor of the election of those persons receiving the highest numbers
of votes cast by the voting interests in the preliminary vote. Prior to January
1, 2001, "voting interests" means all shares that are subject to the
shareholders' agreement. Thereafter, "voting interests" means all shares subject
to the shareholders' agreement held by all managing directors.
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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 obligations of Goldman Sachs under the shareholders' agreement.
INFORMATION REGARDING THE SHAREHOLDERS' COMMITTEE
The terms and provisions of the shareholders' agreement are administered by
the Shareholders' Committee. The Shareholders' Committee consists of Messrs.
Paulson, Hurst, Thain and Thornton. It is possible that over time all or a
majority of the members of the Shareholders' Committee will not be members of
our board of directors.
Members of the Shareholders' Committee are entitled to indemnification from
Goldman Sachs in their capacities as members of the Shareholders' Committee.
VOTING AGREEMENT
Both Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association agreed to vote their shares of common stock in the same manner as a
majority of the shares of common stock held by the managing directors of Goldman
Sachs are voted. The obligations of Sumitomo Bank Capital Markets, Inc. and
Kamehameha Activities Association under the voting agreements are enforceable by
The Goldman Sachs Group, Inc. The managing directors have no right to enforce
the voting agreements.
INSTRUMENT OF INDEMNIFICATION
In connection with our initial public offering, Goldman Sachs entered into
an instrument of indemnification. The instrument of indemnification covers
certain former partners of Goldman Sachs, including the managing directors who
were profit participating limited partners, each executive officer of Goldman
Sachs, the retired limited partners, Sumitomo Bank Capital Markets, Inc. and
Kamehameha Activities Association. Under the instrument of indemnification, in
the event any indemnitee is, or is threatened to be, made a party to any action,
suit or proceeding by reason of the fact that such indemnitee was a general or
limited partner, shareholder, member, director, officer, employee or agent of
The Goldman Sachs Group, L.P. or certain of its affiliates or subsidiaries or is
serving or served, at the request of The Goldman Sachs Group, L.P. or certain of
its affiliates or subsidiaries, in any of these capacities in
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another enterprise, Goldman Sachs is, subject to certain exceptions, obligated
to indemnify and hold such indemnitee harmless from any losses, damages or
expenses incurred by such indemnitee in the action, suit or proceeding. The
instrument of indemnification does not duplicate the obligations of Goldman
Sachs under the tax indemnification agreement described below. The
indemnification obligation of Goldman Sachs under the instrument of
indemnification also extends to the indemnification obligations that certain
indemnitees, including each executive officer of The Goldman Sachs Group, Inc.,
may have to other indemnitees.
The instrument of indemnification also provides that Goldman Sachs will,
subject to certain exceptions, release each indemnitee from all actions, suits
or other claims that The Goldman Sachs Group, L.P. may have had or which Goldman
Sachs, as a successor to The Goldman Sachs Group, L.P., may have arising out of
an indemnitee's partnership or other interest in The Goldman Sachs Group, L.P.
or certain of its affiliates or subsidiaries or arising out of the conduct of
such indemnitee while engaged in the conduct of the business of The Goldman
Sachs Group, L.P. or its affiliates or subsidiaries.
DIRECTOR AND OFFICER INDEMNIFICATION
We entered into an agreement that provides indemnification to our directors
and officers and to the directors and certain officers of the general partner of
The Goldman Sachs Group, L.P., members of our Management Committee or our
Partnership Committee or the former Executive Committee of The Goldman Sachs
Group, L.P. and all other persons requested or authorized by our board of
directors or the board of directors of the general partner of The Goldman Sachs
Group, L.P. to take actions on our behalf, The Goldman Sachs Group, L.P. or the
general partner of The Goldman Sachs Group, L.P. in connection with the plan of
incorporation, the registration statement for our initial public offering and
certain other registration statements for all losses, damages, costs and
expenses incurred by the indemnified person arising out of the relevant
registration statements or the transactions contemplated by the plan of
incorporation. We have also entered into a similar indemnification agreement
with our directors, some of our officers and all other persons requested or
authorized by our board of directors or any committee thereof to take actions on
our behalf in connection with the registration statement of which this
prospectus is a part and certain other registration statements. These agreements
are in addition to our indemnification obligations under our by-laws.
TAX INDEMNIFICATION AGREEMENT AND
RELATED MATTERS
An entity that has historically operated in corporate form generally is
liable for any adjustments to the corporation's taxes for periods prior to its
initial public offering. In contrast, the former partners of The Goldman Sachs
Group, L.P., rather than Goldman Sachs, generally will be liable for adjustments
to taxes (including U.S. federal and state income taxes) attributable to the
operations of The Goldman Sachs Group, L.P. and its affiliates prior to our
initial public offering. In connection with our initial public offering, we
entered into a tax indemnification agreement to indemnify certain former limited
partners of The Goldman Sachs Group, L.P., including the managing directors who
were profit participating limited partners, each then-current director and
executive officer of The Goldman Sachs Group, Inc., the retired limited
partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association, against certain increases in each tax indemnitee's taxes that
relate to activities of The Goldman Sachs Group, L.P. or certain of its
affiliates in respect of periods prior to our initial public offering. We are
required to make additional payments to offset any taxes payable by a tax
indemnitee in respect of payments made pursuant to the tax indemnification
agreement only to the extent the payments made to that tax indemnitee exceed a
fixed amount. Any such payment of additional taxes by Goldman Sachs is offset by
any tax benefit received by the tax indemnitee.
The tax indemnification agreement includes provisions that permit Goldman
Sachs to control any tax proceeding or contest which might result in Goldman
Sachs being
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required to make a payment under the tax indemnification agreement.
The incorporation transactions described under "-- Incorporation
Transactions" were structured in a manner that is not expected to result in a
significantly disproportionate tax or other burden to any former partner of The
Goldman Sachs Group, L.P. If the incorporation transactions have a
disproportionate effect on any partner, Goldman Sachs may, but is not required
to, make special payments and arrangements with any person who incurs a
disproportionate tax or other burden.
OTHER TRANSACTIONS
Goldman Sachs, in the ordinary course of business, maintains margin
accounts for certain of its directors and executive officers. Any credit
extended to any director or executive officer pursuant to his or her margin
account was made on substantially the same terms, including interest and
collateral, as those generally prevailing at the time for comparable third-party
extensions of credit, and did not involve more than the usual risk of
collectibility or present unfavorable terms.
We have established funds in order to permit our managing directors to
participate in our merchant banking investments. Many of our managing directors,
their spouses or entities owned or controlled by the managing directors have
invested their personal funds in these investment vehicles. Distributions of
greater than $60,000 from these funds to our executive officers or those persons
or entities affiliated with them (which reflect investments made over several
years) in fiscal 1999 were as follows: Mr. Paulson -- $5,094,509; Mr.
Hurst -- $795,558; Mr. Katz -- $215,622; Mr. Palm -- $678,976; Mr.
Viniar -- $188,308; and Mr. Zubrow -- $171,061.
In addition, certain of our executive officers from time to time invest
their personal funds directly in other funds managed by Goldman Sachs on the
same terms and with the same conditions as the other investors in these funds,
who are not our directors or executive officers.
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DESCRIPTION OF NOTES WE MAY OFFER
Please note that in this section entitled "Description of Notes We May Offer",
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 own 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 registered in street name or in
notes issued in book-entry form through The Depository Trust Company. Owners of
beneficial interests in the notes should read the subsection entitled "-- Legal
Ownership of Notes".
INFORMATION ABOUT OUR MEDIUM-TERM
NOTE PROGRAM
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 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 later under "-- Default, Remedies and Waiver of Default"; and
- - Second, the trustee performs administrative duties for us, such as sending you
interest payments and notices.
WE MAY ISSUE OTHER SERIES OF DEBT SECURITIES
The indenture permits us to issue different series of debt securities from
time to time. The Series B medium-term notes will be a single, distinct series
of debt securities. We may, however, issue notes in such amounts, at such times
and on such terms as we wish. The notes will differ from one another, and from
other series, in their terms.
This section summarizes the material terms that will apply generally to the
notes as a series. Each particular note will have financial and other terms
specific to it, and the specific terms of each note will be described in a
prospectus supplement attached to the front of this prospectus. Those terms may
vary from the terms described here. As you read this section, therefore, please
remember that the specific terms of your note as described in your prospectus
supplement will supplement and, if applicable, may modify or replace the general
terms described in this section. The statements we make in this section may not
apply to your note.
When we refer to the notes, the Series B medium-term notes or these notes,
we mean the Medium-Term Notes, Series B. 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 your prospectus supplement, we mean the prospectus supplement
describing the specific terms of the note you purchase.
AMOUNTS THAT WE MAY ISSUE
The indenture does not limit the aggregate amount of debt securities that
we may issue, nor does it limit the number of series or the aggregate amount of
any particular series. We have authorized the issuance of Series B medium-term
notes in such amounts as will not result in the notes having an aggregate
initial offering price greater than $22,000,000,000, or an equivalent amount in
any other currency or currency unit. As of the date of this prospectus, we have
already issued notes having an aggregate initial offering price of approximately
$9.8 billion. We may, however, increase this authorized amount at any time
without your consent.
The indenture and the notes do not limit our ability to incur other
indebtedness or to issue other securities. Also, we are not subject to financial
or similar restrictions by the terms of the notes, except as described under
"-- Restrictive Covenant and Defeasance -- Restriction on Liens" below.
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HOW THE NOTES RANK AGAINST OTHER DEBT
The Series B medium-term notes will not be secured by any property or
assets of The Goldman Sachs Group, Inc. or its subsidiaries. Thus, by owning a
note, you are one of our unsecured creditors.
The notes will not be subordinated to any of our other debt obligations.
This means that, in a bankruptcy or liquidation proceeding against us, the notes
would rank equally in right of payment with all other unsecured and
unsubordinated debt of The Goldman Sachs Group, Inc.
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".
THIS SECTION IS ONLY A SUMMARY
The indenture and its associated documents, including your note, contain
the full legal text of the matters described in this section and your prospectus
supplement. 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 and your prospectus supplement summarize all the material
terms of the indenture and your note. They do not, however, describe every
aspect of the indenture and your note. For example, in this section and your
prospectus supplement, we use terms that have been given special meaning in the
indenture, but we describe the meaning of only the more important of those
terms.
FEATURES COMMON TO ALL NOTES
STATED MATURITY AND MATURITY
The day on which the principal amount of your note is scheduled to become
due is called the stated maturity of the principal and is specified in your
prospectus supplement. 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 other 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 a note without specifying a particular payment,
we mean the stated maturity or maturity, as the case may be, of the principal.
CURRENCY OF NOTES
Amounts that become due and payable on your note will be payable in a
currency, composite currency, basket of currencies or currency unit or units
specified in your prospectus supplement.
We refer to this currency, composite currency, basket of currencies or
currency unit or units as a specified currency. The specified currency for your
note will be U.S. dollars, unless your prospectus supplement states otherwise.
Some notes may have different specified currencies for principal and interest.
You will have to pay for your notes by delivering the requisite amount of
the specified currency for the principal to Goldman, Sachs & Co. or another
dealer that we name in your prospectus supplement, unless other arrangements
have been made between you and us or you and that dealer. We will make payments
on your notes in the specified currency, except as described below in
"-- Payment Mechanics".
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TYPES OF NOTES
We will issue the following three types of notes:
- - FIXED RATE NOTES. A note of this type will bear interest at a fixed rate
described in the applicable prospectus supplement. This type includes zero
coupon notes, which bear no interest and are instead issued at a price lower
than the principal amount.
- - FLOATING RATE NOTES. A note of this type will bear interest at rates that are
determined by reference to an interest rate formula. In some cases, the rates
may also be adjusted by adding or subtracting a spread or multiplying by a
spread multiplier and may be subject to a minimum rate or a maximum rate. The
various interest rate formulas and these other features are described below in
"-- Interest Rates -- Floating Rate Notes". If your note is a floating rate
note, the formula and any adjustments that apply to the interest rate will be
specified in your prospectus supplement.
- - INDEXED NOTES. A note of this type provides that the principal amount payable
at its maturity, and/or the amount of interest payable on an interest payment
date, will be determined by reference to one or more stocks, including baskets
of stocks and stock indices, or to any other index described in the applicable
prospectus supplement. If you are a Holder of an indexed note, you may receive
a principal amount at maturity that is greater than or less than the face
amount of your note depending upon the value of the applicable index at
maturity. That value may fluctuate over time. Some indexed notes may also be
exchangeable, at the option of the Holder or The Goldman Sachs Group, Inc.,
into stock of an issuer other than The Goldman Sachs Group, Inc. If you
purchase an indexed note, your prospectus supplement will include information
about the relevant index and about how amounts that are to become payable will
be determined by reference to that index. Before you purchase any indexed
note, you should read carefully the section entitled "Risk Factors -- An
Investment in Indexed Notes Presents Significant Risks Not Associated with
Other Types of Notes" and any other risk factors which are specified in the
applicable prospectus supplement.
ORIGINAL ISSUE DISCOUNT NOTES
A fixed rate note, a floating rate note or an indexed note may be an
original issue discount note. A note of this type is issued at a price lower
than its principal amount and provides that, upon redemption or acceleration of
its maturity, an amount less than its principal amount will be payable. A note
issued at a discount to its principal may, for U.S. federal income tax purposes,
be considered an original issue discount note, regardless of the amount payable
upon redemption or acceleration of maturity. See "United States
Taxation -- United States Holders -- Original Issue Discount" below for a brief
description of the U.S. federal income tax consequences of owning an original
issue discount note.
INFORMATION IN THE PROSPECTUS SUPPLEMENT
Your prospectus supplement will describe one or more of the following terms
of your note:
- - the stated maturity;
- - the specified currency or currencies for principal and interest, if not U.S.
dollars;
- - the price at which we originally issue your note, expressed as a percentage of
the principal amount, and the original issue date;
-- MARKET-MAKING TRANSACTIONS. If you purchase your note in a market-making
transaction, you will receive information about the price you pay and
your trade and settlement dates in a separate confirmation of sale. A
market-making transaction is one in which Goldman, Sachs & Co. or
another of our affiliates resells a note that it has previously acquired
from another holder. A market-making transaction in a particular note
occurs after the original issuance and sale of the note.
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- - whether your note is a fixed rate note, a floating rate note or an indexed
note and also whether it is an original issue discount note;
- - if your note is a fixed rate note, the yearly rate at which your note will
bear interest, if any, and the interest payment dates, if different from those
set forth below under "-- Interest Rates -- Fixed Rate Notes";
- - if your note is a floating rate note, the interest rate basis, which may be
one of the nine base rates described in "-- Interest Rates -- Floating Rate
Notes" below; any applicable index currency or maturity, spread or spread
multiplier or initial, maximum or minimum rate; the interest reset,
determination, calculation and payment dates; and the calculation agent, all
of which we describe under "-- Interest Rates -- Floating Rate Notes" below;
- - if your note is an original issue discount note, the yield to maturity;
- - if your note is an indexed note, the principal amount, if any, we will pay you
at maturity, the amount of interest, if any, we will pay you on an interest
payment date or the formula we will use to calculate these amounts, if any,
and whether your note will be exchangeable for or payable in stock of an
issuer other than The Goldman Sachs Group, Inc. or other property;
- - whether your note may be redeemed at our option or repaid at the Holder's
option prior to the stated maturity and, if so, other relevant terms such as
the redemption commencement date, repayment date(s), redemption price(s) and
redemption period(s), all of which we describe under "-- Redemption and
Repayment" below;
- - whether we will issue or make available your note in non-book-entry form; and
- - any other terms of your note that are not inconsistent with the provisions of
the indenture, which other terms could be different from those described in
this prospectus.
Your prospectus supplement will summarize specific financial and other
terms of your note, while this prospectus describes terms that apply generally
to the notes as a series. Consequently, the terms described in your prospectus
supplement will supplement those described in this prospectus and, if the terms
described there are inconsistent with those described here, the terms described
there will be controlling. The terms used in your prospectus supplement have the
meanings described in this prospectus, unless otherwise specified.
LEGAL OWNERSHIP OF NOTES
We refer to those who have notes registered in their own names, on the
books that we or the trustee maintain for this purpose, as the "Holders" of
those notes. These persons are the legal holders of the 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 each note in book-entry form only, unless we specify
otherwise in the applicable prospectus supplement. This means notes will be
represented by one or more global notes registered in the name of a financial
institution that holds them as depositary on behalf of other financial
institutions that participate in the depositary's book-entry system. These
participating institutions, in turn, hold beneficial interests in the notes on
behalf of themselves or their customers.
Under the indenture, only the person in whose name a note is registered is
recognized as the Holder of that note. Consequently, for notes issued in global
form, we will recognize only the depositary as the Holder of the notes and we
will make all payments on the notes to the depositary. The depositary passes
along the payments it receives to its participants, which in turn pass the
payments along to their customers who are the beneficial owners. The depositary
and its participants do so under agreements they have made with one another or
with their customers; they are not obligated to do so under the terms of the
notes.
As a result, investors will not own notes directly. Instead, they will own
beneficial inter-
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ests in a global note, through a bank, broker or other financial institution
that participates in the depositary's book-entry system or holds an interest
through a participant. As long as the notes are issued in global form, investors
will be indirect holders, and not Holders, of the notes.
STREET NAME HOLDERS
In the future we may terminate a global note or issue notes initially in
non-global form. In these cases, 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 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 that payment or notice even if that Holder is
required, under agreements with depositary participants or customers or by law,
to pass it along to the indirect holders but does not do so. Similarly, if we
want to obtain the approval of the Holders for any purpose -- e.g., to amend the
indenture or to relieve us of the consequences of a default or of our obligation
to comply with a particular provision of the indenture -- we would seek the
approval only from the Holders, and not the indirect holders, of the notes.
Whether and how the Holders contact the indirect holders is up to the Holders.
When we refer to you, we mean those who invest in the notes being offered
by this prospectus, whether they are the Holders or only indirect holders of
those notes. When we refer to your notes, we mean the notes 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.
WHAT IS A GLOBAL NOTE?
We will issue each note in book-entry form only, unless we specify
otherwise in the applicable prospectus supplement. Each note issued in
book-entry form will be represented by a global note that we deposit with and
register in the name of a financial institution or its nominee, that we select.
The financial institution that we select for this purpose is called the
depositary. Unless we specify otherwise in the applicable prospectus supplement,
The Depository Trust Company, New
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York, New York, known as DTC, will be the depositary for all notes issued in
book-entry form.
A global note may represent one or any other number of individual notes.
Generally, all notes represented by the same global note will have the same
terms. We may, however, issue a global note that represents multiple notes that
have different terms and are issued at different times. We call this kind of
global note a master global note.
A global note may not be transferred to or registered in the name of anyone
other than the depositary or its nominee, unless special termination situations
arise. We describe those situations below under "-- Special Situations When a
Global Note Will Be Terminated". As a result of these arrangements, the
depositary, or its nominee, will be the sole registered owner and Holder of all
notes represented by a global note, and investors will be permitted to own only
beneficial interests in a global note. Beneficial interests must be held by
means of an account with a broker, bank or other financial institution that in
turn has an account with the depositary or with another institution that does.
Thus, an investor whose note is represented by a global note will not be a
Holder of the note, but only an indirect holder of a beneficial interest in the
global note.
If the prospectus supplement for a particular note indicates that the note
will be issued in global form only, then the note will be represented by a
global note at all times unless and until the global note is terminated. We
describe the situations in which this can occur below under "-- Special
Situations When a Global Note Will Be Terminated". The global note may be a
master global note, although your prospectus supplement will not indicate
whether it is a master global note. If termination occurs, we may issue the
notes through another book-entry clearing system or decide that the notes may no
longer be held through any book-entry clearing system.
SPECIAL CONSIDERATIONS FOR GLOBAL NOTES
As an indirect holder, an investor's rights relating to a global note will
be governed by the account rules of the investor's financial institution and of
the depositary, as well as general laws relating to securities transfers. We do
not recognize this type of investor as a Holder of notes and instead deal only
with the depositary that holds the global note.
If notes are issued only in the form of a global note, 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 under "-- Legal Ownership of Notes"
above;
- - 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
circumstances where certificates representing the notes must be delivered to
the lender or other beneficiary of the pledge in order for the pledge to be
effective.
- - The depositary's policies, which may change from time to time, will govern
payments, transfers, exchanges and other matters relating to an investor's
interest in a global note. We and the trustee have no responsibility for any
aspect of the depositary's actions or for its records of ownership interests
in a global note. We and the trustee also do not supervise the depositary in
any way;
- - The depositary will require that those who purchase and sell interests in a
global note within its book-entry system use immediately available funds and
your broker or bank may require you to do so as well; and
- - Financial institutions that participate in the depositary's book-entry system,
and through which an investor holds its interest in the global notes, may also
have their
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own policies affecting payments, notices and other matters relating to the
notes. There may be more than one financial intermediary in the chain of
ownership for an investor. We do not monitor and are not responsible for the
actions of any of those intermediaries.
SPECIAL SITUATIONS WHEN A GLOBAL NOTE WILL BE TERMINATED
In a few special situations described below, a global note will be
terminated and interests in it will be exchanged for certificates in non-global
form representing the notes it represented. After that exchange, the choice of
whether to hold the notes directly or in street name will be up to the investor.
Investors must consult their own banks or brokers to find out how to have their
interests in a global note transferred on termination to their own names, so
that they will be Holders. We have described the rights of Holders and street
name investors above under "-- Legal Ownership of Notes".
The special situations for termination of a global note are as follows:
- - if the depositary notifies us that it is unwilling, unable or no longer
qualified to continue as depositary for that global note and we do not appoint
another institution to act as depositary within 60 days;
- - if we notify the trustee that we wish to terminate that global note; or
- - if an event of default has occurred with regard to notes represented by that
global note and has not been cured or waived; we discuss defaults later under
"-- Default, Remedies and Waiver of Default".
If a global note is terminated, only the depositary, and not we or the trustee,
is responsible for deciding the names of the institutions in whose names the
notes represented by the global note will be registered and, therefore, who will
be the Holders of those notes.
INTEREST RATES
This subsection describes the different kinds of interest rates that may
apply to your note, if it bears interest.
FIXED RATE NOTES
Each fixed rate note, except any zero coupon note, will bear interest from
its original issue date or from the most recent date to which interest on the
note has been paid or made available for payment. Interest will accrue on the
principal of a fixed rate note at the fixed yearly rate stated in the applicable
prospectus supplement, until the principal is paid or made available for
payment. Unless otherwise specified in the applicable prospectus supplement,
interest on a fixed rate note will be payable semiannually each May 15 and
November 15, which will be the interest payment dates for a fixed rate note, and
at maturity. Each payment of interest due on an interest payment date or the
date of 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 interest payment date or the date of maturity. We will compute
interest on fixed rate notes on the basis of a 360-day year of twelve 30-day
months. We will pay interest on each interest payment date and at maturity as
described below under "-- Payment Mechanics".
FLOATING RATE NOTES
In this subsection, we use several specialized terms relating to the manner in
which floating interest rates are calculated. These terms appear in BOLD,
ITALICIZED type the first time they appear, and we define these terms in "--
Special Rate Calculation Terms" at the end of this subsection.
Also, please remember that the specific terms of your note as described in your
prospectus supplement will supplement and, if applicable, may modify or
replace the general terms regarding the floating rates of interest described
in this subsection. The statements we make in this subsection may not apply to
your note.
Each floating rate note will bear interest from its original issue date or
from the most recent date to which interest on the note has been paid or made
available for payment.
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Interest will accrue on the principal of a floating rate note at the yearly
rate determined pursuant to the interest rate formula stated in the applicable
prospectus supplement, until the principal is paid or made available for
payment. We will pay interest on each interest payment date and at maturity as
described below under "-- Payment Mechanics".
BASE RATES. We currently expect to issue floating rate notes that bear
interest at rates based on one or more of the following base rates:
- - commercial paper rate;
- - prime rate;
- - LIBOR;
- - EURIBOR;
- - treasury rate;
- - CMT rate;
- - CD rate;
- - federal funds rate; and/or
- - 11th district rate.
We describe each of these base rates in further detail below in this subsection.
If you purchase a floating rate note, your prospectus supplement will specify
the type of base rate that applies to your note.
INITIAL BASE RATE. For any floating rate note, the base rate in effect
from the original issue date to the first interest reset date will be the
initial base rate. We will specify the initial base rate in the applicable
prospectus supplement.
SPREAD OR SPREAD MULTIPLIER. In some cases, the base rate for a floating
rate note may be adjusted:
- - by adding or subtracting a specified number of basis points, called the
spread, with one basis point being 0.01%; or
- - by multiplying the base rate by a specified percentage, called the spread
multiplier.
If you purchase a floating rate note, your prospectus supplement will specify
whether a spread or spread multiplier will apply to your note and, if so, the
amount of the spread or spread multiplier.
MAXIMUM AND MINIMUM RATES. The actual interest rate, after being adjusted
by the spread or spread multiplier, may also be subject to either or both of the
following limits:
- - a maximum rate -- i.e., a specified upper limit that the actual interest rate
in effect at any time may not exceed; and/or
- - a minimum rate -- i.e., a specified lower limit that the actual interest rate
in effect at any time may not fall below.
If you purchase a floating rate note, your prospectus supplement will specify
whether a maximum rate and/or minimum rate will apply to your note and, if so,
what those rates are.
Whether or not a maximum rate applies, the interest rate on a floating rate
note will in no event be higher than the maximum rate permitted by New York law,
as it may be modified by U.S. law of general application. Under current New York
law, the maximum rate of interest, with some exceptions, for any loan in an
amount less than $250,000 is 16% and for any loan in the amount of $250,000 or
more but less than $2,500,000 is 25% per year on a simple interest basis. These
limits do not apply to loans of $2,500,000 or more.
The rest of this subsection describes how the interest rate and the
interest payment dates will be determined, and how interest will be calculated,
on a floating rate note.
INTEREST RESET DATES. The rate of interest on a floating rate note will be
reset, by the calculation agent described below, daily, weekly, monthly,
quarterly, semi-annually or annually. The date on which the interest rate resets
and the reset rate becomes effective is called the interest reset date. Except
as otherwise specified in the applicable prospectus supplement, the interest
reset date will be as follows:
- - for floating rate notes that reset daily, each BUSINESS DAY;
- - for floating rate notes that reset weekly and are not treasury rate notes, the
Wednesday of each week;
- - for treasury rate notes that reset weekly, the Tuesday of each week, except as
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otherwise described in the next to last paragraph under "-- Interest
Determination Dates" below;
- - for floating rate notes that reset monthly, the third Wednesday of each month;
- - for floating rate notes that reset quarterly, the third Wednesday of March,
June, September and December of each year;
- - for floating rate notes that reset semi-annually, the third Wednesday of each
of two months of each year as specified in the applicable prospectus
supplement; and
- - for floating rate notes that reset annually, the third Wednesday of one month
of each year as specified in the applicable prospectus supplement.
For a floating rate note, the interest rate in effect on any particular day will
be the interest rate determined with respect to the latest interest reset date
that occurs on or before that day. There are several exceptions, however, to the
reset provisions described above.
The base rate in effect from the original issue date to the first interest
reset date will be the initial base rate. For floating rate notes that reset
daily or weekly, the base rate in effect for each day following the second
business day prior to an interest payment date to, but excluding, the interest
payment date, and for each day following the second business day prior to the
maturity to, but excluding, the maturity, will be the base rate in effect on
that second business day.
If any interest reset date for a floating rate note would otherwise be a
day that is not a business day, the interest reset date will be postponed to the
next day that is a business day. For a LIBOR note, however, if that business day
is in the next succeeding calendar month, the interest reset date will be the
immediately preceding business day.
INTEREST DETERMINATION DATES. The interest rate that takes effect on an
interest reset date will be determined by the calculation agent by reference to
a particular date called an interest determination date. Except as otherwise
specified in the applicable prospectus supplement:
- - For all floating rate notes other than LIBOR notes, EURIBOR notes, treasury
rate notes and 11th district rate notes, the interest determination date
relating to a particular interest reset date will be the second business day
before the interest reset date.
- - For LIBOR notes, the interest determination date relating to a particular
interest reset date will be the second LONDON BUSINESS DAY preceding the
interest reset date, unless the INDEX CURRENCY is pounds sterling, in which
case the interest determination date will be the interest reset date. We refer
to an interest determination date for a LIBOR note as a LIBOR interest
determination date.
- - For EURIBOR notes, the interest determination date relating to a particular
interest reset date will be the second EURO BUSINESS DAY preceding the
interest reset date. We refer to an interest determination date for a EURIBOR
note as a EURIBOR interest determination date.
- - For treasury rate notes, the interest determination date relating to a
particular interest reset date, which we refer to as a treasury interest
determination date, will be the day of the week in which the interest reset
date falls on which treasury bills -- i.e., direct obligations of the U.S.
government -- would normally be auctioned. Treasury bills are usually sold at
auction on the Monday of each week, unless that day is a legal holiday, in
which case the auction is usually held on the following Tuesday, except that
the auction may be held on the preceding Friday. If as the result of a legal
holiday an auction is held on the preceding Friday, that Friday will be the
treasury interest determination date relating to the interest reset date
occurring in the next succeeding week. If the auction is held on a day that
would otherwise be an interest reset date, then the interest reset date will
instead be the first business day following the auction date.
- - For 11th district rate notes, the interest determination date relating to a
particular interest reset date will be the last working
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day, in the first calendar month before that interest reset date, on which the
Federal Home Loan Bank of San Francisco publishes the monthly average cost of
funds paid by member institutions of the Eleventh Federal Home Loan Bank
District for the second calendar month before that interest reset date. We
refer to an interest determination date for an 11th district rate note as an
11th district interest determination date.
INTEREST CALCULATION DATES. As described above, the interest rate that
takes effect on a particular interest reset date will be determined by reference
to the corresponding interest determination date. Except for LIBOR notes and
EURIBOR notes, however, the determination of the rate will actually be made on a
day no later than the corresponding interest calculation date. The interest
calculation date will be the earlier of the following:
- - the tenth calendar day after the interest determination date or, if that tenth
calendar day is not a business day, the next succeeding business day; and
- - the business day immediately preceding the interest payment date or the
maturity, whichever is the day on which the next payment of interest will be
due.
The calculation agent need not wait until the relevant interest calculation date
to determine the interest rate if the rate information it needs to make the
determination is available from the relevant sources sooner.
INTEREST PAYMENT DATES. The interest payment dates for a floating rate
note will depend on when the interest rate is reset and, unless we specify
otherwise in the applicable prospectus supplement, will be as follows:
- - for floating rate notes that reset daily, weekly or monthly, the third
Wednesday of each month or the third Wednesday of March, June, September and
December of each year, as specified in the applicable prospectus supplement;
- - for floating rate notes that reset quarterly, the third Wednesday of March,
June, September and December of each year;
- - for floating rate notes that reset semi-annually, the third Wednesday of the
two months of each year specified in the applicable prospectus supplement; or
- - for floating rate notes that reset annually, the third Wednesday of the month
specified in the applicable prospectus supplement.
Regardless of these rules, if a note is originally issued after the regular
record date and before the date that would otherwise be the first interest
payment date, the first interest payment date will be the date that would
otherwise be the second interest payment date. We have defined the term "regular
record date" below under "-- Payment Mechanics -- Who Receives Payment?".
In addition, the following special provision will apply to a floating rate
note with regard to any interest payment date other than one that falls on the
maturity. If the interest payment date would otherwise fall on a day that is not
a business day, then the interest payment date will be the next day that is a
business day. However, if the floating rate note is a LIBOR note or a EURIBOR
note and the next business day falls in the next calendar month, then the
interest payment date will be advanced to the next preceding day that is a
business day. In all cases, an interest payment date that falls on the maturity
will not be changed.
CALCULATION OF INTEREST. Calculations relating to floating rate notes will
be made by the calculation agent, an institution that we appoint as our agent
for this purpose. That institution may include any affiliate of ours, such as
Goldman, Sachs & Co. The prospectus supplement for a particular floating rate
note will name the institution that we have appointed to act as calculation
agent for that note as of its original issue date. We may appoint a different
institution to serve as calculation agent from time to time after the original
issue date of the note without your consent and without notifying you of the
change.
For each floating rate note, the calculation agent will determine, on the
corresponding interest calculation or determination date, as applicable, the
interest rate that takes
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effect on each interest reset date. In addition, the calculation agent will
calculate the amount of interest that has accrued during each interest period --
i.e., the period from and including the original issue date, or the last date to
which interest has been paid or made available for payment, to but excluding the
payment date. For each interest period, the calculation agent will calculate the
amount of accrued interest by multiplying the face amount of the floating rate
note by an accrued interest factor for the interest period. This factor will
equal the sum of the interest factors calculated for each day during the
interest period. The interest factor for each day will be expressed as a decimal
and will be calculated by dividing the interest rate (also expressed as a
decimal) applicable to that day:
- - by 360, in the case of commercial paper rate notes, prime rate notes, LIBOR
notes, EURIBOR notes, CD rate notes, federal funds rate notes and 11th
district rate notes; or
- - by the actual number of days in the year, in the case of treasury rate notes
and CMT rate notes.
Upon the request of the Holder of any floating rate note, the calculation
agent will provide for that note the interest rate then in effect -- and, if
determined, the interest rate that will become effective on the next interest
reset date. The calculation agent's determination of any interest rate, and its
calculation of the amount of interest for any interest period, will be final and
binding in the absence of manifest error.
All percentages resulting from any calculation relating to a note will be
rounded upward or downward, as appropriate, to the next higher or lower one
hundred-thousandth of a percentage point (e.g., 9.876541% (or .09876541) being
rounded down to 9.87654% (or .0987654) and 9.876545% (or .09876545) being
rounded up to 9.87655% (or .0987655)). All amounts used in or resulting from any
calculation relating to a floating rate note will be rounded upward or downward,
as appropriate, to the nearest cent, in the case of U.S. dollars, or to the
nearest corresponding hundredth of a unit, in the case of a currency other than
U.S. dollars, with one-half cent or one-half of a corresponding hundredth of a
unit or more being rounded upward.
In determining the base rate that applies to a floating rate note during a
particular interest period, the calculation agent may obtain rate quotes from
various banks or dealers active in the relevant market, as described in the
following subsections. Those reference banks and dealers may include the
calculation agent itself and its affiliates, as well as any agent and its
affiliates, and they may include affiliates of The Goldman Sachs Group, Inc.
COMMERCIAL PAPER RATE NOTES
If you purchase a commercial paper rate note, your note will bear interest
at a base rate equal to the commercial paper rate and adjusted by the spread or
spread multiplier, if any, specified in your prospectus supplement.
The commercial paper rate will be the MONEY MARKET YIELD of the rate, for
the relevant interest determination date, for commercial paper having the INDEX
MATURITY specified in your prospectus supplement, as published in H.15(519)
under the heading "Commercial Paper -- Nonfinancial". If the commercial paper
rate cannot be determined as described above, the following procedures will
apply.
- - If the rate described above does not appear in H.15(519) at 3:00 P.M., New
York City time, on the relevant interest calculation date (unless the
calculation is made earlier and the rate is available from that source at that
time), then the commercial paper rate will be the rate, for the relevant
interest determination date, for commercial paper having the index maturity
specified in your prospectus supplement, as published in H.15 DAILY UPDATE or
any other recognized electronic source used for displaying that rate, under
the heading "Commercial Paper -- Nonfinancial".
- - If the rate described above does not appear in H.15(519), H.15 daily update or
another recognized electronic source at 3:00 P.M., New York City time, on the
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relevant interest calculation date (unless the calculation is made earlier and
the rate is available from one of those sources at that time), the commercial
paper rate will be the money market yield of the arithmetic mean of the
following offered rates for U.S. dollar commercial paper that has the relevant
index maturity and is placed for an industrial issuer whose bond rating is
"AA", or the equivalent, from a nationally recognized rating agency: the rates
offered as of 11:00 A.M., New York City time, on the relevant interest
determination date, by three leading U.S. dollar commercial paper dealers in
New York City selected by the calculation agent.
- - If fewer than three dealers selected by the calculation agent are quoting as
described above, the commercial paper rate for the new interest period will be
the commercial paper rate in effect for the prior interest period. If the
initial base rate has been in effect for the prior interest period, however,
it will remain in effect for the new interest period.
PRIME RATE NOTES
If you purchase a prime rate note, your note will bear interest at a base
rate equal to the prime rate and adjusted by the spread or spread multiplier, if
any, specified in your prospectus supplement.
The prime rate will be the rate, for the relevant interest determination
date, published in H.15(519) under the heading "Bank Prime Loan". If the prime
rate cannot be determined as described above, the following procedures will
apply.
- - If the rate described above does not appear in H.15(519) at 3:00 P.M., New
York City time, on the relevant interest calculation date (unless the
calculation is made earlier and the rate is available from that source at that
time), then the prime rate will be the rate, for the relevant interest
determination date, as published in H.15 daily update or another recognized
electronic source used for the purpose of displaying that rate, under the
heading "Bank Prime Loan".
- - If the rate described above does not appear in H.15(519), H.15 daily update or
another recognized electronic source at 3:00 P.M., New York City time, on the
relevant interest calculation date (unless the calculation is made earlier and
the rate is available from one of those sources at that time), then the prime
rate will be the arithmetic mean of the following rates as they appear on the
REUTERS SCREEN US PRIME 1 PAGE: the rate of interest publicly announced by
each bank appearing on that page as that bank's prime rate or base lending
rate, as of 11:00 A.M., New York City time, on the relevant interest
determination date.
- - If fewer than four of these rates appear on the Reuters screen US PRIME 1
page, the prime rate will be the arithmetic mean of the prime rates or base
lending rates, as of the close of business on the relevant interest
determination date, of three major banks in New York City selected by the
calculation agent. For this purpose, the calculation agent will use rates
quoted on the basis of the actual number of days in the year divided by a
360-day year.
- - If fewer than three banks selected by the calculation agent are quoting as
described above, the prime rate for the new interest period will be the prime
rate in effect for the prior interest period. If the initial base rate has
been in effect for the prior interest period, however, it will remain in
effect for the new interest period.
LIBOR NOTES
If you purchase a LIBOR note, your note will bear interest at a base rate
equal to LIBOR, which will be the London interbank offered rate for deposits in
U.S. dollars or any other index currency, as specified in your prospectus
supplement. In addition, the applicable LIBOR base rate will be adjusted by the
spread or spread multiplier, if any, specified in your prospectus supplement.
LIBOR will be determined in the following manner:
- - LIBOR will be either:
-- the offered rate appearing on the TELERATE LIBOR PAGE; or
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-- the arithmetic mean of the offered rates appearing on the REUTERS SCREEN
LIBOR PAGE unless that page by its terms cites only one rate, in which
case that rate;
in either case, as of 11:00 A.M., London time, on the relevant LIBOR interest
determination date, for deposits of the relevant index currency having the
relevant index maturity beginning on the relevant interest reset date. Your
prospectus supplement will indicate the index currency, the index maturity and
the reference page that apply to your LIBOR note. If no reference page is
specified in your prospectus supplement, Telerate LIBOR page will apply to your
LIBOR note.
- - If Telerate LIBOR page applies and the rate described above does not appear on
that page, or if Reuters screen LIBOR page applies and fewer than two of the
rates described above appears on that page or no rate appears on any page on
which only one rate normally appears, then LIBOR will be determined on the
basis of the rates, at approximately 11:00 A.M., London time, on the relevant
LIBOR interest determination date, at which deposits of the following kind are
offered to prime banks in the London interbank market by four major banks in
that market selected by the calculation agent: deposits of the index currency
having the relevant index maturity, beginning on the relevant interest reset
date, and in a REPRESENTATIVE AMOUNT. The calculation agent will request the
principal London office of each of these banks to provide a quotation of its
rate. If at least two quotations are provided, LIBOR for the relevant LIBOR
interest determination date will be the arithmetic mean of the quotations.
- - If fewer than two quotations are provided as described above, LIBOR for the
relevant LIBOR interest determination date will be the arithmetic mean of the
rates for loans of the following kind to leading European banks quoted, at
approximately 11:00 A.M., in the principal financial center for the country of
the index currency, on that LIBOR interest determination date, by three major
banks in that financial center selected by the calculation agent: loans of the
index currency having the relevant index maturity, beginning on the relevant
interest reset date, and in a representative amount.
- - If fewer than three banks selected by the calculation agent are quoting as
described above, LIBOR for the new interest period will be LIBOR in effect for
the prior interest period. If the initial base rate has been in effect for the
prior interest period, however, it will remain in effect for the new interest
period.
EURIBOR NOTES
If you purchase a EURIBOR note, your note will bear interest at a base rate
equal to the interest rate for deposits in euros designated as "EURIBOR" and
sponsored jointly by the European Banking Federation and ACI -- the Financial
Market Association (or any company established by the joint sponsors for
purposes of compiling and publishing that rate). In addition, the EURIBOR base
rate will be adjusted by the spread or spread multiplier, if any, specified in
your prospectus supplement. EURIBOR will be determined in the following manner:
- - EURIBOR will be the offered rate for deposits in euros having the index
maturity specified in your prospectus supplement, beginning on the second euro
business day after the relevant EURIBOR interest determination date, as that
rate appears on TELERATE PAGE 248 as of 11:00 A.M., Brussels time, on the
relevant EURIBOR interest determination date.
- - If the rate described above does not appear on Telerate page 248, EURIBOR will
be determined on the basis of the rates, at approximately 11:00 A.M., Brussels
time, on the relevant EURIBOR interest determination date, at which deposits
of the following kind are offered to prime banks in the EURO-ZONE interbank
market by the principal euro-zone office of each of four major banks in that
market selected by the calculation agent: euro deposits having the relevant
index maturity, beginning on the relevant interest reset date, and in a
representative amount. The calculation agent will request the principal
euro-zone office of each of these banks to provide a quotation
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of its rate. If at least two quotations are provided, EURIBOR for the relevant
EURIBOR interest determination date will be the arithmetic mean of the
quotations.
- - If fewer than two quotations are provided as described above, EURIBOR for the
relevant EURIBOR interest determination date will be the arithmetic mean of
the rates for loans of the following kind to leading euro-zone banks quoted,
at approximately 11:00 A.M., Brussels time on that EURIBOR interest
determination date, by three major banks in the euro-zone selected by the
calculation agent: loans of euros having the relevant index maturity,
beginning on the relevant interest reset date, and in a representative amount.
- - If fewer than three banks selected by the calculation agent are quoting as
described above, EURIBOR for the new interest period will be EURIBOR in effect
for the prior interest period. If the initial base rate has been in effect for
the prior interest period, however, it will remain in effect for the new
interest period.
TREASURY RATE NOTES
If you purchase a treasury rate note, your note will bear interest at a
base rate equal to the treasury rate and adjusted by the spread or spread
multiplier, if any, specified in your prospectus supplement.
The treasury rate will be the rate for the auction, on the relevant
treasury interest determination date, of treasury bills having the index
maturity specified in your prospectus supplement, as that rate appears on
Telerate page 56 or 57 under the heading "Investment Rate". If the treasury rate
cannot be determined in this manner, the following procedures will apply.
- - If the rate described above does not appear on either page at 3:00 P.M., New
York City time, on the relevant interest calculation date (unless the
calculation is made earlier and the rate is available from that source at that
time), the treasury rate will be the BOND EQUIVALENT YIELD of the rate, for
the relevant interest determination date, for the type of treasury bill
described above, as published in H.15 daily update, or another recognized
electronic source used for displaying that rate, under the heading "U.S.
Government Securities/Treasury Bills/Auction High".
- - If the rate described in the prior paragraph does not appear in H.15 daily
update or another recognized electronic source at 3:00 P.M., New York City
time, on the relevant interest calculation date (unless the calculation is
made earlier and the rate is available from one of those sources at that
time), the treasury rate will be the bond equivalent yield of the auction
rate, for the relevant treasury interest determination date and for treasury
bills of the kind described above, as announced by the U.S. Department of the
Treasury.
- - If the auction rate described in the prior paragraph is not so announced by
3:00 P.M., New York City time, on the relevant interest calculation date, or
if no such auction is held for the relevant week, then the treasury rate will
be the bond equivalent yield of the rate, for the relevant treasury interest
determination date and for treasury bills having a remaining maturity closest
to the specified index maturity, as published in H.15(519) under the heading
"U.S. Government Securities/Treasury Bills/Secondary Market".
- - If the rate described in the prior paragraph does not appear in H.15(519) at
3:00 P.M., New York City time, on the relevant interest calculation date
(unless the calculation is made earlier and the rate is available from one of
those sources at that time), then the treasury rate will be the rate, for the
relevant treasury interest determination date and for treasury bills having a
remaining maturity closest to the specified index maturity, as published in
H.15 daily update, or another recognized electronic source used for displaying
that rate, under the heading "U.S. Government Securities/Treasury
Bills/Secondary Market".
- - If the rate described in the prior paragraph does not appear in H.15 daily
update or another recognized electronic source at 3:00 P.M., New York City
time, on the relevant interest calculation date (unless
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the calculation is made earlier and the rate is available from one of those
sources at that time), the treasury rate will be the bond equivalent yield of
the arithmetic mean of the following secondary market bid rates for the issue
of treasury bills with a remaining maturity closest to the specified index
maturity: the rates bid as of approximately 3:30 P.M., New York City time, on
the relevant treasury interest determination date, by three primary U.S.
government securities dealers in New York City selected by the calculation
agent.
- - If fewer than three dealers selected by the calculation agent are quoting as
described in the prior paragraph, the treasury rate in effect for the new
interest period will be the treasury rate in effect for the prior interest
period. If the initial base rate has been in effect for the prior interest
period, however, it will remain in effect for the new interest period.
CMT RATE NOTES
If you purchase a CMT rate note, your note will bear interest at a base
rate equal to the CMT rate and adjusted by the spread or spread multiplier, if
any, specified in your prospectus supplement.
The CMT rate will be the following rate displayed on the DESIGNATED CMT
TELERATE PAGE under the heading " . . . Treasury Constant
Maturities . . . Federal Reserve Board Release H.15 . . . Mondays Approximately
3:45 P.M.", under the column for the DESIGNATED CMT INDEX MATURITY:
- - if the designated CMT Telerate page is Telerate page 7051, the rate for the
relevant interest determination date; or
- - if the designated CMT Telerate page is Telerate page 7052, the weekly or
monthly average, as specified in your prospectus supplement, for the week that
ends immediately before the week in which the relevant interest determination
date falls, or for the month that ends immediately before the month in which
the relevant interest determination date falls, as applicable.
If the CMT rate cannot be determined in this manner, the following procedures
will apply.
- - If the applicable rate described above is not displayed on the relevant
designated CMT Telerate page at 3:00 P.M., New York City time, on the relevant
interest calculation date (unless the calculation is made earlier and the rate
is available from that source at that time), then the CMT rate will be the
applicable treasury constant maturity rate described above -- i.e., for the
designated CMT index maturity and for either the relevant interest
determination date or the weekly or monthly average, as applicable -- as
published in H.15(519).
- - If the applicable rate described above does not appear in H.15(519) at 3:00
P.M., New York City time, on the relevant interest calculation date (unless
the calculation is made earlier and the rate is available from one of those
sources at that time), then the CMT rate will be the treasury constant
maturity rate, or other U.S. treasury rate, for the designated CMT index
maturity and with reference to the relevant interest determination date, that:
-- is published by the Board of Governors of the Federal Reserve System, or
the U.S. Department of the Treasury, and
-- is determined by the calculation agent to be comparable to the
applicable rate formerly displayed on the designated CMT Telerate page
and published in H.15(519).
- - If the rate described in the prior paragraph does not appear at 3:00 P.M., New
York City time, on the relevant interest calculation date (unless the
calculation is made earlier and the rate is available from one of those
sources at that time), then the CMT rate will be the yield to maturity of the
arithmetic mean of the following secondary market offered rates for the most
recently issued treasury notes having an original maturity of approximately
the designated CMT index maturity and a remaining term to maturity of not less
than the designated CMT index maturity minus one year, and in a representative
amount, the offered rates, as of approximately 3:30 P.M., New York City time,
on the relevant interest determination date, of three primary U.S. govern-
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ment securities dealers in New York City selected by the calculation agent. In
selecting these offered rates, the calculation agent will request quotations
from five of these primary dealers and will disregard the highest
quotation -- or, if there is equality, one of the highest -- and the lowest
quotation -- or, if there is equality, one of the lowest. Treasury notes are
direct, non-callable, fixed rate obligations of the U.S. government.
- - If the calculation agent is unable to obtain three quotations of the kind
described in the prior paragraph, the CMT rate will be the yield to maturity
of the arithmetic mean of the following secondary market offered rates for
treasury notes with an original maturity longer than the designated CMT index
maturity, with a remaining term to maturity closest to the designated CMT
index maturity and in a representative amount: the offered rates, as of
approximately 3:30 P.M., New York City time, on the relevant interest
determination date, of three primary U.S. government securities dealers in New
York City selected by the calculation agent. In selecting these offered rates,
the calculation agent will request quotations from five of these primary
dealers and will disregard the highest quotation -- or, if there is equality,
one of the highest -- and the lowest quotation -- or, if there is equality,
one of the lowest. If two treasury notes with an original maturity longer than
the designated CMT index maturity have remaining terms to maturity that are
equally close to the designated CMT index maturity, the calculation agent will
obtain quotations for the treasury note with the shorter remaining term to
maturity.
- - If fewer than five but more than two of these primary dealers are quoting as
described in the prior paragraph, then the CMT rate for the relevant interest
determination date will be based on the arithmetic mean of the offered rates
so obtained, and neither the highest nor the lowest of those quotations will
be disregarded.
- - If two or fewer primary dealers selected by the calculation agent are quoting
as described above, the CMT rate in effect for the new interest period will be
the CMT rate in effect for the prior interest period. If the initial base rate
has been in effect for the prior interest period, however, it will remain in
effect for the new interest period.
CD RATE NOTES
If you purchase a CD rate note, your note will bear interest at a base rate
equal to the CD rate and adjusted by the spread or spread multiplier, if any,
specified in your prospectus supplement.
The CD rate will be the rate, on the relevant interest determination date,
for negotiable U.S. dollar certificates of deposit having the index maturity
specified in your prospectus supplement, as published in H.15(519) under the
heading "CDs (Secondary Market)". If the CD rate cannot be determined in this
manner, the following procedures will apply.
- - If the rate described above does not appear in H.15(519) at 3:00 P.M., New
York City time, on the relevant interest calculation date (unless the
calculation is made earlier and the rate is available from that source at that
time), then the CD rate will be the rate, for the relevant interest
determination date, described above as published in H.15 daily update, or
another recognized electronic source used for displaying that rate, under the
heading "CDs (Secondary Market)".
- - If the rate described above does not appear in H.15(519), H.15 daily update or
another recognized electronic source at 3:00 P.M., New York City time, on the
relevant interest calculation date (unless the calculation is made earlier and
the rate is available from one of those sources at that time), the CD rate
will be the arithmetic mean of the following secondary market offered rates
for negotiable U.S. dollar certificates of deposit of major U.S. money center
banks with a remaining maturity closest to the specified index maturity, and
in a representative amount: the rates offered as of 10:00 A.M., New York City
time, on the relevant interest determination date, by three leading nonbank
dealers in negotiable U.S. dollar certificates of deposit in
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New York City, as selected by the calculation agent.
- - If fewer than three dealers selected by the calculation agent are quoting as
described above, the CD rate in effect for the new interest period will be the
CD rate in effect for the prior interest period. If the initial base rate has
been in effect for the prior interest period, however, it will remain in
effect for the new interest period.
FEDERAL FUNDS RATE NOTES
If you purchase a federal funds rate note, your note will bear interest at
a base rate equal to the federal funds rate and adjusted by the spread or spread
multiplier, if any, specified in your prospectus supplement.
The federal funds rate will be the rate for U.S. dollar federal funds on
the relevant interest determination date, as published in H.15 (519) under the
heading "Federal Funds (Effective)", as that rate is displayed on Telerate page
120. If the federal funds rate cannot be determined in this manner, the
following procedures will apply.
- - If the rate described above is not displayed on Telerate page 120 at 3:00
P.M., New York City time, on the relevant interest calculation date (unless
the calculation is made earlier and the rate is available from that source at
that time), then the federal funds rate, for the relevant interest
determination date, will be the rate described above as published in H.15
daily update, or another recognized electronic source used for displaying that
rate, under the heading "Federal Funds (Effective)".
- - If the rate described above is not displayed on Telerate page 120 and does not
appear in H.15(519), H.15 daily update or another recognized electronic source
at 3:00 P.M., New York City time, on the relevant interest calculation date
(unless the calculation is made earlier and the rate is available from one of
those sources at that time), the federal funds rate will be the arithmetic
mean of the rates for the last transaction in overnight, U.S. dollar federal
funds arranged, before 9:00 A.M., New York City time, on the relevant interest
determination date, by three leading brokers of U.S. dollar federal funds
transactions in New York City selected by the calculation agent.
- - If fewer than three brokers selected by the calculation agent are quoting as
described above, the federal funds rate in effect for the new interest period
will be the federal funds rate in effect for the prior interest period. If the
initial base rate has been in effect for the prior interest period, however,
it will remain in effect for the new interest period.
11TH DISTRICT RATE NOTES
If you purchase an 11th district rate note, your note will bear interest at
a base rate equal to the 11th district rate and adjusted by the spread or spread
multiplier, if any, specified in your prospectus supplement.
The 11th district rate will be the rate equal to the monthly weighted
average cost of funds for the calendar month immediately before the relevant
11th district interest determination date, as displayed on Telerate page 7058
under the heading "11th District" as of 11:00 A.M., San Francisco time, on that
date. If the 11th district rate cannot be determined in this manner, the
following procedures will apply.
- - If the rate described above does not appear on Telerate page 7058 on the
relevant 11th district interest determination date, then the 11th district
rate for that date will be the monthly weighted average cost of funds paid by
institutions that are members of the Eleventh Federal Home Loan Bank District
for the calendar month immediately before the relevant 11th district interest
determination date, as most recently announced by the Federal Home Loan Bank
of San Francisco as that cost of funds.
- - If the Federal Home Loan Bank of San Francisco fails to announce the cost of
funds described in the prior paragraph on or before the relevant 11th district
interest determination date, the 11th district rate in effect for the new
interest period will be the 11th district rate in effect for the prior
interest period. If the initial base rate has been in effect for the prior
interest period,
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however, it will remain in effect for the new interest period.
SPECIAL RATE CALCULATION TERMS
In this subsection entitled "-- Interest Rates", we use several terms that
have special meanings relevant to calculating floating interest rates. We define
these terms as follows:
The term "BOND EQUIVALENT YIELD" means a yield expressed as a percentage
and calculated in accordance with the following formula:
<TABLE>
<S> <C> <C> <C> <C>
D x N
bond equivalent yield = ------------- x 100
360 - (D x M)
</TABLE>
where
- - "D" means the annual rate for treasury bills quoted on a bank discount basis
and expressed as a decimal;
- - "N" means 365 or 366, as the case may be; and
- - "M" means the actual number of days in the applicable interest reset period.
The term "BUSINESS DAY" means, for any note, a day that meets all the
following applicable requirements:
- - for all notes, is a Monday, Tuesday, Wednesday, Thursday or Friday that is not
a day on which banking institutions in New York City generally are authorized
or obligated by law, regulation or executive order to close;
- - if the note is a LIBOR note, is also a London business day;
- - if the note has a specified currency other than U.S. dollars or euros, is also
a day on which banking institutions are not authorized or obligated by law,
regulation or executive order to close in the principal financial center of
the country issuing the specified currency; and
- - if the note is a EURIBOR note or has a specified currency of euros, or is a
LIBOR note for which the index currency is euros, is also a Euro business day.
The term "DESIGNATED CMT INDEX MATURITY" means the index maturity for a CMT
rate note and will be the original period to maturity of a U.S. treasury
security -- either 1, 2, 3, 5, 7, 10, 20 or 30 years -- specified in the
applicable pricing supplement. If no such original maturity period is so
specified, the designated CMT index maturity will be 2 years.
The term "DESIGNATED CMT TELERATE PAGE" means the Telerate page specified
in the applicable prospectus supplement that displays treasury constant
maturities as reported in H.15(519). If no Telerate page is so specified, then
the applicable page will be Telerate page 7052. If Telerate page 7052 applies
but the applicable prospectus supplement does not specify whether the weekly or
monthly average applies, the weekly average will apply.
The term "EURO BUSINESS DAY" means any day on which the Trans-European
Automated Real-Time Gross Settlement Express Transfer (TARGET) System, or any
successor system, is open for business.
The term "EURO-ZONE" means, at any time, the region comprised of the member
states of the European Economic and Monetary Union that, as of that time, have
adopted a single currency in accordance with the Treaty on European Union of
February 1992.
"H.15(519)" means the weekly statistical release entitled "Statistical
Release H.15 (519)", or any successor publication, published by the Board of
Governors of the Federal Reserve System.
"H.15 DAILY UPDATE" means the daily update of H.15(519) available through
the worldwide-web site of the Board of Governors of the Federal Reserve System,
at http://www.bog.frb.fed.us/releases/h15/update, or any successor site or
publication.
The term "INDEX CURRENCY" means, with respect to a LIBOR note, the currency
specified as such in the applicable prospectus supplement. The index currency
may be U.S. dollars or any other currency, and will be U.S. dollars unless
another currency is specified in the applicable prospectus supplement.
The term "INDEX MATURITY" means, with respect to a floating rate note, the
period to
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maturity of the instrument or obligation on which the interest rate formula is
based, as specified in the applicable prospectus supplement.
"LONDON BUSINESS DAY" means any day on which dealings in the relevant index
currency are transacted in the London interbank market.
The term "MONEY MARKET YIELD" means a yield expressed as a percentage and
calculated in accordance with the following formula:
<TABLE>
<S> <C> <C> <C> <C>
D x 360
money market yield = ------------- x 100
360 - (D x M)
</TABLE>
where
- - "D" means the annual rate for commercial paper quoted on a bank discount basis
and expressed as a decimal; and
- - "M" means the actual number of days in the relevant interest reset period.
The term "REPRESENTATIVE AMOUNT" means an amount that, in the calculation
agent's judgment, is representative of a single transaction in the relevant
market at the relevant time.
"REUTERS SCREEN LIBOR PAGE" means the display on the Reuters Monitor Money
Rates Service, or any successor service, on the page designated as "LIBO" or any
replacement page or pages on which London interbank rates of major banks for the
relevant index currency are displayed.
"REUTERS SCREEN US PRIME 1 PAGE" means the display on the "US PRIME 1" page
on the Reuters Monitor Money Rates Service, or any successor service, or any
replacement page or pages on that service, for the purpose of displaying prime
rates or base lending rates of major U.S. banks.
"TELERATE LIBOR PAGE" means Telerate page 3750 or any replacement page or
pages on which London interbank rates of major banks for the relevant index
currency are displayed.
"TELERATE PAGE" means the display on Bridge Telerate, Inc., or any
successor service, on the page or pages specified in this prospectus or the
applicable prospectus supplement, or any replacement page or pages on that
service.
If, when we use the terms designated CMT Telerate page, H.15(519), H.15
daily update, Reuters screen LIBOR page, Reuters screen US PRIME 1 page,
Telerate LIBOR page or Telerate page, we refer to a particular heading or
headings on any of those pages, those references include any successor or
replacement heading or headings as determined by the calculation agent.
REDEMPTION AND REPAYMENT
Unless otherwise indicated in your prospectus supplement, your note 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 notes. In addition, we will not be entitled to redeem your note before its
stated maturity unless your prospectus supplement specifies a redemption
commencement date. You will not be entitled to require us to buy your note from
you, before its stated maturity, unless your prospectus supplement specifies one
or more repayment dates.
If your prospectus supplement specifies a redemption commencement date or a
repayment date, it will also specify one or more redemption prices or repayment
prices, which will be expressed as a percentage of the principal amount of your
note. It may also specify one or more redemption periods during which the
redemption prices relating to a redemption of notes during those periods will
apply.
If your prospectus supplement specifies a redemption commencement date,
your note will be redeemable at our option at any time on or after that date. If
we redeem your note, we will do so at the specified redemption price, together
with interest accrued to the redemption date. If different prices are specified
for different redemption periods, the price we pay will be the price that
applies to the redemption period during which your note is redeemed.
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If your prospectus supplement specifies a repayment date, your note will be
repayable at your option on the specified repayment date at the specified
repayment price, together with interest accrued to the repayment date.
In the event that we exercise an option to redeem any note, we will give to
the trustee and the Holder written notice of the principal amount of the note to
be redeemed, not less than 30 days nor more than 60 days before the applicable
redemption date. We will give the notice in the manner described below in
"-- Notices".
If a note represented by a global note is subject to repayment at the
Holder's option, the depositary or its nominee, as the Holder, will be the only
person that can exercise the right to repayment. Any indirect holders who own
beneficial interests in the global note and wish to exercise a repayment right
must give proper and timely instructions to their banks or brokers through which
they hold their interests, requesting that they notify the depositary to
exercise the repayment right on their behalf. Different firms have different
deadlines for accepting instructions from their customers, and you should take
care to act promptly enough to ensure that your request is given effect by the
depositary before the applicable deadline for exercise.
Street name and other indirect holders should contact their banks or
brokers for information about how to exercise a repayment right in a
timely manner.
In the event that the option of the Holder to elect repayment as described
above is deemed to be a "tender offer" within the meaning of Rule 14e-1 under
the Securities Exchange Act of 1934, we will comply with Rule 14e-1 as then in
effect to the extent applicable.
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. Notes that we or they 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 any 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 of our
assets and the successor firm is a non-U.S. entity, neither we nor any successor
would have any obliga-
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tion to compensate you for any resulting adverse tax consequences to the notes.
RESTRICTIVE COVENANT AND DEFEASANCE
RESTRICTION ON LIENS
In the indenture, we promise not to create or guarantee any debt for
borrowed money that is secured by a lien on the voting or profit participating
equity ownership interests that we or any of our subsidiaries own in Goldman,
Sachs & Co. (or in any subsidiary that beneficially owns or holds, directly or
indirectly, those interests in Goldman, Sachs & Co.), unless we also secure the
notes on an equal or priority basis with the other secured debt. Our promise,
however, is subject to an important exception: we may secure debt for borrowed
money with liens on those interests without securing the notes if our board of
directors determines that the liens do not materially detract from or interfere
with the then-present value or control of those interests.
Except as noted above, the indenture does not restrict our ability to put
liens on our interests in our subsidiaries other than Goldman, Sachs & Co., nor
does it restrict our ability to sell or otherwise dispose of our interests in
any of our subsidiaries, including Goldman, Sachs & Co. In addition, the
restriction on liens applies only to liens that secure debt for borrowed money.
For example, liens imposed by operation of law, such as liens to secure
statutory obligations for taxes or workers' compensation benefits, or liens we
create to secure obligations to pay legal judgments or surety bonds, would not
be covered by this restriction.
DEFEASANCE AND COVENANT DEFEASANCE
Unless we say otherwise in the applicable prospectus supplement, the
provisions for full defeasance and covenant defeasance described below apply to
each note as indicated in the applicable prospectus supplement. In general, we
expect these provisions to apply to each note that is not a floating rate or
indexed note and to each note that has a specified currency of U.S. dollars.
FULL DEFEASANCE. If there is a change in U.S. federal tax law, as
described below, we can legally release ourselves from all payment and other
obligations on your note. This is called full defeasance. To do so, each of the
following must occur:
- - We must deposit in trust for the benefit of all Holders a combination of money
and U.S. government or U.S. government agency notes or bonds that will
generate enough cash to make interest, principal and any other payments on
your note on their various due dates;
- - There must be a change in current U.S. federal tax law or an Internal Revenue
Service ruling that lets us make the above deposit without causing you to be
taxed on your note any differently than if we did not make the deposit and
just repaid the note ourselves. Under current federal tax law, the deposit and
our legal release from the note would be treated as though we took back your
note and gave you your share of the cash and notes or bonds deposited in
trust. In that event, you could recognize gain or loss on your note; and
- - We must deliver to the trustee a legal opinion of our counsel confirming the
tax law change described above.
If we ever fully defease your note, you will have to rely solely on the
trust deposit for payments on your note. You could not look to us for payment in
the event of any shortfall.
COVENANT DEFEASANCE. Under current U.S. federal tax law, we can make the
same type of deposit described above and be released from certain restrictive
covenants relating to your note. This is called covenant defeasance. In that
event, you would lose the protection of those restrictive covenants. In order to
achieve covenant defeasance, we must do both of the following:
- - We must deposit in trust for the benefit of the Holders a combination of money
and U.S. government or U.S. government agency notes or bonds that will
generate enough cash to make interest, principal and any other payments on
your note on their various due dates.
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- - We must deliver to the trustee a legal opinion of our counsel confirming that
under current U.S. federal income tax law we may make the above deposit
without causing you to be taxed on your note any differently than if we did
not make the deposit and just repaid the note ourselves.
If we accomplish covenant defeasance with regard to your note, the
following provisions of the indenture and the notes would no longer apply:
- - Our promise not to create liens on our voting or profit participating equity
ownership interests in Goldman, Sachs & Co. described above under
"-- Restriction on Liens" and any other covenants that your prospectus
supplement may state are applicable to your note; and
- - The events of default resulting from a breach of covenants, described below in
the fourth item under "-- Default, Remedies and Waiver of Default -- Events of
Default".
If we accomplish covenant defeasance, you can still look to us for
repayment of your note in the event of any shortfall in the trust deposit. You
should note, however, that if one of the remaining events of default occurred,
such as our bankruptcy, and your note became immediately due and payable, there
may be a shortfall. Depending on the event causing the default, you may not be
able to obtain payment of the shortfall.
DEFAULT, REMEDIES AND WAIVER OF DEFAULT
You will have special rights if an event of default with respect to your
note occurs and is not cured, as described in this subsection.
EVENTS OF DEFAULT
With respect to your note, when we refer to an event of default, we mean
any of the following:
- - We do not pay the principal or any premium on any Series B medium-term note on
its due date;
- - We do not pay interest on any Series B medium-term note within 30 days after
its due date;
- - We do not deposit a sinking fund payment with regard to any Series B
medium-term note on its due date, but only if the payment is required in the
applicable prospectus supplement;
- - We remain in breach of our covenant described under "-- Restrictive Covenant
and Defeasance -- Restriction on Liens" above, or any other covenant we make
in the indenture for the benefit of the Series B medium-term 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 the Series B medium-term 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; or
- - If your prospectus supplement states that any additional event of default
applies to your note, that event of default occurs.
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 all Series B
medium-term notes may declare the entire principal amount of all the 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 the 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 affected notes. If the maturity of any notes is
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accelerated and a judgment for payment has not yet been obtained, the Holders of
a majority in principal amount of the notes affected by the acceleration may
cancel the acceleration for all the affected notes.
If an event of default occurs, the trustee will have special duties. In
that situation, the trustee will be obligated to use those of its rights and
powers under the indenture, and to use the same degree of care and skill in
doing so, that a prudent person would use in that situation in conducting his or
her own affairs.
Except as described in the prior paragraph, the trustee is not required to
take any action under the indenture at the request of any Holders unless the
Holders offer the trustee reasonable protection from expenses and liability.
This is called an indemnity. If the trustee is provided with an indemnity
reasonably satisfactory to it, the Holders of a majority in principal amount of
all Series B medium-term notes 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 the Series B medium-term
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 all Series B medium-
term 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 the
Series B medium-term 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 all Series B medium-term notes.
You are, however, entitled 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 Series B
medium-term notes may waive a default for all Series B medium-term notes. If
this happens, the default will be treated as if it has not occurred. No one can
waive a payment default on your note, however, without the approval of the
particular Holder of that note.
WE WILL GIVE THE TRUSTEE INFORMATION ABOUT DEFAULTS ANNUALLY
We will furnish to the trustee every year 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.
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
Series B medium-term notes.
CHANGES REQUIRING EACH HOLDER'S APPROVAL
First, there are changes that cannot be made without the approval of each
Holder of
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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 amount payable on acceleration of the
maturity after a default, the interest rate or the redemption price for a
note;
- - permit redemption of a note if not previously permitted;
- - impair any right a Holder may have to require repayment of its note;
- - impair any right that a Holder of an indexed note may have to exchange the
note for securities or other property;
- - change the currency of any payment on a note other than as permitted by the
note;
- - change the place of payment on a note, if it is in non-global form;
- - impair a Holder's right to sue for payment of any amount due on its note;
- - reduce the percentage in principal amount of the notes and any other affected
series of debt securities, taken together, the approval of whose Holders is
needed to change the indenture or the notes;
- - reduce the percentage in principal amount of the notes and any other affected
series of debt securities, taken separately or together, as the case may be,
the consent 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
Series B medium-term notes. 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 Series B medium-term notes would
require the following approval:
- - If the change affects only the Series B medium-term notes, it must be approved
by the Holders of a majority in principal amount of the Series B medium-term
notes.
- - If the change affects the Series B medium-term notes 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 Series B
medium-term notes and all other series affected by the change, with the Series
B medium-term notes and all the other series voting together as one class for
this purpose.
In each case, the required approval must be given by written consent.
The same majority approval would be required for us to obtain a waiver of
any of our covenants in the indenture. Our covenants include the promises we
make about merging and putting liens on our interests in Goldman, Sachs & Co.,
which we describe above under "-- Mergers and Similar Transactions" and
"-- Restrictive Covenant and Defeasance". If the Holders approve a waiver of a
covenant, we will not have to comply with it. The Holders, however, cannot
approve a waiver of any provision in a particular note, or in the indenture as
it affects that note, that we cannot change without the approval of the Holder
of that note as described above in "-- Changes Requiring Each Holder's
Approval", unless that Holder approves the waiver.
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Book-entry and other indirect holders should consult their banks or brokers
for information on how approval may be granted or denied if we seek to
change the indenture or the notes or request a waiver.
SPECIAL RULES FOR ACTION BY HOLDERS
When Holders take any action under the indenture, such as giving a notice
of default, declaring an acceleration, approving any change or waiver or giving
the trustee an instruction, we will apply the following rules. We may apply
similar rules to other series of debt securities issued under the indenture.
ONLY OUTSTANDING NOTES ARE ELIGIBLE
Only Holders of outstanding Series B medium-term notes will be eligible to
participate in any action by Holders of those notes. Also, we will count only
outstanding notes in determining whether the various percentage requirements for
taking action have been met. For these purposes, a note will not be
"outstanding":
- - if it has been surrendered for cancellation;
- - if we have deposited or set aside, in trust for its Holder, money for its
payment or redemption;
- - if we have fully defeased it as described above under "-- Restrictive Covenant
and Defeasance -- Defeasance and Covenant Defeasance -- Full Defeasance"; or
- - if we or one of our affiliates, such as Goldman, Sachs & Co., is the
beneficial owner.
In some situations, Holders of debt securities of other series may be eligible
to participate in an action by Holders of the notes. In that event, we may
follow special rules in calculating the principal amount of their debt
securities that is to be treated as outstanding for the purposes described
above. This may happen, for example, if the principal amount is payable in a
foreign currency, increases over time or is not to be fixed until maturity.
DETERMINING RECORD DATES FOR ACTION BY HOLDERS
We will generally be entitled to set any day as a record date for the
purpose of determining the Holders that are entitled to take action under the
indenture. In certain limited circumstances, only the trustee will be entitled
to set a record date for action by Holders. If we or the trustee set a record
date for an approval or other action to be taken by Holders, that vote or action
may be taken only by persons or entities who are Holders on the record date and
must be taken during the period that we specify for this purpose, or that the
trustee specifies if it sets the record date. We or the trustee, as applicable,
may shorten or lengthen this period from time to time. This period, however, may
not extend beyond the 180th day after the record date for the action. In
addition, record dates for any global note may be set in accordance with
procedures established by the depositary from time to time. Accordingly, record
dates for global notes may differ from those for other notes.
ELIGIBLE PRINCIPAL AMOUNT OF SOME NOTES
For any note of the kind described below, we will decide how much principal
amount to attribute to the note as follows:
- - For an original issue discount note, we will use the principal amount that
would be due and payable on the action date if the maturity of the note were
accelerated to that date because of a default;
- - For a note whose principal amount is not known, we will use any amount that we
indicate in the prospectus supplement for that note. The principal amount of a
note may not be known, for example, because it is based on an index that
changes from time to time and the principal amount is not to be determined
until a later date; or
- - For notes with a principal amount denominated in one or more foreign
currencies or currency units, we will use the U.S. dollar equivalent, which we
will determine.
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FORM, EXCHANGE AND TRANSFER
If the notes cease to be issued in global form, they will be issued:
- - only in fully registered form;
- - without interest coupons; and
- - unless we indicate otherwise in your prospectus supplement, in denominations
of $1,000 and that are multiples of $1,000.
Holders may exchange their notes for notes of smaller denominations or
combined into fewer notes of larger denominations, as long as the total
principal amount is not changed.
Holders may exchange or transfer their notes at the office of the trustee.
We have appointed the trustee to act as our agent for registering notes in the
names of Holders and transferring notes. 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.
If we have designated additional transfer agents for your note, they will
be named in your prospectus supplement. 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.
If any notes are redeemable and we redeem less than all those notes, we may
block the transfer or exchange of those notes during the period beginning 15
days before the day we mail the notice of redemption and ending on the day of
that mailing, in order to freeze the list of Holders to prepare the mailing. We
may also refuse to register transfers of or exchange any note selected for
redemption, except that we will continue to permit transfers and exchanges of
the unredeemed portion of any note being partially redeemed.
If a note is issued as a global note, only the depositary will be entitled
to transfer and exchange the note as described in this subsection, since it will
be the sole Holder of the note.
PAYMENT MECHANICS
WHO RECEIVES PAYMENT?
If interest is due on a note on an interest payment date, we will pay the
interest to the person or entity in whose name the note is registered at the
close of business on the regular record date (see below) 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 or another amount
besides interest is due on a note at maturity, we will pay the amount to the
Holder of the note against surrender of the note at a proper place of payment
(or, in the case of a global note, in accordance with the applicable policies of
the depositary).
REGULAR RECORD DATES FOR INTEREST
Unless we specify otherwise in the applicable prospectus supplement, the
regular record date relating to an interest payment date for any fixed rate note
will be the May 1 or November 1 next preceding that interest payment date, and
for any floating rate note will be the 15th calendar day before that interest
payment date, in each case whether or not the record date 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 DUE IN U.S. DOLLARS
We will follow the practice described in this subsection when paying
amounts due in U.S. dollars. Payments of amounts due in other currencies will be
made as described in the next subsection.
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PAYMENTS ON GLOBAL NOTES. We will make payments on a global note in
accordance with the applicable policies of the depositary as in effect from time
to time. Under those policies, we will pay directly to the depositary, or its
nominee, and not to any indirect holders who own beneficial interests in the
global note. An indirect holder's right to receive those payments will be
governed by the rules and practices of the depositary and its participants, as
described under "-- What Is a Global Note?".
PAYMENTS ON NON-GLOBAL NOTES. We will make payments on a note in
non-global form as follows. We will pay interest that is due on an interest
payment date by check mailed on the interest payment date to the Holder at his
or her address shown on the trustee's records as of the close of business on the
regular record date. We will make all other payments by check at the paying
agent described below, against surrender of the note. All payments by check will
be made in next-day funds -- i.e., funds that become available on the day after
the check is cashed.
Alternatively, if a non-global note has a face amount of at least
$1,000,000 and the Holder asks us to do so, we will pay any amount that becomes
due on the note by wire transfer of immediately available funds to an account at
a bank in New York City, on the due date. To request wire payment, the Holder
must give the paying agent appropriate wire transfer instructions at least five
business days before the requested wire payment is due. In the case of any
interest payment due on an interest payment date, the instructions must be given
by the person or entity who is the Holder on the relevant regular record date.
In the case of any other payment, payment will be made only after the note is
surrendered to the paying agent. Any wire instructions, once properly given,
will remain in effect unless and until new instructions are given in the manner
described above.
Book-entry and other indirect holders should consult their banks or brokers for
information on how they will receive payments on their notes.
HOW WE WILL MAKE PAYMENTS DUE IN OTHER CURRENCIES
We will follow the practice described in this subsection when paying
amounts that are due in a specified currency other than U.S. dollars.
PAYMENTS ON GLOBAL NOTES. We will make payments on a global note in
accordance with the applicable policies of the depositary as in effect from time
to time. We understand that these policies, as currently in effect at DTC, are
as follows.
Unless otherwise indicated in your prospectus supplement, if you are an
indirect holder of global notes denominated in a specified currency other than
U.S. dollars and if you elect to receive payments in that other currency, you
must notify the participant through which your interest in the global note is
held of your election:
- - on or before the applicable regular record date, in the case of a payment of
interest, or
- - on or before the 16th day prior to stated maturity, or any redemption or
repayment date, in the case of payment of principal or any premium.
You may elect to receive all or only a portion of any interest, principal
or premium payment in a specified currency other than U.S. dollars.
Your participant must, in turn, notify DTC of your election on or before
the third DTC business day after that regular record date, in the case of a
payment of interest, and on or before the 12th DTC business day prior to stated
maturity, or on the redemption or repayment date if your note is redeemed or
repaid earlier, in the case of a payment of principal or any premium.
DTC, in turn, will notify the paying agent of your election in accordance
with DTC's procedures.
If complete instructions are received by the participant and forwarded by
the participant to DTC, and by DTC to the paying agent, on or before the dates
noted above, the paying agent, in accordance with DTC's in-
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structions, will make the payments to you or your participant by wire transfer
of immediately available funds to an account maintained by the payee with a bank
located in the country issuing the specified currency or in another jurisdiction
acceptable to us and the paying agent.
If the foregoing steps are not properly completed, we expect DTC to inform
the paying agent that payment is to be made in U.S. dollars. In that case, we or
our agent will convert the payment to U.S. dollars in the manner described below
under "-- Conversion to U.S. Dollars". We expect that we or our agent will then
make the payment in U.S. dollars to DTC, and that DTC in turn will pass it along
to its participants.
Indirect holders of a global note denominated in a currency other than U.S.
dollars should consult their banks or brokers for information on how to
request payment in the specified currency.
PAYMENTS ON NON-GLOBAL NOTES. Except as described in the last paragraph
under this heading, we will make payments on notes in non-global form in the
applicable specified currency. We will make these payments by wire transfer of
immediately available funds to any account that is maintained in the applicable
specified currency at a bank designated by the Holder and is acceptable to us
and the trustee. To designate an account for wire payment, the Holder must give
the paying agent appropriate wire 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 regular record date. In the case of any other
payment, the payment will be made only after the note is surrendered to the
paying agent. Any instructions, once properly given, will remain in effect
unless and until new instructions are properly 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.
Although a payment on a note in non-global form may be due in a specified
currency other than U.S. dollars, we will make the payment in U.S. dollars if
the Holder asks us to do so. To request U.S. dollar payment, the Holder must
provide appropriate written notice to the trustee at least five business days
before the next due date for which payment in U.S. dollars is requested. In the
case of any interest payment due on an interest payment date, the request must
be made by the person or entity who is the Holder on the regular record date.
Any request, once properly made, will remain in effect unless and until revoked
by notice properly given in the manner described above.
Book-entry and other indirect holders of a note with a specified currency
other than U.S. dollars should contact their banks or brokers for information
about how to receive payments in the specified currency or in U.S. dollars.
CONVERSION TO U.S. DOLLARS. When we are asked by a Holder to make payments
in U.S. dollars of an amount due in another currency, either on a global note or
a non-global note as described above, we will determine the U.S. dollar amount
the Holder receives as follows. The exchange rate agent described below will
request currency bid quotations expressed in U.S. dollars from three or, if
three are not available, then two, recognized foreign exchange dealers in New
York City, any of which may be the exchange rate agent, an affiliate of The
Goldman Sachs Group, Inc. as of 11:00 A.M., New York City time, on the second
business day before the payment date. Currency bid quotations will be requested
on an aggregate basis, for all Holders of notes and other debt securities, if
any, requesting U.S. dollar payments of amounts due on the same date in the same
specified currency. The U.S. dollar
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amount the Holder receives will be based on the highest acceptable currency bid
quotation received by the exchange rate agent. If the exchange rate agent
determines that at least two acceptable currency bid quotations are not
available on that second business day, the payment will be made in the specified
currency.
To be acceptable, a quotation must be given as of 11:00 A.M., New York City
time, on the second business day before the due date and the quoting dealer must
commit to execute a contract at the quotation. If some but not all of the
relevant notes are LIBOR notes or EURIBOR notes, the second preceding business
day will be determined for this purpose as if none of those notes were LIBOR
notes or EURIBOR notes.
A Holder that requests payment in U.S. dollars will bear all associated
currency exchange costs, which will be deducted from the payment.
WHEN THE SPECIFIED CURRENCY IS NOT AVAILABLE. If we are obligated to make
any payment in a specified currency other than U.S. dollars, and the specified
currency or any successor currency is not available to us 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 that specified currency by making the payment
in U.S. dollars, on the basis of the most recently available exchange rate.
For a specified currency other than U.S. dollars, the exchange rate will be
the noon buying rate for cable transfers of the specified currency in New York
City as quoted by the Federal Reserve Bank of New York on the 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 a manner described above will not result in a default under
any note or the indenture.
THE EURO. The euro may be a specified currency for some notes. On January
1, 1999, the euro became the legal currency for the 11 member states
participating in the European Economic and Monetary Union. During a transition
period from January 1, 1999 to December 31, 2001 and for a maximum of six months
thereafter, the former national currencies of these 11 member states will
continue to be legal tender in their country of issue, at rates irrevocably
fixed on December 31, 1998.
EXCHANGE RATE AGENT. If we issue a note in a specified currency other than
U.S. dollars, we will appoint a financial institution to act as the exchange
rate agent and will name the institution initially appointed when the note is
originally issued in the applicable prospectus supplement. We may select
Goldman, Sachs & Co. or another of our affiliates to perform this role. We may
change the exchange rate agent from time to time after the original issue date
of the note without your consent and without notifying you of the change.
All determinations made by the exchange rate agent will be at its sole
discretion unless we state in the applicable prospectus supplement that any
determination is subject to our approval. In the absence of manifest error,
those determinations will be conclusive for all purposes and binding on you and
us, without any liability on the part of the exchange rate agent.
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 any note 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. The term business day has a special meaning, which we
describe above under "-- Special Rate Calculation Terms".
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PAYING AGENT
We may appoint one or more financial institutions to act as our paying
agents, at whose designated offices notes in non-global entry form 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 the paying
agent. We must notify you of changes in the paying agents.
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
Notices to be given to Holders of a global note will be given only to the
depositary, in accordance with its applicable policies as in effect from time to
time. Notices to be given to Holders of notes not in global form 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. 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 Series B medium-term notes and is the opinion of
Sullivan & Cromwell, United States tax 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 deals only with notes that are due to mature 30 years or less from
the date on which they are issued. The United States federal income tax
consequences of owning notes that are due to mature more than 30 years from
their date of issue will be discussed in an applicable prospectus supplement.
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, and 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
Except as described below in the case of interest on a discount note that
is not qualified stated interest, each as defined below under "-- Original Issue
Discount -- General", you will be taxed on any interest on your note, whether
payable in U.S. dollars or a foreign currency, including a composite currency or
basket of currencies other than U.S. dollars, as ordinary income at the time you
receive the interest or it accrues, depending on your method of accounting for
tax purposes.
CASH BASIS TAXPAYERS. If you are a taxpayer that uses the cash receipts
and disbursements method of accounting for tax purposes and you receive an
interest payment that is denominated in, or determined by reference to, a
foreign currency, 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.
ACCRUAL BASIS TAXPAYERS. If you are a taxpayer that uses an accrual method
of accounting for tax purposes, you may
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determine the amount of income that you recognize with respect to an interest
payment denominated in, or determined by reference to, a foreign currency 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 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, denominated in, or determined by reference to, a foreign currency for
which you accrued an amount of income, 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.
ORIGINAL ISSUE DISCOUNT
GENERAL. If you own a note, other than a short-term note with a term of
one year or less, it will be treated as a discount note issued at an original
issue discount if the amount by which the note's stated redemption price at
maturity exceeds its issue price is more than a de minimis amount. Generally, a
note's issue price will be the first price at which a substantial amount of
notes included in the issue of which the note is a part is sold to persons other
than bond houses, brokers, or similar persons or organizations acting in the
capacity of underwriters, placement agents, or wholesalers. A note's stated
redemption price at maturity is the total of all payments provided by the note
that are not payments of qualified stated interest. Generally, an interest
payment on a note is qualified stated interest if it is one of a series of
stated interest payments on a note that are unconditionally payable at least
annually at a single fixed rate, with certain exceptions for lower rates paid
during some periods, applied to the outstanding principal amount of the note.
There are special rules for variable rate notes that are discussed under
"-- Variable Rate Notes".
In general, your note is not a discount note if the amount by which its
stated redemption price at maturity exceeds its issue price is less than the de
minimis amount of 1/4 of 1% of its stated redemption price at maturity
multiplied by the number of complete years to its maturity. Your note will have
de minimis original issue discount if the amount of the excess is less than the
de minimis amount. If your note has de minimis original issue discount, you must
include the de minimis amount in income as stated principal payments are made on
the note, unless you make the election described below under "-- Election to
Treat All Interest as Original Issue Discount". You can determine the includible
amount with respect to each such payment by multiplying the total amount of
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your note's de minimis original issue discount by a fraction equal to:
- - the amount of the principal payment made
divided by
- - the stated principal amount of the note.
Generally, if your discount note matures more than one year from its date
of issue, you must include original issue discount in income before you receive
cash attributable to that income. The amount of OID that you must include in
income is calculated using a constant-yield method, and generally you will
include increasingly greater amounts of OID in income over the life of your
note. More specifically, you can calculate the amount of accrued OID that you
must include in income by adding the daily portions of OID with respect to your
discount note for each day during the taxable year or portion of the taxable
year that you hold your discount note. You can determine the daily portion by
allocating to each day in any accrual period a pro rata portion of the OID
allocable to that accrual period. You may select an accrual period of any length
with respect to your note and you may vary the length of each accrual period
over the term of your note. However, no accrual period may be longer than one
year and each scheduled payment of interest or principal on the note must occur
on either the first or final day of an accrual period.
You can determine the amount of OID allocable to an accrual period by:
- - multiplying your discount note's adjusted issue price at the beginning of the
accrual period by your note's yield to maturity; and then
- - subtracting from this figure the sum of the payments of qualified stated
interest on your note allocable to the accrual period.
You must determine the note's yield to maturity on the basis of compounding at
the close of each accrual period and adjusting for the length of each accrual
period. Further, you can determine your discount note's adjusted issue price at
the beginning of any accrual period by:
- - adding your note's issue price and any accrued OID for each prior accrual
period; and then
- - subtracting any payments previously made on your note that were not qualified
stated interest payments.
If an interval between payments of qualified stated interest on your note
contains more than one accrual period, then, when you determine the amount of
OID allocable to an accrual period, you must allocate the amount of qualified
stated interest payable at the end of the interval, including any qualified
stated interest that is payable on the first day of the accrual period
immediately following the interval, pro rata to each accrual period in the
interval based on their relative lengths. In addition, you must increase the
adjusted issue price at the beginning of each accrual period in the interval by
the amount of any qualified stated interest that has accrued prior to the first
day of the accrual period but that is not payable until the end of the interval.
You may compute the amount of OID allocable to an initial short accrual period
by using any reasonable method if all other accrual periods, other than a final
short accrual period, are of equal length.
The amount of OID allocable to the final accrual period is equal to the
difference between:
- - the amount payable at the maturity of your note, other than any payment of
qualified stated interest; and
- - your note's adjusted issue price as of the beginning of the final accrual
period.
ACQUISITION PREMIUM. If you purchase your note for an amount that is less
than or equal to the sum of all amounts, other than qualified stated interest,
payable on your note after the purchase date but is greater than the amount of
your note's adjusted issue price, as determined above under "-- General", the
excess is acquisition premium. If you do not make the election described below
under "-- Election to Treat All Interest as Original Issue Discount", then
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you must reduce the daily portions of OID by an amount equal to:
- - the excess of your adjusted basis in the note immediately after purchase
over
- - the adjusted issue price of the note
divided by:
- - the excess of the sum of all amounts payable (other than qualified stated
interest) on the note after the purchase date
over
- - the note's adjusted issue price.
MARKET DISCOUNT. You will be treated as if you purchased your note, other
than a short-term note, at a market discount, and your note will be a market
discount note if:
- - you purchase your note for less than its issue price as determined above under
"-- General"; and
- - the note's stated redemption price at maturity or, in the case of a discount
note, the note's revised issue price, exceeds the price you paid for your note
by at least 1/4 of 1% of your note's stated redemption price at maturity or
revised issue price, respectively, multiplied by the number of complete years
to the note's maturity. To determine the revised issue price of your note for
these purposes, you generally add any OID that has accrued on your note to its
issue price.
If your note's stated redemption price at maturity or, in the case of a
discount note, its revised issue price, does not exceed the price you paid for
the note by 1/4 of 1% multiplied by the number of complete years to the note's
maturity, the excess constitutes de minimis market discount, and the rules
discussed below are not applicable to you.
You must treat any gain you recognize on the maturity or disposition of
your market discount note as ordinary income to the extent of the accrued market
discount on your note. Alternatively, you may elect to include market discount
in income currently over the life of your note. If you make this election, it
will apply to all debt instruments with market discount that you acquire on or
after the first day of the first taxable year to which the election applies. You
may not revoke this election without the consent of the Internal Revenue
Service. If you own a market discount note and do not make this election, you
will generally be required to defer deductions for interest on borrowings
allocable to your note in an amount not exceeding the accrued market discount on
your note until the 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.
PRE-ISSUANCE ACCRUED INTEREST. An election may be made to decrease the
issue price of your note by the amount of pre-issuance accrued interest if:
- - a portion of the initial purchase price of your note is attributable to
pre-issuance accrued interest;
- - the first stated interest payment on your note is to be made within one year
of your note's issue date; and
- - the payment will equal or exceed the amount of pre-issuance accrued interest.
If this election is made, a portion of the first stated interest payment
will be treated as a return of the excluded pre-issuance accrued interest and
not as an amount payable on your note.
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NOTES SUBJECT TO CONTINGENCIES INCLUDING OPTIONAL REDEMPTION. Your note is
subject to a contingency if it provides for an alternative payment schedule or
schedules applicable upon the occurrence of a contingency or contingencies,
other than a remote or incidental contingency, whether such contingency relates
to payments of interest or of principal. In such a case, you must determine the
yield and maturity of your note by assuming that the payments will be made
according to the payment schedule most likely to occur if:
- - the timing and amounts of the payments that comprise each payment schedule are
known as of the issue date; and
- - one of such schedules is significantly more likely than not to occur.
If there is no single payment schedule that is significantly more likely than
not to occur, other than because of a mandatory sinking fund, you must include
income on your note in accordance with the general rules that govern contingent
payment obligations. These rules will be discussed in the applicable prospectus
supplement.
Notwithstanding the general rules for determining yield and maturity, if
your note is subject to contingencies, and either you or we have an
unconditional option or options that, if exercised, would require payments to be
made on the note under an alternative payment schedule or schedules, then in the
case of an option or options of ours, we will be deemed to exercise or not
exercise an option or combination of options in the manner that minimizes the
yield on your note and, in the case of an option or options that you hold, you
will be deemed to exercise or not exercise an option or combination of options
in the manner that maximizes the yield on your note. If both you and we hold
options described in the preceding sentence, those rules will apply to each
option in the order in which they may be exercised. You may determine the yield
on your note for the purposes of those calculations by using any date on which
your note may be redeemed or repurchased as the maturity date and the amount
payable on the date that you chose in accordance with the terms of your note as
the principal amount payable at maturity.
If a contingency, including the exercise of an option, actually occurs or
does not occur contrary to an assumption made according to the above rules then,
except to the extent that a portion of your note is repaid as a result of this
change in circumstances and solely to determine the amount and accrual of OID,
you must redetermine the yield and maturity of your note by treating your note
as having been retired and reissued on the date of the change in circumstances
for an amount equal to your note's adjusted issue price on that date.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. You may elect
to include in gross income all interest that accrues on your note using the
constant-yield method described above under "-- General", with the modifications
described below. For purposes of this election, interest will include stated
interest, OID, de minimis original issue discount, market discount, de minimis
market discount and unstated interest, as adjusted by any amortizable bond
premium, described below under "-- Notes Purchased at a Premium", or acquisition
premium.
If you make this election for your note, then, when you apply the
constant-yield method:
- - the issue price of your note will equal your cost;
- - the issue date of your note will be the date you acquired it; and
- - no payments on your note will be treated as payments of qualified stated
interest.
Generally, this election will apply only to the note for which you make it;
however, if the note for which this election is made has amortizable bond
premium, you will be deemed to have made an election to apply amortizable bond
premium against interest for all debt instruments with amortizable bond premium,
other than debt instruments the interest on which is excludible from gross
income, that you hold as of the beginning of the taxable year to which the
election applies or any taxable year thereafter. Additionally, if you make this
election for a market discount note, you will be treated as having made the
election discussed above under "-- Market
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Discount" to include market discount in income currently over the life of all
debt instruments that you currently hold or later acquire. You may not revoke
any election to apply the constant-yield method to all interest on a note or the
deemed elections with respect to amortizable bond premium or market discount
notes without the consent of the Internal Revenue Service.
VARIABLE RATE NOTES. Your note will be a variable rate note if:
- - your note's issue price does not exceed the total noncontingent principal
payments by more than the lesser of:
1. .015 multiplied by the product of the total noncontingent principal
payments and the number of complete years to maturity from the issue date,
or
2. 15 percent of the total noncontingent principal payments; and
- - your note provides for stated interest, compounded or paid at least annually,
only at:
1. one or more qualified floating rates,
2. a single fixed rate and one or more qualified floating rates,
3. a single objective rate, or
4. a single fixed rate and a single objective rate that is a qualified inverse
floating rate.
Your note will have a variable rate that is a qualified floating rate if:
- - variations in the value of the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds in the currency
in which your note is denominated; or
- - the rate is equal to such a rate multiplied by either:
1. a fixed multiple that is greater than 0.65 but not more than 1.35, or
2. a fixed multiple that is greater than 0.65 but not more than 1.35,
increased or decreased by a fixed rate; and
- - the value of the rate on any date during the term of your note is set no
earlier than three months prior to the first day on which that value is in
effect and no later than one year following that first day.
If your note provides for two or more qualified floating rates that are
within 0.25 percentage points of each other on the issue date or can reasonably
be expected to have approximately the same values throughout the term of the
note, the qualified floating rates together constitute a single qualified
floating rate.
Your note will not have a qualified floating rate, however, if the rate is
subject to certain restrictions (including caps, floors, governors, or other
similar restrictions) unless such restrictions are fixed throughout the term of
the note or are not reasonably expected to significantly affect the yield on the
note.
Your note will have a variable rate that is a single objective rate if:
- - the rate is not a qualified floating rate;
- - the rate is determined using a single, fixed formula that is based on
objective financial or economic information that is not within the control of
or unique to the circumstances of the issuer or a related party; and
- - the value of the rate on any date during the term of your note is set no
earlier than three months prior to the first day on which that value is in
effect and no later than one year following that first day.
Your note will not have a variable rate that is an objective rate, however,
if it is reasonably expected that the average value of the rate during the first
half of your note's term will be either significantly less than or significantly
greater than the average value of the rate during the final half of your note's
term.
An objective rate as described above is a qualified inverse floating rate
if:
- - the rate is equal to a fixed rate minus a qualified floating rate; and
- - the variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the cost of newly borrowed funds.
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<PAGE> 127
Your note will also have a single qualified floating rate or an objective
rate if interest on your note is stated at a fixed rate for an initial period of
one year or less followed by either a qualified floating rate or an objective
rate for a subsequent period, and either:
- - the fixed rate and the qualified floating rate or objective rate have values
on the issue date of the note that do not differ by more than 0.25 percentage
points; or
- - the value of the qualified floating rate or objective rate is intended to
approximate the fixed rate.
Commercial paper rate notes, prime rate notes, LIBOR notes, EURIBOR notes,
treasury rate notes, CMT rate notes, CD rate notes, federal funds rate notes,
and 11th district rate notes generally will be treated as variable rate notes
under these rules.
In general, if your variable rate note provides for stated interest at a
single qualified floating rate or objective rate (or one of those rates after a
single fixed rate for an initial period), all stated interest on your note is
qualified stated interest. In this case, the amount of OID, if any, is
determined by using, for a qualified floating rate or qualified inverse floating
rate, the value as of the issue date of the qualified floating rate or qualified
inverse floating rate, or, for any other objective rate, a fixed rate that
reflects the yield reasonably expected for your note.
If your variable rate note does not provide for stated interest at a single
qualified floating rate or a single objective rate, and also does not provide
for interest payable at a fixed rate other than a single fixed rate for an
initial period, you generally must determine the interest and OID accruals on
your note by:
- - determining a fixed rate substitute for each variable rate provided under your
variable rate note;
- - constructing the equivalent fixed rate debt instrument (using the fixed rate
substitute described above);
- - determining the amount of qualified stated interest and OID with respect to
the equivalent fixed rate debt instrument; and
- - adjusting for actual variable rates during the applicable accrual period.
When you determine the fixed rate substitute for each variable rate provided
under the variable rate note, you generally will use the value of each variable
rate as of the issue date or, for an objective rate that is not a qualified
inverse floating rate, a rate that reflects the reasonably expected yield on
your note.
If your variable rate note provides for stated interest either at one or
more qualified floating rates or at a qualified inverse floating rate, and also
provides for stated interest at a single fixed rate other than a single fixed
rate for an initial period, you generally must determine interest and OID
accruals by using the method described in the previous paragraph. However, your
variable rate note will be treated, for purposes of the first three steps of the
determination, as if your note had provided for a qualified floating rate, or a
qualified inverse floating rate, rather than the fixed rate. The qualified
floating rate, or qualified inverse floating rate, that replaces the fixed rate
must be such that the fair market value of your variable rate note as of the
issue date approximates the fair market value of an otherwise identical debt
instrument that provides for the qualified floating rate, or qualified inverse
floating rate, rather than the fixed rate.
SHORT-TERM NOTES. In general, if you are an individual or other cash basis
United States holder of a short-term note, you are not required to accrue OID,
as specially defined below for the purposes of this paragraph, for United States
federal income tax purposes unless you elect to do so. However, you may be
required to include any stated interest in income as you receive it. If you are
an accrual basis taxpayer, a taxpayer in a special class, including, but not
limited to, a regulated investment company, common trust fund, or a certain type
of pass-through entity, or a cash basis taxpayer who so elects, you will be
required to accrue OID on short-term notes on either a straight-line basis or
under the constant-yield method, based on daily compounding. If you are not
required and do not elect to include OID in income currently,
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<PAGE> 128
any gain you realize on the sale or retirement of your short-term note will be
ordinary income to the extent of the accrued OID, which will be determined on a
straight-line basis unless you make an election to accrue the OID under the
constant-yield method, through the date of sale or retirement. However, if you
are not required and do not elect to accrue OID on your short-term notes, you
will be required to defer deductions for interest on borrowings allocable to
your short-term notes in an amount not exceeding the deferred income until the
deferred income is realized.
When you determine the amount of OID subject to these rules, you must
include all interest payments on your short-term note, including stated
interest, in your short-term note's stated redemption price at maturity.
FOREIGN CURRENCY DISCOUNT NOTES. If your discount note is denominated in,
or determined by reference to, a foreign currency, you must determine OID for
any accrual period on your discount note in the foreign currency and then
translate the amount of OID into U.S. dollars in the same manner as stated
interest accrued by an accrual basis United States holder, as described under
"-- United States Holders -- Payments of Interest". You may recognize ordinary
income or loss when you receive an amount attributable to OID in connection with
a payment of interest or the sale or retirement of your note.
NOTES PURCHASED AT A PREMIUM
If you purchase your note for an amount in excess of its principal amount,
you may elect to treat the excess as amortizable bond premium. If you make this
election, you will reduce the amount required to be included in your income each
year with respect to interest on your note by the amount of amortizable bond
premium allocable to that year, based on your note's yield to maturity. If your
note is denominated in, or determined by reference to, a foreign currency, you
will compute your amortizable bond premium in units of the foreign currency and
your amortizable bond premium will reduce your interest income in units of the
foreign currency. 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. See also
"-- Original Issue Discount -- Election to Treat All Interest as Original Issue
Discount".
PURCHASE, SALE AND RETIREMENT OF THE NOTES
Your tax basis in your note will generally be the U.S. dollar cost, as
defined below, of your note, adjusted by:
- - adding any OID or market discount, de minimis original issue discount and de
minimis market discount; and then
- - subtracting any payments on your note that are not qualified stated interest
payments and any amortizable bond premium applied to reduce the interest on
your note.
If you purchase your note with foreign currency, 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.
You will generally recognize gain or loss on the sale or retirement of your
note equal to the difference between the amount you realize on the sale or
retirement and your tax basis in your note. If your note is sold or retired for
an amount in foreign currency, 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
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<PAGE> 129
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.
You will recognize capital gain or loss when you sell or retire your note,
except to the extent attributable to changes in exchange rates as described in
the next paragraph or to accrued but unpaid interest, described above under
"-- Original Issue Discount -- Short-Term Notes" or "-- Market Discount", or
subject to the rules governing contingent payment obligations. 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.
EXCHANGE OF AMOUNTS IN OTHER THAN U.S. DOLLARS
If you receive foreign currency as interest on your note or on the sale or
retirement of your note, your tax basis in the foreign currency will equal its
U.S. dollar value when the interest is received or at the time of the sale or
retirement. If you purchase foreign currency, you generally will have a tax
basis equal to the U.S. dollar value of the foreign currency on the date of your
purchase. If you sell or dispose of a foreign currency, including if you use it
to purchase notes or exchange it for U.S. dollars, any gain or loss recognized
generally will be ordinary income or loss.
INDEXED AND OTHER NOTES
The applicable prospectus supplement will discuss any special United States
federal income tax rules with respect to contingent foreign currency notes,
notes the payments on which are determined by reference to any index and other
notes that are subject to the rules governing contingent payment obligations
which are not subject to the rules governing variable rate notes.
UNITED STATES ALIEN HOLDERS
This subsection describes the tax consequences to a United States alien
holder. You are a United States alien holder if you are the beneficial owner of
a note and are, for United States federal income tax purposes:
- - a nonresident alien individual;
- - a foreign corporation;
- - a foreign partnership; or
- - an estate or trust that is not subject to United States federal income tax on
a net income basis on income or gain from a note.
If you are a United States holder, this section does not apply to you.
This discussion assumes that the note is not subject to the rules of
Section 871(h)(4)(A) of the Internal Revenue Code, relating to interest payments
that are determined by reference to the income, profits, changes in the value of
property or other attributes of the debtor or a related party.
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, premium, if any, and interest, including OID,
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
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<PAGE> 130
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.
BACKUP WITHHOLDING AND
INFORMATION REPORTING
UNITED STATES HOLDERS
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, any premium and interest on your note and the accrual of OID on a
discount 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, including payments of OID, 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
You are generally exempt from backup withholding and information reporting,
with respect to any payments of principal, premium or interest, including OID,
made by us and other payors, provided that you provide the certification
described above under "-- United States Alien Holders", and provided further
that the payor does not have actual knowledge that you are a United States
person. See "-- United States Alien Holders" above for a discussion of the rules
under the final withholding regulations. 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-
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<PAGE> 131
United States status, under penalties of perjury, or otherwise establish an
exemption. Payments of the proceeds from the sale by a United States alien
holder of a note made to or through a foreign office of a broker will not be
subject to information reporting or backup withholding. However, information
reporting, but not backup withholding, may apply to a payment made outside the
United States of the proceeds of a sale of a note through an office outside the
United States if the broker is:
- - a United States person;
- - a controlled foreign corporation for United States tax purposes;
- - 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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<PAGE> 132
EMPLOYEE RETIREMENT INCOME SECURITY ACT
This section is only relevant to you if you are an insurance company or the
fiduciary of a pension plan or an employee benefit plan proposing to invest in
the notes.
The Goldman Sachs Group, Inc. and certain of its affiliates may each be
considered a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), 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 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
In connection with the commencement of our Series B medium-term note
program, the validity of the notes was passed upon for The Goldman Sachs Group,
Inc. by Gregory K. Palm, Esq., General Counsel of The Goldman Sachs Group, Inc.,
and for the agents by Sullivan & Cromwell, New York, New York. As of the date of
this prospectus, Mr. Palm owned 1,715,694 shares of common stock, and
participated in the employee benefit plans, of The Goldman Sachs Group, Inc. The
opinions of Mr. Palm and of Sullivan & Cromwell were based on certain
assumptions about future actions required to be taken by The Goldman Sachs
Group, Inc. and the trustee in connection with the issuance and sale of each
note, about the specific terms of each note and about other matters that may
affect the validity of the notes but which could not be ascertained on the date
of those opinions.
Sullivan & Cromwell has in the past represented and continues to represent
Goldman Sachs on a regular basis and in a variety of matters. Sullivan &
Cromwell represented The Goldman Sachs Group, Inc. in connection with our
initial public offering, a secondary offering of our common stock and
underwritten debt offerings, and has performed services for The Goldman Sachs
Group, Inc. in connection with this offering.
EXPERTS
The consolidated financial statements of Goldman Sachs as of November 27,
1998 and November 26, 1999 and for each of the three years in the period ended
November 26, 1999 included in this prospectus and the financial statement
schedule included in the registration statement have been 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 income statement and balance sheet data included in "Selected
Consolidated Financial Data" for each of the five years in the period ended
November 26, 1999 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.
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<PAGE> 133
AVAILABLE INFORMATION
The Goldman Sachs Group, Inc. is required to file annual, quarterly and
current reports, proxy statements and other information with the SEC. You may
read and copy any documents filed by us at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our filings
with the SEC are also available to the public through the SEC's Internet site at
http://www.sec.gov and through the NYSE, 20 Broad Street, New York, New York
10005, on which our common stock is listed.
We have filed with the SEC a registration statement on Form S-1 relating to
the notes. 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.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
We have included in this prospectus statements that may constitute
"forward-looking statements" within the meaning of the safe harbor provisions of
The Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not historical facts but instead represent only our belief
regarding future events, many of which, by their nature, are inherently
uncertain and outside of our control. It is possible that our actual results may
differ, possibly materially, from the anticipated results indicated in these
forward-looking statements.
Information regarding important factors that could cause actual results to
differ, perhaps materially, from those in our forward-looking statements is
contained under the caption "Risk Factors" in this prospectus.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements as of November 26, 1999
and November 27, 1998 and for the three years in the
period ended November 26, 1999
Report of Independent Accountants........................... F-2
Consolidated Statements of Earnings......................... F-3
Consolidated Statements of Financial Condition.............. F-4
Consolidated Statements of Changes in Stockholders' Equity
and Partners' Capital..................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Consolidated Statements of Comprehensive Income............. F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 135
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders,
The Goldman Sachs Group, Inc.:
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of earnings, changes in
stockholders' equity and partners' capital, cash flows and comprehensive income
(included on pages F-3 to F-30 of this prospectus) present fairly, in all
material respects, the consolidated financial position of The Goldman Sachs
Group, Inc. and Subsidiaries (the "firm") as of November 26, 1999 and November
27, 1998, and the results of their consolidated operations and their
consolidated cash flows for each of the three fiscal years in the period ended
November 26, 1999, in conformity with accounting principles generally accepted
in the United States. 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
financial statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit 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 28, 1997, November 29, 1996 and November 24, 1995, and the related
consolidated statements of earnings, changes in partners' capital and cash flows
for the years ended November 29, 1996 and November 24, 1995 (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
consolidated financial data for each of the five years in the period ended
November 26, 1999 (included on pages 26 and 27 of this prospectus) is fairly
stated, in all material respects, in relation to the consolidated financial
statements from which it has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 21, 2000.
F-2
<PAGE> 136
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
---------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Global capital markets
Investment banking.................................... $ 4,359 $ 3,368 $ 2,587
Trading and principal investments..................... 5,758 2,015 2,303
Asset management and securities services................ 2,524 2,085 1,456
Interest income......................................... 12,722 15,010 14,087
----------- ------- -------
Total revenues........................................ 25,363 22,478 20,433
Interest expense........................................ 12,018 13,958 12,986
----------- ------- -------
Revenues, net of interest expense..................... 13,345 8,520 7,447
Operating expenses
Compensation and benefits, excluding employee initial
public offering awards................................ 6,459 3,838 3,097
Nonrecurring employee initial public offering
awards(1)............................................. 2,257 -- --
Amortization of employee initial public offering
awards................................................ 268 -- --
Brokerage, clearing and exchange fees................... 446 424 357
Market development...................................... 364 287 206
Communications and technology........................... 306 265 208
Depreciation and amortization........................... 337 242 178
Occupancy............................................... 314 207 168
Professional services and other......................... 402 336 219
Charitable contribution................................. 200 -- --
----------- ------- -------
Total operating expenses.............................. 11,353 5,599 4,433
Pre-tax earnings........................................ 1,992 2,921 3,014
(Benefit)/provision for taxes........................... (716) 493 268
----------- ------- -------
Net earnings............................................ $ 2,708 $ 2,428 $ 2,746
=========== ======= =======
Earnings per share
Basic................................................. $ 5.69 -- --
Diluted............................................... 5.57 -- --
Average common shares outstanding
Basic................................................. 475,883,756 -- --
Diluted............................................... 485,803,960 -- --
</TABLE>
- ---------------
(1) Includes expense of $666 million related to the initial irrevocable
contribution of shares of common stock to a defined contribution plan.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 137
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF NOVEMBER
--------------------
1999 1998
---- ----
(IN MILLIONS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C>
Assets
Cash and cash equivalents................................... $ 3,055 $ 2,836
Cash and securities segregated in compliance with U.S.
federal and other regulations............................. 9,135 7,887
Receivables from brokers, dealers and clearing
organizations............................................. 4,490 4,321
Receivables from customers and counterparties............... 30,140 14,953
Securities borrowed......................................... 78,418 69,158
Securities purchased under agreements to resell............. 37,106 37,484
Right to receive securities................................. 1,604 7,564
Financial instruments owned, at fair value
Commercial paper, certificates of deposit and time
deposits................................................ 1,435 1,382
U.S. government, federal agency and sovereign
obligations............................................. 22,193 24,789
Corporate debt............................................ 9,821 10,744
Equities and convertible debentures....................... 16,381 11,066
State, municipal and provincial obligations............... 756 918
Derivative contracts...................................... 30,661 21,299
Physical commodities...................................... 562 481
Other assets................................................ 4,734 2,498
-------- --------
$250,491 $217,380
======== ========
Liabilities and Equity
Short-term borrowings, including commercial paper........... $ 37,756 $ 27,430
Payables to brokers, dealers and clearing organizations..... 2,129 730
Payables to customers and counterparties.................... 57,405 46,208
Securities loaned........................................... 9,169 11,088
Securities sold under agreements to repurchase.............. 40,183 36,257
Obligation to return securities............................. 1,595 9,783
Financial instruments sold, but not yet purchased, at fair
value U.S. government, federal agency and sovereign
obligations............................................... 19,170 22,360
Corporate debt............................................ 2,642 1,441
Equities and convertible debentures....................... 14,002 6,406
Derivative contracts...................................... 28,488 24,722
Physical commodities...................................... 586 966
Other liabilities and accrued expenses...................... 6,269 3,699
Long-term borrowings........................................ 20,952 19,906
-------- --------
240,346 210,996
Commitments and contingencies
Partners' capital allocated for income taxes and potential
withdrawals............................................... -- 74
Partners' capital........................................... -- 6,310
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, 441,421,899 shares issued and
outstanding............................................... 4 --
Restricted stock units; 76,048,404 units issued and
outstanding............................................... 4,339 --
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized, 7,440,362 shares issued and
outstanding............................................... -- --
Additional paid-in capital.................................. 7,359 --
Retained earnings........................................... 444 --
Unearned compensation....................................... (2,038) --
Accumulated other comprehensive income...................... 37 --
-------- --------
10,145 6,310
-------- --------
$250,491 $217,380
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 138
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Partners' capital
Balance, beginning of year................................ $ 6,310 $ 6,107 $ 5,309
Transfer of beginning partners' capital allocated for
income taxes and potential withdrawals.................. 74 -- --
Net earnings.............................................. 2,264(1) 2,428 2,746
Capital contributions..................................... 48 9 89
Return on capital and certain distributions to partners... (306) (619) (557)
Termination of profit participation plans................. -- (368) --
Transfers to partners' capital allocated for income taxes
and potential withdrawals, net.......................... -- (1,247) (1,480)
Distributions of remaining partners' capital.............. (4,520)(2) -- --
Exchange of partnership interests for shares of common
stock................................................... (3,901) -- --
Transfer to accumulated other comprehensive income........ 31 -- --
------- ------- -------
Balance, end of year...................................... -- 6,310 6,107
Common stock, par value $0.01 per share
Balance, beginning of year................................ -- -- --
Common stock issued....................................... 4 -- --
------- ------- -------
Balance, end of year...................................... 4 -- --
Restricted stock units
Balance, beginning of year................................ -- -- --
Restricted stock units granted, net of forfeitures of $42
million................................................. 4,339 -- --
------- ------- -------
Balance, end of year...................................... 4,339 -- --
Nonvoting common stock, par value $0.01 per share
Balance, beginning of year............................... -- -- --
Nonvoting common stock issued............................. -- -- --
------- ------- -------
Balance, end of year...................................... -- -- --
Additional paid-in capital
Balance, beginning of year................................ -- -- --
Exchange of partnership interests for shares of common
stock................................................... 3,901 -- --
Issuance of common stock.................................. 2,891 -- --
Issuance of common stock contributed to a defined
contribution plan....................................... 674 -- --
Dividends paid............................................ (107)(3) -- --
------- ------- -------
Balance, end of year...................................... 7,359 -- --
Retained earnings
Balance, beginning of year................................ -- -- --
Net earnings.............................................. 444(4) -- --
------- ------- -------
Balance, end of year...................................... 444 -- --
Unearned compensation
Balance, beginning of year................................ -- -- --
Restricted stock units granted, net of forfeitures of $23
million................................................. (2,311) -- --
Amortization of restricted stock units.................... 273 -- --
------- ------- -------
Balance, end of year...................................... (2,038) -- --
Accumulated other comprehensive income
Balance, beginning of year................................ -- -- --
Transfer from partners' capital........................... (31) -- --
Currency translation adjustment........................... 68 -- --
------- ------- -------
Balance, end of year...................................... 37 -- --
------- ------- -------
$10,145 $ 6,310 $ 6,107
======= ======= =======
</TABLE>
- ---------------
(1) Represents net earnings of the partnership from November 28, 1998 through
May 6, 1999.
(2) Represents the retired limited partners' exchanges of partnership interests
for cash and junior subordinated debentures, the redemption of senior
limited partnership interests for cash and other distributions of partners'
capital in accordance with the partnership agreement.
(3) Represents two quarterly dividends of $0.12 per common share each.
(4) Represents net earnings of the corporation from May 7, 1999 through November
26, 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 139
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings.............................................. $ 2,708 $ 2,428 $ 2,746
Noncash items included in net earnings
Depreciation and amortization........................... 337 242 178
Deferred income taxes................................... (1,387) 23 32
Stock-based compensation................................ 2,989 -- --
Changes in operating assets and liabilities
Cash and securities segregated in compliance with U.S.
federal and other regulations........................... (1,248) (2,984) (670)
Net receivables from brokers, dealers and clearing
organizations........................................... 1,453 (789) (1,599)
Net payables to customers and counterparties.............. (3,990) 14,664 5,029
Securities borrowed, net.................................. (11,179) (21,158) (10,814)
Financial instruments owned, at fair value................ (13,718) 148 (7,439)
Financial instruments sold, but not yet purchased, at fair
value................................................... 9,059 7,559 11,702
Other, net................................................ 2,387 (71) 905
-------- -------- --------
Net cash (used for)/provided by operating activities.... (12,589) 62 70
Cash flows from investing activities
Property, leasehold improvements and equipment............ (656) (476) (259)
Financial instruments owned, at fair value................ 189 (180) (360)
Acquisitions, net of cash acquired........................ (187) -- (74)
-------- -------- --------
Net cash used for investing activities.................. (654) (656) (693)
Cash flows from financing activities
Short-term borrowings, net................................ 755 2,193 1,082
Securities sold under agreements to repurchase, net....... 4,304 (5,909) (4,717)
Issuance of long-term borrowings.......................... 11,000 10,527 7,734
Repayment of long-term borrowings......................... (753) (2,058) (1,855)
Capital contributions..................................... 48 9 89
Dividends paid............................................ (107) -- --
Returns on capital and certain distributions to
partners................................................ (306) (619) (557)
Termination of the profit participation plans............. -- (368) --
Proceeds from issuance of common stock.................... 2,633 -- --
Partners' capital distributions, net...................... (4,112) -- --
Partners' capital allocated for income taxes and potential
withdrawals............................................. -- (1,673) (2,034)
-------- -------- --------
Net cash provided by/(used for) financing activities.... 13,462 2,102 (258)
Net increase/(decrease) in cash and cash equivalents.... 219 1,508 (881)
Cash and cash equivalents, beginning of year.............. 2,836 1,328 2,209
-------- -------- --------
Cash and cash equivalents, end of year.................... $ 3,055 $ 2,836 $ 1,328
======== ======== ========
</TABLE>
- ---------------
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest approximated the related expense for each of the
fiscal years presented. Payments of income taxes were $463 million for the year
ended November 1999 and were immaterial for the years ended November 1998 and
1997.
Noncash activities:
In connection with the firm's conversion to corporate form, junior subordinated
debentures of $371 million were issued to retired limited partners in exchange
for their partnership interests.
Common stock issued in connection with acquisitions was $245 million in 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 140
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net earnings................................................ $2,708 $2,428 $2,746
Other comprehensive income, net of tax
Currency translation adjustment........................... 37 (31) (28)
------ ------ ------
Comprehensive income........................................ $2,745 $2,397 $2,718
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1/DESCRIPTION OF BUSINESS
The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation,
together with its consolidated subsidiaries (collectively, the firm), is a
global investment banking and securities firm that provides a wide range of
financial services worldwide to a substantial and diversified client base. On
May 7, 1999, the firm converted from a partnership to a corporation and
completed its initial public offering.
The firm's activities are divided into two business segments:
GLOBAL CAPITAL MARKETS. This segment comprises Investment Banking, which
includes Financial Advisory and Underwriting, and Trading and Principal
Investments, which includes Fixed Income, Currency and Commodities (FICC),
Equities and Principal Investments (Principal Investments primarily represents
net revenues from the firm's merchant banking investments); and
ASSET MANAGEMENT AND SECURITIES SERVICES. This segment comprises Asset
Management, Securities Services and Commissions.
NOTE 2/SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Group Inc.
and its U.S. and international subsidiaries including Goldman, Sachs & Co.
(GS&Co.) and J. Aron & Company in New York, Goldman Sachs International (GSI) in
London and Goldman Sachs (Japan) Ltd. (GSJL) in Tokyo. Certain reclassifications
have been made to prior-year amounts to conform to the current-year
presentation. All material intercompany transactions and balances have been
eliminated.
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, 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 1999, 1998 and 1997 refer
to the firm's fiscal year ended, or the date, as the context requires, November
26, 1999, November 27, 1998 and November 28, 1997, 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 non-U.S. 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 netting agreement. The firm takes possession of securities
purchased under agreements to resell, monitors the market value of these
securities on a daily basis and obtains additional collateral as appropriate.
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.
F-8
<PAGE> 142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The consolidated statement of financial condition as of November 1999
generally reflects purchases and sales of financial instruments, including
agency transactions, on a trade date basis. The consolidated statement of
financial condition as of November 1998 generally reflects these transactions on
a settlement date basis. Recording these transactions on a trade date basis
would not have resulted in a material adjustment to the consolidated statement
of financial condition as of November 1998.
Substantially all financial instruments used in the firm's trading and
nontrading 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, or if liquidating the firm's
position is reasonably expected to affect market prices, 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 nontrading assets and liabilities is discussed further in Notes 3, 4
and 5.
PRINCIPAL INVESTMENTS
Principal investments are carried at fair value, generally based upon
quoted market prices or 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
generally included in "Trading and principal investments" on the consolidated
statements of earnings.
Derivatives used for nontrading 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
derivatives 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 nontrading 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 manage-
F-9
<PAGE> 143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ment believes a legal right of setoff exists
under an enforceable 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 at
acquisition date is recorded as goodwill and amortized over periods of 15 to 20
years on a straight-line basis.
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.
EARNINGS PER SHARE
Earnings per share (EPS) is computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Basic EPS
is calculated by dividing net earnings by the weighted average number of common
shares outstanding. Common shares outstanding includes common stock and
nonvoting common stock as well as restricted stock units for which no future
service is required as a condition to the delivery of the underlying common
stock. Diluted EPS includes the determinants of basic EPS and, in addition,
reflects the dilutive effect of common stock deliverable pursuant to the
restricted stock units and stock options for which future service is required as
a condition to the delivery of the underlying common stock.
STOCK-BASED COMPENSATION
The firm has elected to account for stock-based employee compensation plans
in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees", as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation". In accordance with APB No. 25, compensation expense
is not recognized for stock options that have no intrinsic value on the date of
grant. Compensation expense is recognized immediately for restricted stock units
for which future service is not required as a condition to the delivery of the
underlying shares of common stock. For restricted stock units with future
service requirements, compensation expense is recognized over the relevant
vesting period using an accelerated amortization methodology.
INCOME TAXES
The firm accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the recognition of tax benefits or
expenses on the temporary differences between the financial reporting and tax
bases of its assets and liabilities. As a partnership, the firm was primarily
subject to unincorporated business taxes and taxes in foreign jurisdictions on
certain of its operations. As a corporation, the earnings of the firm are
subject to U.S. federal, foreign, state and local taxes. As a result of its
conversion to corporate form, the firm recognized the tax effect of the change
in its income tax rate on both its deferred tax assets and liabilities and the
earnings attributable to the period from May 7, 1999 to the end of the fiscal
year. The firm's tax assets and liabilities are presented as a component of
"Other assets" and "Other liabilities and accrued expenses", respectively, on
the consolidated statements of financial condition.
F-10
<PAGE> 144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in non-U.S. currencies are translated at
rates of exchange prevailing on the date of the statement of financial
condition, and revenues and expenses are translated at average rates of exchange
for the fiscal year. Gains or losses on translation of the financial statements
of a non-U.S. operation, where the functional currency is other than the U.S.
dollar, are reflected as a separate component of equity. Gains or losses on
foreign currency transactions are included in the consolidated statements of
earnings.
As a partnership, the firm reported the cumulative translation adjustment
as a component of "Partners' capital allocated for income taxes and potential
withdrawals" on the consolidated statement of financial condition. Effective
with the firm's conversion to corporate form, the cumulative translation
adjustment is reported as "Accumulated other comprehensive income" on the
consolidated statement of financial condition.
ACCOUNTING DEVELOPMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- an amendment of FASB Statement No.
133", which deferred to fiscal years beginning after June 15, 2000 the effective
date of the accounting and reporting requirements of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively, referred to as
derivatives), and for hedging activities. This Statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative instrument depends on its intended
use and the resulting designation. The firm intends to adopt the provisions of
SFAS No. 133 deferred by SFAS No. 137 in fiscal 2001 and is currently assessing
their effect.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP) No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", effective for fiscal years beginning after December 15, 1998. SOP
No. 98-1 requires that certain costs of computer software developed or obtained
for internal use be capitalized and amortized over the useful life of the
related software. The firm previously expensed the cost of all software
development in the period it was incurred. The adoption of SOP No. 98-1 is not
expected to have a material effect on the firm's results of operations or
financial condition. The firm intends to adopt the provisions of SOP No. 98-1 in
fiscal 2000.
NOTE 3/FINANCIAL INSTRUMENTS
Financial instruments, including both cash instruments and derivatives, are
used to manage market risk, facilitate customer transactions, engage in
proprietary 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 con-
F-11
<PAGE> 145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dition. Nontrading assets and liabilities are generally carried at fair value or
amounts that approximate fair value.
Nontrading 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.
Nontrading 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. The fair value of the firm's long-term borrowings and associated
hedges is discussed in Note 5.
TRADING AND PRINCIPAL INVESTMENTS
The firm's Trading and Principal Investments business, a component of the
Global Capital Markets segment, 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 include allocations of interest income and expense to specific
securities, commodities and other positions in relation to the cash generated
by, or funding requirements of, the underlying positions.
The following table sets forth the net revenues of Trading and Principal
Investments:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
FICC................................................... $2,862 $1,438 $2,055
Equities............................................... 1,961 795 573
Principal Investments.................................. 950 146 298
------ ------ ------
Total.................................................. $5,773 $2,379 $2,926
====== ====== ======
</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. 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.
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.
MARKET RISK. The potential for changes in the market value of the firm's
trading
F-12
<PAGE> 146
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
positions is referred to as "market risk". The
firm's trading positions result from underwriting, market-making and proprietary
trading activities.
Categories of market risk include exposures to interest rates, currency
rates, equity prices and commodity prices. A description of each market risk
category is set forth below:
- 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.
These risk exposures are managed through diversification, by controlling
position sizes and by establishing 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 held by the firm
fails to perform its contractual obligations to the firm. To reduce credit
exposures, the firm seeks to enter into netting agreements with counterparties
that permit the firm to offset receivables and payables with such
counterparties. In addition, the firm attempts to further reduce credit risk by
entering into agreements that enable us to obtain collateral from a
counterparty, to terminate or reset the terms of transactions after specified
time periods or upon the occurrence of credit-related events, by seeking
third-party guarantees of the counterparty's obligations, and through the use of
credit derivatives.
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 1999 and 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 other 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 nontrading derivative contracts to manage
the interest rate and currency exposure on its long-term borrowings. Nontrading
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.
F-13
<PAGE> 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
------------------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Interest Rate
Financial futures and forward settlement
contracts....................................... $ 422,465 $ 406,302
Swap agreements................................... 2,581,100 1,848,977
Written option contracts.......................... 509,841 423,561
Equity
Financial futures and forward settlement
contracts....................................... 10,082 7,405
Swap agreements................................... 3,423 2,752
Written option contracts.......................... 113,653 54,856
Currency and Commodity
Financial futures and forward settlement
contracts....................................... 460,941 420,138
Swap agreements................................... 110,159 51,502
Written option contracts.......................... 193,989 183,929
</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
--------------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Purchased Option Contracts
Interest rate........................................ $484,104 $509,770
Equity............................................... 114,680 59,571
Currency and commodity............................... 210,421 186,748
</TABLE>
The firm utilizes replacement cost as a 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 netting
agreement. Replacement cost for purchased option contracts is the market value
of the contract. The firm controls its credit
F-14
<PAGE> 148
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk through an established credit approval process, by monitoring counterparty
limits, obtaining collateral where appropriate and, in some cases, entering
into enforceable netting agreements.
The fair value of derivative financial instruments used for trading
purposes, computed in accordance with the firm's netting policy, is set forth
below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
------------------------------------------------
1999 1998
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Year End
Forward settlement contracts............. $ 4,555 $ 4,625 $ 4,061 $ 4,201
Swap agreements.......................... 12,052 11,587 10,000 11,475
Option contracts......................... 14,018 12,274 7,140 9,038
------- ------- ------- -------
Total.................................... $30,625 $28,486 $21,201 $24,714
======= ======= ======= =======
Monthly Average
Forward settlement contracts............. $ 3,877 $ 3,619 $ 4,326 $ 3,979
Swap agreements.......................... 10,414 11,210 7,340 8,158
Option contracts......................... 9,249 9,707 6,696 8,958
------- ------- ------- -------
Total.................................... $23,540 $24,536 $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
------------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Commercial paper....................................... $ 9,403 $10,008
Promissory notes....................................... 11,061 10,763
Bank loans and other(1)................................ 17,292 6,659
------- -------
Total(2)............................................... $37,756 $27,430
======= =======
</TABLE>
- ---------------
(1) As of November 1999 and November 1998, short-term borrowings included $10.82
billion and $2.96 billion, respectively, of long-term borrowings maturing
within one year.
(2) As of November 1999 and November 1998, weighted average interest rates for
short-term borrowings, including commercial paper, were 5.66% and 5.19%,
respectively.
The firm maintains unencumbered securities with a market value in excess of
all uncollateralized short-term borrowings.
F-15
<PAGE> 149
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
------------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Fixed Rate Obligations(1)
U.S. dollar.......................................... $ 8,236 $ 5,260
Non-U.S. dollar...................................... 1,980 2,066
Floating Rate Obligations(2)
U.S. dollar.......................................... 9,697 11,858
Non-U.S. dollar...................................... 1,039 722
------- -------
Total(3)............................................... $20,952 $19,906
======= =======
</TABLE>
- ---------------
(1) During 1999 and 1998, interest rates on U.S. dollar fixed rate obligations
ranged from 5.56% to 12.00% and from 5.74% to 10.10%, respectively. During
1999 and 1998, non-U.S. dollar fixed rate obligations interest rates ranged
from 0.85% to 9.51% and from 1.90% to 9.51%, respectively.
(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 one to 30 years from the date of issue.
Long-term borrowings by maturity date are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
----------------------------------------------------------------
1999 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
1999....................... $ -- $ -- $ -- $ 2,443 $ 199 $ 2,642
2000....................... 2,527 114 2,641 4,293 272 4,565
2001....................... 3,145 327 3,472 2,261 148 2,409
2002....................... 1,638 594 2,232 1,669 265 1,934
2003....................... 1,522 404 1,926 1,409 412 1,821
2004....................... 1,857 134 1,991 1,310 43 1,353
2005 - Thereafter.......... 7,244 1,446 8,690 3,733 1,449 5,182
------- ------ ------- ------- ------ -------
Total...................... $17,933 $3,019 $20,952 $17,118 $2,788 $19,906
======= ====== ======= ======= ====== =======
</TABLE>
The firm enters into nontrading derivative contracts, such as interest rate
and currency swap agreements, to effectively convert a substantial portion of
its fixed rate long-term borrowings into U.S. dollar-based floating rate
obligations. Accordingly, the aggregate carrying value of these long-term
borrowings and related hedges approximates fair value.
F-16
<PAGE> 150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective weighted average interest rates for long-term borrowings,
after hedging activities, are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
-----------------------------------
1999 1998
---------------- ---------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed rate obligations........................ $ 650 10.17% $ 222 8.09%
Floating rate obligations..................... 20,302 6.03 19,684 5.63
------- -------
Total............................... $20,952 6.16 $19,906 5.66
======= =======
</TABLE>
As of November 1999 and November 1998, the notional amounts of the related
swap agreements used for nontrading purposes were $12.94 billion and $10.21
billion, respectively.
The fair value and carrying value of these agreements are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
------------------------------------------------
1999 1998
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Fair value................................. $ 3 $159 $519 $7
Carrying value............................. 36 2 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 noncancelable lease agreements,
principally for office space, expiring on various dates through 2019. Certain
agreements are subject to periodic escalation charges for increases in real
estate taxes and other charges. Minimum rental commitments, net of minimum
sublease rentals, under noncancelable leases for 2000 and the succeeding four
years and thereafter
F-17
<PAGE> 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and rent charged to operating expense for the last three years are set forth
below:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Minimum Rental Commitments
2000.................................................... $ 203
2001.................................................... 183
2002.................................................... 182
2003.................................................... 181
2004.................................................... 154
2005 - Thereafter....................................... 836
------
Total................................................... $1,739
======
Net Rent Expense
1999.................................................... $ 154
1998.................................................... 104
1997.................................................... 87
</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. In
connection with these activities, the firm had commitments to invest up to $1.09
billion and $1.39 billion in corporate and real estate merchant banking
investment funds and a bridge loan fund as of November 1999 and November 1998,
respectively.
In connection with loan origination and participation, the firm had loan
commitments of $9.38 billion and $1.51 billion as of November 1999 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 $575 million and $790 million
relating to its fund management activities as of November 1999 and November
1998, respectively.
The firm had pledged securities of $35.83 billion and $22.88 billion as
collateral for securities borrowed of approximately equivalent value as of
November 1999 and November 1998, respectively.
The firm had commitments to enter into repurchase and resale agreements of
$30.58 billion and $46.26 billion as of November 1999 and November 1998,
respectively.
The firm provides letters of credit issued by various banks to
counterparties in lieu of securities or cash to satisfy various collateral and
margin deposit requirements. Letters of credit outstanding were $10.30 billion
and $8.81 billion as of November 1999 and November 1998, respectively.
NOTE 7/EQUITY CAPITAL
On May 7, 1999, the firm converted from a partnership to a corporation and
completed its initial public offering. In that offering, the firm sold
51,000,000 shares of common stock. In addition, the firm completed a number of
transactions to have Group Inc. succeed to the business of The Goldman Sachs
Group, L.P. These transactions included the exchange of the partnership
interests of the participating limited partners (PLPs), retired limited
partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association for shares of common stock. As of November 1999, the firm had equity
of $10.15 billion.
F-18
<PAGE> 152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares of nonvoting common stock are convertible into shares of common
stock on a one-for-one basis upon transfer by Sumitomo Bank Capital Markets,
Inc., the beneficial owner of such shares as of November 1999, to a third party,
and in certain other circumstances.
As of November 1998, the firm had $6.31 billion in partners' capital, which
included both the general partner's and limited partners' capital. Partners'
capital allocated for income taxes and potential withdrawals represented
management's estimate of net amounts distributable, primarily to the PLPs, under
the Partnership Agreement, for items including, among other things, income taxes
and capital withdrawals.
NOTE 8/EARNINGS PER SHARE
The computations of basic and diluted EPS are set forth below:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 1999
-------------
(IN MILLIONS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C>
Numerator for basic and diluted EPS -- earnings
available to common stockholders.................... $2,708
===========
Denominator for basic EPS -- weighted average number
of common shares.................................... 475,883,756
Effect of dilutive securities
Restricted stock units.............................. 5,657,350
Stock options....................................... 4,262,854
-----------
Dilutive potential common shares...................... 9,920,204
-----------
Denominator for diluted EPS -- weighted average number
of common shares and dilutive potential common
shares.............................................. 485,803,960
===========
Basic EPS............................................. $ 5.69
Diluted EPS........................................... 5.57
</TABLE>
NOTE 9/EMPLOYEE BENEFIT PLANS
The firm sponsors various pension plans and certain other postretirement
benefit plans, primarily healthcare and life insurance, which cover most
employees worldwide. The firm also provides certain benefits to former or
inactive employees prior to retirement. A summary of these plans is set forth
below:
DEFINED BENEFIT PENSION PLANS AND POSTRETIREMENT PLANS
The firm maintains a defined benefit pension plan for substantially all
U.S. employees. Employees of certain non-U.S. subsidiaries participate in
various local defined benefit plans. These plans generally provide benefits
based on years of credited service and a percentage of the employee's eligible
compensation. In addition, the firm has unfunded postretirement benefit plans
that provide medical and life insurance for eligible retirees, employees and
dependents in the United States.
F-19
<PAGE> 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables provide a summary of the changes in the plans'
projected benefit obligations and the fair value of assets for 1999 and 1998,
and a statement of the funded status of the plans as of November 1999 and
November 1998:
<TABLE>
<CAPTION>
NOVEMBER 1999 NOVEMBER 1998
------------------------------- -------------------------------
U.S. NON-U.S. POST- U.S. NON-U.S. POST-
PENSION PENSION RETIREMENT PENSION PENSION RETIREMENT
------- -------- ---------- ------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Benefit Obligation
Balance, beginning of year............. $108 $120 $ 60 $ 90 $ 77 $ 52
Service cost........................... 4 15 3 3 11 2
Interest cost.......................... 8 5 4 7 4 4
Actuarial (gain)/loss.................. (10) (4) (4) 10 30 4
Benefits paid.......................... (2) (4) (2) (2) (1) (2)
Effect of foreign exchange rates....... -- 6 -- -- (1) --
---- ---- ---- ---- ---- ----
Balance, end of year................... $108 $138 $ 61 $108 $120 $ 60
==== ==== ==== ==== ==== ====
Fair Value of Plan Assets
Balance, beginning of year............. $133 $ 75 $ -- $131 $ 56 $ --
Actual return on plan assets........... 17 11 -- 4 11 --
Firm contributions..................... -- 26 2 -- 10 3
Benefits paid.......................... (2) (4) (2) (2) (1) (3)
Effect of foreign exchange rates....... -- 2 -- -- (1) --
---- ---- ---- ---- ---- ----
Balance, end of year................... $148 $110 $ -- $133 $ 75 $ --
==== ==== ==== ==== ==== ====
Prepaid/(Accrued) Benefit Cost
Funded Status.......................... $ 40 $(28) $(61) $ 25 $(45) $(60)
Unrecognized actuarial loss............ 2 14 5 20 23 9
Unrecognized transition obligation..... (37) 23 -- (40) 22 --
Unrecognized prior service cost........ -- -- (2) -- -- (2)
---- ---- ---- ---- ---- ----
Prepaid/(accrued) benefit cost......... $ 5 $ 9 $(58) $ 5 $ -- $(53)
==== ==== ==== ==== ==== ====
</TABLE>
For plans in which the accumulated benefit obligation exceeded plan assets,
the projected benefit obligation and aggregate accumulated benefit obligation
was $138 million and $121 million as of November 1999, respectively, and $85
million and $85 million as of November 1998, respectively. The fair value of
plan assets for these plans was $110 million and $57 million as of November 1999
and November 1998, respectively. For plans in which the accumulated benefit
obligation exceeded the fair value of plan assets, the effect of recognizing
this amount would not have been material to the consolidated statements of
financial condition or comprehensive income.
F-20
<PAGE> 154
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of pension expense/(income) and postretirement expense are
set forth below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 1999 YEAR ENDED NOVEMBER 1998
------------------------------- -------------------------------
U.S. NON-U.S. POST- U.S. NON-U.S. POST-
PENSION PENSION RETIREMENT PENSION PENSION RETIREMENT
------- -------- ---------- ------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Service cost........................... $ 4 $15 $3 $ 3 $11 $2
Interest cost.......................... 8 5 4 7 4 4
Expected return on plan assets......... (10) (5) -- (10) (4) --
Net amortization....................... (2) 3 -- (3) 2 --
---- --- -- ---- --- --
Total.................................. $ -- $18 $7 $ (3) $13 $6
==== === == ==== === ==
</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
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Defined Benefit Pension Plans
U.S. Plans
Discount rate............................................. 7.5% 7.0% 7.5%
Rate of increase in future compensation levels............ 5.0 5.0 5.0
Expected long-term rate of return on plan assets.......... 7.5 7.5 7.5
International Plans
Discount rate............................................. 4.6 5.0 5.7
Rate of increase in future compensation levels............ 4.3 4.7 5.3
Expected long-term rate of return on plan assets.......... 6.0 6.0 7.0
Postretirement Plans
Discount rate............................................. 7.5 7.0 7.5
Rate of increase in future compensation levels............ 5.0 5.0 5.0
</TABLE>
For measurement purposes, a 6.6% annual rate of increase in the per capita
cost of covered healthcare benefits was assumed for the fiscal year ending
November 2000. The rate was assumed to decrease gradually to 5.0% for the fiscal
year ending November 2008 and remain at that level thereafter.
The assumed cost of healthcare has an effect on the amounts reported for
the firm's healthcare plans. A 1% change in the assumed healthcare cost trend
rate would have the following effects:
<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cost................................................... $1 $1 $(1) $(1)
Obligation............................................. 9 9 (8) (7)
</TABLE>
DEFINED CONTRIBUTION PLANS
The firm contributes to employer-sponsored U.S. and international defined
contribution plans. The firm's contribution to these plans was $94 million, $70
million and $68 million for 1999, 1998 and 1997, respectively.
The firm has also established a nonqualified defined contribution plan (the
Plan) for certain senior employees. Shares of common
F-21
<PAGE> 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock contributed to the Plan in 1999 and outstanding as of November 1999 were
12,660,685. The shares of common stock will vest and generally be distributable
to the participant on specified future dates if the participant satisfies
certain conditions and the participant's employment with the firm has not been
terminated, with certain exceptions for terminations of employment due to death
or a change in control. Dividends on the underlying shares of common stock are
paid currently to the participants. Forfeited shares remain in the Plan and are
reallocated to other participants. Contributions to the Plan are expensed on the
date of grant. Plan expense in 1999 was $674 million, including $666 million
granted in connection with the firm's initial public offering.
NOTE 10/EMPLOYEE INCENTIVE PLANS
STOCK INCENTIVE PLAN
The firm sponsors a stock incentive plan that provides for grants of
incentive stock options, nonqualified stock options, stock appreciation rights,
dividend equivalent rights, restricted stock, restricted stock units and other
stock-based awards. The stock incentive plan also permits the making of loans to
purchase shares of common stock.
The total number of shares of common stock that may be issued under the
stock incentive plan through fiscal 2002 may not exceed 300,000,000 shares and,
in each fiscal year thereafter, may not exceed 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. As of
November 1999, 183,440,631 shares were available for grant under the stock
incentive plan.
RESTRICTED STOCK UNITS
The firm issued restricted stock units to employees in 1999 under the stock
incentive plan, primarily in connection with its initial public offering and as
part of year-end compensation. Of the total restricted stock units outstanding
as of November 1999, (i) 40,344,481 units required future service as a condition
to the delivery of the underlying shares of common stock, and (ii) 35,703,923
units did not require future service. In all cases, delivery of the underlying
shares of common stock is conditioned on the grantee's satisfying certain other
requirements outlined in the award agreements.
The activity related to these restricted stock units during 1999 is set
forth below:
<TABLE>
<CAPTION>
RESTRICTED STOCK UNITS OUTSTANDING
-----------------------------------
NO FUTURE SERVICE FUTURE SERVICE
REQUIRED REQUIRED
----------------- --------------
(IN MILLIONS, EXCEPT UNIT AMOUNTS)
<S> <C> <C>
Outstanding, beginning of year....................... -- --
Granted............................................ 36,127,314 40,780,999
Forfeited.......................................... (355,177) (436,518)
Delivered.......................................... (68,214) --
----------- -----------
Outstanding, end of year............................. 35,703,923 40,344,481
=========== ===========
Noncash compensation expense, net of forfeitures..... $2,042 $273
</TABLE>
F-22
<PAGE> 156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future noncash compensation expense related to the restricted stock
units for which future service is required is set forth below:
<TABLE>
<CAPTION>
COMPENSATION
EXPENSE
------------
(IN MILLIONS)
<S> <C>
2000.................................................. $ 733
2001.................................................. 610
2002.................................................. 429
2003.................................................. 214
2004.................................................. 52
------
Total................................................. $2,038
======
</TABLE>
STOCK OPTIONS
Stock options granted to employees during 1999 will generally become
exercisable in equal installments on or about the third, fourth and fifth
anniversaries of the date of grant if the grantee has satisfied certain
conditions and the grantee's employment with the firm has not been terminated,
with certain exceptions for terminations of employment due to death, retirement,
extended absence or a change in control. Once service requirements have been
met, these options will generally remain exercisable, subject to satisfaction of
certain conditions, until the tenth anniversary of the date of grant. Pursuant
to APB No. 25, compensation expense was not recognized for those options that
had no intrinsic value on the date of grant. The dilutive effect of these
options is included in diluted common shares outstanding under SFAS No. 128.
The activity of these stock options during 1999 is set forth below:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE REMAINING LIFE (YEARS)
----------- ---------------- ----------------------
<S> <C> <C> <C>
Outstanding, beginning of
year.......................... -- $ -- --
Granted....................... 40,863,172 52.91 --
Exercised..................... -- -- --
Forfeited..................... (503,506) 53.00 --
----------
Outstanding, end of year........ 40,359,666 52.91 9.42
==========
</TABLE>
The weighted average fair value of options granted through November 1999
was $16.13 per option. Fair value is estimated as of the grant date based on a
binomial option pricing model using the following weighted average assumptions:
<TABLE>
<S> <C>
Risk-free interest rate.................................... 6.1%
Expected life.............................................. 7 years
Expected volatility........................................ 30.0%
Dividend yield............................................. 1.0%
</TABLE>
F-23
<PAGE> 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA EFFECT OF SFAS NO. 123
If the firm were to recognize compensation expense under the fair
value-based method of SFAS No. 123 with respect to options granted, net earnings
would have decreased resulting in pro forma net earnings and EPS as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 1999
-------------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Net earnings, as reported....................... $2,708
Pro forma net earnings.......................... 2,650
EPS, as reported
Basic........................................... $ 5.69
Diluted......................................... 5.57
Pro forma EPS
Basic........................................... $ 5.57
Diluted......................................... 5.45
</TABLE>
In the table above, pro forma compensation expense associated with option
grants is recognized over the relevant vesting period. The effect of applying
SFAS No. 123 in the pro forma disclosure above is not representative of the
potential pro forma effect on net earnings in future periods.
NOTE 11/INCOME TAXES
Prior to its conversion to corporate form, the firm operated as a
partnership and generally was not subject to U.S. federal and state income
taxes. The earnings of the firm, however, were subject to local unincorporated
business taxes. In addition, certain non-U.S. subsidiaries were subject to
income taxes in their local jurisdictions. The partners of the firm's
predecessor partnership were taxed on their proportionate share of the
partnership's taxable income or loss. Effective with the conversion from a
partnership to a corporation on May 7, 1999, the firm became subject to U.S.
federal, state and local corporate income taxes.
The components of the net tax (benefit)/expense reflected on the
consolidated statements of earnings are set forth below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current Taxes
U.S. federal............................................. $ 16 $ 16 $ 5
State and local.......................................... 67 28 87
Non-U.S. ................................................ 588 426 144
------- ---- ----
Total current tax expense...................... 671 470 236
Deferred Taxes
U.S. federal............................................. (688) -- --
State and local.......................................... (342) (3) (4)
Non-U.S. ................................................ (357) 26 36
------- ---- ----
Total deferred tax (benefit)/expense........... (1,387) 23 32
------- ---- ----
Net tax (benefit)/expense................................ $ (716) $493 $268
======= ==== ====
</TABLE>
F-24
<PAGE> 158
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the financial reporting and tax bases of assets and liabilities. These
temporary differences result in taxable or deductible amounts in future years
and are measured using the tax rates and laws that will be in effect when such
differences are expected to reverse. In connection with the conversion from a
partnership to a corporation, the firm recognized a deferred tax benefit related
to the revaluation of net deferred tax assets recorded as a partnership.
Additionally, deferred tax assets were recorded as a result of acquisitions
during 1999.
Significant components of the firm's deferred tax assets and liabilities
are set forth below:
<TABLE>
<CAPTION>
AS OF NOVEMBER
--------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Deferred Tax Assets
Compensation and benefits................................... $1,397 $44
Foreign tax credits......................................... 140 --
Depreciation and amortization............................... 57 14
Other, net.................................................. 226 14
------ ---
1,820 72
Less: valuation allowance(1)................................ (83) --
------ ---
Total deferred tax assets......................... 1,737 72
------ ---
Deferred Tax Liabilities
Unrealized gains............................................ 257 33
------ ---
Total deferred tax liabilities.................... 257 33
------ ---
Net deferred tax assets..................................... $1,480 $39
====== ===
</TABLE>
- ---------------
(1) Relates primarily to the ability to recognize tax benefits associated with
non-U.S. operations.
A reconciliation of the U.S. federal statutory income tax rate to the
firm's effective income tax rate is set forth below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
----------------------------
1999 1998(1) 1997(1)
---- ------- -------
<S> <C> <C> <C>
U.S. federal statutory income tax rate................. 35.0% --% --%
Increase related to:
State and local taxes, net of U.S. income tax
effects.............................................. 5.0 0.9 2.8
Foreign................................................ -- 15.5 6.0
Other.................................................. -- 0.5 0.1
----- ---- ---
Rate before one-time events............................ 40.0 16.9 8.9
Revaluation of deferred tax assets upon change in tax
status............................................... (41.4)(2) -- --
Rate benefit for partnership period.................... (37.7)(3) -- --
Other.................................................. 3.2 -- --
----- ---- ---
Total tax (benefit)/expense............................ (35.9)% 16.9% 8.9%
===== ==== ===
</TABLE>
- ---------------
(1) The U.S. federal statutory income tax rate is not applicable to 1998 or 1997
because the firm operated as a partnership and generally was not subject to
corporate federal income taxes. U.S. federal taxes paid by subsidiary
corporations are included in "Other" for 1998 and 1997.
(2) The deferred tax benefit recognized upon the firm's change in tax status
from partnership to corporate form primarily reflects the revaluation of the
deferred tax assets and liabilities at the firm's corporate income tax rate.
(3) The rate benefit for the partnership period relates to the firm's earnings
prior to its conversion to corporate form, which generally were not subject
to corporate income taxes.
F-25
<PAGE> 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12/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 1999 and November 1998, GS&Co.
had regulatory net capital, as defined, of $2.92 billion and $3.25 billion,
respectively, which exceeded the amounts required by $2.31 billion and $2.70
billion, respectively.
GSI, a registered U.K. broker-dealer and subsidiary of Group Inc., is
subject to the capital requirements of the Securities and Futures Authority
Limited, and GSJL, a Tokyo-based broker-dealer, is subject to the capital
requirements of the Japanese Ministry of Finance and the Financial Supervisory
Agency. As of November 1999 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 1999 and November 1998, these subsidiaries were in compliance
with their local capital adequacy requirements.
NOTE 13/BUSINESS SEGMENTS
In reporting to management, the firm's operating results are categorized
into the following two principal segments: Global Capital Markets; and Asset
Management and Securities Services.
GLOBAL CAPITAL MARKETS
The Global Capital Markets segment includes services related to the
following:
INVESTMENT BANKING. The firm provides a broad range of investment banking
services to a diverse group of corporations, financial institutions, governments
and individuals. The firm's 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.
TRADING AND PRINCIPAL INVESTMENTS. The firm's Trading and Principal
Investments business facilitates transactions with a diverse group of
corporations, financial institutions, governments and individuals and takes
proprietary positions through market making in and trading of fixed income and
equity products, currencies, commodities, and swaps and other derivatives.
Trading and Principal Investments is divided into three categories:
- - FICC. The firm 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. The firm 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 net
revenues from the firm's merchant banking investments.
ASSET MANAGEMENT AND SECURITIES SERVICES
The Asset Management and Securities Services segment includes services
related to the following:
- - ASSET MANAGEMENT. Asset Management generates management fees by providing
investment advisory services to a diverse client base of institutions and
individuals;
- - SECURITIES SERVICES. Securities Services includes prime brokerage, financing
ser-
F-26
<PAGE> 160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vices and securities lending and the firm's matched book businesses, all of
which generate revenue primarily in the form of fees or interest rate spreads;
and
- - COMMISSIONS. Commissions include agency transactions for clients on major
stock and futures exchanges and revenues from the increased share of the
income and gains derived from the firm's merchant banking funds.
BASIS OF PRESENTATION
In reporting segments, certain of the firm's business lines have been
aggregated where they have similar economic characteristics and are similar in
each of the following areas: (i) the nature of the services they provide, (ii)
their methods of distribution, (iii) the types of clients they serve and (iv)
the regulatory environments in which they operate.
The firm allocates revenues and expenses between the two segments. Due to
the integrated nature of the business segments, estimates and judgments have
been made in allocating certain revenue and expense items. Transactions between
segments are based on specific criteria or approximate third-party rates. Total
operating expenses include corporate items that have not been allocated to
either business segment. The allocation process is based on the manner in which
management views the business of the firm.
The segment information presented in the table below is prepared according
to the following methodologies:
- - Revenues and expenses directly associated with each segment are included in
determining pre-tax earnings.
- - Net revenues in the firm's segments include allocations of interest income and
expense to specific securities, commodities and other positions in relation to
the cash generated by, or funding requirements of, the underlying positions.
Net interest is allocated to the Trading and Principal Investments component
of Global Capital Markets and the Securities Services component of Asset
Management and Securities Services. Net interest is included within segment
net revenues as it is consistent with the way in which management assesses
segment performance.
- - Overhead expenses not directly allocable to specific segments are allocated
ratably based on direct segment expenses.
- - The nonrecurring expenses associated with the firm's conversion to corporate
form and related transactions are not allocated to individual segments as
management excludes them in evaluating segment performance.
F-27
<PAGE> 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT OPERATING RESULTS
Management believes that the following information provides a reasonable
representation of each segment's contribution to consolidated pre-tax earnings
and total assets:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Global Capital Markets
Net revenues(1)............................... $ 10,132 $ 5,747 $ 5,513
Operating expenses(2)......................... 6,232 3,978 3,228
-------- -------- --------
Pre-tax earnings(3)........................... $ 3,900 $ 1,769 $ 2,285
======== ======== ========
Segment assets................................ $127,515 $102,724 $ 99,974
======== ======== ========
Asset Management and Securities Services
Net revenues(1)............................... $ 3,213 $ 2,773 $ 1,934
Operating expenses(2)......................... 2,396 1,621 1,205
-------- -------- --------
Pre-tax earnings(3)........................... $ 817 $ 1,152 $ 729
======== ======== ========
Segment assets................................ $121,693 $114,293 $ 78,193
======== ======== ========
Total
Net revenues(1)............................... $ 13,345 $ 8,520 $ 7,447
Operating expenses(2)......................... 11,353(5) 5,599 4,433
-------- -------- --------
Pre-tax earnings.............................. $ 1,992 $ 2,921 $ 3,014
======== ======== ========
Total assets(4)............................... $250,491 $217,380 $178,401
======== ======== ========
</TABLE>
- ---------------
(1) Net revenues include net interest as set forth in the table below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Global Capital Markets...................................... $ 15 $ 364 $ 623
Asset Management and Securities Services.................... 689 688 478
---- ------ ------
Total net interest.......................................... $704 $1,052 $1,101
==== ====== ======
</TABLE>
(2) Operating expenses include depreciation and amortization as set forth in the
table below:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Global Capital Markets...................................... $228 $ 158 $ 119
Asset Management and Securities Services.................... 109 84 59
---- ------ ------
Total depreciation and amortization......................... $337 $ 242 $ 178
==== ====== ======
</TABLE>
(3) The pre-tax earnings of the firm's segments in 1999 reflect payments for
services rendered by managing directors who, prior to the firm's conversion
to corporate form, were profit participating limited partners. In prior
years, these payments were accounted for as distributions of partners'
capital rather than as compensation and benefits expense. As a result, these
payments are not reflected in the operating expenses of the firm's segments
in 1998 and 1997 and, therefore, the pre-tax earnings of the firm's segments
in these years are not comparable with 1999.
(4) Includes deferred tax assets relating to the firm's conversion to corporate
form and certain other assets that management believes are not allocable to
a particular segment.
(5) Includes the following expenses that have not been allocated to the firm's
segments: (i) nonrecurring employee initial public offering awards of $2.26
billion, (ii) the ongoing amortization of employee initial public offering
awards of $268 million and (iii) the charitable contribution to The Goldman
Sachs Foundation of $200 million made at the time of the firm's initial
public offering.
F-28
<PAGE> 162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the net revenues of the firm's two segments:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
---------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Financial Advisory.................................... $ 2,270 $1,774 $1,184
Underwriting.......................................... 2,089 1,594 1,403
------- ------ ------
Investment Banking.................................... 4,359 3,368 2,587
------- ------ ------
FICC.................................................. 2,862 1,438 2,055
Equities.............................................. 1,961 795 573
Principal Investments................................. 950 146 298
------- ------ ------
Trading and Principal Investments..................... 5,773 2,379 2,926
------- ------ ------
Total Global Capital Markets.......................... 10,132 5,747 5,513
------- ------ ------
Asset Management...................................... 919 675 458
Securities Services................................... 772 730 487
Commissions........................................... 1,522 1,368 989
------- ------ ------
Total Asset Management and Securities Services........ 3,213 2,773 1,934
------- ------ ------
Total net revenues.................................... $13,345 $8,520 $7,447
======= ====== ======
</TABLE>
GEOGRAPHIC INFORMATION
Due to the highly integrated nature of international financial markets, the
firm manages its businesses based on the profitability of the enterprise as a
whole. Accordingly, management believes that profitability by geographic region
is not necessarily meaningful.
The firm's revenues, expenses and identifiable assets are generally
allocated based on the country of domicile of the legal entity providing the
service.
F-29
<PAGE> 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the total net revenues, pre-tax earnings,
and identifiable assets of the firm and its consolidated subsidiaries by
geographic region allocated on the basis described above:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-------------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net Revenues
United States.............................. $ 8,536 $ 5,133 $ 4,724
Other Americas............................. 327 308 379
United Kingdom............................. 3,103 1,893 1,570
Other Europe............................... 375 333 190
Asia....................................... 1,004 853 584
--------- --------- ---------
Total net revenues......................... $ 13,345 $ 8,520 $ 7,447
========= ========= =========
Pre-tax Earnings(1)
United States.............................. $ 2,878 $ 1,315 $ 1,737
Other Americas............................. 184 209 302
United Kingdom............................. 1,203 746 625
Other Europe............................... 198 216 89
Asia....................................... 254 435 261
Other...................................... (2,725)(3) -- --
--------- --------- ---------
Total pre-tax earnings..................... $ 1,992 $ 2,921 $ 3,014
========= ========= =========
Identifiable Assets
United States.............................. $ 238,875 $ 213,971 $ 189,622
Other Americas............................. 6,118 6,596 8,512
United Kingdom............................. 119,350 94,025 69,260
Other Europe............................... 11,737 8,820 7,555
Asia....................................... 18,088 19,536 13,085
Eliminations and other(2).................. (143,677) (125,568) (109,633)
--------- --------- ---------
Total identifiable assets.................. $ 250,491 $ 217,380 $ 178,401
========= ========= =========
</TABLE>
- ---------------
(1) The pre-tax earnings of the firm in 1999 reflect payments for services
rendered by managing directors who, prior to the firm's conversion to
corporate form, were profit participating limited partners. In prior years,
these payments were accounted for as distributions of partners' capital
rather than as compensation and benefits expense. As a result, these
payments are not reflected in the firm's operating expenses in 1998 and 1997
and, therefore, the pre-tax earnings in these years are not comparable with
1999.
(2) Reflects eliminations and certain assets that are not allocable to a
particular geographic region.
(3) Includes the following expenses that have not been allocated to the firm's
geographic regions: (i) nonrecurring employee initial public offering awards
of $2.26 billion, (ii) the ongoing amortization of employee initial public
offering awards of $268 million and (iii) the charitable contribution to The
Goldman Sachs Foundation of $200 million made at the time of the firm's
initial public offering.
NOTE 14/SUBSEQUENT EVENTS
On December 20, 1999, the Board of Directors of Group Inc. declared a
dividend of $0.12 per share to be paid on February 24, 2000 to voting and
nonvoting common shareholders of record on January 24, 2000.
F-30
<PAGE> 164
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY RESULTS (UNAUDITED)
The following represents the firm's unaudited quarterly results for 1999
and 1998. These quarterly results conform with generally accepted accounting
principles and reflect all adjustments, consisting only of normal recurring
adjustments, that are, in the opinion of management, necessary for a fair
presentation of the results.
<TABLE>
<CAPTION>
1999 FISCAL QUARTER
-------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues............................ $5,856 $ 6,355 $6,440 $6,712
Interest expense.......................... 2,861 2,886 3,032 3,239
------ ------- ------ ------
Revenues, net of interest expense......... 2,995 3,469 3,408 3,473
Operating expenses........................ 1,807 4,956 2,326 2,264
------ ------- ------ ------
Pre-tax earnings/(loss)................... 1,188 (1,487)(1) 1,082 1,209
Provision/(benefit) for taxes............. 181 (1,827)(2) 444 486
------ ------- ------ ------
Net earnings............................ $1,007 $ 340 $ 638 $ 723
====== ======= ====== ======
Earnings per share
Basic................................... -- $ 0.72 $ 1.34 $ 1.51
Diluted................................. -- 0.71 1.32 1.48
Dividends paid per share.................. -- -- 0.12 0.12
</TABLE>
- ---------------
(1) Includes nonrecurring expenses of $2.26 billion associated with the firm's
conversion to corporate form and the firm's charitable contribution to The
Goldman Sachs Foundation of $200 million made at the time of the firm's
initial public offering.
(2) Includes a net tax benefit of $825 million related to the firm's conversion
to corporate form, a benefit of $880 million related to the granting of
employee initial public offering awards and a benefit of $80 million related
to the charitable contribution to The Goldman Sachs Foundation.
<TABLE>
<CAPTION>
1998 FISCAL QUARTER
--------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Total revenues............................... $5,903 $6,563 $5,735 $4,277
Interest expense............................. 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-31
<PAGE> 165
PLAN OF DISTRIBUTION
PLAN OF DISTRIBUTION FOR THE INITIAL OFFERING AND SALE OF NOTES
The Goldman Sachs Group, Inc. and Goldman, Sachs & Co., as the agent (the
"agent"), have entered into a distribution agreement with respect to the notes.
Subject to certain conditions, the agent has agreed to use its reasonable
efforts to solicit purchases of the notes. The Goldman Sachs Group, Inc. has the
right to accept offers to purchase notes and may reject any proposed purchase of
the notes. The agent may also reject any offer to purchase notes. The Goldman
Sachs Group, Inc. will pay the agent a commission on any notes sold through the
agent. The commission will range from 0.150% to 0.900% of the principal amount
of the notes, depending on the stated maturity of the notes.
The Goldman Sachs Group, Inc. may also sell notes to the agent who will
purchase the notes as principal for its own account. In that case, the agent
will purchase the notes at a price equal to the issue price specified in the
applicable prospectus supplement, less a discount. Unless otherwise stated in
the applicable prospectus supplement, the discount will equal the applicable
commission on an agency sale of notes with the same stated maturity.
The agent may resell any notes it purchases as principal to other brokers
or dealers at a discount, which may include all or part of the discount the
agent received from The Goldman Sachs Group, Inc. If all the notes are not sold
at the initial offering price, the agent may change the offering price and the
other selling terms.
The Goldman Sachs Group, Inc. may also sell notes directly to its
investors. No commissions will be paid on notes sold directly.
The agent, whether acting as agent or principal, may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933. The Goldman
Sachs Group, Inc. has agreed to indemnify the agent against certain liabilities,
including liabilities under the Securities Act.
If the agent sells notes to dealers who resell to investors and the agent
pays the dealers all or part of the discount or commission it receives from The
Goldman Sachs Group, Inc., those dealers may also be deemed to be "underwriters"
within the meaning of the Securities Act.
The Goldman Sachs Group, Inc. estimates that its share of the total
expenses of this offering, excluding underwriting discounts and commissions
whether paid to Goldman, Sachs & Co. or any other agent, will be approximately
$10.5 million.
Unless otherwise indicated in the applicable prospectus supplement, the
purchase price of the notes will be required to be paid in immediately available
funds in New York City.
The Goldman Sachs Group, Inc. may appoint agents, other than or in addition
to Goldman, Sachs & Co., with respect to certain notes. Any other agents will be
named in the applicable prospectus supplements and those agents will enter into
the distribution agreement referred to above. The other agents may be affiliates
or customers of The Goldman Sachs Group, Inc. and may engage in transactions
with and perform services for The Goldman Sachs Group, Inc. in the ordinary
course of business.
Goldman, Sachs & Co. is a subsidiary of The Goldman Sachs Group, Inc. Rule
2720 of the Conduct Rules of the National Association of Securities Dealers,
Inc. imposes certain requirements when an NASD member such as Goldman, Sachs &
Co. distributes an affiliated company's debt securities. Goldman, Sachs & Co.
has advised The Goldman Sachs Group, Inc. that this offering will comply with
the applicable requirements of Rule 2720.
Goldman, Sachs & Co. will not confirm initial sales to accounts over which
it exercises discretionary authority without the prior written approval of the
customer.
P-1
<PAGE> 166
PLAN OF DISTRIBUTION FOR MARKET-MAKING
RESALES BY AFFILIATES
This prospectus may be used by Goldman, Sachs & Co. in connection with
offers and sales of the notes in market-making transactions. In a market-making
transaction, Goldman, Sachs & Co. may resell a note it acquires from other
holders, after the original offering and sale of the note. Resales of this kind
may occur in the open market or may be privately negotiated, at prices related
to prevailing market prices at the time of resale or at negotiated prices. In
these transactions, Goldman, Sachs & Co. may act as principal or agent,
including as agent for the counterparty in a transaction in which Goldman, Sachs
& Co. acts as principal or as agent for both counterparties in a transaction in
which Goldman, Sachs & Co. does not act as principal. Goldman, Sachs & Co. may
receive compensation in the form of discounts and commissions, including from
both counterparties in some cases. Other affiliates of The Goldman Sachs Group,
Inc. may also engage in transactions of this kind and may use this prospectus
for this purpose.
The Goldman Sachs Group, Inc. does not expect to receive any proceeds from
market-making transactions. The Goldman Sachs Group, Inc. does not expect that
Goldman, Sachs & Co. or any other affiliate that engages in these transactions
will pay any proceeds from its market-making resales to The Goldman Sachs Group,
Inc.
A market-making transaction will have a settlement date later than the
original issue date of the note. Information about the trade and settlement
dates, as well as the purchase price, for a market-making transaction will be
provided to the purchaser in a separate confirmation of sale.
Unless otherwise indicated in the applicable prospectus supplement or
confirmation of sale, the purchase price of the notes will be required to be
paid in immediately available funds in New York City.
Unless The Goldman Sachs Group, Inc. or an agent informs you in your
confirmation of sale that your note is being purchased in its original
offering and sale, you may assume that you are purchasing your note in a
market-making transaction.
MATTERS RELATING TO ORIGINAL SALES AND
MARKET-MAKING RESALES
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 (i.e., $22 billion) of all of the Series B medium-term notes.
The notes are a new issue of securities, and there will be no established
trading market for any note prior to its original issue date. The Goldman Sachs
Group, Inc. does not plan to list the notes on a securities exchange. The
Goldman Sachs Group, Inc. has been advised by Goldman, Sachs & Co. that it
intends to make a market in the notes. However, neither Goldman, Sachs & Co. nor
any other affiliate that makes a market is obligated to do so and any of them
may stop doing so at any time without notice. No assurance can be given as to
the liquidity or trading market for the notes.
In this prospectus, the terms "this offering" means the initial offering of
the notes made in connection with their original issuance. This term does not
refer to any subsequent resales of notes in market-making transactions.
P-2
<PAGE> 167
- -------------------------------------------------------
- -------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell or a solicitation of an offer to buy the securities it
describes, but only under circumstances and in jurisdictions where it is lawful
to do so. The information contained in this prospectus is current only as of its
date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Our Business Principles............... 2
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 24
Capitalization........................ 25
Selected Consolidated Financial
Data................................ 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 28
Business.............................. 51
Management............................ 68
Principal Shareholders................ 81
Certain Relationships and Related
Transactions........................ 84
Description of Notes We May Offer..... 89
United States Taxation................ 119
Employee Retirement Income Security
Act................................. 130
Validity of the Notes................. 130
Experts............................... 130
Available Information................. 131
Cautionary Statement Pursuant to the
Private Securities Litigation Reform
Act of 1995......................... 131
Index to Consolidated Financial
Statements.......................... F-1
Plan of Distribution.................. P-1
</TABLE>
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
$22,000,000,000
THE GOLDMAN SACHS
GROUP, INC.
Medium-Term Notes, Series B
------------------
[GOLDMAN SACHS LOGO]
------------------
GOLDMAN, SACHS & CO.
-------------------------------------------------------
-------------------------------------------------------
<PAGE> 168
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 by the registrant in connection with
the distribution of the securities registered under this registration statement:
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
-----------
<S> <C>
SEC registration fee........................................ $ 1,848,000
NASD fees................................................... 30,500
Legal fees and expenses..................................... 100,000
Fees and expenses of qualification under state securities
laws (including legal fees)............................... 10,000
Accounting fees and expenses................................ 100,000
Printing fees............................................... 1,100,000
Rating agency fees.......................................... 100,000
Trustee's fees and expenses................................. 10,000
Miscellaneous............................................... 201,500
-----------
Total............................................. $ 3,500,000
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee of or agent to the registrant. The
statute provides that it is not exclusive of other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise. Section 6.4 of the
registrant's by-laws provides for indemnification by the registrant of any
director or officer (as such term is defined in the by-laws) of the registrant
who is or was a director of any of its subsidiaries, is or was a member of the
Shareholders' Committee (as defined in the prospectus included in this
registration statement) acting pursuant to the shareholders' agreement (as
defined in the prospectus included in this registration statement) or, at the
request of the registrant, is or was serving as a director or officer of, or in
any other capacity for, any other enterprise, to the fullest extent permitted by
law. The by-laws also provide that the registrant shall advance expenses to a
director or officer and, if reimbursement of such expenses is demanded in
advance of the final disposition of the matter with respect to which such demand
is being made, upon receipt of an undertaking by or on behalf of such director
or officer to repay such amount if it is ultimately determined that the director
or officer is not entitled to be indemnified by the registrant. To the extent
authorized from time to time by the board of directors of the registrant, the
registrant may provide to any one or more employees of the registrant, one or
more officers, employees and other agents of any subsidiary or one or more
directors, officers, employees and other agents of any other enterprise, rights
of indemnification and to receive payment or reimbursement of expenses,
including attorneys' fees, that are similar to the rights conferred in the
by-laws of the registrant on directors and officers of the registrant
II-1
<PAGE> 169
or any subsidiary or other enterprise. The by-laws do not limit the power of the
registrant or its board of directors to provide other indemnification and
expense reimbursement rights to directors, officers, employees, agents and other
persons otherwise than pursuant to the by-laws. The registrant has entered into
agreements with certain directors, officers and employees who are asked to serve
in specified capacities at subsidiaries and other entities.
The registrant has entered into an agreement that provides indemnification
to its directors and officers and to the directors and certain officers of the
general partner of The Goldman Sachs Group, L.P., members of its Management
Committee or its Partnership Committee or the former Executive Committee of The
Goldman Sachs Group, L.P. and all other persons requested or authorized by the
registrant's board of directors or the board of directors of the general partner
of The Goldman Sachs Group, L.P. to take actions on behalf of the registrant,
The Goldman Sachs Group, L.P. or the general partner of The Goldman Sachs Group,
L.P. in connection with the plan of incorporation and certain registration
statements for all losses, damages, costs and expenses incurred by the
indemnified person arising out of the relevant registration statements or the
transactions contemplated by the plan of incorporation. The registrant has also
entered into a similar indemnification agreement with its directors, some of its
officers and all other persons requested or authorized by the registrant's board
of directors or any committee thereof to take actions on behalf of the
registrant in connection with this registration statement and certain other
registration statements. These agreements are in addition to the registrant's
indemnification obligations under its by-laws.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The registrant's amended and restated certificate of incorporation
provides for such limitation of liability.
Policies of insurance are maintained by the registrant under which its
directors and officers are insured, within the limits and subject to the
limitations of the policies, against certain expenses in connection with the
defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.
Reference is also made to Section 7 of the distribution agreement filed as
Exhibit 1.1 to the registration statement for information concerning the agent's
obligation to indemnify the registrant and its officers and directors in certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its conversion to corporate form, the registrant issued:
(i) 265,019,073 shares of the registrant's common stock, par value $0.01 per
share, to certain managing directors who were profit participating limited
partners of The Goldman Sachs Group, L.P. in exchange for all of these managing
directors' interests in The Goldman Sachs Group, L.P. and certain other
affiliates; (ii) 47,270,551 shares of common stock and $295 million principal
amount of 12% junior subordinated debentures of the registrant to certain
retired limited partners of The Goldman Sachs Group, L.P. in exchange for all of
such limited partners' interests in The Goldman Sachs Group, L.P. and certain
other affiliates; (iii) 30,425,052 shares of common stock and 7,440,362 shares
of the registrant's nonvoting common stock, par value $0.01 per share, to
Sumitomo Bank Capital Markets, Inc. in exchange for its interests in The Goldman
Sachs Group, L.P. and Goldman, Sachs & Co.; and (iv) 30,975,421 shares of common
stock to Kamehameha
II-2
<PAGE> 170
Activities Association in exchange for its interests in The Goldman Sachs Group,
L.P. Also, simultaneously with its conversion to corporate form on May 7, 1999,
the registrant made awards of restricted stock units and/or stock options to
substantially all of its employees and made an irrevocable contribution of
shares of common stock to a nonqualified defined contribution plan. The offering
and sale of the shares of common stock, junior subordinated debentures and
nonvoting common stock to the managing directors who were profit participating
limited partners, retired limited partners, Sumitomo Bank Capital Markets, Inc.
and Kamehameha Activities Association were not registered under the Securities
Act of 1933, because the offering and sale (i) was made in reliance on the
exemption provided by Section 4(2) of the Securities Act of 1933 and Rule 506
thereunder for transactions by an issuer not involving a public offering (with
the recipients representing their intentions to acquire the securities for their
own accounts and not with a view to the distribution thereof and acknowledging
that the securities were issued in a transaction not registered under the
Securities Act of 1933) or (ii) were made outside the United States pursuant to
Regulation S under the Securities Act of 1933 to persons who were not citizens
or residents of the United States. The foregoing employee awards and
contribution of common stock were not registered under the Securities Act of
1933 because the awards and contribution either did not involve an offer or sale
for purposes of Section 2(a)(3) of the Securities Act of 1933, in reliance on
the fact that the awards were made to a relatively broad class of employees who
provided no consideration in exchange for their awards, or were offered and sold
in transactions not involving a public offering, exempt from registration under
the Securities Act of 1933 pursuant to Section 4(2) and in compliance with Rule
506 thereunder.
On April 13, 1999, the registrant entered into an arrangement with a group
of 10 employees pursuant to which a portion of a performance-based bonus that is
payable to such employees in 2002 will be paid in shares of common stock of the
registrant valued at $53.00 per share. Under this arrangement, up to 386,500
shares of common stock may be issued. The offering and sale of these 386,500
shares of common stock was made pursuant to Rule 701 under the Securities Act of
1933.
On September 24, 1999, the registrant issued 4,024,637 shares of common
stock in connection with its acquisition of The Hull Group, Inc. These shares
were issued in a transaction not involving a public offering in reliance on the
exemption provided by Section 4(2) of the Securities Act of 1933 and Rule 506
thereunder for transactions by an issuer not involving a public offering (with
the recipients representing their intentions to acquire the shares for their own
accounts and not with a view to the distribution thereof and acknowledging that
the shares were issued in a transaction not registered under the Securities Act
of 1933).
During the period from May 7, 1999 to February 11, 2000 the registrant
issued a series of $1 billion aggregate principal amount of Medium-Term Notes,
Series A, with a thirteen-month final maturity, exchangeable monthly for a new
like security. This series was issued in a transaction not involving a public
offering in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933 and Rule 506 thereunder for transactions by an issuer not
involving a public offering (with the purchasers representing their intentions
to acquire the notes for their own accounts and not with a view to the
distribution thereof and acknowledging that the notes were not registered under
the Securities Act of 1933). Goldman, Sachs & Co. acted as the sole placement
agent for this offering.
During the period from May 7, 1999 to February 11, 2000, the registrant
issued its Euro Medium-Term Notes, Series C, with maturities ranging from 12
months to 180 months, in an aggregate face or principal amount equivalent to
$547 million (including certain of those notes which were not denominated in
U.S. dollars). All of these notes were offered and sold outside the United
States pursuant to Regulation S under the Securities Act of 1933 to persons who
were not citizens or residents of the United States. Goldman Sachs International
acted as the sole placement agent for these offerings.
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<PAGE> 171
During the period from May 7, 1999 to February 11, 2000, the registrant
issued its debt securities (other than its Euro Medium-Term Notes, Series C,
referred to above), with a maturity of 60 months, in an aggregate principal
amount equivalent to $229.6 million (those debt securities were denominated in
Japanese yen). All of those debt securities were offered and sold outside the
United States pursuant to Regulation S under the Securities Act of 1933 to
persons who were not citizens or residents of the United States. Goldman Sachs
International, Nomura International and Norinchukin International plc acted as
placement agents for that offering.
During the period from May 7, 1999 to February 11, 2000, the registrant
issued its Medium-Term Notes, Series C, with maturities of 12 months, in an
aggregate face or principal amount equivalent to $42.8 million. All of these
notes were issued in transactions not involving a public offering in reliance
upon the exemption provided by Rule 144A under the Securities Act of 1933.
Goldman, Sachs & Co. acted as the sole placement agent for these offerings.
During the period from May 7, 1999 to February 11, 2000, the registrant
issued an aggregate principal amount of $5.3 billion of extendable commercial
notes. These notes have an initial maturity of not more than 90 days and bear
commercial paper interest rates during that period. They are extendable at the
registrant's option to a total maturity of 13 months and bear interest at a
floating rate depending on the registrant's credit rating during the extension
period. These notes were issued in a transaction not involving a public offering
in reliance upon the exemption provided by Section 4(2) of the Securities Act of
1933. Goldman Sachs & Co. acted as the sole placement agent for these offerings.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1 Distribution Agreement, dated as of May 19, 1999, between
The Goldman Sachs Group, Inc. and Goldman, Sachs & Co., as
agent.
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 Certificate of Incorporation of The Goldman Sachs Group,
Inc.**
3.2 Amended and Restated Certificate of Incorporation of The
Goldman Sachs Group, Inc.*
3.3 Amended and Restated By-Laws of The Goldman Sachs Group,
Inc.*
4.1 Indenture, dated as of May 19, 1999, between The Goldman
Sachs Group, Inc. and The Bank of New York, as trustee
(incorporated by reference to Exhibit 6 of the registrant's
registration statement on Form 8-A, filed on June 29,
1999).***
4.2 Form of debt securities of The Goldman Sachs Group, Inc.
(included in Exhibit 4.1).***
4.3 Form of Floating Rate Medium-Term Note.***
4.4 Form of Fixed Rate Medium-Term Note.***
4.5 Form of Mandatory Exchangeable Note.***
4.6 Form of Exchangeable Note.***
4.7 Specimen of 7.35% Note due 2009.***
4.8 Specimen of Index-Linked Note due 2002 (Linked to the Nikkei
225).***
4.9 Specimen of Callable Index-Linked Note due 2003 (Linked to
the GSTI(TM) Internet Index).***
4.10 Specimen of 7.50% Note due 2005.***
</TABLE>
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<PAGE> 172
<TABLE>
<C> <S>
4.11 Specimen of 7.80% Note due 2010.***
Certain instruments defining the rights of holders of other
long-term debt securities of the registrant and its
subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of
Regulation S-K. The registrant hereby undertakes to furnish
to the SEC, upon request, copies of any such instruments.
5.1 Opinion of Gregory K. Palm, Esq., a General Counsel of The
Goldman Sachs Group, Inc.
8.1 Opinion of Sullivan & Cromwell, United States tax counsel to
The Goldman Sachs Group, Inc., re tax matters.
8.2 Opinion of Sullivan & Cromwell, United States tax counsel to
the registrant, re tax matters relating to 2.00%
Exchangeable Notes due 2006 (Exchangeable for Common Stock
of Wells Fargo & Company).***
8.3 Opinion of Sullivan & Cromwell, United States tax counsel to
the registrant, re tax matters relating to Index-Linked Note
due 2002 (Linked to the Nikkei 225).***
8.4 Opinion of Sullivan & Cromwell, United States tax counsel to
the registrant, re tax matters relating to 0.25%
Exchangeable Notes due 2004 (Exchangeable for Common Stock
of Yahoo! Inc.)***
10.1 Lease, dated June 11, 1985, between Metropolitan Life
Insurance Company and Goldman, Sachs & Co.**
10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank
(National Association) and The Goldman Sachs Group, L.P., as
amended.**
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and The Goldman Sachs Group, L.P.**
10.4 Lease, dated as of July 16, 1998, between TCC Acquisition
Corp. and The Goldman Sachs Group, L.P.**
10.5 Agreement for Lease, dated April 2, 1998, among (i) JC No. 3
(UK) Limited and Fleet Street Square Management Limited
trading as Fleet Street Partnership, (ii) Goldman Sachs
International, (iii) Restamove Limited, (iv) The Goldman
Sachs Group, L.P. and (v) Itochu Corporation.**
10.6 Annexure 1 to Agreement for Lease, dated April 2, 1998,
among (i) JC No. 3 (UK) Limited and Fleet Street Square
Management Limited trading as Fleet Street Partnership, (ii)
Goldman Sachs International, (iii) Restamove Limited, (iv)
The Goldman Sachs Group, L.P. and (v) Itochu Corporation
(Form of Occupational Lease among (i) JC No. 3 (UK) Limited
and Fleet Street Square Management Limited trading as Fleet
Street Partnership, (ii) Goldman Sachs International and
(iii) The Goldman Sachs Group, L.P.).**
10.7 Agreement relating to Developer's Fit Out Works to be
carried out at 120 Fleet Street, London, dated April 2,
1998, among (i) JC No. 3 (UK) Limited and Fleet Street
Square Management Limited, (ii) Goldman Sachs Property
Management, (iii) Itochu Corporation and (iv) The Goldman
Sachs Group, L.P.**
10.8 Agreement relating to One Carter Lane, London EC4, dated
March 25, 1998, among Britel Fund Trustees Limited, Goldman
Sachs International, The Goldman Sachs Group, L.P., English
Property Corporation plc and MEPC plc.**
10.9 Fit Out Works Agreement relating to One Carter Lane, London
EC4, dated March 25, 1998, among Britel Fund Trustees
Limited, Goldman Sachs International, Goldman Sachs Property
Management, The Goldman Sachs Group, L.P., English Property
Corporation plc and MEPC plc.**
</TABLE>
II-5
<PAGE> 173
<TABLE>
<C> <S>
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. John L. Weinberg.**
10.18 The Goldman Sachs Partner Compensation Plan.*
10.19 Form of Employment Agreement.*
10.20 Form of Agreement Relating to Noncompetition and Other
Covenants.*
10.21 Form of Pledge Agreement.*
10.22 Form of Award Agreement (Formula RSUs).*
10.23 Form of Award Agreement (Discretionary RSUs).*
10.24 Form of Option Agreement (Discretionary Options).*
10.25 Tax Indemnification Agreement, dated as of May 7, 1999, by
and among The Goldman Sachs Group, Inc. and various
parties.*
10.26 Form of Shareholders' Agreement among The Goldman Sachs
Group, Inc. and various parties.
10.27 Instrument of Indemnification.*
10.28 Form of Indemnification Agreement.
10.29 Subscription Agreement, dated as of April 24, 1992, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and The Goldman Sachs Group, L.P.**
10.30 Subscription Agreement, dated as of November 21, 1994, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and The Goldman Sachs Group, L.P.**
10.31 Letter Agreement, dated March 15, 1999, among Kamehameha
Activities Association and The Goldman Sachs Group, L.P.
(the "Kamehameha Letter Agreement").**
10.32 Amended and Restated Subscription Agreement, dated March 28,
1989, among The Sumitomo Bank, Limited, Sumitomo Bank
Capital Markets, Inc., Goldman, Sachs & Co. and The Goldman
Sachs Group, L.P.**
10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo
Bank, Limited, Sumitomo Bank Capital Markets, Inc. and The
Goldman Sachs Group, L.P. (the "Sumitomo Letter
Agreement").**
10.34 Lease, dated September 24, 1992, from LDT Partners to
Goldman Sachs International.**
10.35 Amendment to Kamehameha Letter Agreement (filed as Exhibit
10.31), dated April 30, 1999, among Kamehameha Activities
Association, the Trustees of the Estate of Bernice Pauahi
Bishop, The Goldman Sachs Group, L.P. and The Goldman Sachs
Group, Inc.*
</TABLE>
II-6
<PAGE> 174
<TABLE>
<S> <C>
10.36 Amendment to Sumitomo Letter Agreement (filed as Exhibit 10.33), dated April 30, 1999, among The Sumitomo
Bank, Limited, Sumitomo Bank Capital Markets, Inc., The Goldman Sachs Group, L.P., The Goldman Sachs
Group, Inc. and Goldman, Sachs & Co.*
10.37 Voting Agreement, dated as of April 30, 1999, by and among The Goldman Sachs Group, Inc., on the one hand,
and The Trustees of the Estate of Bernice Pauahi Bishop and Kamehameha Activities Association, on the
other hand.*
10.38 Voting Agreement, dated as of April 30, 1999, by and among The Goldman Sachs Group, Inc., on the one hand,
and The Sumitomo Bank, Limited, and Sumitomo Bank Capital Markets, Inc., on the other hand.*
10.39 Letter Agreement, dated August 18, 1999, between The Goldman Sachs Group, Inc. and Mr. James A. Johnson
(incorporated by reference to Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 27, 1999).
10.40 Letter Agreement, dated August 18, 1999, between The Goldman Sachs Group, Inc. and Sir John Browne
(incorporated by reference to Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 27, 1999).
10.41 Letter Agreement, dated November 9, 1999, between The Goldman Sachs Group, Inc. and Mr. John H. Bryan
(incorporated by reference to Exhibit 10.42 to the registrant's registration statement on Form S-1 (No.
333-90677)).
10.42 Registration Rights Instrument, dated as of December 10, 1999 (incorporated by reference to Exhibit G to
Amendment No. 1 to Schedule 13D, filed December 17, 1999, relating to the registrant's common stock).
10.43 Supplemental Registration Rights Instrument, dated as of December 10, 1999 (incorporated by reference to
Exhibit H to Amendment No. 1 to Schedule 13D, filed December 17, 1999, relating to the registrant's common
stock).
10.44 Form of Indemnification Agreement.
10.45 Letter Agreement, dated January 21, 2000, between The Goldman Sachs Group, Inc. and Dr. Ruth J. Simmons
(incorporated by reference to Exhibit 10.45 to the registrant's Annual Report on Form 10-K for the fiscal
year ended November 26, 1999).
12.1 Statement re computation of ratios of earnings to fixed charges (incorporated by reference to Exhibit 12.1
to the registrant's Annual Report on Form 10-K for the fiscal year ended November 26, 1999)
21.1 List of subsidiaries of The Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 21.1 to the
registrant's Annual Report on Form 10-K for the fiscal year ended November 26, 1999).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Gregory K. Palm, Esq. (included in Exhibit 5.1 above).
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1 above).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee.
</TABLE>
- ---------------
* Incorporated by reference to the corresponding exhibit to the registrant's
registration statement on Form S-1 (No. 333-75213).
** Incorporated by reference to the corresponding exhibit to the registrant's
registration statement on Form S-1 (No. 333-74449).
***Incorporated by reference to the corresponding exhibit to the registrant's
registration statement on Form S-1 (No. 333-75321).
II-7
<PAGE> 175
(b) FINANCIAL STATEMENT SCHEDULES
Condensed financial information of The Goldman Sachs Group, Inc. 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> 176
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement on Form S-1 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 February, 2000.
THE GOLDMAN SACHS GROUP, INC.
By: /s/ DAVID A. VINIAR
------------------------------------
Name: David A. Viniar
Title: Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John A. Thain, Robert J. Katz, Gregory K.
Palm and David A. Viniar and each of them severally, his or her true and lawful
attorney-in-fact with power of substitution and resubstitution to sign in his or
her name, place and stead, in any and all capacities, to do any and all things
and execute any and all instruments that such attorney may deem necessary or
advisable under the Securities Act of 1933 (the "Securities Act"), and any
rules, regulations and requirements of the U.S. Securities and Exchange
Commission (the "Commission") in connection with the registration under the
Securities Act of the debt securities of the registrant, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign his or her name in his or her respective capacity as a member of the Board
of Directors or officer of the registrant, this registration statement and/or
such other form or forms as may be appropriate to be filed with the Commission
as any of them may deem appropriate in respect of the debt securities of the
registrant, to any and all amendments thereto (including post-effective
amendments) to this registration statement, to any related Rule 462(b)
registration statement and to any other documents filed with the Commission, as
fully for all intents and purposes as he or she might or could do in person, and
hereby ratifies and confirms all said attorneys-in-fact and agents, each acting
alone, and his or her substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on the 11th day of February, 2000.
<TABLE>
<CAPTION>
TITLE SIGNATURE
----- ---------
<S> <C>
Director, Chairman of the Board and Chief Executive
Officer (Principal Executive Officer) /s/ HENRY M. PAULSON, JR.
----------------------------------------------
Henry M. Paulson, Jr.
Director and Vice Chairman /s/ ROBERT J. HURST
----------------------------------------------
Robert J. Hurst
Director, President and Co-Chief Operating Officer /s/ JOHN A. THAIN
----------------------------------------------
John A. Thain
</TABLE>
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<PAGE> 177
<TABLE>
<CAPTION>
TITLE SIGNATURE
----- ---------
<S> <C>
Director, President and Co-Chief Operating Officer /s/ JOHN L. THORNTON
----------------------------------------------
John L. Thornton
Director
----------------------------------------------
Sir John Browne
Director
----------------------------------------------
John H. Bryan
Director
----------------------------------------------
James A. Johnson
Director
----------------------------------------------
Ruth J. Simmons
Director /s/ JOHN L. WEINBERG
----------------------------------------------
John L. Weinberg
Chief Financial Officer (Principal Financial Officer) /s/ DAVID A.VINIAR
----------------------------------------------
David A. Viniar
Principal Accounting Officer /s/ SARAH G. SMITH
----------------------------------------------
Sarah G. Smith
</TABLE>
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<PAGE> 178
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders,
The Goldman Sachs Group, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated January 21, 2000 included on page F-2 of this prospectus also
included an audit of the financial statement schedule listed in Item 16(b)
herein. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 21, 2000.
S-1
<PAGE> 179
SCHEDULE IV
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE GOLDMAN SACHS GROUP, INC.
CONDENSED STATEMENTS OF EARNINGS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
--------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Revenues
Equity in earnings of subsidiaries.......................... $1,231 $1,780 $2,378
Principal investments....................................... 1,139 540 339
Interest income, principally from affiliates................ 3,305 4,369 2,943
------ ------ ------
Total revenues............................................ 5,675 6,689 5,660
Interest expense............................................ 3,338 4,201 2,858
------ ------ ------
Revenues, net of interest expense......................... 2,337 2,488 2,802
Operating Expenses
Compensation and benefits................................... 251 9 12
Other....................................................... 109 43 29
Charitable contribution..................................... 200 -- --
------ ------ ------
Total operating expenses.................................. 560 52 41
Pre-tax earnings............................................ 1,777 2,436 2,761
(Benefit)/provision for taxes............................... (931) 8 15
------ ------ ------
Net earnings................................................ $2,708 $2,428 $2,746
====== ====== ======
</TABLE>
The accompanying note is an integral part of these condensed financial
statements.
S-2
<PAGE> 180
SCHEDULE IV
THE GOLDMAN SACHS GROUP, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
AS OF NOVEMBER
--------------------
1999 1998
---- ----
(in millions, except
share and per share
amounts)
<S> <C> <C>
Assets
Cash and cash equivalents................................... $ 1 $ 11
Financial instruments owned, at fair value.................. 3,476 2,147
Receivables from affiliates................................. 41,511 33,562
Subordinated loan receivables from affiliates............... 9,048 8,668
Investment in subsidiaries.................................. 7,526 5,077
Other assets................................................ 2,284 1,123
------- -------
$63,846 $50,588
======= =======
Liabilities and Equity
Short-term borrowings, including commercial paper........... $32,286 $23,364
Payables to affiliates...................................... 207 1,679
Other liabilities and accrued expenses...................... 572 147
Long-term borrowings
With third parties........................................ 20,262 18,584
With affiliates........................................... 374 430
------- -------
53,701 44,204
Commitments and contingencies
Partners' capital allocated for income taxes and potential
withdrawals............................................... -- 74
Partners' capital........................................... -- 6,310
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, 441,421,899 shares issued and
outstanding............................................... 4 --
Restricted stock units; 76,048,404 units issued and
outstanding............................................... 4,339 --
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized, 7,440,362 shares issued and
outstanding............................................... -- --
Additional paid-in capital.................................. 7,359 --
Retained earnings........................................... 444 --
Unearned compensation....................................... (2,038) --
Accumulated other comprehensive income...................... 37 --
------- -------
10,145 6,310
------- -------
$63,846 $50,588
======= =======
</TABLE>
The accompanying note is an integral part of these condensed financial
statements.
S-3
<PAGE> 181
SCHEDULE IV
THE GOLDMAN SACHS GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
-----------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings.............................................. $ 2,708 $ 2,428 $ 2,746
Noncash items included in net earnings
Equity in earnings of subsidiaries...................... (1,231) (1,780) (2,378)
Depreciation and amortization........................... 71 35 19
Deferred income taxes................................... (1,030) -- --
Other, net.............................................. 46 -- --
Changes in operating assets and liabilities
Financial instruments owned, at fair value................ (1,575) (8) (395)
Other, net................................................ 553 (501) (98)
------- ------- -------
Net cash (used for)/provided by operating activities.... (458) 174 (106)
Cash flows from investing activities
Financial instruments owned, at fair value................ 246 (243) (331)
Receivables from affiliates, net.......................... (6,416) (8,235) (4,320)
Subordinated loan receivables from affiliates............. (380) (1,779) (1,528)
Investment in subsidiaries, net........................... (850) 1,362 2,147
Property, leasehold improvements and equipment............ (292) (145) (4)
Acquisition............................................... (196) -- --
------- ------- -------
Net cash used for investing activities.................. (7,888) (9,040) (4,036)
Cash flows from financing activities
Short-term borrowings, net................................ 12 2,586 39
Issuance of long-term borrowings.......................... 10,755 10,289 7,498
Repayment of long-term borrowings......................... (587) (1,698) (1,005)
Capital contributions..................................... 48 9 89
Dividends paid............................................ (107) -- --
Returns on capital and certain distributions to
partners................................................ (306) (619) (557)
Termination of the profit participation plan.............. -- (21) --
Proceeds from issuance of common stock.................... 2,633 -- --
Partners' capital distributions, net...................... (4,112) -- --
Partners' capital allocated for income taxes and potential
withdrawals............................................. -- (1,673) (2,034)
------- ------- -------
Net cash provided by financing activities............... 8,336 8,873 4,030
Net (decrease)/increase in cash and cash equivalents...... (10) 7 (112)
Cash and cash equivalents, beginning of year................ 11 4 116
------- ------- -------
Cash and cash equivalents, end of year...................... $ 1 $ 11 $ 4
======= ======= =======
</TABLE>
- ----------------
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest approximated the related expense for each of the
fiscal years presented. Payments of income taxes were immaterial.
Noncash activities:
Receivables from affiliates includes $2.94 billion of stock-based compensation
awards granted to employees of affiliated entities.
In connection with the firm's conversion to corporate form, junior subordinated
debentures of $371 million were issued to the retired limited partners in
exchange for their partnership interests.
Common stock issued in connection with the acquisition was $245 million in 1999.
The accompanying note is an integral part of these condensed financial
statements.
S-4
<PAGE> 182
SCHEDULE IV
THE GOLDMAN SACHS GROUP, INC.
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, Inc. should be read in conjunction with the consolidated financial
statements of The Goldman Sachs Group, Inc. and subsidiaries and the notes
thereto.
Investments in subsidiaries are accounted for using the equity method.
These 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, 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> 183
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
1.1 Distribution Agreement, dated as of May 19, 1999, between
The Goldman Sachs Group, Inc. and Goldman, Sachs & Co., as
agent.
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 Certificate of Incorporation of The Goldman Sachs Group,
Inc.**
3.2 Amended and Restated Certificate of Incorporation of The
Goldman Sachs Group, Inc.*
3.3 Amended and Restated By-Laws of The Goldman Sachs Group,
Inc.*
4.1 Indenture, dated as of May 19, 1999, between The Goldman
Sachs Group, Inc. and The Bank of New York, as trustee
(incorporated by reference to Exhibit 6 of the registrant's
registration statement on Form 8-A, filed on June 29,
1999).***
4.2 Form of debt securities of The Goldman Sachs Group, Inc.
(included in Exhibit 4.1).***
4.3 Form of Floating Rate Medium-Term Note.***
4.4 Form of Fixed Rate Medium-Term Note.***
4.5 Form of Mandatory Exchangeable Note.***
4.6 Form of Exchangeable Note.***
4.7 Specimen of 7.35% Note due 2009.***
4.8 Specimen of Index-Linked Note due 2002 (Linked to the Nikkei
225).***
4.9 Specimen of Callable Index-Linked Note due 2003 (Linked to
the GSTI(TM) Internet Index).***
4.10 Specimen of 7.50% Note due 2005.***
4.11 Specimen of 7.80% Note due 2010.***
Certain instruments defining the rights of holders of other
long-term debt securities of the registrant and its
subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of
Regulation S-K. The registrant hereby undertakes to furnish
to the SEC, upon request, copies of any such instruments.
5.1 Opinion of Gregory K. Palm, Esq., a General Counsel of The
Goldman Sachs Group, Inc.
8.1 Opinion of Sullivan & Cromwell, United States tax counsel to
The Goldman Sachs Group, Inc., re tax matters.
8.2 Opinion of Sullivan & Cromwell, United States tax counsel to
the registrant, re tax matters relating to 2.00%
Exchangeable Notes due 2006 (Exchangeable for Common Stock
of Wells Fargo & Company).***
8.3 Opinion of Sullivan & Cromwell, United States tax counsel to
the registrant, re tax matters relating to Index-Linked Note
due 2002 (Linked to the Nikkei 225).***
8.4 Opinion of Sullivan & Cromwell, United States tax counsel to
the registrant, re tax matters relating to 0.25%
Exchangeable Notes due 2004 (Exchangeable for Common Stock
of Yahoo! Inc.)***
</TABLE>
<PAGE> 184
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.1 Lease, dated June 11, 1985, between Metropolitan Life
Insurance Company and Goldman, Sachs & Co.**
10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank
(National Association) and The Goldman Sachs Group, L.P., as
amended.**
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and The Goldman Sachs Group, L.P.**
10.4 Lease, dated as of July 16, 1998, between TCC Acquisition
Corp. and The Goldman Sachs Group, L.P.**
10.5 Agreement for Lease, dated April 2, 1998, among (i) JC No. 3
(UK) Limited and Fleet Street Square Management Limited
trading as Fleet Street Partnership, (ii) Goldman Sachs
International, (iii) Restamove Limited, (iv) The Goldman
Sachs Group, L.P. and (v) Itochu Corporation.**
10.6 Annexure 1 to Agreement for Lease, dated April 2, 1998,
among (i) JC No. 3 (UK) Limited and Fleet Street Square
Management Limited trading as Fleet Street Partnership, (ii)
Goldman Sachs International, (iii) Restamove Limited, (iv)
The Goldman Sachs Group, L.P. and (v) Itochu Corporation
(Form of Occupational Lease among (i) JC No. 3 (UK) Limited
and Fleet Street Square Management Limited trading as Fleet
Street Partnership, (ii) Goldman Sachs International and
(iii) The Goldman Sachs Group, L.P.).**
10.7 Agreement relating to Developer's Fit Out Works to be
carried out at 120 Fleet Street, London, dated April 2,
1998, among (i) JC No. 3 (UK) Limited and Fleet Street
Square Management Limited, (ii) Goldman Sachs Property
Management, (iii) Itochu Corporation and (iv) The Goldman
Sachs Group, L.P.**
10.8 Agreement relating to One Carter Lane, London EC4, dated
March 25, 1998, among Britel Fund Trustees Limited, Goldman
Sachs International, The Goldman Sachs Group, L.P., English
Property Corporation plc and MEPC plc.**
10.9 Fit Out Works Agreement relating to One Carter Lane, London
EC4, dated March 25, 1998, among Britel Fund Trustees
Limited, Goldman Sachs International, Goldman Sachs Property
Management, The Goldman Sachs Group, L.P., English Property
Corporation plc and MEPC plc.**
10.10 Underlease of premises known as One Carter Lane, London EC4,
dated September 9, 1998, among Britel Fund Trustees Limited,
Goldman Sachs International and The Goldman Sachs Group,
L.P.**
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. John L. Weinberg.**
</TABLE>
<PAGE> 185
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
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, dated as of May 7, 1999 by
and among The Goldman Sachs Group, Inc. and various
parties.*
10.26 Form of Shareholders' Agreement among The Goldman Sachs
Group, Inc. and various parties.
10.27 Instrument of Indemnification.*
10.28 Form of Indemnification Agreement.
10.29 Subscription Agreement, dated as of April 24, 1992, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and The Goldman Sachs Group, L.P.**
10.30 Subscription Agreement, dated as of November 21, 1994, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and The Goldman Sachs Group, L.P.**
10.31 Letter Agreement, dated March 15, 1999, among Kamehameha
Activities Association and The Goldman Sachs Group, L.P.
(the "Kamehameha Letter Agreement").**
10.32 Amended and Restated Subscription Agreement, dated 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.*
</TABLE>
<PAGE> 186
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.39 Letter Agreement, dated August 18, 1999, between The Goldman
Sachs Group, Inc. and Mr. James A. Johnson (incorporated by
reference to Exhibit 10.1 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended August
27, 1999).
10.40 Letter Agreement, dated August 18, 1999, between The Goldman
Sachs Group, Inc. and Sir John Browne (incorporated by
reference to Exhibit 10.2 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended August
27, 1999).
10.41 Letter Agreement, dated November 9, 1999, between The
Goldman Sachs Group, Inc. and Mr. John H. Bryan
(incorporated by reference to Exhibit 10.42 to the
registrant's registration statement on Form S-1 (No. 333-
90677)).
10.42 Registration Rights Instrument, dated as of December 10,
1999 (incorporated by reference to Exhibit G to Amendment
No. 1 to Schedule 13D, filed December 17, 1999, relating to
the registrant's common stock).
10.43 Supplemental Registration Rights Instrument, dated as of
December 10, 1999 (incorporated by reference to Exhibit H to
Amendment No. 1 to Schedule 13D, filed December 17, 1999,
relating to the registrant's common stock).
10.44 Form of Indemnification Agreement.
10.45 Letter Agreement, dated January 21, 2000, between The
Goldman Sachs Group, Inc. and Dr. Ruth J. Simmons
(incorporated by reference to Exhibit 10.45 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended November 26, 1999).
12.1 Statement re computation of ratios of earnings to fixed
charges (incorporated by reference to Exhibit 12.1 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended November 26, 1999).
21.1 List of subsidiaries of The Goldman Sachs Group, Inc.
(incorporated by reference to Exhibit 21.1 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended November 26, 1999).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Gregory K. Palm, Esq. (included in Exhibit 5.1
above).
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1
above).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee.
</TABLE>
- ---------------
* Incorporated by reference to the corresponding exhibit to the registrant's
registration statement on Form S-1 (No. 333-75213).
** Incorporated by reference to the corresponding exhibit to the registrant's
registration statement on Form S-1 (No. 333-74449).
***Incorporated by reference to the corresponding exhibit to the registrant's
registration statement on Form S-1 (No. 333-75321).
<PAGE> 1
THE GOLDMAN SACHS GROUP, INC.
$15,000,000,000
MEDIUM-TERM NOTES, SERIES B
DISTRIBUTION AGREEMENT
May 19, 1999
Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
The Goldman Sachs Group, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell from time to time its Medium-Term Notes, Series B
(the "Securities") in an amount having an aggregate initial offering price of up
to $15,000,000,000 and agrees with each of you (individually, an "Agent" and,
collectively, the "Agents") as set forth in this Agreement. Each of the terms
"the Agents", "such Agent", "any Agent", "an Agent", "each Agent", "the
Purchasing Agent" and "the Selling Agent", when used in this Agreement or in any
Terms Agreement (as defined below) or in the Annexes hereto, shall mean Goldman,
Sachs & Co. except at any time when more than one Agent is acting as such
hereunder, as contemplated in Section 10 hereof.
The Company acknowledges and agrees that Goldman, Sachs & Co. may use
the Prospectus (as defined below) in connection with offers and sales of the
Securities as contemplated in the Prospectus under the caption "Plan of
Distribution of the Notes -- Plan of Distribution for Market-Making Resales by
Affiliates" ("Secondary Market Transactions"). The Company further acknowledges
and agrees that Goldman, Sachs & Co. is under no obligation to effect any
Secondary Market Transactions and, if it does so, it may discontinue effecting
such transactions at any time without providing any notice to the Company. The
term "Agent", whenever used in this Agreement, shall include Goldman, Sachs &
Co., whether acting in its capacity as an Agent or acting in connection with a
Secondary Market Transaction, except as may be specifically provided otherwise
herein.
Subject to the terms and conditions stated herein and to the
reservation by the Company of the right to sell Securities directly on its own
behalf, the Company hereby (i) appoints each Agent as an agent of the Company
for the purpose of soliciting and receiving offers to purchase Securities from
the Company pursuant to Section 2(a) hereof and (ii) agrees that, except as
otherwise contemplated herein, whenever it determines to sell Securities
directly to any Agent as principal, it will enter into a separate agreement
(each a "Terms Agreement"), substantially in the form of Annex I hereto or in
such other form as may be agreed by the parties to that particular agreement,
relating to such sale in accordance with Section 2(b) hereof. This Distribution
Agreement shall not be construed to create either an obligation on the part of
the Company to sell any Securities or an obligation of any of the Agents to
purchase Securities as principal.
<PAGE> 2
The Securities will be issued under an indenture, dated as of May 19,
1999 (as it may be amended from time to time, the "Indenture"), between the
Company and The Bank of New York, as trustee (including any successor trustee
thereunder, the "Trustee"). The Securities shall have the maturity ranges,
interest rates, if any, redemption provisions and other terms set forth in the
Prospectus referred to below as it may be amended or supplemented from time to
time. The Securities will be issued, and the terms and rights thereof
established, from time to time by the Company in accordance with the Indenture.
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 Prospectus under the caption "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 Sections 1(d) and 1(p) hereof,
the conditions set forth in Section 6(e) hereof and the provisions of Annex III
hereof, references to the Company with respect to any time before the
consummation of the Incorporation Transactions shall be deemed to be references
to Group.
1. The Company represents and warrants to, and agrees with,
each Agent that:
(a) A registration statement on Form S-1 (File No.
333-75321) in respect of the Securities has been filed with the
Securities and Exchange Commission (the "Commission"); such
registration statement and any post-effective amendment thereto, each
in the form heretofore delivered or to be delivered to such Agent,
excluding exhibits to such registration statement, have been declared
effective by the Commission in such form; no other document with
respect to such registration statement has been filed with the
Commission (other than the prospectuses filed pursuant to Rule 424(b)
of the rules and regulations of the Commission under the Securities
Act of 1933, as amended (the "Act"), each in the form delivered to the
Agents); and no stop order suspending the effectiveness of such
registration statement has been issued and no proceeding for that
purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in such 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 such registration
statement, including all exhibits thereto but excluding Form T-1 and,
if applicable, including the information contained in the form of
final prospectus filed with the Commission pursuant to Rule 424(b)
under the Act, in accordance with Section 4(a) hereof and deemed by
virtue of Rule 430A under the Act to be part of the registration
statement, each as amended at the time such part of the registration
statement became effective, is hereinafter collectively called the
"Registration Statement"; the prospectus (including, if applicable,
any prospectus supplement) relating to the Securities, in the form in
which it has most recently been filed, or transmitted for filing, with
the Commission on or prior to the date of this Agreement, is
hereinafter called the "Prospectus"; any supplement to the Prospectus
that sets forth only the terms of a particular issue of the Securities
and is filed in accordance with Section 4(a) hereof is hereinafter
called a "Pricing Supplement"; and any reference herein to the
Prospectus as amended or supplemented shall be deemed to refer to and
include the Prospectus as amended and supplemented (including by the
applicable Pricing Supplement) in relation to Securities to be sold
pursuant to this Agreement, in the form filed or transmitted for
filing with the Commission pursuant to Rule 424(b) under the Act and
in accordance with Section 4(a) hereof);
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in
all material respects to the requirements of the Act and the Trust
Indenture Act of
2
<PAGE> 3
1939, as amended (the "Trust Indenture Act"), and the rules and
regulations of the Commission thereunder, and did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein;
(c) The Registration Statement and the Prospectus conform,
and any further amendments or supplements to the Registration
Statement or the Prospectus will conform, in all material respects to
the requirements of the Act and the 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
the Prospectus and any amendment or supplement thereto, contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by any Agent expressly for use in the Prospectus as
amended or supplemented to relate to a particular issuance of
Securities;
(d) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the partners' capital or
capital stock, as applicable, or long-term debt of the Company or any
of its subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, partners' capital or
stockholders' equity, as applicable, or results of operations of the
Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus;
(e) 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 Prospectus;
(f) The Company has an authorized capitalization as set
forth in the Prospectus, 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;
(g) The Securities have been duly authorized, and, when
issued and delivered pursuant to this Agreement and any Terms
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, 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 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 conforms and the Securities of any particular issuance of
Securities will conform to the descriptions thereof contained in the
Prospectus as amended or supplemented to relate to such issuance of
Securities;
3
<PAGE> 4
(h) The issue and sale of the Securities, the compliance by
the Company with all of the provisions of the Securities, the
Indenture, this Agreement and any Terms 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 is a party or by which the Company is
bound or to which any of the property or assets of the Company is
subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation, as amended, or the
By-laws of the Company 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 properties; and no consent, approval,
authorization, order, registration or qualification of or with any
court or governmental agency or body is required for the solicitation
of offers to purchase Securities, the issue and sale of the Securities
or the consummation by the Company of the other transactions
contemplated by this Agreement, any Terms Agreement or the Indenture,
except such as have been, or will have been prior to the Commencement
Date (as defined in Section 3 hereof), obtained under the Act or 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 solicitation by
such Agent of offers to purchase Securities from the Company and with
purchases of Securities by such Agent as principal, as the case may
be, in each case in the manner contemplated hereby;
(i) Neither the Company nor any of its 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;
(j) The statements set forth in the Prospectus under the
caption "Description of Notes We May Offer", insofar as they purport
to constitute a summary of the terms of the Securities, and under the
captions "United States Taxation" and "Plan of Distribution of Notes",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate, complete and fair;
(k) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or to which any property of the Company
or any of its subsidiaries is subject, which, if determined adversely
to the Company or any of its subsidiaries, would individually or in
the aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity 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;
(l) The Company is not and, after giving effect to each
offering and sale of the Securities, will not be an "investment
company", as such terms are defined in the Investment Company Act of
1940, as amended (the "Investment Company Act");
(m) Immediately after any sale of Securities by the Company
hereunder or under any Terms Agreement, the aggregate amount of
Securities which shall have been issued and sold by the Company
hereunder or under any Terms Agreement and of any debt securities of
the Company (other than such Securities) that shall have been issued
and sold pursuant to the Registration Statement will not exceed the
amount of debt securities registered under the Registration Statement;
4
<PAGE> 5
(n) The Company and its subsidiaries possess all
concessions, permits, licenses, consents, exemptions, franchises,
authorizations, orders, registrations, qualifications and other
approvals issued by the appropriate Federal, state and foreign
governments, governmental or regulatory authorities, self-regulatory
organizations and all courts or other tribunals, and are members in
good standing of each Federal, state or foreign exchange, board of
trade, clearing house or association and self-regulatory or similar
organization necessary to conduct their respective businesses as
described in the Prospectus;
(o) The statements set forth in the Prospectus 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 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 the Company and its subsidiaries, are
independent public accountants as required by the Act and the rules
and regulations of the Commission thereunder.
2. (a) On the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set
forth, each of the Agents hereby severally and not jointly agrees, as
agent of the Company, to use its reasonable efforts to solicit and
receive offers to purchase the Securities from the Company upon the
terms and conditions set forth in the Prospectus as amended or
supplemented from time to time. So long as this Agreement shall remain
in effect with respect to any Agent, the Company shall not, without
the consent of such Agent, solicit or accept offers to purchase, or
sell, any debt securities with a maturity at the time of original
issuance of 12 months or more except pursuant to this Agreement or any
Terms Agreement, or except pursuant to a private placement not
constituting a public offering under the Act, except pursuant to an
offering outside the United States that is not subject to the
registration requirements of the Act or except in connection with a
firm commitment underwriting pursuant to an underwriting agreement
that does not provide for a continuous offering of medium-term debt
securities (other than in Secondary Market Transactions). However, the
Company reserves the right to sell, and may solicit and accept offers
to purchase, Securities directly on its own behalf in transactions
with persons other than broker-dealers, and, in the case of any such
sale not resulting from a solicitation made by any Agent, no
commission will be payable with respect to such sale. These provisions
shall not limit Section 4(f) hereof or any similar provision included
in any Terms Agreement.
Procedural details relating to the issue and delivery of
Securities, the solicitation of offers to purchase Securities and the
payment in each case therefor shall be as set forth in the
Administrative Procedure attached hereto as Annex II as it may be
amended from time to time by written agreement between the Agents and
the Company (the "Administrative Procedure"). The provisions of the
Administrative Procedure shall apply to all transactions contemplated
hereunder other than those made pursuant to a Terms Agreement. Each
Agent and the Company agree to perform the respective duties and
obligations specifically provided to be performed by each of them
5
<PAGE> 6
in the Administrative Procedure. The Company will furnish to the
Trustee a copy of the Administrative Procedure as from time to time in
effect.
The Company reserves the right, in its sole discretion, to
instruct the Agents to suspend at any time, for any period of time or
permanently, the solicitation of offers to purchase the Securities. As
soon as practicable, but in any event not later than one business day
in New York City, after receipt of notice from the Company, the Agents
will suspend solicitation of offers to purchase Securities from the
Company until such time as the Company has advised the Agents that
such solicitation may be resumed. During such period, the Company
shall not be required to comply with the provisions of Sections 4(h),
4(i), 4(j) and 4(k). Upon advising the Agents that such solicitation
may be resumed, however, the Company shall simultaneously provide the
documents required to be delivered by Sections 4(h), 4(i), 4(j) and
4(k), and the Agents shall have no obligation to solicit offers to
purchase the Securities until such documents have been received by the
Agents. In addition, any failure by the Company to comply with its
obligations hereunder, including its obligations to deliver the
documents required by Sections 4(h), 4(i), 4(j) and 4(k), shall
automatically terminate the Agents' obligations hereunder, including
its obligations to solicit offers to purchase the Securities hereunder
as agent or to purchase Securities hereunder as principal.
The Company agrees to pay each Agent a commission, at the
time of settlement of any sale of a Security by the Company as a
result of a solicitation made by such Agent, in an amount equal to the
following applicable percentage of the principal amount of such
Security sold:
<TABLE>
<CAPTION>
Commission
(percentage of
aggregate
principal amount
Range of Maturities of Securities sold)
------------------- -------------------
<S> <C>
From 1 year to 2 years .150%
From 2 years to less than 3 years .175%
From 3 years to less than 4 years .250%
From 4 years to less than 5 years .300%
From 5 years to less than 6 years .350%
From 6 years to less than 7 years .375%
From 7 years to less than 10 years .400%
From 10 years to less than 12 years .475%
From 12 years to less than 20 years .550%
From 20 years to less than 30 years .600%
From 30 years to less than 40 years .750%
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Commission
(percentage of
aggregate
principal amount
Range of Maturities of Securities sold)
------------------- -------------------
<S> <C>
40 years and more .900%
</TABLE>
(b) Each sale of Securities by the Company to any Agent as
principal shall be made in accordance with the terms of this Agreement
and (unless the Company and such Agent shall otherwise agree) a Terms
Agreement which will provide for the sale of such Securities by the
Company to, and the purchase thereof by, such Agent; a Terms Agreement
may also specify certain provisions relating to the reoffering of such
Securities by such Agent; the commitment of any Agent to purchase
Securities as principal, whether pursuant to any Terms Agreement or
otherwise, shall be deemed to have been made on the basis of the
representations and warranties of the Company herein contained and
shall be subject to the terms and conditions herein set forth; each
Terms Agreement shall specify the principal amount of Securities to be
purchased by any Agent pursuant thereto, the price to be paid to the
Company for such Securities, any provisions relating to rights of, and
default by, underwriters acting together with such Agent in the
reoffering of the Securities and the time and date and place of
delivery of and payment for such Securities; such Terms Agreement
shall also specify any requirements for opinions of counsel,
accountants' letters and officers' certificates pursuant to Section 4
hereof and such Terms Agreement may also include such other provisions
(including provisions that modify this Agreement insofar as it sets
forth the agreement between the Company and such Agent) as the Company
and such Agent may agree upon. Each Agent proposes to offer Securities
purchased by it as principal from the Company for sale at prevailing
market prices or prices related thereto at the time of sale, which may
be equal to, greater than or less than the price at which such
Securities are purchased by such Agent from the Company.
For each sale of Securities by the Company to an
Agent as principal that is not made pursuant to a Terms Agreement, the
procedural details relating to the issue and delivery of such
Securities and payment therefor shall be as set forth in the
Administrative Procedure. For each such sale of Securities by the
Company to an Agent as principal that is not made pursuant to a Terms
Agreement, the Company agrees to pay such Agent a commission (or grant
an equivalent discount) as provided in Section 2(a) hereof and in
accordance with the schedule set forth therein.
Each time and date of delivery of and payment for
Securities to be purchased from the Company by an Agent as principal,
whether set forth in a Terms Agreement or in accordance with the
Administrative Procedure, is referred to herein as a "Time of
Delivery".
(c) Each Agent agrees, with respect to any Security
denominated in a currency other than U.S. dollars, and whether acting
as agent, as principal under any Terms Agreement or otherwise
(including, in the case of Goldman, Sachs & Co., in any Secondary
Market Transaction), not to solicit offers to purchase or otherwise
offer, sell or deliver such Security, directly or indirectly, in, or
to residents of, the country issuing such currency, except as
permitted by applicable law.
3. The documents required to be delivered pursuant to Section 6
hereof on the Commencement Date (as defined below) shall be delivered to the
Agents at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New
York 10004, at 11:00 a.m., New York City time, on the date of this Agreement,
7
<PAGE> 8
which date and time of such delivery may be postponed by agreement between the
Agents and the Company but in no event shall be later than the day prior to the
date on which solicitation of offers to purchase Securities is commenced or on
which any Terms Agreement is executed (such time and date being referred to
herein as the "Commencement Date").
4. The Company covenants and agrees with each Agent:
(a) (i) To make no amendment or supplement to the
Registration Statement or the Prospectus (A) prior to the Commencement
Date which shall be disapproved by any Agent promptly after reasonable
notice thereof, (B) after the date of any Terms Agreement or other
agreement by an Agent to purchase Securities as principal and prior to
the related Time of Delivery which shall be disapproved by any Agent
party to such Terms Agreement or so purchasing as principal promptly
after reasonable notice thereof or (C) during the period beginning on
the Commencement Date and continuing for as long as may be required
under applicable law, in the reasonable judgment of Goldman, Sachs &
Co. after consultation with the Company, in order to offer and sell
any Securities in Secondary Market Transactions as contemplated by the
Prospectus (the "Secondary Transactions Period") which shall be
disapproved by Goldman, Sachs & Co. promptly after reasonable notice
thereof;
(ii) to prepare, with respect to any Securities to
be sold by the Company through or to such Agent pursuant to this
Agreement, a Pricing Supplement with respect to such Securities in a
form previously approved by such Agent and to file such Pricing
Supplement pursuant to Rule 424(b) under the Act not later than the
close of business of the Commission on the fifth business day after
the date on which such Pricing Supplement is first used;
(iii) to make no amendment or supplement to the
Registration Statement or Prospectus, other than any Pricing
Supplement, at any time prior to having afforded each Agent a
reasonable opportunity to review and comment thereon;
(iv) to file promptly all reports and any
definitive proxy or information statements required to be filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act for so long as the delivery of a prospectus
is required in connection with the offering or sale of the Securities
(including, in the case of Goldman, Sachs & Co., in any Secondary
Market Transactions during the Secondary Transactions Period), and
during such same period to advise such Agent, promptly after the
Company receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or has become effective or any
supplement to the Prospectus or any amended Prospectus (other than any
Pricing Supplement that relates to Securities not purchased through or
by such Agent) has been filed with the Commission, of the issuance by
the Commission of any stop order or of any order preventing or
suspending the use of any prospectus relating to the Securities, 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 amendment or supplement of the Registration Statement or
Prospectus or for additional information; and
(v) in the event of the issuance of any such stop
order or of any such order preventing or suspending the use of any
such prospectus or suspending any such qualification, to use
promptly its best efforts to obtain its withdrawal;
It is understood and agreed that, if 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
8
<PAGE> 9
required to be included in the Registration Statement or the Prospectus may be
incorporated therein by reference as permitted by such form, provided that:
(W) If a new registration statement is filed, the
Company shall be deemed to have made the representations
and warranties in Sections 1(a), 1(b) and 1(c) hereof with
respect to such new registration statement as of its
effective date, any preliminary prospectus included
therein, as of its date, and the prospectus included
therein in the form in which it is first filed pursuant to
Rule 424(b) under the Act, as of its date, and to have made
the agreements in Section 4(a)(i) hereof with respect to
the initial filing of such new registration statement, each
filing of a pre-effective amendment thereto and each filing
of a related prospectus pursuant to Rule 424(a) or (b)
under the Act;
(X) if a new registration statement is filed and
becomes effective, any reference herein to the Registration
Statement, any Preliminary Prospectus or the Prospectus
shall thereafter include, respectively, such new
registration statement, any preliminary prospectus included
therein and the prospectus included therein in the form
first filed pursuant to Rule 424(b) under the Act;
(Y) if a new registration statement is filed and
becomes effective, any reference in this Agreement to any
Preliminary Prospectus or the Prospectus shall thereafter
be deemed to refer to and include any documents filed after
the date of such Preliminary Prospectus or Prospectus, as
the case may be, under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and incorporated by
reference in such Preliminary Prospectus or Prospectus, as
the case may be; and
(Z) if 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;
(b) Promptly from time to time to take such action as such
Agent may reasonably request to qualify the Securities for offering
and sale under the securities laws of such jurisdictions as such
Agent may request and to comply with such laws so as to permit the
continuance of sales and dealings therein for as long as may be
necessary to complete the distribution or sale of the Securities
(including, in the case of Goldman, Sachs & Co., in any Secondary
Market Transactions during the Secondary Transactions Period);
provided, however, 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) (i) To furnish such Agent with copies of the
Registration Statement and each amendment thereto and with copies of
the Prospectus as each time amended or supplemented, other than any
Pricing Supplement (except as provided in the Administrative
Procedure), in the form in which it is filed with the Commission
pursuant to Rule 424 under the Act, all in such quantities as such
Agent may reasonably request from time to time;
(ii) if the delivery of a prospectus is required at any
time in connection with the offering or sale of the Securities
(including Securities purchased from the Company by such Agent as
principal and including, in the case of Goldman, Sachs & Co., in any
Secondary Market Transactions during the Secondary Transactions
Period) and if at such time any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would include
an untrue statement of a material fact or omit to state any material
fact necessary in order to make
9
<PAGE> 10
the statements therein, in the light of the circumstances under which
they were made when such Prospectus is delivered, not misleading, or,
if for any other reason it shall be necessary during such same period
to amend or supplement the Prospectus in order to comply with the Act
or the Trust Indenture Act, to notify such Agent and request such
Agent, in its capacity as agent of the Company, to suspend
solicitation of offers to purchase Securities from the Company (and,
if so notified, such Agent shall cease such solicitations as soon as
practicable, but in any event not later than one business day later);
and if the Company shall decide to amend or supplement the
Registration Statement or the Prospectus as then amended or
supplemented, to so advise such Agent promptly by telephone (with
confirmation in writing) and to prepare and cause to be filed promptly
with the Commission an amendment or supplement to the Registration
Statement or the Prospectus as then amended or supplemented that will
correct such statement or omission or effect such compliance;
(iii) notwithstanding paragraph (ii) above, if during
the period specified in such paragraph such Agent continues to own
Securities purchased from the Company by such Agent as principal or
such Agent is otherwise required to deliver a prospectus in respect of
transactions in the Securities (including, in the case of Goldman,
Sachs & Co., in any Secondary Market Transactions during the Secondary
Transactions Period), the Company shall promptly prepare and file with
the Commission such an amendment or supplement and furnish without
charge to such Agent as many copies as it may from time to time during
such period reasonably request of such amendment or supplement;
provided, however, that the Company may elect, upon notice to Goldman,
Sachs & Co., not to comply with this paragraph (iii) with respect to
any Secondary Market Transaction, but only for a period or periods
that the Company reasonably determines are necessary in order to avoid
premature disclosure of material, non-public information, unless,
notwithstanding such election, such disclosure would otherwise be
required under this Agreement; and provided, further, that no such
period or periods described in the preceding proviso shall exceed 90
days in the aggregate during any period of 12 consecutive calendar
months. Upon receipt of any such notice, Goldman, Sachs & Co. shall
cease using the Prospectus or any amendment or supplement thereto in
connection with Secondary Market Transactions until it receives notice
from the Company that it may resume using such document (or such
document as it may be amended or supplemented);
(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) So long as any Securities are outstanding, to furnish
to such Agent copies of all reports or other communications (financial
or other) furnished to stockholders generally, and to deliver to such
Agent (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as such Agent 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);
(f) That, from the date of any Terms Agreement with such
Agent or other agreement by such Agent to purchase Securities as
principal and continuing to and including the later of (i) the
10
<PAGE> 11
termination of the trading restrictions for the Securities purchased
thereunder, as notified to the Company by such Agent, and (ii) the
related Time of Delivery, the Company will not, without the prior
written consent of such Agent, offer, sell, contract to sell or
otherwise dispose of any debt securities of the Company which both
mature more than 12 months after such Time of Delivery and are
substantially similar to the Securities;
(g) That each acceptance by the Company of an offer to
purchase Securities hereunder (including any purchase from the Company
by such Agent as principal not pursuant to a Terms Agreement), and
each execution and delivery by the Company of a Terms Agreement with
such Agent, shall be deemed to be an affirmation to such Agent that
the representations and warranties of the Company contained in or made
pursuant to this Agreement are true and correct as of the date of such
acceptance or of such Terms Agreement, as the case may be, as though
made at and as of such date, and an undertaking that such
representations and warranties will be true and correct as of the
settlement date for the Securities relating to such acceptance or as
of the Time of Delivery relating to such sale, as the case may be, as
though made at and as of such date (except that such representations
and warranties shall be deemed to relate to the Registration Statement
and the Prospectus as amended and supplemented relating to such
Securities);
(h) That reasonably in advance of each time the
Registration Statement or the Prospectus shall be amended or
supplemented (other than by a Pricing Supplement), and each time the
Company sells Securities to such Agent as principal pursuant to a
Terms Agreement and such Terms Agreement specifies the delivery of an
opinion or opinions by Sullivan & Cromwell, counsel to the Agents, as
a condition to the purchase of Securities pursuant to such Terms
Agreement, the Company shall furnish to such counsel such papers and
information as they may reasonably request to enable them to furnish
to such Agent the opinion or opinions referred to in Section 6(b)
hereof;
(i) That each time the Registration Statement or the
Prospectus shall be amended or supplemented (other than by a Pricing
Supplement), and each time the Company sells Securities to such Agent
as principal pursuant to a Terms Agreement and such Terms Agreement
specifies the delivery of an opinion under this Section 4(i) as a
condition to the purchase of Securities pursuant to such Terms
Agreement, the Company shall furnish or cause to be furnished
forthwith to such Agent a written opinion of one of the Company's
General Counsel, Robert J. Katz, Esq. or Gregory K. Palm, Esq., or
other counsel for the Company satisfactory to such Agent, dated the
date of such amendment or supplement or the Time of Delivery relating
to such sale, as the case may be, in form satisfactory to such Agent,
to the effect that such Agent may rely on the opinion of such counsel
referred to in Section 6(c) hereof which was last furnished to such
Agent to the same extent as though it were dated the date of such
letter authorizing reliance (except that the statements in such last
opinion shall be deemed to relate to the Registration Statement and
the Prospectus as amended and supplemented to such date) or, in lieu
of such opinion, an opinion of the same tenor as the opinion of such
counsel referred to in Section 6(c) hereof but modified to relate to
the Registration Statement and the Prospectus as amended and
supplemented to such date;
(j) That each time the Registration Statement or the
Prospectus shall be amended or supplemented to set forth financial
information included in or derived from the Company's consolidated
financial statements or accounting records, and each time the Company
sells Securities to such Agent as principal pursuant to a Terms
Agreement and such Terms Agreement specifies the delivery of a letter
under this Section 4(j) as a condition to the purchase of Securities
pursuant to such Terms Agreement, the Company shall cause the
independent certified public
11
<PAGE> 12
accountants who have certified the financial statements of the Company
and its subsidiaries included or incorporated by reference in the
Registration Statement forthwith to furnish such Agent a letter, dated
the date of such amendment or supplement or the Time of Delivery
relating to such sale, as the case may be, in form satisfactory to
such Agent, of the same tenor as the letter referred to in Section
6(d) hereof but modified to relate to the Registration Statement and
the Prospectus as amended or supplemented to the date of such letter,
with such changes as may be necessary to reflect changes in the
financial statements and other information derived from the accounting
records of the Company, to the extent such financial statements and
other information are available as of a date not more than five
business days prior to the date of such letter; provided, however,
that, with respect to any financial information or other matter, such
letter may reconfirm as true and correct at such date as though made
at and as of such date, rather than repeat, statements with respect to
such financial information or other matter made in the letter referred
to in Section 6(d) hereof which was last furnished to such Agent;
(k) That each time the Registration Statement or the
Prospectus shall be amended or supplemented (other than by a Pricing
Supplement), and each time the Company sells Securities to such Agent
as principal and the applicable Terms Agreement specifies the delivery
of a certificate under this Section 4(k) as a condition to the
purchase of Securities pursuant to such Terms Agreement, the Company
shall furnish or cause to be furnished forthwith to such Agent a
certificate, dated the date of such supplement or amendment or the
Time of Delivery relating to such sale, as the case may be, in such
form and executed by such officers of the Company as shall be
satisfactory to such Agent, to the effect that the statements
contained in the certificates referred to in Section 6(i) hereof which
was last furnished to such Agent are true and correct at such date as
though made at and as of such date (except that such statements shall
be deemed to relate to the Registration Statement and the Prospectus
as amended and supplemented to such date), or, in lieu of such
certificate, certificates of the same tenor as the certificates
referred to in said Section 6(i) but modified to relate to the
Registration Statement and the Prospectus as amended and supplemented
to such date; and
(l) To offer to any person who has agreed to purchase
Securities from the Company as the result of an offer to purchase
solicited by such Agent the right to refuse to purchase and pay for
such Securities if, on the related settlement date fixed pursuant to
the Administrative Procedure, any condition set forth in Section 6(a),
6(e), 6(f), 6(g) or 6(h) hereof shall not have been satisfied (it
being understood that the judgment of such person with respect to the
impracticability or inadvisability of such purchase of Securities
shall be substituted, for purposes of this Section 4(l), for the
respective judgments of an Agent with respect to certain matters
referred to in such Sections 6(e) and 6(g), and that such Agent shall
have no duty or obligation whatsoever to exercise the judgment
permitted under such Sections 6(e) and 6(g) on behalf of any such
person).
5. The Company covenants and agrees with each Agent 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, the Prospectus and any Pricing
Supplements and all other amendments and supplements thereto and the mailing and
delivering of copies thereof to such Agent; (ii) the fees, disbursements and
expenses of counsel for the Agents in connection with the establishment of the
program contemplated hereby, any opinions to be rendered by such counsel
hereunder and under any Terms Agreement and the transactions contemplated
hereunder and under any Terms Agreement; (iii) the cost of printing, producing
or reproducing this Agreement, any Terms Agreement, any Indenture, closing
documents (including any compilations thereof) and any other
12
<PAGE> 13
documents in connection with the offering, purchase, sale and delivery
of the Securities; (iv) all expenses in connection with the
qualification of the Securities for offering and sale under state
securities laws as provided in Section 4(b) hereof, including the fees
and disbursements of counsel for the Agents in connection with such
qualification and in connection with the Blue Sky and legal investment
surveys; (v) any fees charged by securities rating services for rating
the Securities; (vi) any filing fees incident to, and the fees and
disbursements of counsel for the Agents in connection with, any
required review by the National Association of Securities Dealers,
Inc. of the terms of the sale of the Securities (other than, in the
case of Goldman, Sachs & Co., in any Secondary Market Transactions);
(vii) the cost of preparing the Securities; (viii) the fees and
expenses of any Trustee and any agent of any Trustee and any transfer
or paying agent of the Company and the fees and disbursements of
counsel for any Trustee or such agent in connection with any Indenture
and the Securities; (ix) any advertising expenses connected with the
solicitation of offers to purchase and the sale of Securities so long
as such advertising expenses have been approved by the Company; and
(x) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided
for in this Section. Except as provided in Sections 7 and 8 hereof,
each Agent shall pay all other expenses it incurs.
6. The obligation of any Agent, as agent of the Company, at any
time ("Solicitation Time") to solicit offers to purchase the Securities from the
Company and the obligation of any Agent to purchase Securities from the Company
as principal, pursuant to any Terms Agreement or otherwise, shall in each case
be subject, in such Agent's discretion, to the condition that all
representations and warranties and other statements of the Company herein (and,
in the case of an obligation of an Agent under a Terms Agreement, in or
incorporated by reference in such Terms Agreement) are true and correct at and
as of the Commencement Date and any applicable date referred to in Section 4(k)
hereof that is prior to such Solicitation Time or Time of Delivery, as the case
may be, and at and as of such Solicitation Time or Time of Delivery, as the case
may be; the condition that prior to such Solicitation Time or Time of Delivery,
as the case may be, the Company shall have performed all of its obligations
hereunder theretofore to be performed; and the following additional conditions:
(a) (i) With respect to any Securities sold at or prior to
such Solicitation Time or Time of Delivery, as the case may be, the
Prospectus as amended or supplemented (including the Pricing
Supplement) with respect to such Securities shall have been filed with
the Commission pursuant to Rule 424(b) under the Act within the
applicable time period prescribed for such filing by the rules and
regulations under the Act and in accordance with Section 4(a) hereof;
(ii) no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and (iii)
all requests for additional information on the part of the Commission
shall have been complied with to the reasonable satisfaction of such
Agent;
(b) Sullivan & Cromwell, counsel to the Agents, shall have
furnished to such Agent (i) such opinion or opinions, dated the
Commencement Date, to the effect that the matters set forth in the
Prospectus 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), (iv), (v), (viii), (ix) and (x) of
subsection (c) below, as well as such other related matters as such
Agent may reasonably request, and (ii) if and to the extent requested
by such Agent, with respect to each applicable date referred to in
Section 4(h) hereof that is on or prior to such Solicitation Time or
Time of Delivery, as the case may be, an opinion or opinions, dated
such applicable date, to the effect that such Agent may rely on the
opinion or
13
<PAGE> 14
opinions which were last furnished to such Agent pursuant to this
Section 6(b) to the same extent as though it or they were dated the
date of such letter authorizing reliance (except that the statements
in such last opinion or opinions shall be deemed to relate to the
Registration Statement and the Prospectus as amended and supplemented
to such date) or, in any case, in lieu of such an opinion or opinions,
an opinion or opinions of the same tenor as the opinion or opinions
referred to in clause (i) but modified to relate to the Registration
Statement and the Prospectus as amended and supplemented to such date;
and in each case such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon
such matters;
(c) Either Robert J. Katz, Esq. or Gregory K. Palm,
Esq., each a General Counsel of the Company, or other counsel for the
Company satisfactory to such Agent, shall have furnished to such Agent
such counsel's written opinions, dated the Commencement Date and each
applicable date referred to in Section 4(i) hereof that is on or prior
to such Solicitation Time or Time of Delivery, as the case may be, in
form and substance satisfactory to such Agent, 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 Prospectus as amended or
supplemented;
(ii) The Company has an authorized
capitalization as set forth in the Prospectus as amended or
supplemented 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) To the best of such counsel's knowledge
and other than as set forth in the Prospectus as amended or
supplemented, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a
party or to which any property of the Company or any of its
subsidiaries is 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;
(iv) This Agreement and any applicable Terms
Agreement have been duly authorized, executed and delivered
by the Company;
(v) [USE THE FOLLOWING IF THE OPINION IS
BEING DELIVERED AT ANY TIME OF DELIVERY -- The Indenture has
been duly authorized, executed and delivered by the Company;
the Securities being delivered at such Time of Delivery have
been duly authorized, executed, authenticated, issued and
delivered by the Company; and the Indenture and such
Securities constitute valid and legally binding obligations
of the Company enforceable in accordance with their
respective terms, subject to bankruptcy, insolvency,
reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general
equity principles; the Indenture and such Securities conform
to the descriptions thereof in the Prospectus as amended or
supplemented; and the Indenture has been duly qualified
under the Trust Indenture Act;]
[USE THE FOLLOWING IF THE OPINION IS NOT BEING
DELIVERED AT A TIME OF DELIVERY -- The Indenture has been
duly authorized, executed and delivered by the Company and
constitutes a valid and legally binding obligation of the
Company enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability
relating to or affecting creditors' rights
14
<PAGE> 15
and to general equity principles; the Series has been duly
authorized and established in conformity with the Indenture
and, when the terms of a particular Security and of its
issuance and sale have been duly authorized and established
by all necessary corporate action in conformity with the
Indenture, and such Security has been duly prepared,
executed, authenticated and issued in accordance with the
Indenture and delivered against payment in accordance with
this Agreement, such Security will constitute a valid and
legally binding obligation of the Company enforceable in
accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or
affecting creditors' rights and to general equity
principles; and the Indenture conforms to the description
thereof in the Prospectus as amended or supplemented and has
been duly qualified under the Trust Indenture Act;]
(vi) 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, this Agreement
and any applicable Terms 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 is
then a party or by which the Company is then bound or to
which any of the property or assets of the Company is then
subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or the
By-laws of the Company as then in effect 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 properties, in each case as
then in effect; provided, however, that for the purposes of
this paragraph (vi), such counsel need not express any
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
and related laws; and provided, further, that insofar as the
compliance by the Company with all the provisions of such
Securities, the Indenture, this Agreement and any applicable
Terms Agreement and the consummation of the transactions
herein and therein contemplated is 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 (it
being understood that, in the case of any opinion to be
delivered at a Time of Delivery, the term "Securities" as
used in this paragraph (vi) shall mean the Securities to be
delivered at such time);
(vii) 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 in accordance with this Agreement or the
consummation by the Company of the other transactions
contemplated by this Agreement, any applicable Terms
Agreement, the Securities or the Indenture, except the
registration of the Securities under the Act, and the
qualification of the Securities 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 solicitation by the
Agents of offers to purchase Securities from the Company and
in connection with any offers and sales by an Agent of
Securities purchased by it as principal, in each case in the
manner contemplated hereby (it being understood that, in the
case of any opinion to be delivered at a Time of Delivery,
the term "Securities" as used in this paragraph (vii) shall
mean the Securities to be delivered at such time);
15
<PAGE> 16
(viii) The statements set forth in the
Prospectus, as amended or supplemented, under the caption
"Description of Notes We May Offer", insofar as they purport
to constitute a summary of the terms of the Securities
described therein, and under the caption "Plan of
Distribution of Notes", insofar as they purport to describe
the provisions of the laws and documents referred to
therein, are accurate, complete and fair (it being
understood that, in the case of any opinion to be delivered
at a Time of Delivery, the term "Securities" as used in this
paragraph (viii) shall mean the Securities to be delivered
at such time);
(ix) 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 (it being understood that, in the
case of any opinion to be delivered at a Time of Delivery,
the term "Securities" as used in this paragraph (ix) shall
mean the Securities to be delivered at such time); and
(x) The Registration Statement and the
Prospectus as amended and supplemented and any further
amendments and supplements thereto made by the Company prior
to the date of such opinion (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 Prospectus,
except for those referred to in the opinion in paragraphs
(ii) and (viii) of this Section 6(c), he has no reason to
believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the
Company prior to the date of such opinion (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 or that, as of
its date and as of the time and date of delivery of such
opinion, the Prospectus as then amended or supplemented
(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 or contains an untrue statement of a
material fact or omitted or omits to state a material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; and
such counsel does not know of any amendment to the
Registration Statement required to be filed or any contracts
or other documents of a character required to be filed as an
exhibit to the Registration Statement or required to be
described in the Registration Statement or the Prospectus as
amended or supplemented which are not filed or described as
required;
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
16
<PAGE> 17
delivered by the Trustee, that any Securities then being delivered
conform to the forms thereof examined by him (or members of the
Company's legal department acting under his supervision), that the
Trustee's certificates of authentication of any Securities then being
delivered 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 in any
country 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. Furthermore, in any
opinion to be delivered otherwise than at a Time of Delivery, such
counsel may also state that he has assumed that, after his opinion is
delivered, the authorization of the Securities will not be modified or
rescinded; there will not be any change in law affecting the validity,
legally binding character or enforceability of the Securities or any
other matters covered by such opinion; the issue, sale, delivery and
performance of the Securities by the Company will comply with
applicable law and any applicable order under a registration and will
not result in any breach or violation of, or any default under or
conflict with, any agreement or instrument binding on the Company; and
the Securities will not include any alternative or additional terms
that are not specified in the forms of Securities examined by him and
that either would result in any conflict, breach, violation or default
of the kind described in paragraph (vi) above or would require any
consent, approval, authorization, order, registration or qualification
of the kind described in paragraph (vii) above to be obtained or made;
(d) Not later than 10:00 a.m., New York City time, on
the Commencement Date and on each applicable date referred to in
Section 4(j) hereof that is on or prior to such Solicitation Time or
Time of Delivery, as the case may be, the independent certified public
accountants who have certified the financial statements of the Company
and its subsidiaries included in the Registration Statement shall have
furnished to such Agent a letter, dated the Commencement Date or such
applicable date, as the case may be, in form and substance
satisfactory to such Agent, to the effect set forth in Annex III
hereto;
(e) (i) Neither the Company nor any of its
subsidiaries shall have sustained since the date of the latest audited
financial statements included in the Prospectus as amended or
supplemented prior to the date of the Pricing Supplement relating to
the Securities to be delivered at the relevant Time of Delivery any
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus as amended or
supplemented prior to the date of the Pricing Supplement relating to
the Securities to be delivered at the relevant Time of Delivery and
(ii) since the respective dates as of which information is given in
the Prospectus as amended or supplemented prior to the date of the
Pricing Supplement relating to the Securities to be delivered at the
relevant Time of Delivery there shall not have been any change in the
partners' capital or capital stock, as applicable, or long-term debt
of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the
general affairs, management, financial position, partners' capital or
stockholders' equity, as applicable, or results of operations of the
Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus as amended or supplemented prior to the
date of the Pricing Supplement relating to the Securities to be
delivered at the relevant Time of Delivery, the effect of which, in
any such case described in clause (i) or (ii), is in the judgment of
such Agent so material and adverse as to make it impracticable or
inadvisable to proceed with
17
<PAGE> 18
the solicitation by such Agent of offers to purchase Securities from
the Company or the purchase by such Agent of Securities from the
Company as principal, as the case may be, on the terms and in the
manner contemplated in the Prospectus as amended or supplemented prior
to the date of the Pricing Supplement relating to the Securities to be
delivered at the relevant Time of Delivery;
(f) On or after the date hereof or on any applicable
Terms Agreement (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;
(g) On or after the date hereof or on any applicable
Terms Agreement 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 in New York declared by either Federal or New York State
authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of
a national emergency or war, if the effect of any such event specified
in this clause (iv) in the judgment of such Agent makes it
impracticable or inadvisable to proceed with the solicitation of
offers to purchase Securities or the purchase of the Securities from
the Company as principal pursuant to the applicable Terms Agreement or
otherwise, as the case may be, on the terms and in the manner
contemplated in the Prospectus;
(h) (i) With respect to any Security denominated in a
currency other than the U.S. dollar, more than one currency or a
composite currency or any Security the principal or interest of which
is indexed to such currency, currencies or composite currency, there
shall not have occurred a suspension or material limitation in foreign
exchange trading in such currency, currencies or composite currency by
a major international bank, a general moratorium on commercial banking
activities in the country or countries issuing such currency,
currencies or composite currency, the outbreak or escalation of
hostilities involving, the occurrence of any material adverse change
in the existing financial, political or economic conditions of, or the
declaration of war or a national emergency by, the country or
countries issuing such currency, currencies or composite currency or
the imposition or proposal of exchange controls by any governmental
authority in the country or countries issuing such currency,
currencies or composite currency; and (ii) with respect to any
Security linked to the capital stock of an issuer other than the
Company, additional conditions comparable to those set forth in
Sections 6(e), 6(f) and 6(g) shall have been satisfied with respect to
such issuer (with such additional conditions being identical to those
in Sections 6(e), (f) and (g), except that, for this purpose, all
references to the Company in such sections shall be deemed to mean
such other issuer and, if the principal trading market for such other
issuer's capital stock is not the New York Stock Exchange, the
reference to the New York Stock Exchange in Section 6(g)(i) shall be
deemed to mean either the New York Stock Exchange or such principal
trading market and in Section 6(g)(ii) shall be deemed to mean only
such principal trading market), it being understood that nothing in
this clause (ii) shall limit or otherwise affect conditions in
Sections 6(e), (f) and (g), which shall apply in addition to any
conditions applicable pursuant to this clause (ii); and
(i) The Company shall have furnished or caused to be
furnished to such Agent certificates of officers of the Company dated
the Commencement Date and each applicable date referred to in Section
4(k) hereof that is on or prior to such Solicitation Time or Time of
Delivery, as the case
18
<PAGE> 19
may be, in such form and executed by such officers of the Company as
shall be satisfactory to such Agent, as to the accuracy of the
representations and warranties of the Company herein at and as of the
Commencement Date or such applicable date, as the case may be, as to
the performance by the Company of all of its obligations hereunder to
be performed at or prior to the Commencement Date or such applicable
date, as the case may be, as to the matters set forth in subsections
(a) and (e) of this Section 6, and as to such other matters as such
Agent may reasonably request.
7. (a) The Company will indemnify and hold harmless each Agent
against any losses, claims, damages or liabilities, joint or several,
to which such Agent 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, the Prospectus,
the Prospectus as amended or supplemented or any other prospectus
relating to the Securities, 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 such Agent for any legal or other expenses reasonably
incurred by it 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, the Prospectus, the Prospectus as amended or supplemented
or any other prospectus relating to the Securities, or any such
amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by such Agent expressly
for use therein.
(b) Each Agent 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, the Prospectus, the Prospectus
as amended or supplemented or any other prospectus relating to the
Securities, 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, the Prospectus, the Prospectus
as amended or supplemented or any other prospectus relating to the
Securities, or any such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by
such Agent expressly for use therein; and will reimburse the Company
for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such action or claim as
such expenses are incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection,
notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party shall not relieve
it from any liability which it may have to any indemnified party
otherwise than under
19
<PAGE> 20
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 7 (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 7 is
unavailable 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 each Agent on the other from the
offering of the Securities to which such loss, claim, damage or
liability (or action in respect thereof) relates. 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 each Agent 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 each Agent on the other shall be
deemed to be in the same proportion as the total net proceeds from the
sale of Securities (before deducting expenses) received by the Company
bear to the total commissions or discounts received by such Agent from
the Company in respect thereof. 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 required to be stated therein or
necessary in order to make the statements therein not misleading
relates to information supplied by the Company on the one hand or by
any Agent 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 each Agent agree that it would
not be just and equitable if contribution pursuant to this subsection
(d) were determined by per capita allocation (even if all Agents were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection
20
<PAGE> 21
with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), an Agent shall
not be required to contribute any amount in excess of the amount by
which the total public offering price at which the Securities
purchased by or through it were sold exceeds the amount of any damages
which such Agent 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
obligations of each of the Agents under this subsection (d) to
contribute are several in proportion to the respective purchases made
by or through it to which such loss, claim, damage or liability (or
action in respect thereof) relates and are not joint.
(e) The obligations of the Company under this Section 7
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 Agent within the meaning of the Act;
and the obligations of each Agent under this Section 7 shall be in
addition to any liability which such Agent 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.
8. Each Agent, in soliciting offers to purchase Securities from
the Company and in performing the other obligations of such Agent hereunder
(other than in respect of any purchase by an Agent as principal, pursuant to a
Terms Agreement or otherwise), is acting solely as agent for the Company and not
as principal. Each Agent will make reasonable efforts to assist the Company in
obtaining performance by each purchaser whose offer to purchase Securities from
the Company was solicited by such Agent and has been accepted by the Company,
but such Agent shall not have any liability to the Company in the event such
purchase is not consummated for any reason. If the Company shall default on its
obligation to deliver Securities to a purchaser whose offer it has accepted, the
Company shall (i) hold each Agent harmless against any loss, claim or damage
arising from or as a result of such default by the Company and (ii)
notwithstanding such default, pay to the Agent that solicited such offer any
commission to which it would be entitled in connection with such sale.
9. The respective indemnities, agreements, representations,
warranties and other statements by any Agent and the Company set forth in or
made 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 Agent or any controlling person of any Agent, or the Company, or
any officer or director or any controlling person of the Company, and shall
survive each delivery of and payment for any of the Securities.
10. (a) The provisions of this Agreement relating to the
solicitation of offers to purchase Securities from the Company may be suspended
or terminated at any time by the Company as to any Agent or by any Agent as to
such Agent upon the giving of written notice of such suspension or termination
to such Agent or the Company, as the case may be. In the event of such
suspension or termination with respect to any Agent, (i) this Agreement shall
remain in full force and effect with respect to any Agent as to which such
suspension or termination has not occurred, (ii) this Agreement shall remain in
full force and effect with respect to the rights and obligations of any party
which have previously accrued or which relate to Securities which are already
issued, agreed to be issued or the subject of a
21
<PAGE> 22
pending offer at the time of such suspension or termination (including all
Securities that may be the subject of a Secondary Market Transaction at any time
during the Secondary Transactions Period) and (z) in any event, this Agreement
shall remain in full force and effect insofar as the fourth paragraph of Section
2(a) and Sections 4(d), 4(e), 5, 7, 8 and 9 hereof are concerned.
(b) The Company, in its sole discretion, may appoint one or more
additional parties to act as Agents hereunder from time to time. Any such
appointment shall be made in a writing signed by the Company and the party so
appointed. Such appointment shall become effective in accordance with its terms
after the execution and delivery of such writing by the Company and such other
party. When such appointment is effective, such other party shall be deemed to
be one of the Agents referred to in, and to have the rights and obligations of
an Agent under, this Agreement, subject to the terms and conditions of such
appointment. The Company shall deliver a copy of such appointment to each other
Agent promptly after it becomes effective.
11. Except as otherwise specifically provided herein or in the
Administrative Procedure, all statements, requests, notices and advices
hereunder shall be in writing, or by telephone if promptly confirmed in writing,
and shall be sufficient in all respects when delivered or sent by facsimile
transmission, personal delivery or registered mail to 85 Broad Street, New York,
New York 10004, Facsimile Transmission No. (212) 363-7609, Attention: Credit
Department; if to any Agent other than Goldman, Sachs & Co., shall be sufficient
in all respects when delivered or sent by facsimile transmission if to Goldman,
Sachs & Co., or registered mail to the facsimile number or address provided by
such Agent to the Company in the document appointing such Agent as an Agent
under this Agreement; and if to the Company, shall be sufficient in all respects
when delivered or sent by facsimile transmission, personal delivery or
registered mail to 85 Broad Street, New York, New York 10004, Facsimile No.
(212) 902-3325, Attention: Treasury Department. Any such statements, requests,
notices or advices shall take effect upon receipt thereof.
12. This Agreement and any Terms Agreement shall be binding upon, and
inure solely to the benefit of, each Agent and the Company and, to the extent
provided in Sections 7, 8 and 9 hereof, the officers and directors of the
Company and any person who controls any Agent or the Company, and their
respective personal representatives, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement or any
Terms Agreement. No purchaser of any of the Securities through or from any Agent
hereunder shall be deemed a successor or assign by reason merely of such
purchase.
13. Time shall be of the essence in this Agreement and any Terms
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.
14. THIS AGREEMENT AND ANY TERMS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
15. This Agreement and any Terms Agreement may be executed by any one
or more of the parties hereto and thereto in any number of counterparts, each of
which shall be an original, but all of such respective counterparts shall
together constitute one and the same instrument.
22
<PAGE> 23
If the foregoing is in accordance with your understanding, please sign
and return to us four counterparts hereof, whereupon this letter and the
acceptance by you thereof shall constitute a binding agreement between the
Company and you in accordance with its terms.
Very truly yours,
The Goldman Sachs Group, Inc.
By: /s/ Dan H. Jester
.......................................
Name: Dan H. Jester
Title: Treasurer and Vice President
Accepted in New York, New York,
as of the date hereof:
/s/ Goldman, Sachs & Co.
........................................
(Goldman, Sachs & Co.)
<PAGE> 24
ANNEX I
THE GOLDMAN SACHS GROUP, INC.
$15,000,000,000
MEDIUM-TERM NOTES, SERIES B
TERMS AGREEMENT
..................................., 1999
Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
[INSERT NAMES OF ANY OTHER PURCHASERS]
Ladies and Gentlemen:
The Goldman Sachs Group, Inc. (the "Company") proposes, subject to the
terms and conditions stated herein and in the Distribution Agreement, dated May
19, 1999 (the "Distribution Agreement"), between the Company on the one hand and
Goldman, Sachs & Co. and any other party acting as Agent thereunder on the
other, to issue and sell to you the securities specified in the Schedule hereto
(the "Purchased Securities"). Each of the provisions of the Distribution
Agreement not specifically related to the solicitation by the Agents, as agents
of the Company, of offers to purchase Securities is incorporated herein by
reference in its entirety, and shall be deemed to be part of this Terms
Agreement to the same extent as if such provisions had been set forth in full
herein. Nothing contained herein or in the Distribution Agreement shall make any
party hereto an agent of the Company or make such party subject to the
provisions therein relating to the solicitation of offers to purchase Securities
from the Company, solely by virtue of its execution of this Terms Agreement.
Each of the representations and warranties set forth therein shall be deemed to
have been made at and as of the date of this Terms Agreement, except that each
representation and warranty in Section 1 of the Distribution Agreement which
makes reference to the Prospectus shall be deemed to be a representation and
warranty as of the date of the Distribution Agreement in relation to the
Prospectus (as therein defined), and also a representation and warranty as of
the date of this Terms Agreement in relation to the Prospectus as amended and
supplemented to relate to the Purchased Securities.
An amendment to the Registration Statement, or a supplement to the
Prospectus, as the case may be, relating to the Purchased Securities, in the
form heretofore delivered to you is now proposed to be filed with the
Commission.
Subject to the terms and conditions set forth herein and in the
Distribution Agreement incorporated herein by reference, the Company agrees to
issue and sell to you and you agree to purchase from the Company the Purchased
Securities, at the time and place, in the principal amount and at the purchase
price set forth in the Schedule hereto.
<PAGE> 25
If the foregoing is in accordance with your understanding, please sign
and return to us ...... counterparts hereof, and upon acceptance hereof by you
this letter and such acceptance hereof, including those provisions of the
Distribution Agreement incorporated herein by reference, shall constitute
a binding agreement between you and the Company
Very truly yours,
The Goldman Sachs Group, Inc.
By:..................................
Name:
Title:
Accepted in New York, New York,
as of the date hereof:
...............................
(Goldman, Sachs & Co.)
[Name(s) of other purchasers]
By:............................
Name:
Title:
-2-
<PAGE> 26
SCHEDULE TO ANNEX I
Title of Purchased Securities:
Medium-Term Notes, Series B
Aggregate Principal Amount:
[$ .................... or units of other Specified Currency]
[Price to Public:]
Purchase Price by Goldman, Sachs & Co. [Name(s) of other purchasers]:
% of the principal amount of the Purchased Securities [, plus
accrued interest from ............... to ...............] [and accrued
amortization, if any, from ................. to ................]
Method of and Specified Funds for Payment of Purchase Price:
[By certified or official bank check or checks, payable to the order
of the Company, in [[New York] Clearing House] [immediately available] funds]
[By wire transfer to a bank account specified by the Company in
[next day] [immediately available] funds]
Indenture:
Indenture, dated as of ....................., 1999, between the
Company and The Bank of New York, as Trustee
Time of Delivery:
Closing Location for Delivery of Securities:
Maturity:
Interest Rate:
[ %] [Zero Coupon] [Describe applicable floating rate provisions]
Interest Payment Dates:
[months and dates]
Documents to be Delivered:
The following documents referred to in the Distribution Agreement
shall be delivered as a condition to the Closing:
[(1) The opinion or opinions of counsel to the Agents referred to in
Section 4(h).]
[(2) The opinion of counsel to the Company referred to in
Section 4(i).]
[(3) The accountants' letter referred to in Section 4(j).]
[(4) The officers' certificate referred to in Section 4(k).]
Other Provisions (including Syndicate Provisions, if applicable):
I-1
<PAGE> 27
ANNEX II
THE GOLDMAN SACHS GROUP, INC.
ADMINISTRATIVE PROCEDURE
This Administrative Procedure relates to the Securities defined in the
Distribution Agreement, dated May 19, 1999 (the "Distribution Agreement"),
between The Goldman Sachs Group, Inc., a Delaware corporation (the "Company") on
the one hand and Goldman, Sachs & Co. and any other party acting as Agent
thereunder, on the other, to which this Administrative Procedure is attached as
Annex II. Defined terms used herein and not defined herein shall have the
meanings given such terms in the Distribution Agreement, the Prospectus as
amended or supplemented, the Indenture or the Securities. To the extent the
procedures set forth below conflict with the provisions of the Securities, the
Indenture or the Distribution Agreement, the relevant provisions of the
Securities, the Indenture and the Distribution Agreement shall control.
The procedures to be followed with respect to the settlement of sales
of Securities directly by the Company to purchasers solicited by an Agent, as
agent, are set forth below. The terms and settlement details related to a
purchase of Securities by an Agent, as principal, from the Company will be set
forth in a Terms Agreement pursuant to the Distribution Agreement, unless the
Company and such Agent otherwise agree as provided in Section 2(b) of the
Distribution Agreement, in which case the procedures to be followed in respect
of the settlement of such sale will be as set forth below. An Agent, in relation
to a purchase of a Security by a purchaser solicited by such Agent, is referred
to herein as the "Selling Agent" and, in relation to a purchase of a Security by
such Agent as principal other than pursuant to a Terms Agreement, as the
"Purchasing Agent".
The Company will advise each Agent in writing of those persons with
whom such Agent is to communicate regarding offers to purchase Securities and
the related settlement details.
Each Security will be issued only in fully registered form and will be
represented by either a global security (a "Global Security") delivered to the
Trustee, as agent for The Depository Trust Company (the "Depositary"), and
recorded in the book-entry system maintained by the Depositary (a "Book-Entry
Security"), or a certificate issued in definitive form (a "Certificated
Security") delivered to a person designated by an Agent, as set forth in the
applicable Pricing Supplement. An owner of a Book-Entry Security will not be
entitled to receive a certificate representing such a Security, except as
provided in the Indenture.
Book-Entry Securities will be issued in accordance with the
Administrative Procedure set forth in Part I hereof, and Certificated Securities
will be issued in accordance with the Administrative Procedure set forth in Part
II hereof.
PART I: ADMINISTRATIVE PROCEDURE FOR BOOK-ENTRY SECURITIES
In connection with the qualification of the Book-Entry Securities for
eligibility in the book-entry system maintained by the Depositary, the Trustee
will perform the custodial, document control and administrative functions
described below, in accordance with its respective obligations under a Letter of
Representation from the Company and the Trustee to the Depositary, dated the
date of the Distribution Agreement, and a Medium-Term Note Certificate Agreement
between the Trustee and the Depositary, dated as of April 14, 1989 (the
"Certificate Agreement"), and its obligations as a participant in the
Depositary, including the Depositary's Same-Day Funds Settlement System
("SDFS").
II-1
<PAGE> 28
Posting Rates by the Company:
The Company and the Agents will discuss from time to time the rates of
interest per annum to be borne by and the maturity of Book-Entry Securities that
may be sold as a result of the solicitation of offers by an Agent. The Company
may establish a fixed set of interest rates and maturities for an offering
period ("posting"). If the Company decides to change already posted rates, it
will promptly advise the Agents to suspend solicitation of offers until the new
posted rates have been established with the Agents.
Acceptance of Offers by the Company:
Each Agent will promptly advise the Company by telephone or other
appropriate means of all reasonable offers to purchase Book-Entry Securities,
other than those rejected by such Agent. Each Agent may, in its discretion
reasonably exercised, reject any offer received by it in whole or in part. Each
Agent also may make offers to the Company to purchase Book-Entry Securities as a
Purchasing Agent. The Company will have the sole right to accept offers to
purchase Book-Entry Securities and may reject any such offer in whole or in
part.
The Company will promptly notify the Selling Agent or Purchasing
Agent, as the case may be, of its acceptance or rejection of an offer to
purchase Book-Entry Securities. If the Company accepts an offer to purchase
Book-Entry Securities, it will confirm such acceptance in writing to the Selling
Agent or Purchasing Agent, as the case may be, and the Trustee.
Communication of Sale Information to the Company by Agent and Settlement
Procedures:
A. After the acceptance of an offer by the Company, the
Selling Agent or Purchasing Agent, as the case may be, will communicate
promptly, but in no event later than the time set forth under "Settlement
Procedure Timetable" below, the following details of the terms of such offer
(the "Sale Information") to the Company by telephone (confirmed in writing)
or by facsimile transmission or other acceptable written means:
(1) Principal Amount of Book-Entry Securities to be purchased;
(2) If a Fixed Rate Book-Entry Security, the interest rate and
initial interest payment date;
(3) Trade Date;
(4) Settlement Date;
(5) Maturity Date;
(6) Specified Currency and, if the Specified Currency is other
than U.S. dollars, the applicable Exchange Rate for such
Specified Currency (it being understood that currently the
Depositary accepts deposits of Global Securities denominated
in U.S. dollars only);
(7) The Exchange Rate Agent and the Exchange Rate Determination
Date, if applicable;
(8) Issue Price;
(9) Selling Agent's commission or Purchasing Agent's discount,
as the case may be;
(10) Net Proceeds to the Company;
(11) If a redeemable or repayable Book-Entry Security, such of
the following as are applicable:
(i) Redemption Commencement Date,
(ii) Initial Redemption Price (% of par),
(iii) Amount (% of par) that the Redemption Price shall
decline (but not below par) on each anniversary of
the Redemption Commencement Date,
II-2
<PAGE> 29
(iv) Repayment date, and
(v) Repayment price;
(12) If an Original Issue Discount Book-Entry Security, the total
amount of Original Issue Discount, the yield to Maturity and
the initial accrual period of Original Issue Discount;
(13) If a Floating Rate Book-Entry Security, such of the
following as are applicable:
(i) Interest Rate Basis,
(ii) Index Maturity and Index Currency,
(iii) Spread or Spread Multiplier,
(iv) Maximum Rate,
(v) Minimum Rate,
(vi) Initial Base Rate,
(vii) Initial Interest Rate,
(viii) Interest Reset Dates,
(ix) Calculation Dates,
(x) Interest Determination Dates,
(xi) Interest Payment Dates,
(xii) Regular Record Dates, and
(xiii) Calculation Agent;
(14) Name, address and taxpayer identification number of the
registered Holder(s);
(15) Denomination of certificates to be delivered at settlement;
(16) Book-Entry Security or Certificated Security; and
(17) Selling Agent or Purchasing Agent.
B. After receiving the Sale Information from the Selling Agent
or Purchasing Agent, as the case may be, the Company will communicate such Sale
Information to the Trustee by facsimile transmission or other acceptable written
means. The Trustee will assign a CUSIP number to the Global Security from a list
of CUSIP numbers previously delivered to the Trustee by the Company representing
such Book-Entry Security and then advise the Company and the Selling Agent or
Purchasing Agent, as the case may be, of such CUSIP number.
C. The Trustee will enter a pending deposit message through the
Depositary's Participant Terminal System, providing the following settlement
information to the Depositary, and the Depositary shall forward such information
to such Agent and Standard & Poor's Ratings Group (or such other entity that
assigns CUSIP numbers or any other identification designations being used for
the relevant Securities):
(1) The applicable Sale Information;
(2) CUSIP number of the Global Security representing such
Book-Entry Security;
(3) Whether such Global Security will represent any other
Book-Entry Security (to the extent known at such time);
II-3
<PAGE> 30
(4) Number of the participant account maintained by the
Depositary on behalf of the Selling Agent or Purchasing
Agent, as the case may be;
(5) The interest payment period; and
(6) Initial Interest Payment Date for such Book-Entry Security,
number of days by which such date succeeds the record date
for the Depositary's purposes (which in the case of Floating
Rate Securities which reset daily or weekly shall be the
date five calendar days immediately preceding the applicable
Interest Payment Date and in the case of all other
Book-Entry Securities shall be the Regular Record Date, as
defined in the Security) and, if calculable at that time,
the amount of interest payable on such Interest Payment
Date.
D. The Trustee will complete and authenticate the Global
Security previously delivered by the Company representing such Book-Entry
Security.
E. The Depositary will credit such Book-Entry Security to the
Trustee's participant account at the Depositary.
F. The Trustee will enter an SDFS deliver order through the
Depositary's Participant Terminal System instructing the Depositary to (i) debit
such Book-Entry Security to the Trustee's participant account and credit such
Book-Entry Security to such Agent's participant account and (ii) debit such
Agent's settlement account and credit the Trustee's settlement account for an
amount equal to the price of such Book-Entry Security less such Agent's
commission or discount, as the case may be. The entry of such a deliver order
shall constitute a representation and warranty by the Trustee to the Depositary
that (a) the Global Security representing such Book-Entry Security has been
issued and authenticated and (b) the Trustee is holding such Global Security
pursuant to the Certificate Agreement.
G. Such Agent will enter an SDFS deliver order through the
Depositary's Participant Terminal System instructing the Depositary (i) to debit
such Book-Entry Security to such Agent's participant account and credit such
Book-Entry Security to the participant accounts of the participants with respect
to such Book-Entry Security and (ii) to debit the settlement accounts of such
participants and credit the settlement account of such Agent for an amount equal
to the price of such Book-Entry Security.
H. Transfers of funds in accordance with SDFS deliver orders
described in Settlement Procedures "F" and "G" will be settled in accordance
with SDFS operating procedures in effect on the settlement date.
I. Upon confirmation of receipt of funds, the Trustee will
transfer to the account of the Company maintained at Citibank, N.A., New York,
New York, or such other account as the Company may have previously specified to
the Trustee, in funds available for immediate use in the amount transferred to
the Trustee in accordance with Settlement Procedure "F".
J. Upon request, the Trustee will send to the Company a
statement setting forth the principal amount of Book-Entry Securities
outstanding as of that date under the Indenture.
K. Such Agent will confirm the purchase of such Book-Entry
Security to the purchaser either by transmitting to the participants with
respect to such Book-Entry Security a confirmation order or orders through the
Depositary's institutional delivery system or by mailing a written confirmation
to such purchaser.
L. The Depositary will, at any time, upon request of the
Company or the Trustee, promptly furnish to the Company or the Trustee a list of
the names and addresses of the participants for whom the Depositary has credited
Book-Entry Securities.
II-4
<PAGE> 31
Preparation of Prospectus or Supplement:
If the Company accepts an offer to purchase a Book-Entry Security, it
will prepare a Pricing Supplement reflecting the terms of such Book-Entry
Security and arrange to have delivered to the Selling Agent or Purchasing Agent,
as the case may be, at least ten copies of such Pricing Supplement, not later
than 5:00 p.m., New York City time, on the business day following the Trade Date
(as defined below), or if the Company and the purchaser agree to settlement on
the business day following the date of acceptance of such offer, not later than
noon, New York City time, on such date. The Company will arrange to have the
Pricing Supplements filed with the Commission not later than the close of
business of the Commission on the fifth business day (or second business day, if
such Book-Entry Security is to be sold pursuant to Rule 430A under the
Securities Act) following the date on which such Pricing Supplement is first
used.
Delivery of Confirmation and Prospectus to Purchaser by Selling Agent:
The Selling Agent will deliver to the purchaser of a Book-Entry
Security a written confirmation of the sale and delivery and payment
instructions. In addition, the Selling Agent will deliver to such purchaser or
its agent the Prospectus as amended or supplemented (including the Pricing
Supplement) in relation to such Book-Entry Security prior to or together with
the earlier of the delivery to such purchaser or its agent of (a) the
confirmation of sale or (b) the Book-Entry Security.
Date of Settlement:
The receipt by the Company of immediately available funds in payment
for a Book-Entry Security and the authentication and issuance of the Global
Security representing such Book-Entry Security shall constitute "settlement"
with respect to such Book-Entry Security. All orders of Book-Entry Securities
solicited by a Selling Agent or made by a Purchasing Agent and accepted by the
Company on a particular date (the "Trade Date") will be settled on a date (the
"Settlement Date") which is the third business day after the Trade Date pursuant
to the "Settlement Procedure Timetable" set forth below, unless the Company and
the purchaser agree to settlement on another business day which shall be no
earlier than the next business day after the Trade Date.
Settlement Procedure Timetable:
For orders of Book-Entry Securities solicited by a Selling Agent and
accepted by the Company for settlement on the third business day after the Trade
Date, Settlement Procedures "A" through "I" set forth above shall be completed
as soon as possible but not later than the respective times (New York City time)
set forth below:
<TABLE>
<CAPTION>
SETTLEMENT
PROCEDURE TIME
- --------- ----
<S> <C> <C>
A 5:00 p.m. on the business day following the Trade Date or 10:00 a.m. on the
business day prior to the Settlement Date, whichever is earlier
B 12:00 noon on the second business day immediately preceding the Settlement
Date
C 2:00 p.m. on the second business day immediately preceding the Settlement
Date
D 9:00 a.m. on the Settlement Date
E 10:00 a.m. on the Settlement Date
F-G 2:00 p.m. on the Settlement Date
</TABLE>
II-5
<PAGE> 32
<TABLE>
<S> <C> <C>
H 4:45 p.m. on the Settlement Date
I 5:00 p.m. on the Settlement Date
</TABLE>
If the initial interest rate for a Floating Rate Book-Entry Security
has not been determined at the time that Settlement Procedure "A" is completed,
Settlement Procedures "B" and "C" shall be completed as soon as such rate has
been determined but no later than 2:00 p.m. on the second business day
immediately preceding the Settlement Date. Settlement Procedure "H" is subject
to extension in accordance with any extension of Fedwire closing deadlines and
in the other events specified in the SDFS operating procedures in effect on the
Settlement Date.
If settlement of a Book-Entry Security is rescheduled or canceled, the
Trustee, upon obtaining knowledge thereof, will deliver to the Depositary,
through the Depositary's Participation Terminal System, a cancellation message
to such effect by no later than 2:00 p.m. on the business day immediately
preceding the scheduled Settlement Date.
Failure to Settle:
If the Trustee fails to enter an SDFS deliver order with respect to a
Book-Entry Security pursuant to Settlement Procedure "F", the Trustee may
deliver to the Depositary, through the Depositary's Participant Terminal System,
as soon as practicable a withdrawal message instructing the Depositary to debit
such Book-Entry Security to the Trustee's participant account, provided that the
Trustee's participant account contains a principal amount of the Global Security
representing such Book-Entry Security that is at least equal to the principal
amount to be debited. If a withdrawal message is processed with respect to all
the Book-Entry Securities represented by a Global Security, the Trustee will
mark such Global Security "canceled", make appropriate entries in the Trustee's
records and send such canceled Global Security to the Company. The CUSIP number
assigned to such Global Security shall, in accordance with CUSIP Service Bureau
procedures, be canceled and not immediately reassigned. If a withdrawal message
is processed with respect to one or more, but not all, of the Book-Entry
Securities represented by a Global Security, the Trustee will exchange such
Global Security for two Global Securities, one of which shall represent such
Book-Entry Security or Securities and shall be canceled immediately after
issuance and the other of which shall represent the remaining Book-Entry
Securities previously represented by the surrendered Global Security and shall
bear the CUSIP number of the surrendered Global Security.
If the purchase price for any Book-Entry Security is not timely paid
to the participants with respect to such Book-Entry Security by the beneficial
purchaser thereof (or a person, including an indirect participant in the
Depositary, acting on behalf of such purchaser), such participants and, in turn
the Agent for such Book-Entry Security may enter deliver orders through the
Depositary's Participant Terminal System debiting such Book-Entry Security to
such participant's account and crediting such Book-Entry Security to such
Agent's account and then debiting such Book-Entry Security to such Agent's
participant account and crediting such Book-Entry Security to the Trustee's
participant account and shall notify the Company and the Trustee thereof.
Thereafter, the Trustee will (i) immediately notify the Company of such order
and the Company shall transfer to such Agent funds available for immediate use
in an amount equal to the price of such Book-Entry Security which was credited
to the account of the Company maintained at the Trustee in accordance with
Settlement Procedure I, and (ii) deliver the withdrawal message and take the
related actions described in the preceding paragraph. If such failure shall have
occurred for any reason other than default by the applicable Agent to perform
its obligations hereunder or under the Distribution Agreement, the Company will
reimburse such Agent on an equitable basis for the loss of its use of funds
during the period when the funds were credited to the account of the Company.
II-6
<PAGE> 33
Notwithstanding the foregoing, upon any failure to settle with respect
to a Book-Entry Security, the Depositary may take any actions in accordance with
its SDFS operating procedures then in effect. In the event of a failure to
settle with respect to one or more, but not all, of the Book-Entry Securities to
have been represented by a Global Security, the Trustee will provide, in
accordance with Settlement Procedure "D", for the authentication and issuance of
a Global Security representing the other Book-Entry Securities to have been
represented by such Global Security and will make appropriate entries in its
records. The Company will, from time to time, furnish the Trustee with a
sufficient quantity of Securities.
PART II: ADMINISTRATIVE PROCEDURE FOR CERTIFICATED SECURITIES
Posting Rates by Company:
The Company and the Agents will discuss from time to time the rates of
interest per annum to be borne by and the maturity of Certificated Securities
that may be sold as a result of the solicitation of offers by an Agent. The
Company may establish a fixed set of interest rates and maturities for an
offering period ("posting"). If the Company decides to change already posted
rates, it will promptly advise the Agents to suspend solicitation of offers
until the new posted rates have been established with the Agents.
Acceptance of Offers by Company:
Each Agent will promptly advise the Company by telephone or other
appropriate means of all reasonable offers to purchase Certificated Securities,
other than those rejected by such Agent. Each Agent may, in its discretion
reasonably exercised, reject any offer received by it in whole or in part. Each
Agent also may make offers to the Company to purchase Certificated Securities as
a Purchasing Agent. The Company will have the sole right to accept offers to
purchase Certificated Securities and may reject any such offer in whole or in
part.
The Company will promptly notify the Selling Agent or Purchasing
Agent, as the case may be, of its acceptance or rejection of an offer to
purchase Certificated Securities. If the Company accepts an offer to purchase
Certificated Securities, it will confirm such acceptance in writing to the
Selling Agent or Purchasing Agent, as the case may be, and the Trustee.
Communication of Sale Information to Company by Agent:
After the acceptance of an offer by the Company, the Selling Agent or
Purchasing Agent, as the case may be, will communicate the following details of
the terms of such offer (the "Sale Information") to the Company by telephone
(confirmed in writing) or by facsimile transmission or other acceptable written
means:
(1) Principal Amount of Certificated Securities to be purchased;
(2) If a Fixed Rate Certificated Security, the interest rate and
initial interest payment date;
(3) Trade Date;
(4) Settlement Date;
(5) Maturity Date;
(6) Specified Currency and, if the Specified Currency is other
than U.S. dollars, the applicable Exchange Rate for such
Specified Currency;
(7) The Exchange Rate Agent and the Exchange Rate Determination
Date, if applicable;
(8) Issue Price;
II-7
<PAGE> 34
(9) Selling Agent's commission or Purchasing Agent's discount,
as the case may be;
(10) Net Proceeds to the Company;
(11) If a redeemable or repayable Certificated Security, such of
the following as are applicable:
(i) Redemption Commencement Date,
(ii) Initial Redemption Price (% of par),
(iii) Amount (% of par) that the Redemption Price shall
decline (but not below par) on each anniversary of
the Redemption Commencement Date,
(iv) Repayment date, and
(v) Repayment price;
(12) If an Original Issue Discount Certificated Security, the
total amount of Original Issue Discount, the yield to
Maturity and the initial accrual period of Original Issue
Discount;
(13) If a Floating Rate Certificated Security, such of the
following as are applicable:
(i) Interest Rate Basis,
(ii) Index Maturity and Index Currency,
(iii) Spread or Spread Multiplier,
(iv) Maximum Rate,
(v) Minimum Rate,
(vi) Initial Base Rate,
(vii) Initial Interest Rate,
(viii) Interest Reset Dates,
(ix) Calculation Dates,
(x) Interest Determination Dates,
(xi) Interest Payment Dates,
(xii) Regular Record Dates, and
(xiii) Calculation Agent;
(14) Name, address and taxpayer identification number of the
registered owner(s);
(15) Denomination of certificates to be delivered at settlement;
(16) Book-Entry Security or Certificated Security; and
(17) Selling Agent or Purchasing Agent.
Preparation of Prospectus or Pricing Supplement by Company:
If the Company accepts an offer to purchase a Certificated Security,
it will prepare a Prospectus Supplement or Pricing Supplement, as applicable,
reflecting the terms of such Certificated Security and arrange to have delivered
to the Selling Agent or Purchasing Agent, as the case may be, at least ten
copies of such Pricing Supplement, not later than 5:00 p.m., New York City time,
on the business day following the Trade Date, or if the Company and the
purchaser agree to settlement on the date of acceptance of such offer, not later
than noon, New York City time, on such date. The Company will arrange to have
the Pricing Supplement filed with the Commission not later than the close of
business
II-8
<PAGE> 35
of the Commission on the fifth business day (or second business day, if such
Certificated Security is to be sold pursuant to Rule 430A under the Securities
Act) following the date on which such Pricing Supplement is first used.
Delivery of Confirmation and Prospectus to Purchaser by Selling Agent:
The Selling Agent will deliver to the purchaser of a Certificated
Security a written confirmation of the sale and delivery and payment
instructions. In addition, the Selling Agent will deliver to such purchaser or
its agent the Prospectus as amended or supplemented (including the Pricing
Supplement, as applicable) in relation to such Certificated Security prior to or
together with the earlier of the delivery to such purchaser or its agent of (a)
the confirmation of sale or (b) the Certificated Security.
Date of Settlement:
All offers of Certificated Securities solicited by a Selling Agent or
made by a Purchasing Agent and accepted by the Company will be settled on a date
(the "Settlement Date") which is the third business day after the date of
acceptance of such offer, unless the Company and the purchaser agree to
settlement (a) on another business day after the acceptance of such offer or (b)
with respect to an offer accepted by the Company prior to 10:00 a.m., New York
City time, on the date of such acceptance.
Instruction from Company to Trustee for Preparation of Certificated Securities:
After receiving the Sale Information from the Selling Agent or
Purchasing Agent, as the case may be, the Company will communicate such Sale
Information to the Trustee by telephone (confirmed in writing) or by facsimile
transmission or other acceptable written means.
The Company will instruct the Trustee by facsimile transmission or
other acceptable written means to authenticate and deliver the Certificated
Securities no later than 2:15 p.m., New York City time, on the Settlement Date.
Such instruction will be given by the Company prior to 3:00 p.m., New York City
time, on the business day immediately preceding the Settlement Date unless the
Settlement Date is the date of acceptance by the Company of the offer to
purchase Certificated Securities in which case such instruction will be given by
the Company by 11:00 a.m., New York City time.
Preparation and Delivery of Certificated Securities by Trustee and Receipt of
Payment Therefor:
The Trustee will prepare each Certificated Security and appropriate
receipts that will serve as the documentary control of the transaction.
In the case of a sale of Certificated Securities to a purchaser
solicited by a Selling Agent, the Trustee will, by 2:15 p.m., New York City
time, on the Settlement Date, deliver the Certificated Securities to the Selling
Agent for the benefit of the purchaser of such Certificated Securities against
delivery by the Selling Agent of a receipt therefor. On the Settlement Date the
Selling Agent will deliver payment for such Certificated Securities in
immediately available funds to the Company in an amount equal to the issue price
of the Certificated Securities less the Selling Agent's commission; provided
that the Selling Agent reserves the right to withhold payment for which it has
not received funds from the purchaser. The Company shall not use any proceeds
advanced by a Selling Agent to acquire securities.
In the case of a sale of Certificated Securities to a Purchasing
Agent, the Trustee will, by 2:15 p.m., New York City time, on the Settlement
Date, deliver the Certificated Securities to the Purchasing Agent against
delivery of payment for such Certificated Securities in immediately available
funds to the Company in an amount equal to the issue price of the Certificated
Securities less the Purchasing Agent's discount.
II-9
<PAGE> 36
Failure of Purchaser to Pay Selling Agent:
If a purchaser (other than a Purchasing Agent) fails to make payment
to the Selling Agent for a Certificated Security, the Selling Agent will
promptly notify the Trustee and the Company thereof by telephone (confirmed in
writing) or by facsimile transmission or other acceptable written means. The
Selling Agent will immediately return the Certificated Security to the Trustee.
Immediately upon receipt of such Certificated Security by the Trustee, the
Company will return to the Selling Agent an amount equal to the amount
previously paid to the Company in respect of such Certificated Security. The
Company will reimburse the Selling Agent on an equitable basis for its loss of
the use of funds during the period when they were credited to the account of the
Company.
The Trustee will cancel the Certificated Security in respect of which
the failure occurred, make appropriate entries in its records and, unless
otherwise instructed by the Company, destroy the Certificated Security.
II-10
<PAGE> 37
ANNEX III
ACCOUNTANTS' LETTER
Pursuant to Sections 4(j) and 6(d), as the case may be, of the
Distribution Agreement, the Company's independent certified public accountants
shall furnish letters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Act and the applicable rules and regulations adopted by the
Commission;
(ii) In their opinion, the financial statements 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 Registration Statement or the Prospectus
as most recently amended or supplemented comply as to form in all
material respects with the applicable accounting requirements of the
Act or the Exchange Act, as applicable, and the related published
rules and regulations thereunder; and, if applicable, they have made a
review in accordance with standards established by the American
Institute of Certified Public Accountants of the consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts 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 Agents;
(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 income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus as most recently amended or supplemented as
indicated in their reports thereon copies of which have been furnished
to the Agents; and on the basis of specified procedures including
inquiries of officials of the Company, who have responsibility for
financial and accounting matters regarding whether the unaudited
condensed consolidated financial statements referred to in paragraph
(vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the Exchange Act and
the related published rules and regulations, nothing came to their
attention that caused 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 Exchange Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus as most recently amended or supplemented agrees with the
corresponding amounts (after restatement where applicable) in the
audited consolidated financial statements for such fiscal years;
(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, 402 and 503(d) respectively, of Regulation S-K;
III-1
<PAGE> 38
(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 the Company and its
subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements
included in the Prospectus as amended or supplemented, inquiries of
officials of the Company 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 condensed consolidated
statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus as most recently amended or supplemented do not
comply as to form in all material respects with the
applicable accounting requirements of the Exchange Act and
the related published rules and regulations, or (ii) any
material modifications should be made to the unaudited
condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows
included in the Prospectus as most recently amended or
supplemented for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus as most
recently amended or supplemented 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 as most recently
amended or supplemented;
(C) the unaudited financial statements which were
not included in the Prospectus as most recently amended or
supplemented but from which were derived the unaudited
condensed financial statements referred to in clause (A) and
any unaudited income statement data and balance sheet items
included in the Prospectus as most recently amended or
supplemented and referred to in clause (B) were not
determined on a basis substantially consistent with the
basis for the audited financial statements included in the
Prospectus as most recently amended or supplemented;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus as most
recently amended or supplemented 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 consolidated capital stock (other than
issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in
each case which were outstanding on the date of the latest
balance sheet included in the Prospectus as most recently
amended or supplemented) (or partners' capital as
applicable) or any increase in the consolidated long-term
debt of the Company and its subsidiaries, or any decreases
in consolidated net current assets or stockholders' equity
or other items specified by the Agents, or any increases in
any items specified by the Agents, in each case as compared
III-2
<PAGE> 39
with amounts comparable shown in the latest balance sheet included in
the Prospectus as most recently amended or supplemented, except in
each case for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in such
letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus as most
recently amended or supplemented to the specified date
referred to in clause (E) there were any decreases in
consolidated total revenues or consolidated revenues, net of
interest expense, pre-tax earnings or total or per share
amounts of consolidated net income or other items specified
by the Agents, or any increases in any items specified by
the Agents, in each case as compared with the comparable
items in the comparable period of the preceding year and
with any other period of corresponding length specified by
the Agents, except in each case for increases or decreases
which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(vii) In addition to the audit 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 audit in accordance with generally
accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Agents which
are derived from the general accounting records of the Company 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
Agents, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and
its subsidiaries and have found them to be in agreement.
All references in this Annex III to the Prospectus shall be deemed to refer to
the Prospectus as defined in the Distribution Agreement as of the Commencement
Date referred to in Section 6(d) thereof and to the Prospectus as amended or
supplemented as of the date of the amendment, supplement or the Time of Delivery
relating to the Terms Agreement requiring the delivery of such letter under
Section 4(j) thereof.
III-3
<PAGE> 1
Exhibit 5.1
The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
February 14, 2000
The Goldman Sachs Group, Inc.,
85 Broad Street,
New York, New York 10004.
Dear Sirs:
In connection with the registration under the Securities Act of 1933 (the
"Act") of the Medium-Term Notes, Series B, at an initial offering price of up to
$7,000,000,000 or the equivalent thereof in other currencies or currency units
(the "Securities"), of The Goldman Sachs Group, Inc., a Delaware corporation
(the "Company"), I, as General Counsel of the Company, have examined (or have
caused members of the Company's legal department to examine) such corporate
records, certificates and other documents, and such questions of law, as I have
considered necessary or appropriate for the purposes for this opinion.
Upon the basis of such examination, it is my opinion, with respect to each
Security to be issued and sold by the Company, that when the Registration
Statement has become effective under the Act, the terms of such Security and of
its issuance and sale have been duly established in conformity with the
authorization for the Securities and with the Indenture relating to the
Securities so as not to violate any applicable law or result in a default under
or breach of any agreement or instrument binding upon the Company and so as to
comply with any requirement or restriction imposed by any court or governmental
body having jurisdiction over the Company, and such Security has been duly
executed and authenticated in accordance with the Indenture and issued and sold
as contemplated in the Registration Statement, such Security will constitute a
valid and legally binding obligation of the Company, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors'
<PAGE> 2
The Goldman Sachs Group, Inc. -2-
rights and to general equity principles.
I note that, as of the date of this opinion, a judgment for money in an
action based on a Security denominated in a foreign currency or currency unit in
a Federal or state court in the United States ordinarily would be enforced in
the United States only in United States dollars. The date used to determine the
rate of conversion of the foreign currency or currency unit in which a
particular Security is denominated into United States dollars will depend upon
various factors, including which court renders the judgment. In the case of a
Security denominated in a foreign currency, a state court in the State of New
York rendering a judgment on such Security would be required under Section 27 of
the New York Judiciary Law to render such judgment in the foreign currency in
which the Security is denominated, and such judgment would be converted into
United States dollars at the exchange rate prevailing on the date of entry of
the judgment.
The foregoing opinion is limited to the Federal laws of the United States,
the laws of the State of New York and the General Corporation Law of the State
of Delaware, and I am expressing no opinion as to the effect of the laws of any
other jurisdiction.
I have relied as to certain matters on information obtained from public
officials, officers of the Company and the general partner of The Goldman Sachs
Group, L.P. and other sources believed by me (or other members of the Company's
legal department under my supervision) to be responsible, and I have assumed
that the Indenture has been duly authorized, executed and delivered by the
Trustee.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the
<PAGE> 3
The Goldman Sachs Group, Inc. -3-
references to me under the heading "Validity of the Notes" in the Prospectus. In
giving such consent, I do not thereby admit that I am in the category of persons
whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ Gregory K. Palm
<PAGE> 1
Exhibit 8.1
SULLIVAN & CROMWELL
125 Broad Street
New York, New York 10004
February 14, 2000
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 up to $7,000,000,000 aggregate offering price of
the Company's Medium-Term Notes, Series B, we hereby confirm to you that the
discussion set forth under the heading "United States Taxation" in the
Prospectus which is a part of the Registration Statement of the Company to which
this opinion is filed as an exhibit is our opinion, subject to the limitations
set forth therein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "United
States Taxation" in the Prospectus. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Sullivan Cromwell
<PAGE> 1
EXHIBIT 10.26
SHAREHOLDERS' AGREEMENT
This Shareholders' Agreement (this "Agreement"), among The
Goldman Sachs Group, Inc., a Delaware corporation ("GS Inc."), and the Covered
Persons listed on Appendix A hereto, as such Appendix A may be amended from time
to time pursuant to the provisions hereof.
WITNESSETH:
WHEREAS, the Covered Persons are beneficial owners of shares
of Common Stock, par value $0.01 per share, of GS Inc. (the "Common Stock").
WHEREAS, the Covered Persons desire to address herein certain
relationships among themselves with respect to the voting and disposition of
their shares of Common Stock and various other matters and desire to give to the
Shareholders' Committee (hereinafter defined) the power to enforce their
agreements with respect thereto.
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements, covenants and provisions herein contained, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS AND OTHER MATTERS
Section 1.1 Definitions. The following words and phrases as
used herein shall have the following meanings, except as otherwise expressly
provided or unless the context otherwise requires:
(a) A Covered Person "acquires" Covered Shares when such
Covered Person first acquires beneficial ownership over such Covered
Shares.
(b) This "Agreement" shall have the meaning ascribed to such
term in the Recitals.
(c) A "beneficial owner" of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares: (i) voting
power, which includes the power to vote, or to direct the voting of,
such security and/or (ii) investment power, which includes the power to
dispose, or to direct the disposition of, such security, but for
purposes of this Agreement a person shall not be deemed a beneficial
owner of
<PAGE> 2
(A) Common Stock solely by virtue of the application of Exchange Act
Rule 13d-3(d) or Exchange Act Rule 13d-5 as in effect on the date
hereof (B) Common Stock solely by virtue of the possession of the legal
right to vote securities under applicable state or other law (such as
by proxy or power of attorney) or (C) Common Stock held of record by a
"private foundation" subject to the requirements of Section 509 of the
Code. "Beneficially own" and "beneficial ownership" shall have
correlative meanings.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and the applicable rulings and regulations
thereunder.
(e) "Common Stock" shall have the meaning ascribed to such
term in the Recitals.
(f) "Company" shall mean GS Inc., together with its
Subsidiaries.
(g) "Continuing Provisions" shall have the meaning ascribed to
such term in Section 7.1(b).
(h) "Covered Persons" shall mean those persons from time to
time listed on Appendix A hereto, and all persons who may become
parties to this Agreement and whose name is required to be listed on
Appendix A hereto, in each case in accordance with the terms hereof.
(i) A Covered Person's "Covered Shares" shall mean any shares
of Common Stock acquired from the Company by such Covered Person and
beneficially owned by such Covered Person at the time in question, but
shall not include (i) Common Stock beneficially owned as a result of
(A) an acquisition, directly or indirectly, from the Company in an
underwritten public offering or (B) conversion of securities
convertible into Common Stock, where beneficial ownership of the
convertible securities was acquired in a transaction described in
clause (A) above, (ii) Excluded Shares (as defined in the Plan of
Incorporation), (iii) any other Common Stock excluded from the
definition of Covered Shares by action of the Board of Directors of GS
Inc. prior to the IPO Date or (iv) any other Common Stock acquired
under a deferred compensation or employee benefit plan and excluded
from the definition of Covered Shares by action of the Board of
Directors of GS Inc. and the Shareholders' Committee after the IPO
Date. "Covered Shares" shall also include the securities that are
defined to be "Covered Shares" in Section 6.4.
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<PAGE> 3
(j) The term "employee" shall mean any person employed by the
Company who receives compensation, other than a person receiving
compensation in the nature of a consulting fee, a pension or a
retainer.
(k) "Employee Covered Person" shall mean a Covered Person who
is an employee of the Company at the time in question.
(l) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended to date and as further amended from time to time.
(m) A reference to an "Exchange Act Rule" shall mean such rule
or regulation of the Securities and Exchange Commission under the
Exchange Act, as in effect from time to time or as replaced by a
successor rule thereto.
(n) "General Transfer Restrictions" shall have the meaning
ascribed to such term in Section 2.2 hereof.
(o) "GS Inc." shall have the meaning ascribed to such term in
the Recitals.
(p) "IPO Date" shall mean the closing date of the initial
public offering of the Common Stock.
(q) "Permitted Basket Transaction" shall mean the purchase or
sale of, or the establishment of a long or short position in, a basket
or index of securities (or of a derivative financial instrument with
respect to a basket or index of securities) that includes securities of
GS Inc., in each case if such purchase, sale or establishment is
permitted under the Company's policy on hedging with respect to
securities of GS Inc. as announced from time to time.
(r) A "person" shall include, as applicable, any individual,
estate, trust, corporation, partnership, limited liability company,
unlimited liability company, foundation, association or other entity.
(s) "Plan of Incorporation" shall mean the plan for the
incorporation and reorganization of the business of The Goldman Sachs
Group, L.P. approved by the Schedule II Limited Partners thereof on
March 8, 1999, as amended from time to time.
(t) "PLP Transfer Restrictions" shall have the meaning
ascribed to such term in Section 2.1 hereof.
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<PAGE> 4
(u) "Preliminary Vote" shall have the meaning ascribed to such
term in Section 4.1 hereof.
(v) "Restricted Person" shall mean any person that is not (i)
a Covered Person or (ii) a director, officer or employee of the Company
acting in such person's capacity as a director, officer or employee;
provided, however, that for purposes of Section 6.1(c) only, the term
"Restricted Person" shall not include Sumitomo Bank Capital Markets,
Inc. and/or Kamehameha Activities Association to the extent that either
or both of such parties are included in such group solely by virtue of
their being parties to Voting Agreements, each dated as of April 30,
1999, with GS Inc., as amended from time to time.
(w) "Shareholders' Committee" shall mean the body constituted
to administer the terms and provisions of this Agreement pursuant to
Article V hereof.
(x) "Sole Beneficial Owner" shall mean a person who is the
beneficial owner of Covered Shares, who does not share beneficial
ownership of such Covered Shares with any other person (other than
pursuant to this Agreement or applicable community property laws) and
who is the only person (other than pursuant to applicable community
property laws) with a direct economic interest in the Covered Shares.
An economic interest of the Company as pledgee shall be disregarded for
this purpose.
(y) "Subsidiary" shall mean any person in which GS Inc. owns,
directly or indirectly, a majority of the equity economic or voting
ownership interest.
(z) "The Goldman Sachs Defined Contribution Plan" shall mean
The Goldman Sachs Defined Contribution Plan adopted by the Board of
Directors of GS Inc. on May 7, 1999, as amended or supplemented from
time to time, and any successors to such Plan.
(aa) "Transfer" shall mean any sale, transfer, pledge,
hypothecation or other disposition, whether direct or indirect, whether
or not for value, and shall include any disposition of the economic or
other risks of ownership of Common Stock, including short sales of
securities of GS Inc., option transactions (whether physical or cash
settled) with respect to securities of GS Inc., use of equity or other
derivative financial instruments relating to securities of GS Inc. and
other hedging arrangements with respect to securities of GS Inc., in
each such case other than Permitted Basket Transactions.
Notwithstanding the foregoing, bona fide pledges of Common Stock
approved by GS Inc. and foreclosures pursuant thereto shall not
constitute Transfers within the meaning of this definition.
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<PAGE> 5
(ab) "Transfer Restrictions" shall mean the General Transfer
Restrictions and the PLP Transfer Restrictions.
(ac) "vote" shall include actions taken or proposed to be
taken by written consent.
(ad) "Voted Covered Shares" shall have the meaning ascribed to
such term in Section 4.2(a).
(ae) "Voting Interests" shall have the meaning ascribed to
such term in Section 4.1 hereof.
Section 1.2 Gender. For the purposes of this Agreement, the
words "he," "his" or "himself" shall be interpreted to include the masculine,
feminine and corporate, other entity or trust form.
ARTICLE II
LIMITATIONS ON TRANSFER OF SHARES
Section 2.1 General. Each Covered Person agrees that such
Covered Person shall not Transfer any Covered Shares beneficially owned by such
Covered Person, except in accordance with all of the following: (a) the terms of
this Agreement, (b) the restrictions on transferability of Common Stock
contained in the Plan of Incorporation (the "PLP Transfer Restrictions"), if
applicable, and (c) the terms of any other contract or agreement with the
Company or other undertaking by which such Covered Person is bound and to which
such Covered Shares are subject.
Section 2.2 General Transfer Restrictions. Each Covered Person
agrees that for so long as such Covered Person is an Employee Covered Person
such Covered Person shall at all times be the Sole Beneficial Owner of at least
that number of Covered Shares which equals 25% of the aggregate number of
Covered Shares (a) beneficially owned by such Covered Person at the time such
Covered Person became a Covered Person and (b) beneficial ownership of which is
acquired by such Covered Person thereafter, with no reduction in such aggregate
number for Covered Shares disposed of by such Covered Person (the "General
Transfer Restrictions"). For purposes of this Section 2.2 only, Covered Shares
held by the trust underlying The Goldman Sachs Defined Contribution Plan and
allocated to a Covered Person shall not be deemed to be beneficially owned by
such Covered Person until such Covered Shares are distributed to such Covered
Person in accordance with the terms of The Goldman Sachs Defined Contribution
Plan. For purposes of this Section 2.2 only, when a delivery of Covered Shares
is made by GS Inc. or by the trustee of the trust underlying The Goldman Sachs
-5-
<PAGE> 6
Defined Contribution Plan to a Covered Person net of Covered Shares to be
withheld for tax purposes or to be paid for the receipt of such delivered
Covered Shares, the recipient of such delivered number of Covered Shares shall
be treated as if such Covered Person acquired the total (gross) number of
Covered Shares to be delivered before giving effect to any such withholding or
payment.
Section 2.3 Compliance with Certain Restrictions.
(a) Each Covered Person agrees that, with respect to all
Common Stock beneficially owned by such Covered Person, such Covered
Person shall comply with the restrictions on transfer imposed by
Section 6(e) of the Underwriting Agreement, dated as of May 3, 1999,
among GS Inc. and the several underwriters named therein, whether or
not said Section refers to such Covered Person by name.
(b) Each Employee Covered Person agrees that, with respect to
all Common Stock beneficially owned by such Employee Covered Person,
and each Covered Person who is not an Employee Covered Person agrees
that, with respect to all Covered Shares beneficially owned by such
Covered Person which could not then be Transferred without contravening
the PLP Transfer Restrictions, at the request of GS Inc. such Covered
Person shall comply with any future restrictions on transfer imposed by
or with the consent of GS Inc. from time to time in connection with any
future offerings of securities of GS Inc., whether by GS Inc. or by any
securityholder of GS Inc. and whether or not such restrictions on
transfer refer to such Covered Person by name.
(c) Each Employee Covered Person agrees that, with respect to
all Common Stock beneficially owned by such Employee Covered Person,
such Employee Covered Person will comply with any restrictions imposed
by the Company from time to time to enable the Company or any party to
an agreement with the Company to account for a business combination by
the pooling of interests method.
Section 2.4 Holding of Covered Shares in Custody and in
Nominee Name; Legend on Certificates; Entry of Stop Transfer Orders.
(a) Each Covered Person understands and agrees that all
Covered Shares beneficially owned by each Employee Covered Person and
all Covered Shares which could not then be Transferred without
contravening the PLP Transfer Restrictions beneficially owned by each
Covered Person who is not an Employee Covered Person (in each case
other than Covered Shares held of record by a trustee in a compensation
or benefit plan administered by the Company and other
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<PAGE> 7
Covered Shares that have been pledged to the Company to secure the
performance of such Covered Person's obligations under any agreement
with the Company) shall be registered in the name of a nominee for such
Covered Person and shall be held in the custody of a custodian until
otherwise determined by the Shareholders' Committee or the Board of
Directors of GS Inc. or until such time as such Covered Shares are
released pursuant to Section 2.4(e) or Section 2.4(f) hereof (whichever
occurs first), and each Covered Person agrees to assign, endorse and
register for transfer into such nominee name or deliver to such
custodian any such Covered Shares which are not so registered or so
held, as the case may be. The form of the custody agreement and the
identity of the custodian and nominee must be satisfactory in form and
substance to the Shareholders' Committee and GS Inc.
(b) Whenever the nominee holder shall receive any dividend or
other distribution upon any Covered Shares other than in Covered
Shares, the Shareholders' Committee will give or cause to be given
notice or direction to the applicable nominee and/or custodian referred
to in paragraph (a) to permit the prompt distribution of such dividend
or distribution to the beneficial owner of such Covered Shares, net of
any tax withholding amounts required to be withheld by the nominee,
unless the distribution of such dividend or distribution is restricted
by the terms of another agreement between the Covered Person and the
Company known to the Shareholders' Committee.
(c) Each Covered Person understands and agrees that any
outstanding certificate representing Covered Shares beneficially owned
by an Employee Covered Person or representing Covered Shares which
could not then be Transferred without contravening the PLP Transfer
Restrictions beneficially owned by a Covered Person who is not an
Employee Covered Person, and any agreement or other instrument
evidencing restricted stock units, options or other rights to receive
or acquire Covered Shares beneficially owned by such Covered Person,
may bear a legend noted conspicuously on each such certificate,
agreement or other instrument reading substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE PROVISIONS OF EITHER OR BOTH OF A SHAREHOLDERS' AGREEMENT
AMONG THE GOLDMAN SACHS GROUP, INC. ("GS INC.") AND THE
PERSONS NAMED THEREIN AND A PLAN OF INCORPORATION OF THE
GOLDMAN SACHS GROUP, L.P., COPIES OF WHICH ARE ON FILE AT THE
PRINCIPAL EXECUTIVE OFFICE OF GS INC. AND WHICH, AMONG OTHER
MATTERS, PLACE RESTRICTIONS ON THE DISPOSITION AND VOTING OF
SUCH SECURITIES. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE MAY BE
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SOLD, EXCHANGED, TRANSFERRED, ASSIGNED, PLEDGED, PARTICIPATED,
HYPOTHECATED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE
THEREWITH."
(d) Each Covered Person agrees and consents to the entry of
stop transfer orders against the transfer of Covered Shares subject to
Transfer Restrictions except in compliance with this Agreement.
(e) The Shareholders' Committee shall develop procedures for
releasing all Covered Shares of each Covered Person who is not an
Employee Covered Person which could then be Transferred without
contravening any Transfer Restrictions to or at the direction of such
Covered Person free and clear of all restrictions and legends described
in this Section 2.4.
(f) The Shareholders' Committee shall also develop procedures
for releasing (free and clear of all restrictions and legends described
in this Section 2.4) a specified number of Covered Shares of an
Employee Covered Person upon the request of any Covered Person and to
or at the direction of such Employee Covered Person, provided that such
request is accompanied by a certificate of such requesting Covered
Person (i) indicating such requesting Covered Person's intention to
Transfer promptly such specified number of Covered Shares and (ii)
establishing that such specified number of Covered Shares are then
permitted to be Transferred without contravening any Transfer
Restrictions (which evidence must be satisfactory to the Shareholders'
Committee).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
Each Covered Person severally represents and warrants for
himself that:
(a) Such Covered Person has (and with respect to Covered
Shares to be acquired, will have) good, valid and marketable title to
the Covered Shares, free and clear of any pledge, lien, security
interest, charge, claim, equity or encumbrance of any kind, other than
pursuant to this Agreement, the Plan of Incorporation or another
agreement with the Company by which such Covered Person is bound and to
which the Covered Shares are subject; and
(b) (if the Covered Person is other than a natural person,
with respect to subsections (i) through (x), and if the Covered Person
is a natural person, with respect to subsections (iv) through (x)
only): (i) such Covered Person is duly organized and validly existing
in good standing under the laws of the jurisdiction
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of such Covered Person's formation; (ii) such Covered Person has full
right, power and authority to enter into and perform this Agreement;
(iii) the execution and delivery of this Agreement and the performance
of the transactions contemplated herein have been duly authorized, and
no further proceedings on the part of such Covered Person are necessary
to authorize the execution, delivery and performance of this Agreement;
and this Agreement has been duly executed by such Covered Person; (iv)
the person signing this Agreement on behalf of such Covered Person has
been duly authorized by such Covered Person to do so; (v) this
Agreement constitutes the legal, valid and binding obligation of such
Covered Person, enforceable against such Covered Person in accordance
with its terms (subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles); (vi) neither the execution and delivery of this Agreement
by such Covered Person nor the consummation of the transactions
contemplated herein conflicts with or results in a breach of any of the
terms, conditions or provisions of any agreement or instrument to which
such Covered Person is a party or by which the assets of such Covered
Person are bound (including without limitation the organizational
documents of such Covered Person, if such Covered Person is other than
a natural person), or constitutes a default under any of the foregoing,
or violates any law or regulation; (vii) such Covered Person has
obtained all authorizations, consents, approvals and clearances of all
courts, governmental agencies and authorities, and any other person, if
any (including the spouse of such Covered Person with respect to the
interest of such spouse in the Covered Shares of such Covered Person if
the consent of such spouse is required), required to permit such
Covered Person to enter into this Agreement and to consummate the
transactions contemplated herein; (viii) there are no actions, suits or
proceedings pending, or, to the knowledge of such Covered Person,
threatened against or affecting such Covered Person or such Covered
Person's assets in any court or before or by any federal, state,
municipal or other governmental department, commission, board, bureau,
agency or instrumentality which, if adversely determined, would impair
the ability of such Covered Person to perform this Agreement; (ix) the
performance of this Agreement will not violate any order, writ,
injunction, decree or demand of any court or federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality to which such Covered Person is subject; and (x) no
statement, representation or warranty made by such Covered Person in
this Agreement, nor any information provided by such Covered Person for
inclusion in a report filed pursuant to Section 6.3 hereof or in a
registration statement filed by GS Inc. contains or will contain any
untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements,
representations or warranties contained herein or information provided
therein not misleading.
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Each Covered Person severally agrees for himself that the
foregoing provision of this Article III shall be a continuing representation and
covenant of such Covered Person during the period that such person shall be a
Covered Person and shares of Common Stock of such person shall be Covered
Shares, and such Covered Person shall take all actions as shall from time to
time be necessary to cure any breach or violation and to obtain any
authorizations, consents, approvals and clearances in order that such
representations shall be true and correct during the foregoing period.
ARTICLE IV
VOTING AGREEMENT
Section 4.1 Preliminary Vote of Covered Persons. Prior to any
vote of the stockholders of GS Inc. there shall be a separate, preliminary vote,
on each matter upon which a stockholder vote is proposed to be taken (each, a
"Preliminary Vote"), of the Covered Shares beneficially owned by (a) through
December 31, 2000, all Covered Persons, and (b) on and after January 1, 2001,
the Employee Covered Persons (including in both clause (a) and (b) and for the
purpose of this Article IV shares of Common Stock held by the trust underlying
The Goldman Sachs Defined Contribution Plan and allocated to Covered Persons (in
the case of clause (a)) and Employee Covered Persons (in the case of clause (b))
who are participants therein) (such Covered Shares at any such time, the "Voting
Interests"). The Preliminary Vote shall be conducted pursuant to procedures
established by the Shareholders' Committee.
Section 4.2 Voting of the Voting Interests.
(a) Other than in elections of directors, every Covered Share
beneficially owned by an Employee Covered Person, every Covered Share
which could not then be Transferred without contravening the PLP
Transfer Restrictions beneficially owned by any Covered Person who is
not an Employee Covered Person and every Covered Share held by the
trust underlying The Goldman Sachs Defined Contribution Plan and
allocated to a Covered Person (collectively, the "Voted Covered
Shares") shall be voted in accordance with the vote of the majority of
the votes cast on the matter in question by the Voting Interests in the
Preliminary Vote.
(b) In elections of directors, every Voted Covered Share shall
be voted in favor of the election of those persons, equal in number to
the number of such positions to be filled, receiving the highest
numbers of votes cast by the Voting Interests in the Preliminary Vote.
Section 4.3 Irrevocable Proxy and Power of Attorney.
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(a) By his signature hereto, each Covered Person hereby gives
the Shareholders' Committee, with full power of substitution and
resubstitution, an irrevocable proxy to vote or otherwise act with
respect to all of the Covered Person's Voted Covered Shares, as fully,
to the same extent and with the same effect as such Covered Person
might or could do under any applicable laws or regulations governing
the rights and powers of stockholders of a Delaware corporation and (i)
directs that such proxy shall be voted in connection with such matters
as are the subject of a Preliminary Vote as provided in this Agreement
--in accordance with such Preliminary Vote, (ii) authorizes the holder
of such proxy to vote on such other matters as may come before a
meeting of stockholders of GS Inc. or any adjournment thereof and as
are related, directly or indirectly, to the matter which was the
subject of the Preliminary Vote -- as the aforementioned persons see
fit in their discretion but in a manner consistent with the Preliminary
Vote, and (iii) authorizes the holder of such proxy to vote on such
other matters as may come before a meeting of stockholders of GS Inc.
or any adjournment thereof (including matters related to adjournment
thereof) -- as the aforementioned persons see fit in their discretion
but not to cast any vote under this clause (iii) which is inconsistent
with the Preliminary Vote or which would achieve an outcome that would
frustrate the intent of the Preliminary Vote. Each such Covered Person
hereby affirms that this proxy is given as a term of this Agreement and
as such is coupled with an interest and is irrevocable. It is further
understood and agreed by each such Covered Person that this proxy may
be exercised by the aforementioned persons with respect to all Voted
Covered Shares of such Covered Person for the period beginning on the
date hereof and ending on the date this Agreement shall have been
terminated pursuant to Section 7.1(a) hereof.
(b) By his signature hereto, each Covered Person appoints the
Shareholders' Committee, with full power of substitution and
resubstitution, his true and lawful attorney-in-fact to direct, in
accordance with the provisions of this Article IV, the voting of any
Voted Covered Shares held of record by any other person but
beneficially owned by such Covered Person (including Voted Covered
Shares held by the trust underlying The Goldman Sachs Defined
Contribution Plan and allocated to such Covered Person), granting to
such attorneys, and each of them, full power and authority to do and
perform each and every act and thing whatsoever that such attorney or
attorneys may deem necessary, advisable or appropriate to carry out
fully the intent of Section 4.2 and Section 4.3(a) as such Covered
Person might or could do personally, hereby ratifying and confirming
all acts and things that such attorney or attorneys may do or cause to
be done by virtue of this power of attorney. It is understood and
agreed by each such Covered Person that this appointment, empowerment
and authorization may be exercised by the aforementioned persons with
respect to all Voted Covered Shares of such Covered Person, and held of
record by another person, for the period beginning on
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the date hereof and ending on the date this Agreement shall have been
terminated pursuant to Section 7.1(a) hereof.
ARTICLE V
SHAREHOLDERS' COMMITTEE
Section 5.1 Constituency. The Shareholders' Committee shall at
any time consist of each of those individuals who are both Employee Covered
Persons and members of the Board of Directors of GS Inc. and who agree to serve
as members of the Shareholders' Committee.
Section 5.2 Additional Members. If there are less than three
individuals who are both Employee Covered Persons and members of the Board of
Directors of GS Inc. and who agree to serve as members of the Shareholders'
Committee, the Shareholders' Committee shall consist of each such individual
plus such additional individuals who are Employee Covered Persons and who are
selected pursuant to procedures established by the Shareholders' Committee as
shall assure a Shareholders' Committee of not less than three members who are
Employee Covered Persons.
Section 5.3 Determinations of and Actions by the Shareholders'
Committee.
(a) All determinations necessary or advisable under this
Agreement (including determinations of beneficial ownership) shall be
made by the Shareholders' Committee, whose determinations shall be
final and binding. The Shareholders' Committee's determinations under
this Agreement and the Plan of Incorporation and actions (including
waivers) hereunder and thereunder need not be uniform and may be made
selectively among Covered Persons (whether or not such Covered Persons
are similarly situated).
(b) Each Covered Person recognizes and agrees that the members
of the Shareholders' Committee in acting hereunder shall at all times
be acting in their individual capacities and not as directors or
officers of the Company and in so acting or failing to act shall not
have any fiduciary duties to the Covered Persons as a member of the
Shareholders' Committee by virtue of the fact that one or more of such
members may also be serving as a director or officer of the Company or
otherwise.
(c) The Shareholders' Committee shall act through a majority
vote of its members and such actions may be taken in person at a
meeting or by a written instrument signed by all of the members.
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Section 5.4 Certain Obligations of the Shareholders'
Committee. The Shareholders' Committee shall be obligated (a) to attend as
proxy, or cause a person designated by it and acting as lawful proxy to attend
as proxy, each meeting of the stockholders of GS Inc. and to vote or to cause
such designee to vote the Covered Shares over which it has the power to vote in
accordance with the results of the Preliminary Vote as set forth in Section 4.2,
and (b) to develop procedures governing Preliminary Votes and other votes and
actions to be taken pursuant to this Agreement.
ARTICLE VI
OTHER AGREEMENTS OF THE PARTIES
Section 6.1 Standstill Provisions. Each Covered Person agrees
that such Covered Person shall not, directly or indirectly, alone or in concert
with any other person, (a) make, or in any way participate in, any
"solicitation" of "proxies" (as such terms are defined in Exchange Act Rule
14a-1) relating to any securities of the Company to or with any Restricted
Person; (b) deposit any Covered Shares in a voting trust or subject any Covered
Shares to any voting agreement or arrangement that includes as a party any
Restricted Person; (c) form, join or in any way participate in a group (as
contemplated by Exchange Act Rule 13d-5(b)) with respect to any securities of
the Company (or any securities the ownership of which would make the owner
thereof a beneficial owner of securities of the Company (for this purpose as
determined by Exchange Act Rule 13d-3 and Exchange Act Rule 13d-5)) that
includes as a party any Restricted Person; (d) make any announcement subject to
Exchange Act Rule 14a-1(l)(2)(iv) to any Restricted Person; (e) initiate or
propose any "shareholder proposal" subject to Exchange Act Rule 14a-8; (f)
together with any Restricted Person, make any offer or proposal to acquire any
securities or assets of GS Inc. or any of its Subsidiaries or solicit or propose
to effect or negotiate any form of business combination, restructuring,
recapitalization or other extraordinary transaction involving, or any change in
control of, GS Inc., its Subsidiaries or any of their respective securities or
assets; (g) together with any Restricted Person, seek the removal of any
directors or a change in the composition or size of the board of directors of GS
Inc.; (h) together with any Restricted Person, in any way participate in a call
for any special meeting of the stockholders of GS Inc.; or (i) assist, advise or
encourage any person with respect to, or seek to do, any of the foregoing.
Section 6.2 Expenses.
(a) GS Inc. shall be responsible for all expenses of the
members of the Shareholders' Committee incurred in the operation and
administration of this Agreement, including expenses of proxy
solicitation for and tabulation of the Preliminary Vote, expenses
incurred in preparing appropriate filings and correspondence with the
Securities and Exchange Commission, lawyers', accountants',
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agents', consultants', experts', investment banking and other
professionals' fees, expenses incurred in enforcing the provisions of
this Agreement, expenses incurred in maintaining any necessary or
appropriate books and records relating to this Agreement and expenses
incurred in the preparation of amendments to and waivers of provisions
of this Agreement.
(b) Each Covered Person shall be responsible for all expenses
of such Covered Person incurred in connection with the compliance by
such Covered Person with his obligations under this Agreement,
including expenses incurred by the Shareholders' Committee or GS Inc.
in enforcing the provisions of this Agreement relating to such
obligations.
Section 6.3 Filing of Schedule 13D or 13G.
(a) In the event that a Covered Person is required to file a
report of beneficial ownership on Schedule 13D or 13G with respect to
the Covered Shares beneficially owned by him (for this purpose as
determined by Exchange Act Rule 13d-3 and Exchange Act Rule 13d-5),
such Covered Person agrees that, unless otherwise directed by the
Shareholders' Committee, such Covered Person will not file a separate
such report, but will file a report together with the other Covered
Persons, containing the information required by the Exchange Act, and
such Covered Person understands and agrees that such report shall be
filed on his behalf by the Shareholders' Committee or any member
thereof. Such Covered Person shall cooperate fully with the other
Covered Persons and the Shareholders' Committee to achieve the timely
filing of any such report and any amendments thereto as may be
required, and such Covered Person agrees that any information
concerning such Covered Person which such Covered Person furnishes in
connection with the preparation and filing of such report will be
complete and accurate.
(b) By his signature hereto, each Covered Person appoints the
Shareholders' Committee and each member thereof, with full power of
substitution and resubstitution, his true and lawful attorney-in-fact
to execute such reports and any and all amendments thereto and to file
such reports with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission,
granting to such attorneys, and each of them, full power and authority
to do and perform each and every act and thing whatsoever that such
attorney or attorneys may deem necessary, advisable or appropriate to
carry out fully the intent of this Section 6.3 as such Covered Person
might or could do personally, hereby ratifying and confirming all acts
and things that such attorney or attorneys may do or cause to be done
by virtue of this power of attorney. Each Covered Person hereby further
designates such attorneys as such Covered Person's
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agents authorized to receive notices and communications with respect to
such reports and any amendments thereto. It is understood and agreed by
each such Covered Person that this appointment, empowerment and
authorization may be exercised by the aforementioned persons for the
period beginning on the date hereof and ending on the date such Covered
Person is no longer subject to the provisions of this Agreement (and
shall extend thereafter for such time as is required to reflect that
such Covered Person is no longer a party to this Agreement).
Section 6.4 Adjustment upon Changes in Capitalization;
Adjustments upon Changes of Control; Representatives, Successors and Assigns.
(a) In the event of any change in the outstanding Common Stock
by reason of stock dividends, stock splits, reverse stock splits,
spin-offs, split-ups, recapitalizations, combinations, exchanges of
shares and the like, the term "Covered Shares" shall refer to and
include the securities received or resulting therefrom, but only to the
extent such securities are received in exchange for or in respect of
Covered Shares. Upon the occurrence of any event described in the
immediately preceding sentence, the Shareholders' Committee shall make
such adjustments to or interpretations of the restrictions of Section
2.2 (and, if it so determines, any other provisions hereof) as it shall
deem necessary or desirable to carry out the intent of such
provision(s). If the Shareholders' Committee deems it desirable, any
such adjustments may take effect from the record date, the "when issued
trading date", the "ex dividend date" or another appropriate date.
(b) In the event of any business combination, restructuring,
recapitalization or other extraordinary transaction involving GS Inc.,
its Subsidiaries or any of their respective securities or assets as a
result of which the Covered Persons shall hold voting securities of a
person other than GS Inc., the Covered Persons agree that this
Agreement shall also continue in full force and effect with respect to
such voting securities of such other person formerly representing or
distributed in respect of Covered Shares of GS Inc., and the terms
"Covered Shares," "Common Stock" and "Voting Interests," and "GS Inc."
and "Company," shall refer to such voting securities formerly
representing or distributed in respect of Covered Shares of GS Inc. and
such person, respectively. Upon the occurrence of any event described
in the immediately preceding sentence, the Shareholders' Committee
shall make such adjustments to or interpretations of the restrictions
of Section 2.2 (and, if it so determines, any other provisions hereof)
as it shall deem necessary or desirable to carry out the intent of such
provision(s). If the Shareholders' Committee deems it desirable, any
such adjustments may take effect from the record date or another
appropriate date.
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(c) This Agreement shall be binding upon and inure to the
benefit of the respective legatees, legal representatives, successors
and assigns of the Covered Persons (and GS Inc. in the event of a
transaction described in Section 6.4(b) hereof); provided, however,
that a Covered Person may not assign this Agreement or any of his
rights or obligations hereunder without the prior written consent of GS
Inc., and any assignment without such consent by a Covered Person shall
be void; and provided further that no assignment of this Agreement by
GS Inc. or to a successor of GS Inc. (by operation of law or otherwise)
shall be valid unless such assignment is made to a person which
succeeds to the business of GS Inc.
substantially as an entirety.
Section 6.5 Further Assurances. Each Covered Person agrees to
execute such additional documents and take such further action as may be
reasonably necessary to effect the provisions of this Agreement.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Term of the Agreement; Termination of Certain
Provisions.
(a) The term of this Agreement shall continue until the first
to occur of January 1, 2050 and such time as this Agreement is
terminated by the affirmative vote of not less than 66 2/3% of the
outstanding Voting Interests. If this Agreement is terminated prior to
the expiration or termination of the restrictions on transfer referred
to in Section 2.3(a), such restrictions on transfer shall continue to
apply in accordance with the provisions of Section 6(e) of the
Underwriting Agreement referred to in Section 2.3(a) unless waived or
terminated as provided in said Underwriting Agreement. If this
Agreement is terminated prior to the expiration or termination of the
PLP Transfer Restrictions, the PLP Transfer Restrictions shall continue
to apply in accordance with the provisions of the Plan of Incorporation
unless waived or terminated as provided in the Plan of Incorporation.
(b) Unless this Agreement is theretofore terminated pursuant
to Section 7.1(a) hereof, any Covered Person who ceases to be an
employee for any reason other than death shall no longer be bound by
the provisions of Section 2.2 and Section 6.1 hereof (unless such
Covered Person is subject to the PLP Transfer Restrictions in which
case Section 6.1 shall continue to apply until December 31, 2000) but
shall be bound by all other provisions of this Agreement until such
time as such Covered Person holds all Covered Shares free from PLP
Transfer Restrictions. Thereafter, such Covered Person shall no longer
be bound by the provisions of this Agreement (other than Sections 5.3,
6.2, 6.3, 6.5, 7.4, 7.5, 7.6,
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7.8, 7.10 and 7.11 (the "Continuing Provisions")), and such Covered
Person's name shall be removed from Appendix A to this Agreement.
(c) Unless this Agreement is theretofore terminated pursuant
to Section 7.1(a) hereof, the estate of any Covered Person who ceases
to be an employee by reason of death or any Covered Person who ceases
to be an employee for any reason other than death and who subsequently
dies shall from and after the date of such death be bound only by the
restrictions on transfer imposed by Section 2.3(a) hereof and the
Continuing Provisions; and upon the expiration of the restrictions in
Section 2.3(a), the estate of such Covered Person shall no longer be
bound by the provisions of this Agreement (other than the Continuing
Provisions), and such Covered Person's name shall be removed from
Appendix A to this Agreement.
Section 7.2 Amendments.
(a) Except as provided in this Section 7.2, provisions of this
Agreement may be amended only by the affirmative vote of a majority of
the outstanding Voting Interests.
(b) This Section 7.2(b), Section 7.1(a) and Section 7.3(a)(i)
may be amended only by the affirmative vote of 66 2/3% of the
outstanding Voting Interests. Any amendment of any other provision of
this Agreement that would have the effect, in connection with a tender
or exchange offer by any person other than the Company as to which the
Board of Directors of GS Inc. is recommending rejection, of permitting
Transfers which would not be permitted by the terms of this Agreement
as theretofore in effect shall also require the affirmative vote of
66 2/3% of the outstanding Voting Interests.
(c) This Section 7.2(c), Article V, Section 7.3(b) and any
other provision the amendment (or addition) of which has the effect of
materially changing the rights or obligations of the Shareholders'
Committee hereunder may be amended (or added) either (i) with the
approval of the Shareholders' Committee and the affirmative vote of a
majority of the Voting Interests or (ii) by the affirmative vote of
66 2/3% of the outstanding Voting Interests.
(d) In addition to any other vote or approval that may be
required under this Section 7.2, any amendment to the General Transfer
Restrictions that would make such General Transfer Restrictions
materially more onerous to a Covered Person will not be enforceable
against that Covered Person unless that Covered Person has consented to
such amendment.
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(e) In addition to any other vote or approval that may be
required under this Section 7.2, any amendment of this Agreement that
has the effect of changing the obligations of GS Inc. hereunder to make
such obligations materially more onerous to GS Inc. shall require the
approval of GS Inc.
(f) In addition to any other vote or approval that may be
required under this Section 7.2, any amendment that has the effect of
amending the provisions of Section 2.3(a), 2.3(b) or 2.3(c) shall
require the approval of GS Inc.
(g) Each Covered Person understands that it is intended that
each managing director of the Company will be a Covered Person under
this Agreement or will become a Covered Person upon his appointment to
such position, and each Covered Person further understands that from
time to time certain other persons may become Covered Persons and
certain Covered Persons will cease to be bound by the provisions of
this Agreement pursuant to the terms hereof. Accordingly, this
Agreement may be amended by action of the Shareholders' Committee from
time to time and without the approval of any other person, but solely
for the purposes of (i) adding to Appendix A such persons as shall be
made party to this Agreement pursuant to the terms hereof or shall (A)
be appointed managing directors of the Company and (B) execute a
counterpart of the signature page of this Agreement, such addition to
be effective as of the time of such action or appointment and (ii)
removing from Appendix A such persons as shall cease to be bound by the
provisions of this Agreement pursuant to Sections 7.1(b) or (c) hereof,
which additions and removals shall be given effect from time to time by
appropriate changes to Appendix A.
Section 7.3 Waivers. The Transfer Restrictions and the other
provisions of this Agreement may be waived only as provided in this
Section 7.3.
(a) The holders of the outstanding Voting Interests may waive
the Transfer Restrictions and the other provisions of this Agreement
without the consent of any other person as follows:
(i) The Transfer Restrictions may be waived, in
connection with any tender or exchange offer by
any person other than the Company as to which
the Board of Directors of GS Inc. is
recommending rejection at the time of such
waiver, only by the affirmative vote of 66 2/3%
of the outstanding Voting Interests;
(ii) The Transfer Restrictions may be waived, in
connection with any tender or exchange offer by
any person other than the
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Company as to which the Board of Directors
of GS Inc. is recommending acceptance or is
not making any recommendation with respect
to acceptance at the time of such waiver,
only by the affirmative vote of a majority
of the outstanding Voting Interests;
(iii) The Transfer Restrictions may be waived, in
connection with any tender or exchange offer
by the Company, by the affirmative vote of a
majority of the outstanding Voting
Interests;
(iv) In all circumstances other than those set
forth in Section 7.3(a)(i), (ii) and (iii),
the provisions of this Agreement may be
waived only by the affirmative vote of a
majority of the outstanding Voting
Interests; provided, however, that the
holders of the outstanding Voting Interests
may not waive the provisions of this
Agreement in the circumstances set forth in
Section 7.3(b); and
(v) In addition to any other action that may be
required under this Section 7.3(a), any
waiver that has the effect of waiving the
provisions of Section 2.3(a), 2.3(b) or
2.3(c) shall require the approval of GS Inc.
(b) The Shareholders' Committee may waive the Transfer
Restrictions and the other provisions of this Agreement without the
consent of any other person as follows:
(i) The Shareholders' Committee may waive the
Transfer Restrictions and the other
provisions of this Agreement to permit: (A)
Covered Persons to participate as sellers in
underwritten public offerings of, and stock
repurchase programs and tender offers by GS
Inc. for, Common Stock; (B) Transfers of
Covered Shares to organizations described in
Section 501(c)(3) of the Code, including
gifts to "private foundations" subject to
the requirements of Section 509 of the Code;
(C) Transfers of Covered Shares held in
employee benefit plans of the Company either
generally or in particular situations; and
(D) particular Covered Persons or all
Covered Persons to Transfer Covered Shares
in particular situations (such as Transfers
to family members, partnerships or trusts),
but not generally (provided that in each of
(A) through (D),
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waivers of the restrictions imposed by Section
2.3(a), 2.3(b) and 2.3(c) shall also require
the prior written consent of GS Inc.);
(ii) The Shareholders' Committee may waive the PLP
Transfer Restrictions in all circumstances
other than in connection with a tender or
exchange offer by any person other than the
Company; and
(iii) The Shareholders' Committee may waive any or
all of the Transfer Restrictions and the other
provisions of this Agreement with respect to
Covered Shares owned by a person at the time
the person becomes a managing director of the
Company or acquired by the person in connection
with such person's becoming a managing director
of the Company; provided that such person was
not an employee of the Company prior to the
granting of such waiver by the Shareholders'
Committee.
(c) GS Inc. agrees that the PLP Transfer Restrictions shall be
deemed to be waived under the Plan of Incorporation if they are waived
as provided in this Agreement.
(d) In connection with any waiver granted under this
Agreement, the Shareholders' Committee or the holders of the percentage
of Voting Interests required for the waiver, as the case may be, may
impose such conditions as they determine on the granting of such
waivers.
(e) The failure of the Company or the Shareholders' Committee
at any time or times to require performance of any provision of this
Agreement shall in no manner affect the rights at a later time to
enforce the same. No waiver by the Company or the Shareholders'
Committee of the breach of any term contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be
deemed to be or construed as a further or continuing waiver of any such
breach or the breach of any other term of this Agreement.
Section 7.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
-20-
<PAGE> 21
Section 7.5 Resolution of Disputes.
(a) The Shareholders' Committee shall have the sole and
exclusive power to enforce the provisions of this Agreement. The
Shareholders' Committee may in its sole discretion request GS Inc. to
conduct such enforcement, and GS Inc. agrees to conduct such
enforcement as requested and directed by the Shareholders' Committee.
(b) Without diminishing the finality and conclusive effect of
any determination by the Shareholders' Committee of any matter under
this Agreement which is provided herein to be determined or proposed by
the Shareholders' Committee (and subject to the provisions of
paragraphs (c) and (d) hereof), any dispute, controversy or claim
arising out of or relating to or concerning the provisions of this
Agreement shall be finally settled by arbitration in New York City
before, and in accordance with the rules then obtaining of, the New
York Stock Exchange, Inc. ("NYSE"), or if the NYSE declines to
arbitrate the matter, the American Arbitration Association ("AAA") in
accordance with the commercial arbitration rules of the AAA.
(c) Notwithstanding the provisions of paragraph (b), and in
addition to its right to submit any dispute or controversy to
arbitration, the Shareholders' Committee may bring, or may cause GS
Inc. to bring, on behalf of the Shareholders' Committee or on behalf of
one or more Covered Persons, an action or special proceeding in a state
or federal court of competent jurisdiction sitting in the State of
Delaware, whether or not an arbitration proceeding has theretofore been
or is ever initiated, for the purpose of temporarily, preliminarily or
permanently enforcing the provisions of this Agreement and, for the
purposes of this paragraph (c), each Covered Person (i) expressly
consents to the application of paragraph (d) to any such action or
proceeding, (ii) agrees that proof shall not be required that monetary
damages for breach of the provisions of this Agreement would be
difficult to calculate and that remedies at law would be inadequate and
(iii) irrevocably appoints each General Counsel of GS Inc., c/o The
Corporation Trust Company, Corporation Trust Center, 1209 Orange
Street, Wilmington, Delaware 19801 as such Covered Person's agent for
service of process in connection with any such action or proceeding,
who shall promptly advise such Covered Person of any such service of
process.
(d) (i) EACH COVERED PERSON HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE
STATE OF DELAWARE OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO OR CONCERNING THIS AGREEMENT THAT IS NOT OTHERWISE
ARBITRATED ACCORDING TO THE PROVISIONS OF PARAGRAPH (B)
-21-
<PAGE> 22
HEREOF. This includes any suit, action or proceeding to compel
arbitration or to enforce an arbitration award. The parties acknowledge
that the forum designated by this paragraph (d) has a reasonable
relation to this Agreement, and to the parties' relationship with one
another. Notwithstanding the foregoing, nothing herein shall preclude
the Shareholders' Committee or GS Inc. from bringing any action or
proceeding in any other court for the purpose of enforcing the
provisions of this Section 7.5.
(ii) The agreement of the parties as to forum is independent
of the law that may be applied in the action, and they each agree to
such forum even if the forum may under applicable law choose to apply
non-forum law. The parties hereby waive, to the fullest extent
permitted by applicable law, any objection which they now or hereafter
may have to personal jurisdiction or to the laying of venue of any such
suit, action or proceeding brought in any court referred to in
paragraph (d)(i). The parties undertake not to commence any action
arising out of or relating to or concerning this Agreement in any forum
other than a forum described in paragraph (d)(i). The parties agree
that, to the fullest extent permitted by applicable law, a final and
non-appealable judgment in any such suit, action or proceeding in any
such court shall be conclusive and binding upon the parties.
Section 7.6 Relationship of Parties. The terms of this
Agreement are intended not to create a separate entity for U.S. federal income
tax purposes, and nothing in this Agreement shall be read to create any
partnership, joint venture or separate entity among the parties or to create any
trust or other fiduciary relationship between them.
Section 7.7 Notices.
(a) Any communication, demand or notice to be given hereunder
will be duly given (and shall be deemed to be received) when delivered
in writing by hand or first class mail or by telecopy to a party at its
address as indicated below:
If to a Covered Person,
c/o The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3876
Attention: General Counsel;
If to the Shareholders' Committee, at
Shareholders' Committee under the Shareholders'
Agreement,
-22-
<PAGE> 23
dated May 7, 1999
c/o The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3876
Attention: General Counsel;
and
If to GS Inc., at
The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3876
Attention: General Counsel.
GS Inc. shall be responsible for notifying each Covered Person
of the receipt of a communication, demand or notice under this
Agreement relevant to such Covered Person at the address of such
Covered Person then in the records of GS Inc. (and each Covered Person
shall notify GS Inc. of any change in such address for communications,
demands and notices).
(b) Unless otherwise provided to the contrary herein, any
notice which is required to be given in writing pursuant to the terms
of this Agreement may be given by telecopy.
Section 7.8 Severability. If any provision of this Agreement
is finally held to be invalid, illegal or unenforceable, (a) the remaining terms
and provisions hereof shall be unimpaired and (b) the invalid or unenforceable
term or provision shall be deemed replaced by a term or provision that is valid
and enforceable and that comes closest to expressing the intention of the
invalid or unenforceable term or provision.
Section 7.9 Right to Determine Tender Confidentially. In
connection with any tender or exchange offer for all or any portion of the
outstanding Common Stock, subject to compliance with all applicable restrictions
on Transfer in this Agreement, the Plan of Incorporation or any other agreement
with GS Inc., each Covered Person will have the right to determine
confidentially whether such Covered Person's Covered Shares will be tendered in
such tender or exchange offer.
-23-
<PAGE> 24
Section 7.10 No Third-Party Rights. Nothing expressed or
referred to in this Agreement will be construed to give any person other than
the parties to this Agreement any legal or equitable right, remedy, or claim
under or with respect to this Agreement or any provision of this Agreement. This
Agreement and all of its provisions and conditions are for the sole and
exclusive benefit of the parties to this Agreement and their successors and
assigns.
Section 7.11 Section Headings. The headings of sections in
this Agreement are provided for convenience only and will not affect its
construction or interpretation.
Section 7.12 Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed an
original, but all such counterparts shall together constitute but one and the
same instrument.
-24-
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have duly executed or
caused to be duly executed this Agreement as of the dates indicated.
THE GOLDMAN SACHS GROUP, INC.
By _________________________________
Name:
Title:
Dated: May 7, 1999
[Signature Page 1 and Signature Page 2 Follow]
<PAGE> 26
Signature Page 1
to
Shareholders' Agreement
Bradley I. Abelow
Paul M. Achleitner
Jonathan R. Aisbitt
Andrew M. Alper
Armen A. Avanessians
David M. Baum
Ron E. Beller
Milton R. Berlinski
Lloyd C. Blankfein
David W. Blood
Peter L. Briger Jr.
Richard J. Bronks
Lawrence R. Buchalter
Michael J. Carr
Christopher J. Carrera
Mary Ann Casati
Andrew A. Chisholm
Zachariah Cobrinik
Abby Joseph Cohen
Gary D. Cohn
Christopher A. Cole
Carlos A. Cordeiro
Henry Cornell
E. Gerald Corrigan
Jon S. Corzine
Claudio Costamagna
Frank L. Coulson, Jr.
Randolph L. Cowen
Philip M. Darivoff
Timothy D. Dattels
Gavyn Davies
David A. Dechman
Paul C. Deighton
Robert V. Delaney
Joseph Della Rosa
Alexander C. Dibelius
John O. Downing
Connie K. Duckworth
C. Steven Duncker
Gordon E. Dyal
Glenn P. Earle
<PAGE> 27
Signature Page 1
to
Shareholders' Agreement (cont.)
Paul S. Efron
J. Michael Evans
W. Mark Evans
Pieter Maarten Feenstra
Lawton W. Fitt
David B. Ford
Edward C. Forst
Christopher G. French
Richard A. Friedman
Joseph D. Gatto
Peter C. Gerhard
Nomi P. Ghez
Joseph H. Gleberman
Richard J. Gnodde
Jeffrey B. Goldenberg
Jacob D. Goldfield
Amy O. Goodfriend
Andrew M. Gordon
Geoffrey T. Grant
Eric P. Grubman
Joseph D. Gutman
Robert S. Harrison
Thomas J. Healey
Sylvain M. Hefes
David B. Heller
Steven M. Heller
David L. Henle
Mary C. Henry
Robert E. Higgins
M. Roch Hillenbrand
Jacquelyn M. Hoffman-Zehner
Robert J. Hurst
Francis J. Ingrassia
Timothy J. Ingrassia
Reuben Jeffery III
Stefan J. Jentzsch
Chansoo Joung
Ann F. Kaplan
Barry A. Kaplan
Robert S. Kaplan
Scott B. Kapnick
<PAGE> 28
Signature Page 1
to
Shareholders' Agreement (cont.)
Erland S. Karlsson
Robert J. Katz
Kevin W. Kennedy
Peter D. Kiernan III
Douglas W. Kimmelman
Bradford C. Koenig
Jonathan L. Kolatch
Peter S. Kraus
David G. Lambert
Thomas D. Lasersohn
Anthony D. Lauto
Matthew G. L'Heureux
Lawrence H. Linden
Robert Litterman
Robert H. Litzenberger
Jonathan M. Lopatin
Michael R. Lynch
Peter G.C. Mallinson
Ronald G. Marks
Eff W. Martin
David J. Mastrocola
John P. McNulty
E. Scott Mead
Sanjeev K. Mehra
T. Willem Mesdag
Eric M. Mindich
Steven T. Mnuchin
Masanori Mochida
Karsten N. Moller
Thomas K. Montag
Wayne L. Moore
Robert B. Morris III
Michael P. Mortara
Sharmin Mossavar-Rahmani
Edward A. Mule
Philip D. Murphy
Thomas S. Murphy, Jr.
Avi M. Nash
Daniel M. Neidich
Kipp M. Nelson
Robin Neustein
<PAGE> 29
Signature Page 1
to
Shareholders' Agreement (cont.)
Suzanne M. Nora Johnson
Michael E. Novogratz
Alok Oberoi
Terence J. O'Neill
Timothy J. O'Neill
Donald C. Opatrny, Jr.
Robert J. O'Shea
Greg M. Ostroff
Terence M. O'Toole
Robert J. Pace
Gregory K. Palm
Henry M. Paulson, Jr.
Scott M. Pinkus
Timothy C. Plaut
Wiet H. Pot
John J. Powers
Michael A. Price
Scott S. Prince
Stephen D. Quinn
Michael G. Rantz
Girish V. Reddy
Arthur J. Reimers
James P. Riley, Jr.
Simon M. Robertson
J. David Rogers
Emmanuel Roman
Ralph F. Rosenberg
Stuart M. Rothenberg
Michael S. Rubinoff
Richard M. Ruzika
John C. Ryan
Michael D. Ryan
Richard A. Sapp
Joseph Sassoon
Tsutomu Sato
Muneer A. Satter
Jonathan S. Savitz
Peter Savitz
Howard B. Schiller
Antoine Schwartz
Eric S. Schwartz
<PAGE> 30
Signature Page 1
to
Shareholders' Agreement (cont.)
Mark Schwartz
Charles B. Seelig, Jr.
Steven M. Shafran
Richard S. Sharp
James M. Sheridan
Richard G. Sherlund
Michael S. Sherwood
Howard A. Silverstein
Dinakar Singh
Christian J. Siva-Jothy
Cody J Smith
Jonathan S. Sobel
Marc A. Spilker
Daniel W. Stanton
Esta E. Stecher
Fredric E. Steck
Robert K. Steel
Hsueh J. Sung
Peter D. Sutherland
Gene T. Sykes
Mark R. Tercek
Donald F. Textor
John A. Thain
John L. Thornton
John R. Tormondsen
Leslie C. Tortora
John L. Townsend, III
Byron D. Trott
Robert B. Tudor III
Thomas E. Tuft
Malcolm B. Turnbull
John E. Urban
Lee G. Vance
David A. Viniar
Barry S. Volpert
George H. Walker
Thomas B. Walker III
Patrick J. Ward
John S. Weinberg
Peter A. Weinberg
George W. Wellde, Jr.
<PAGE> 31
Signature Page 1
to
Shareholders' Agreement (cont.)
Anthony G. Williams
Gary W. Williams
Kendrick R. Wilson III
Jon Winkelried
Steven J. Wisch
Richard E. Witten
Tracy R. Wolstencroft
Yasuyo Yamazaki
Danny O. Yee
Michael J. Zamkow
Yoel Zaoui
Gregory H. Zehner
Jide J. Zeitlin
Joseph R. Zimmel
Barry L. Zubrow
Mark A. Zurack
By:_________________________
Name:
Title: Attorney-in-Fact
Dated: May 7, 1999
<PAGE> 32
Signature Page 2
to
Shareholders' Agreement
____________________________
Name:
Dated: May 7, 1999
<PAGE> 33
APPENDIX A
PARTIES TO THE SHAREHOLDERS' AGREEMENT
NAME
Bradley I. Abelow
Peter C. Aberg
Paul M. Achleitner
Jonathan R. Aisbitt
Elliot M. Alchek
Andrew M. Alper
Philippe J. Altuzarra
Kazutaka P. Arai
David M. Atkinson
Mitchel J. August
Armen A. Avanessians
John S. Barakat
Barbara J. Basser-Bigio
David M. Baum
Robert A. Beckwitt
Jonathan A. Beinner
Ron E. Beller
Tarek M. Ben Halim
Jaime I. Bergel
Todd L. Bergman
Milton R. Berlinski
Andrew S. Berman
Frances R. Bermanzohn
Jeffrey J. Bernstein
Robert A. Berry
Jean-Luc Biamonti
James J. Birch
Lloyd C. Blankfein
David W. Blood
David R. Boles
David A. Bolotsky
Charles W.A. Bott
Charles C. Bradford III
Benjamin S. Bram
Thomas C. Brasco
Peter L. Briger Jr.
<PAGE> 34
APPENDIX A (CONT.)
Craig W. Broderick
Richard J. Bronks
Charles K. Brown
Vern J. Brownell
Peter D. Brundage
Lawrence R. Buchalter
Steven M. Bunson
Timothy B. Bunting
Calvert C. Burkhart
Michael S. Burton
George H. Butcher III
Lawrence V. Calcano
John D. Campbell
Richard M. Campbell-Breeden
Anthony H. Carpet
Michael J.Carr
Christopher J. Carrera
Virginia E. Carter
Calvin R. Carver, Jr.
Mary Ann Casati
Chris Casciato
Douglas W. Caterfino
Michael J. Certo
Varkki P. Chacko
David K. Chang
Thomas P. Chang
Sacha A. Chiaramonte
Andrew A. Chisholm
Robert J. Christie
Peter T. Cirenza
Kent A. Clark
Zachariah Cobrinik
Abby Joseph Cohen
Gary D. Cohn
Christopher A. Cole
Timothy J. Cole
Laura C. Conigliaro
Frank T. Connor
Donna L. Conti
Edith W. Cooper
Philip A. Cooper
John W. Copeland
Carlos A. Cordeiro
<PAGE> 35
APPENDIX A (CONT.)
Henry Cornell
E. Gerald Corrigan
Jon S. Corzine
Claudio Costamagna
Frank L. Coulson, Jr.
Randolph L. Cowen
Neil D. Crowder
John W. Curtis
Stephen C. Daffron
John S. Daly
Philip M. Darivoff
Matthew S. Darnall
Timothy D. Dattels
Gavyn Davies
David A. Dechman
Paul C. Deighton
Juan A. Del Rivero
Robert V. Delaney
Joseph Della Rosa
Emanuel Derman
Andrew C. Devenport
Stephen D. Dias
Alexander C. Dibelius
Simon P. Dingemans
Sandra D'Italia
Paula A. Dominick
Noel B. Donohoe
Jana Hale Doty
Robert G. Doumar, Jr.
John O. Downing
Michael B. Dubno
Connie K. Duckworth
William C. Dudley
Matthieu B. Duncan
C. Steven Duncker
Karlo J. Duvnjak
Jay S. Dweck
Gordon E. Dyal
Isabelle Ealet
Glenn P. Earle
Paul S. Efron
Herbert E. Ehlers
Alexander S. Ehrlich
<PAGE> 36
APPENDIX A (CONT.)
John E. Eisenberg
Glenn D. Engel
Michael P. Esposito
George C. Estey
Mark D. Ettenger
J. Michael Evans
W. Mark Evans
Charles P. Eve
Paul D. Farrell
Elizabeth C. Fascitelli
Pieter Maarten Feenstra
Steven M. Feldman
Laurie R. Ferber
Robert P. Fisher, Jr.
Lawton W. Fitt
Stephen C. Fitzgerald
David N. Fleischer
Jeffrey S. Flug
David B. Ford
Eric O. Fornell
Edward C. Forst
Oliver L. Frankel
Matthew T. Fremont-Smith
Christopher G. French
Richard A. Friedman
C. Douglas Fuge
Joseph D. Gatto
Emmanuel Gavaudan
Eduardo B. Gentil
Peter C. Gerhard
Nomi P. Ghez
H. John Gilbertson, Jr.
Alan R. Gillespie
Joseph H. Gleberman
Richard J. Gnodde
Jeffrey B. Goldenberg
Jacob D. Goldfield
Amy O. Goodfriend
Jay S. Goodgold
Andrew M. Gordon
Robert D. Gottlieb
Geoffrey T. Grant
William M. Grathwohl
<PAGE> 37
APPENDIX A (CONT.)
David J. Greenwald
Louis S. Greig
Christopher Grigg
Douglas C. Grip
Eric P. Grubman
Celeste A. Guth
Joseph D. Gutman
Erol Hakanoglu
Roger C. Harper
Charles T. Harris III
Robert S. Harrison
Shelley A. Hartman
Nobumichi Hattori
Stephen J. Hay
Walter H. Haydock
Isabelle Hayen
Thomas J. Healey
John P. Heanue
Robert C. Heathcote
Sylvain M. Hefes
David B. Heller
Steven M. Heller
R. Douglas Henderson
David L. Henle
Mary C. Henry
Robert E. Higgins
M. Roch Hillenbrand
Maykin Ho
Timothy E. Hodgson
Jacquelyn M. Hoffman-Zehner
Christopher G. Hogg
Gregory T. Hoogkamp
Robert D. Hormats
Robert G. Hottensen, Jr.
James A. Hudis
Terry P. Hughes
Bimaljit S. Hundal
Robert J. Hurst
Francis J. Ingrassia
Timothy J. Ingrassia
Masahiro Iwano
William L. Jacob III
Mark M. Jacobs
<PAGE> 38
APPENDIX A (CONT.)
Richard I. Jaffee
Reuben Jeffery III
Stefan J. Jentzsch
Dan H. Jester
Daniel J. Jick
Robert H. Jolliffe
Robert C. Jones
Reginald L. Jones III
Chansoo Joung
Andrew J. Kaiser
Donald G. Kane II
Ann F. Kaplan
Barry A. Kaplan
David A. Kaplan
Jason S. Kaplan
Robert S. Kaplan
Scott B. Kapnick
Erland S. Karlsson
Carolyn F. Katz
Robert J. Katz
Sofia Katzap
Haruo Kawamura
Tetsuya Kawano
Sion P. Kearsey
R. Mark Keating
John L. Kelly
Kevin M. Kelly
Kevin W. Kennedy
Peter D. Kiernan III
James T. Kiernan, Jr.
Sun Bae Kim
Douglas W. Kimmelman
Colin E. King
Robert C. King, Jr.
Adrian P. Kingshott
Ewan M. Kirk
Michael K. Klingher
Craig A. Kloner
Bradford C. Koenig
Mark J. Kogan
Jonathan L. Kolatch
David J. Kostin
Koji Kotaka
<PAGE> 39
APPENDIX A (CONT.)
Peter S. Kraus
Christoph M. Ladanyi
David G. Lambert
Pierre F. Lapeyre Jr.
Bruce M. Larson
Thomas D. Lasersohn
Anthony D. Lauto
Susan R. Leadem
Andrew D. Learoyd
Donald C. Lee
Kenneth H. M. Leet
Paulo C. Leme
Hughes B. Lepic
Alan B. Levande
Thomas B. Lewis, Jr.
Mark E. Leydecker
Matthew G. L'Heureux
Aaron D. Liberman
Gwen R. Libstag
Stephen C. Lichtenauer
Roger A. Liddell
Richard J. Lieb
Mitchell J. Lieberman
Josephine Linden
Lawrence H. Linden
Robert Litterman
Robert H. Litzenberger
Ernest S. Liu
David J. Lockwood
Jonathan M. Lopatin
Francisco Lopez-Balboa
Victor M. Lopez-Balboa
Antigone Loudiadis
C. Richard Lucy
Michael C. Luethke
Michael R. Lynch
Shogo Maeda
John A. Mahoney
Sean O. Mahoney
Jun Makihara
Russell E. Makowsky
Peter G.C. Mallinson
Charles G. R. Manby
<PAGE> 40
APPENDIX A (CONT.)
Barry A. Mannis
Richard J. Markowitz
Ronald G. Marks
Robert J. Markwick
Eff W. Martin
Jacques Martin
John J. Masterson
David J. Mastrocola
Kathy M. Matsui
Tadanori Matsumura
Heinz Thomas Mayer
Richard X. McArdle
Theresa E. McCabe
Joseph M. McConnell
Mark E. McGoldrick
Stephen J. McGuinness
John C. McIntire
John W. McMahon
Geraldine F. McManus
Audrey A. McNiff
Anne Welsh McNulty
John P. McNulty
E. Scott Mead
David M. Meerschwam
Sanjeev K. Mehra
Richard W. Meister
Amos Meron
T. Willem Mesdag
Kenneth A. Miller
Therese L. Miller
James E. Milligan
Eric M. Mindich
Peter A. Mindnich
Edward S. Misrahi
Steven T. Mnuchin
Kurt C. Mobley
Masanori Mochida
Karsten N. Moller
Thomas K. Montag
Wayne L. Moore
Yukihiro Moroe
Robert B. Morris III
Michael P. Mortara
<PAGE> 41
APPENDIX A (CONT.)
Matthias R. Mosler
Jeffrey M. Moslow
Sharmin Mossavar-Rahmani
Ian Mukherjee
Edward A. Mule
Donald J. Mulvihill
Patrick E. Mulvihill
Richard A. Murley
Philip D. Murphy
Thomas S. Murphy, Jr.
Gaetano J. Muzio
Michiya Nagai
Kiyotaka Nakamura
Avi M. Nash
Trevor Nash
Warwick M. Negus
Daniel M. Neidich
Kipp M. Nelson
Robin Neustein
Duncan L. Niederauer
Suzanne M. Nora Johnson
Christopher K. Norton
Michael E. Novogratz
Jay S. Nydick
Alok Oberoi
Jinsuk T. Oh
John C. O'Hara
Terence J. O'Neill
Timothy J. O'Neill
Richard T. Ong
Ronald M. Ongaro
Donald C. Opatrny, Jr.
Daniel B. O'Rourke
Robert J. O'Shea
Greg M. Ostroff
Terence M. O'Toole
Robert J. Pace
Robert N. Packer
Gregory K. Palm
Mukesh K. Parekh
Melissa B. Patrusky
Henry M. Paulson, Jr.
Alberto M. Piedra Jr.
<PAGE> 42
APPENDIX A (CONT.)
Stephen R. Pierce
Philip J. Pifer
Scott M. Pinkus
Timothy C. Plaut
Andrea Ponti
Wiet H. Pot
Michael J. Poulter
John J. Powers
Michael A. Price
Scott S. Prince
Stephen D. Quinn
John J. Rafter
Dioscoro-Roy I. Ramos
Charlotte P. Ransom
Michael G. Rantz
Joseph Ravitch
Girish V. Reddy
Arthur J. Reimers
Anthony John Reizenstein
James P. Riley, Jr.
Simon M. Robertson
J. David Rogers
John F.W. Rogers
Emmanuel Roman
Pamela P. Root
Ralph F. Rosenberg
Jacob D. Rosengarten
Stuart M. Rothenberg
Michael S. Rubinoff
Paul M. Russo
Richard M. Ruzika
John C. Ryan
Michael D. Ryan
J. Michael Sanders
Allen Sangines-Krause
Richard A. Sapp
Joseph Sassoon
Tsutomu Sato
Muneer A. Satter
Jonathan S. Savitz
Peter Savitz
P. Sheridan Schechner
Gary B. Schermerhorn
<PAGE> 43
APPENDIX A (CONT.)
Mitchell I. Scherzer
Howard B. Schiller
Antoine Schwartz
Eric S. Schwartz
Mark Schwartz
Steven M. Scopellite
David J. Scudellari
Charles B. Seelig, Jr.
Steven M. Shafran
Richard S. Sharp
John P. Shaughnessy
Robert J. Shea, Jr.
James M. Sheridan
Richard G. Sherlund
Michael S. Sherwood
Howard A. Silverstein
Richard P. Simon
Victor R. Simone, Jr.
Dinakar Singh
Ravi Sinha
Allen W. Sinsheimer
Edward M. Siskind
Christian J. Siva-Jothy
Mark F. Slaughter
Cody J Smith
Michael M. Smith
Sarah G. Smith
Randolph C. Snook
Jonathan S. Sobel
Judah C. Sommer
Theodore T. Sotir
Marc A. Spilker
Daniel W. Stanton
Esta E. Stecher
Fredric E. Steck
Robert K. Steel
Robert S. Stellato
Raymond S. Stolz
Steven H. Strongin
Andrew J. Stuart
Patrick Sullivan
Hsueh J. Sung
George M. Suspanic
<PAGE> 44
APPENDIX A (CONT.)
Peter D. Sutherland
Gene T. Sykes
Gary A. Syman
John H. Taylor
Robert E. Taylor
Greg W. Tebbe
Mark R. Tercek
Donald F. Textor
John A. Thain
John L. Thornton
Daisuke Toki
John R. Tormondsen
Leslie C. Tortora
John L. Townsend, III
Mark J. Tracey
Byron D. Trott
Michael A. Troy
Robert B. Tudor III
Thomas E. Tuft
Barry S. Turkanis
Malcolm B. Turnbull
Harkanwar Uberoi
Kaysie P. Uniacke
John E. Urban
Hugo H. Van Vredenburch
Lee G. Vance
John J. Vaske
Oksana Vayner-Ryklin
David A. Viniar
Barry S. Volpert
George H. Walker
Thomas B. Walker III
Nicholas J. Walsh
David R. Walton
Hsueh-Ming Wang
Patrick J. Ward
Haruko Watanuki
Edward F. Watts Jr.
David M. Weil
John S. Weinberg
Peter A. Weinberg
Mark S. Weiss
George W. Wellde, Jr.
<PAGE> 45
APPENDIX A (CONT.)
Bradley W. Wendt
Peter S. Wheeler
Barbara A. White
A. Carver Wickman
Susan A. Willetts
Anthony G. Williams
Gary W. Williams
Todd A. Williams
Kendrick R. Wilson III
Jon Winkelried
Steven J. Wisch
Richard E. Witten
Tracy R. Wolstencroft
Zi Wang Xu
Tetsufumi Yamakawa
Yasuyo Yamazaki
Danny O. Yee
Jaime E. Yordan
W. Thomas York Jr.
Michael J. Zamkow
Paolo Zannoni
Yoel Zaoui
Gregory H. Zehner
Jide J. Zeitlin
Joan H. Zief
Joseph R. Zimmel
James P. Ziperski
Barry L. Zubrow
Mark A. Zurack
<PAGE> 1
EXHIBIT 10.28
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into as of the 7th day of May, 1999, by and between The Goldman Sachs Group,
Inc., a Delaware corporation ("GS Inc.") and each of the Indemnitees listed on
the signature pages to this agreement (each, an "Indemnitee", and collectively,
the "Indemnitees") as such signature pages may be amended and supplemented from
time to time.
WITNESSETH
WHEREAS, GS Inc. has become party to a plan for the incorporation of
the business of The Goldman Sachs Group, L.P. ("GS Group") and the related
reorganization of the business of GS Group, which plan was approved by The
Goldman Sachs Corporation ("GS Corp.") in its capacity as general partner of GS
Group and by the Schedule II Limited Partners of GS Group in March 1999 (such
plan of incorporation together with all exhibits thereto as it or they may be
amended from time to time, the "Plan of Incorporation");
WHEREAS, as part of the Plan of Incorporation, GS Inc. has filed and
proposes to file registration statements (the "Registration Statements") with
the Securities and Exchange Commission for the public offering and sale of
shares of its common stock (including shares issuable in connection with
employee benefit plans) and debt securities (including medium-term notes);
<PAGE> 2
WHEREAS, GS Inc. has requested and will request certain of the
Indemnitees to execute the Registration Statements in the capacity or capacities
listed and to be listed in such Registration Statements; and
WHEREAS, each Indemnitee is or was one or more of the following: (i) an
officer or director of GS Inc., (ii) an officer or director of GS Corp., (iii) a
person requested or authorized by the board of directors or a person authorized
by the board of directors of GS Inc. or GS Corp. to take actions on behalf of GS
Group, GS Inc. or GS Corp. in connection with the Registration Statements or the
Plan of Incorporation or (iv) a member of the Management Committee or
Partnership Committee of GS Inc. or the former Executive Committee of GS Group.
NOW, therefore, in consideration of each Indemnitee's acting and
agreeing to act in the capacities referred to above, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties do hereby agree as follows:
1. General. GS Inc. (A) will indemnify and hold harmless each
Indemnitee against any Losses (as hereinafter defined), joint or several, to
which such Indemnitee may become subject, under the Securities Act of 1933, as
amended (the "Act") or otherwise, insofar as such Losses (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statements or any
related Rule 462(b) Registration Statements or any preliminary prospectus or
prospectus comprising a part thereof, or any
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<PAGE> 3
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that GS Inc. shall not be liable in any such case to the extent that
any such Losses arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission relating to such Indemnitee
made in any preliminary prospectus, any registration statement or any prospectus
or any amendment or supplement in reliance upon and in conformity with written
information relating to such Indemnitee furnished to GS Inc. by such Indemnitee
expressly for use therein; and (B) will indemnify and hold harmless each
Indemnitee against any Losses (or actions in respect thereof) which otherwise
arise out of or are based upon or asserted against such Indemnitee in connection
with such Indemnitee's acting in the capacities referred to above in connection
with the transactions contemplated by the Plan of Incorporation, except to the
extent any such Losses referred to in this clause (B) arise out of or are based
upon the type of conduct for which (x) a director would not be exempt from
liability or (y) the indemnification of a director would be limited in respect
of such Losses, in the case of (x) and (y), within the meaning of Article
Twelfth of the Amended and Restated Certificate of Incorporation of GS Inc. or
Section 102(b)(7) of the Delaware General Corporation Law (whether or not such
Indemnitee is a director).
Notwithstanding the foregoing provisions of this Section 1, GS Inc. and
each Indemnitee agree that insofar as indemnification for liabilities arising
under the Act
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<PAGE> 4
may be permitted under this Agreement to an Indemnitee who is a director,
officer or controlling person of GS Inc., in the event that a claim for
indemnification against such liabilities is made by such an Indemnitee (other
than the payment by GS Inc. of expenses incurred or paid by such Indemnitee in
the successful defense of any action, suit or proceeding) in connection with a
Registration Statement, GS Inc. will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act, and GS Inc. and such Indemnitee
will be governed by the final adjudication of such question.
2. Losses. As used in this Agreement, the term "Losses" shall include,
without limitation, damages, losses, claims, judgments, liabilities, fines,
penalties, excise taxes, settlements, and costs, attorneys' fees, accountants'
fees, and disbursements and costs of attachment or similar bonds, investigation
costs, defense preparation costs, costs of preparing for and presenting evidence
or testimony, and any expenses of establishing a right to indemnification under
this Agreement. The term "Losses" shall not include taxes except to the extent
taxes are imposed in respect of payments otherwise made pursuant to this
Agreement, in which case such Indemnitee's Losses shall include an amount not
greater than the net taxes payable (taking into account any deductions or other
tax benefits available to such Indemnitee as a result of the Losses in respect
of which such payment is made).
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<PAGE> 5
3. Enforcement. Subject to the provisions of the second paragraph of
Section 1 hereof, if a claim or request by an Indemnitee under this Agreement is
not paid by GS Inc. or on its behalf, within thirty (30) days after a written
claim or request has been received by GS Inc. and, if applicable, the
affirmation in Section 5 hereof has been received by GS Inc., such Indemnitee
may at any time thereafter commence an arbitration proceeding in accordance with
Section 9 hereof against GS Inc. to recover the unpaid amount of the claim or
request and, if successful in whole or in part, such Indemnitee shall be
entitled to be paid also the expenses of prosecuting such proceeding. It shall
be a defense to any such proceeding (other than a proceeding commenced to
enforce a claim for expenses incurred in defending any actual or threatened
proceeding in advance of its final disposition where the required affirmation
and undertaking, if any is required, have been tendered to GS Inc.) that such
Indemnitee has not met the standards of conduct for GS Inc. to indemnify such
Indemnitee herein for the amount claimed, but the burden of proving such defense
shall be on GS Inc. Neither the failure of GS Inc. (including its Board of
Directors, legal counsel or shareholders) to have made a determination prior to
the commencement of such proceeding that indemnification of such Indemnitee is
proper in the circumstances because such Indemnitee has met the applicable
standard of conduct set forth herein, nor an actual determination by GS Inc.
(including its Board of Directors, legal counsel or shareholders) that such
Indemnitee has not met such applicable standard of conduct, shall be a defense
to the proceeding or create a presumption that such Indemnitee has not met the
applicable standard of conduct.
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<PAGE> 6
4. Partial Indemnification. If an Indemnitee is entitled under any
provision of this Agreement to indemnification by GS Inc. for some or a portion
of any Losses, but not for the total amount thereof, GS Inc. shall nevertheless
indemnify such Indemnitee for the portion of such Losses to which such
Indemnitee is entitled.
5. Expenses. Expenses incurred by an Indemnitee in connection with any
proceeding shall be paid by GS Inc. upon request of such Indemnitee that GS Inc.
pay such expenses, but only upon receipt by GS Inc. of (i) a written affirmation
of such Indemnitee's good faith belief that the applicable standard of conduct
necessary for indemnification by GS Inc. has been met, (ii) a written
undertaking by or on behalf of such Indemnitee to reimburse GS Inc. for expenses
if and to the extent that it is ultimately determined that the applicable
standard of conduct has not been met and (iii) satisfactory evidence of the
amount of such expenses.
6. Notice of Claim. Each Indemnitee shall promptly notify GS Inc. in
writing of any claim against such Indemnitee for which indemnification will or
could be sought under this Agreement. In addition, each Indemnitee shall give GS
Inc. such information and cooperation as it may reasonably require and as shall
be within such Indemnitee's power and at such times and places as are not unduly
burdensome for such Indemnitee.
7. Defense of Claim. With respect to any proceeding as to which an
Indemnitee notifies GS Inc. of the commencement thereof:
(a) GS Inc. will be entitled to participate at its own
expense;
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<PAGE> 7
(b) subject to Section 7(c) hereof, GS Inc. shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction against any Indemnitee and any other Indemnitees, be
liable to such Indemnitee and such other Indemnitees for the fees and
expenses of more than one separate law firm (in addition to a single
firm of local counsel);
(c) except as otherwise provided below, to the extent that it
may wish, GS Inc. will be entitled to assume the defense thereof, with
counsel reasonably satisfactory to such Indemnitee, which in GS Inc.'s
sole discretion may be regular counsel to GS Inc. and may be counsel to
other Indemnitees. The Indemnitees also shall have the right to employ
one separate counsel for such Indemnitees in such action, suit or
proceeding if such Indemnitees reasonably conclude that if they did not
there would be a conflict of interest between GS Inc. and such
Indemnitees, and under such circumstances the fees and expenses of such
counsel shall be paid by GS Inc.; and
(d) GS Inc. shall not be liable to indemnify an Indemnitee
under this Agreement for any amounts paid in settlement of any action
or claim effected without GS Inc.'s written consent. GS Inc. shall not
settle any action or claim in any manner which would impose any cost or
limitation on an Indemnitee without such Indemnitee's written consent.
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<PAGE> 8
Neither GS Inc. nor an Indemnitee will unreasonably withhold or delay
its consent to any proposed settlement.
8. Non-exclusivity. The right to indemnification and the payment of
expenses incurred in defending a proceeding in advance of its final disposition
conferred in this Agreement shall not be exclusive of or affected in any way by
any other right which an Indemnitee may have or hereafter may acquire under any
statute, certificate of incorporation, by-laws, agreement, arrangement,
resolution or instrument providing indemnification or expense payment, except
that any payments otherwise required to be made by GS Inc. hereunder shall be
offset by any and all amounts received by an Indemnitee from any other
indemnitor or under one or more liability insurance policies maintained by an
indemnitor or otherwise and shall not be duplicative of any other payments
received by an Indemnitee from GS Inc. in respect of the matter giving rise to
the indemnity hereunder. When an Indemnitee is entitled to indemnification,
expense advancement or reimbursement under this Instrument and any other
agreement, arrangement, resolution or instrument of GS Inc. or The Goldman Sachs
Group, L.P., the Indemnitee may choose to pursue its rights under one or more,
but less than all, of such applicable agreements, arrangements, resolutions or
instruments, in which case such Indemnitee need only comply with the standards
and procedures of the agreements, arrangements, resolutions or instruments under
which it chooses to pursue its rights. Without limiting the foregoing, the
rights of any indemnified person under the resolution of the Executive Committee
of GS Group, adopted on May 12, 1997 (the "Resolution")
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<PAGE> 9
shall remain in full force and effect insofar as an indemnified person has any
rights thereunder with respect to the acts, omissions and status of such person
through the date of this Agreement. The execution and delivery of this
Instrument shall constitute notice, effective as of the date of this Instrument,
that the Resolution is rescinded insofar as it relates to the acts, omissions
and status of such person after the date of this Instrument.
9. Arbitration. (a)Subject to the provisions of the second paragraph of
Section 1 and Section 9(b) hereof, any dispute, controversy or claim between an
Indemnitee and GS Inc. arising out of or relating to or concerning the
provisions of this Agreement shall be finally settled by arbitration in New York
City before, and in accordance with the rules then obtaining of, the New York
Stock Exchange, Inc. ("NYSE") or, if the NYSE declines to arbitrate the matter,
the American Arbitration Association (the "AAA") in accordance with the
commercial arbitration rules of the AAA.
(b) Notwithstanding the provision of Section 9(a) and in addition to
its right to submit any dispute or controversy to arbitration, GS Inc. may bring
an action or special proceeding in a state or federal court of competent
jurisdiction sitting in the State of Delaware, whether or not an arbitration
proceeding has theretofore been or is ever initiated, for the purpose of
temporarily, preliminarily or permanently enforcing the provisions of this
Agreement or to enforce an arbitration award, and, for the purposes of this
Section 9(b), each Indemnitee (i) expressly consents to the application of
Section 9(c) hereof to any such action or proceeding, (ii) agrees that proof
shall not be required that
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<PAGE> 10
monetary damages for breach of the provisions of this Agreement would be
difficult to calculate and that remedies at law would be inadequate and (iii)
irrevocably appoints each General Counsel of GS Inc., c/o The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801 as such Indemnitee's agent for service of process in connection with any
such action or proceeding, who shall promptly advise such Indemnitee of any such
service of process.
(c) (i) EACH INDEMNITEE HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE
STATE OF DELAWARE OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO OR CONCERNING THIS AGREEMENT THAT IS NOT OTHERWISE
ARBITRATED ACCORDING TO THE PROVISIONS OF SECTION 9(a) HEREOF. This
includes any suit, action or proceeding to compel arbitration or to
enforce an arbitration award. The parties acknowledge that the forum
designated by this Section 9(c) has a reasonable relation to this
Agreement, and to the parties' relationship with one another.
Notwithstanding the foregoing, nothing herein shall preclude GS Inc.
from bringing any action or proceeding in any other court for the
purpose of enforcing the provisions of this Section 9.
(ii) The agreement of an Indemnitee as to forum is independent
of the law that may be applied in the action, and each Indemnitee
agrees to this forum even if the forum may under applicable law choose
to apply non-forum law. Each Indemnitee hereby waives, to the fullest
extent permitted by applicable law, any
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<PAGE> 11
objection which such Indemnitee now or hereafter may have to personal
jurisdiction or to the laying of venue of any such suit, action or
proceeding in any court referred to in Section 9(c)(i). The parties
undertake not to commence any action arising out of or relating to this
Agreement in any forum other than the forum described in this Section
9(c). The parties agree that, to the fullest extent permitted by
applicable law, a final and non-appealable judgment in any such suit,
action or proceeding in any such court shall be conclusive and binding
upon the parties.
10. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns (including any direct or indirect successor by merger or
consolidation), heirs, executors and administrators.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS.
12. Amendment. Each party understands that from time to time certain
other persons may become Indemnitees and certain Indemnitees will cease to be
Indemnitees to the extent provided in this Section 12. Accordingly, this
Agreement may be amended by action of GS Inc. from time to time to add
additional Indemnitees, without the approval of any other person other than such
proposed Indemnitees, each of whom shall execute a counterpart of the signature
page of this Agreement. This
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<PAGE> 12
Agreement may also be amended by action of GS Inc. and without the approval of
any other person to remove an Indemnitee; provided that such amendment shall not
be effective unless GS Inc. has provided 30 days prior written notice to the
Indemnitee and, in any event, such amendment shall not affect any rights of such
Indemnitee to be indemnified in respect of Losses associated with the acts,
omissions or status of such Indemnitee through the effective date of such
termination (including the right to subsequent indemnification and expense
advancement and reimbursement relating to such acts, omissions or status).
13. Waiver of Breach. The failure or delay of a party at any time to
require performance by any other party of any provision of this Agreement, even
if known, shall not affect the right of such party to require performance of
that provision or to exercise any right, power, or remedy hereunder, and any
waiver by any party of any breach of any provision of this Agreement shall not
be construed as a waiver of any continuing or succeeding breach of such
provision, a waiver of the provision itself, or a waiver of any right, power, or
remedy under this Agreement. No notice to or demand on any party in any case
shall, of itself, entitle such party to other or further notice or demand in
similar or other circumstances.
14. Severability. GS Inc. and each Indemnitee agree that the agreements
and provisions contained in this Agreement are severable and divisible, that
each such agreement and provision does not depend upon any other provision or
agreement for its enforceability, and that each such agreement and provision set
forth
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<PAGE> 13
herein constitutes an enforceable obligation between GS Inc. and such
Indemnitee. Consequently, GS Inc. and each Indemnitee hereto agrees that neither
the invalidity nor the unenforceability of any provision of this Agreement shall
affect the other provisions hereof, and this Agreement shall remain in full
force and effect and be construed in all respects as if such invalid or
unenforceable provision were omitted.
15. No Presumption. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that an Indemnitee
did not meet the applicable standard of conduct for indemnification under this
Agreement.
16. Notices. Any communication, demand or notice to be given hereunder
will be duly given when delivered in writing by hand or first class mail to GS
Inc. at its principal executive office or to an Indemnitee at its last address
appearing in the business records of GS Inc. (or to such other addresses as a
party may designate by written notice to GS Inc.).
17. No Assignments. No Indemnitee may assign its rights or obligations
under this Agreement without the prior written consent of GS Inc.
18. No Third Party Rights. Nothing expressed or referred to in this
Agreement will be construed to give any person other than the parties to this
Agreement any legal or equitable right, remedy or claim under or with respect to
this Agreement or any provision of this Agreement. This Agreement and all of its
provisions are for the sole
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<PAGE> 14
and exclusive benefit of the parties to this Agreement and their successors and
permitted assigns.
19. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute but one and the same instrument.
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<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the date first written above.
THE GOLDMAN SACHS GROUP, INC.
By:______________________________
Name:
Title:
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<PAGE> 16
INDEMNITEES:
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<PAGE> 1
Exhibit 10.44
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and
entered into as of the 9th day of November 1999, by and between The Goldman
Sachs Group, Inc., a Delaware corporation ("GS Inc."), and each of the
Indemnitees listed on the signature pages to this Agreement (each, an
"Indemnitee", and collectively, the "Indemnitees") as such signature pages may
be amended and supplemented from time to time pursuant to the terms of this
Agreement.
WITNESSETH
WHEREAS, GS Inc. has filed and proposes to file registration
statements with the Securities and Exchange Commission under the Securities Act
of 1933 (the "Securities Act") for the public offering and sale of securities of
GS Inc., which securities may include shares of its common stock (including
shares to be sold by stockholders of GS Inc. or issuable in connection with
employee benefit plans), debt securities (including medium-term notes),
warrants, preferred stock and/or any other securities of GS Inc. approved by, or
pursuant to action of, the Board of Directors of GS Inc.;
WHEREAS, GS Inc. has in the past requested and will in the
future request certain of the Indemnitees to execute registration statements in
the capacity or capacities listed, or to be listed, in registration statements
and to take actions in connection with registration statements; and
WHEREAS, each Indemnitee is one of the following: (i) an
officer or director of GS Inc. or (ii) a person requested or authorized by the
Board of Directors of GS Inc. or any committee thereof to take actions on behalf
of GS Inc. in connection with a registration statement.
NOW, therefore, in consideration of each Indemnitee's acting
and agreeing to act in the capacities referred to above, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. General. GS Inc. will indemnify and hold harmless each
Indemnitee against any Losses (as hereinafter defined), joint or several, to
which such Indemnitee may become subject, under the Securities Act or otherwise,
insofar as such Losses (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement (as defined below) or any preliminary
prospectus, prospectus, or prospectus supplement comprising a part thereof or
relating thereto, or any amendment or supplement to any of the foregoing
documents (collectively, the "Offering Documents") or any untrue or alleged
untrue oral statement relating to any offering contemplated by any Offering
<PAGE> 2
Document, or arise out of or are based upon an omission or alleged omission to
state in any Offering Document or such oral statement a material fact required
to be stated therein or necessary to make the statements in any Offering
Document or such oral statement not misleading; provided, however, that GS Inc.
shall not be liable in any such case to the extent that any such Losses arise
out of or are based upon an untrue statement or alleged untrue statement or
omission or alleged omission relating to such Indemnitee made in any Offering
Document or such oral statement in reliance upon and in conformity with written
information relating to such Indemnitee furnished to GS Inc. by such Indemnitee
expressly for use therein. "Registration Statement" means any registration
statement previously filed or hereafter filed by GS Inc. under the Securities
Act on any applicable form (including Forms S-8 and S-4) for the registration of
any securities of GS Inc. under the Securities Act, including, without
limitation, debt and equity securities, guarantees, back-up undertakings,
rights, warrants and options and interests in employee benefit plans, and shall
include any amendment, post-effective or otherwise, thereto and any related
registration statement filed pursuant to Rule 462 under the Securities Act.
Notwithstanding the foregoing provisions of this Section 1, GS
Inc. and each Indemnitee agree that insofar as indemnification for liabilities
arising under the Securities Act may be permitted under this Agreement to an
Indemnitee who is a director, officer or controlling person of GS Inc., in the
event that a claim for indemnification against such liabilities is made by such
an Indemnitee (other than the payment by GS Inc. of expenses incurred or paid by
such Indemnitee in the successful defense of any action, suit or proceeding) in
connection with a Registration Statement, GS Inc. will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act, and GS Inc. and
such Indemnitee will be governed by the final adjudication of such question.
2. Losses. As used in this Agreement, the term "Losses" shall
include, without limitation, damages, losses, claims, judgments, liabilities,
fines, penalties, excise taxes, settlements, and costs, attorneys' fees,
accountants' fees, and disbursements and costs of attachment or similar bonds,
investigation costs, defense preparation costs, costs of preparing for and
presenting evidence or testimony, and any expenses of establishing a right to
indemnification under this Agreement. The term "Losses" shall not include taxes
except to the extent taxes are imposed in respect of payments otherwise made
pursuant to this Agreement, in which case such Indemnitee's Losses shall include
an amount not greater than the net taxes payable (taking into account any
deductions, credits or other tax benefits available to such Indemnitee as a
result of the Losses in respect of which such payment is made and the payment of
the taxes imposed in respect of such payment).
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<PAGE> 3
3. Enforcement. Subject to the provisions of the second
paragraph of Section 1 hereof, if a claim or request by an Indemnitee under this
Agreement is not paid by GS Inc. or on its behalf, within thirty (30) days after
a written claim or request has been received by GS Inc. and, if applicable, the
written undertaking in Section 5 hereof has been received by GS Inc., such
Indemnitee may at any time thereafter commence an arbitration proceeding in
accordance with Section 9 hereof against GS Inc. to recover the unpaid amount of
the claim or request and, if successful in whole or in part, such Indemnitee
shall be entitled to be paid also the expenses of prosecuting such proceeding.
4. Partial Indemnification; Contribution. If an Indemnitee is
entitled under any provision of this Agreement to indemnification by GS Inc. for
some or a portion of any Losses, but not for the total amount thereof, GS Inc.
shall nevertheless indemnify such Indemnitee for the portion of such Losses to
which such Indemnitee is entitled. If the indemnification provided for in this
Agreement is insufficient or unavailable for any reason, GS Inc. shall
contribute to relevant Losses to the maximum extent permitted by law.
5. Expenses. Expenses incurred by an Indemnitee in connection
with any proceeding shall be paid by GS Inc. upon request of such Indemnitee
that GS Inc. pay such expenses, but only upon receipt by GS Inc. of (i) a
written undertaking by or on behalf of such Indemnitee to reimburse GS Inc. for
expenses if and to the extent that it is ultimately determined that such
indemnification is not permitted by the Securities Act (and that contribution is
unavailable with respect to such payments) and (ii) satisfactory evidence of the
amount of such expenses.
6. Notice of Claim. Each Indemnitee shall promptly notify GS
Inc. in writing of any claim against such Indemnitee for which indemnification
will or could be sought under this Agreement. In addition, each Indemnitee shall
give GS Inc. such information and cooperation as it may reasonably require and
as shall be within such Indemnitee's power and at such times and places as are
not unduly burdensome for such Indemnitee.
7. Defense of Claim. With respect to any proceeding as to
which an Indemnitee notifies GS Inc. of the commencement thereof:
(a) GS Inc. will be entitled to participate at its own
expense;
(b) subject to Section 7(c) hereof, GS Inc. shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction against any Indemnitee and any other Indemnitees, be
liable to such Indemnitee and such other Indemnitees for the fees and
expenses of
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<PAGE> 4
more than one separate law firm (in addition to a single firm of local
counsel);
(c) except as otherwise provided below, to the extent that it
may wish, GS Inc. will be entitled to assume the defense thereof, with
counsel reasonably satisfactory to such Indemnitee, which in GS Inc.'s
sole discretion may be regular counsel to GS Inc. and may be counsel to
other Indemnitees. The Indemnitees also shall have the right to employ
one separate counsel for such Indemnitees in such action, suit or
proceeding if such Indemnitees reasonably conclude that if they did not
there would be a conflict of interest between GS Inc. and such
Indemnitees, and under such circumstances the fees and expenses of such
counsel shall be paid by GS Inc.; and
(d) GS Inc. shall not be liable to indemnify an Indemnitee
under this Agreement for any amounts paid in settlement of any action,
suit or proceeding effected without GS Inc.'s written consent. GS Inc.
shall not settle any action, suit or proceeding in any manner which
would impose any cost or limitation on an Indemnitee or would admit
fault by an Indemnitee without such Indemnitee's written consent. No
Indemnitee shall settle any action, suit, or proceeding without the
prior written consent of GS Inc. Neither GS Inc. nor an Indemnitee will
unreasonably withhold or delay its consent to any proposed settlement.
8. Non-exclusivity. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Agreement shall not be exclusive of or affected in
any way by any other right which an Indemnitee may have or hereafter may acquire
under any statute, certificate of incorporation, by-laws, agreement,
arrangement, resolution or instrument providing indemnification or expense
payment, except that any payments otherwise required to be made by GS Inc.
hereunder shall be offset by any and all amounts received by an Indemnitee from
any other indemnitor or under one or more liability insurance policies
maintained by an indemnitor or otherwise and shall not be duplicative of any
other payments received by an Indemnitee from GS Inc. in respect of the matter
giving rise to the indemnity hereunder. When an Indemnitee is entitled to
indemnification, expense advancement or reimbursement under this Instrument and
any other agreement, arrangement, resolution or instrument of GS Inc., the
Indemnitee may choose to pursue its rights under one or more, but less than all,
of such applicable agreements, arrangements, resolutions or instruments, in
which case such Indemnitee need only comply with the standards and procedures of
the agreements, arrangements, resolutions or instruments under which it chooses
to pursue its rights.
-4-
<PAGE> 5
9. Arbitration.
(a) Subject to the provisions of the second paragraph of
Section 1 and Section 9(b) hereof, any dispute, controversy or claim
between an Indemnitee and GS Inc. arising out of or relating to or
concerning the provisions of this Agreement shall be finally settled by
arbitration in New York City before, and in accordance with the rules
then applying of, the New York Stock Exchange, Inc. ("NYSE") or, if the
NYSE declines to arbitrate the matter or the matter is not otherwise
arbitrable before it, the American Arbitration Association (the "AAA")
in accordance with the commercial arbitration rules of the AAA.
(b) Notwithstanding the provision of Section 9(a) and in
addition to its right to submit any dispute or controversy to
arbitration, GS Inc. may bring an action or special proceeding in a
state or federal court of competent jurisdiction sitting in the State
of Delaware, whether or not an arbitration proceeding has theretofore
been or is ever initiated, for the purpose of temporarily,
preliminarily or permanently enforcing the provisions of this Agreement
or to enforce an arbitration award, and, for the purposes of this
Section 9(b), each Indemnitee (i) expressly consents to the application
of Section 9(c) hereof to any such action or proceeding, (ii) agrees
that proof shall not be required that monetary damages for breach of
the provisions of this Agreement would be difficult to calculate and
that remedies at law would be inadequate and (iii) irrevocably appoints
each General Counsel of GS Inc., c/o The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801 as such Indemnitee's agent for service of process in connection
with any such action or proceeding, who shall promptly advise such
Indemnitee of any such service of process.
(c) (i) EACH INDEMNITEE HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE
STATE OF DELAWARE OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO OR CONCERNING THIS AGREEMENT THAT IS NOT OTHERWISE
ARBITRATED ACCORDING TO THE PROVISIONS OF SECTION 9(a) HEREOF. This
includes any suit, action or proceeding to compel arbitration or to
enforce an arbitration award. The parties acknowledge that the forum
designated by this Section 9(c) has a reasonable relation to this
Agreement, and to the parties' relationship with one another.
Notwithstanding the foregoing, nothing herein shall preclude GS Inc.
from bringing any action or proceeding in any other court for the
purpose of enforcing the provisions of this Section 9.
-5-
<PAGE> 6
(ii) The agreement of an Indemnitee as to forum is independent
of the law that may be applied in the action, and each Indemnitee
agrees to this forum even if the forum may under applicable law choose
to apply non-forum law. Each Indemnitee hereby waives, to the fullest
extent permitted by applicable law, any objection which such Indemnitee
now or hereafter may have to personal jurisdiction or to the laying of
venue of any such suit, action or proceeding in any court referred to
in Section 9(c)(i). The parties undertake not to commence any action
arising out of or relating to this Agreement in any forum other than
the forum described in this Section 9(c). The parties agree that, to
the fullest extent permitted by applicable law, a final and
non-appealable judgment in any such suit, action or proceeding in any
such court shall be conclusive and binding upon the parties.
10. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns (including any direct or indirect successor by
merger or consolidation), heirs, executors and administrators.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
12. Amendment. Each party understands that from time to time
certain other persons may become Indemnitees and certain Indemnitees will cease
to be Indemnitees to the extent provided in this Section 12. Accordingly, this
Agreement may be amended by action of GS Inc. from time to time to add
additional Indemnitees, without the approval of any other person other than such
proposed additional Indemnitees, each of whom shall execute a counterpart of the
signature page of this Agreement. This Agreement may also be amended by action
of GS Inc. and without the approval of any other person to remove an Indemnitee;
provided that such amendment shall not be effective unless GS Inc. has provided
30 days prior written notice to the Indemnitee and, in any event, such amendment
shall not affect any rights of such Indemnitee to be indemnified in respect of
Losses associated with the acts, omissions or status of such Indemnitee through
the effective date of such termination (including the right to subsequent
indemnification and expense advancement and reimbursement relating to such acts,
omissions or status).
13. Waiver of Breach. The failure or delay of a party at any
time to require performance by any other party of any provision of this
Agreement, even if known, shall not affect the right of such party to require
performance of that provision or to exercise any right, power, or remedy
hereunder, and any waiver by any party of any breach of any provision of this
Agreement shall not be construed as a waiver of any
-6-
<PAGE> 7
continuing or succeeding breach of such provision, a waiver of the provision
itself, or a waiver of any right, power, or remedy under this Agreement. No
notice to or demand on any party in any case shall, of itself, entitle such
party to other or further notice or demand in similar or other circumstances.
14. Severability. GS Inc. and each Indemnitee agree that the
agreements and provisions contained in this Agreement are severable and
divisible, that each such agreement and provision does not depend upon any other
provision or agreement for its enforceability, and that each such agreement and
provision set forth herein constitutes an enforceable obligation between GS Inc.
and such Indemnitee. Consequently, GS Inc. and each Indemnitee hereto agrees
that neither the invalidity nor the unenforceability of any provision of this
Agreement shall affect the other provisions hereof, and this Agreement shall
remain in full force and effect and be construed in all respects as if such
invalid or unenforceable provision were omitted.
15. Notices. Any communication, demand or notice to be given
hereunder will be duly given when delivered in writing by hand or first class
mail to GS Inc. at its principal executive office or to an Indemnitee at its
last address appearing in the business records of GS Inc. (or to such other
addresses as a party may designate by written notice to GS Inc.).
16. No Assignments. No Indemnitee may assign its rights or
delegate obligations under this Agreement without the prior written consent of
GS Inc. Any assignment or delegation in violation of this Section 16 shall be
null and void.
17. No Third Party Rights. Nothing expressed or referred to in
this Agreement will be construed to give any person other than the parties to
this Agreement any legal or equitable right, remedy or claim under or with
respect to this Agreement or any provision of this Agreement. This Agreement and
all of its provisions are for the sole and exclusive benefit of the parties to
this Agreement and their successors and permitted assigns.
18. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute but one and the same instrument.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement as of the date first written above.
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Gregory K. Palm
--------------------------
Name: Gregory K. Palm
Title: Authorized Person
[Signatures Continued on Next Page]
<PAGE> 9
INDEMNITEES:
<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 21, 2000, on our
audits of the consolidated financial statements, selected consolidated financial
data and the financial statement schedule of The Goldman Sachs Group, Inc. 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
February 14, 2000.
<PAGE> 1
Exhibit 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
---------------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
---------------------------
The Goldman Sachs Group, Inc.
(Exact name of obligor as specified in its charter)
Delaware 13-4019460
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
85 Broad Street 10004
New York, New York (Zip code)
(Address of principal executive offices)
---------------------------
Medium-Term Notes
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------- --------------------------------------------
Name Address
- ---------------------------------------------------------------- --------------------------------------------
<S> <C>
Superintendent of Banks of the State of New York 2 Rector Street, New York, N.Y. 10006,
and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York, N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 11th day of February, 2000.
THE BANK OF NEW YORK
By: /s/ MARY LAGUMINA
---------------------------------------
Name: MARY LAGUMINA
Title: ASSISTANT VICE PRESIDENT
-3-
<PAGE> 4
Exhibit 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business September 30,
1999, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
In Thousands
------------
<S> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin ........................ $ 6,394,412
Interest-bearing balances ................................................. 3,966,749
Securities:
Held-to-maturity securities ............................................... 805,227
Available-for-sale securities ............................................. 4,152,260
Federal funds sold and Securities purchased under
agreements to resell ...................................................... 1,449,439
Loans and lease financing receivables:
Loans and leases, net of unearned
income................................................................... 37,900,739
LESS: Allowance for loan and
lease losses............................................................. 572,761
LESS: Allocated transfer risk
reserve.................................................................. 11,754
Loans and leases, net of unearned income,
allowance, and reserve .................................................. 37,316,224
Trading Assets ............................................................... 1,646,634
Premises and fixed assets (including capitalized
leases) ................................................................... 678,439
Other real estate owned ...................................................... 11,571
Investments in unconsolidated subsidiaries and
associated companies ...................................................... 183,038
Customers' liability to this bank on acceptances
outstanding ............................................................... 349,282
Intangible assets ............................................................ 790,558
Other assets ................................................................. 2,498,658
-----------
Total assets ................................................................. $60,242,491
===========
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
LIABILITIES
Deposits:
In domestic offices ....................................................... $26,030,231
Noninterest-bearing........................................................ 11,348,986
Interest-bearing........................................................... 14,681,245
In foreign offices, Edge and Agreement
subsidiaries, and IBFs .................................................. 18,530,950
Noninterest-bearing........................................................ 156,624
Interest-bearing........................................................... 18,374,326
Federal funds purchased and Securities sold under
agreements to repurchase .................................................. 2,094,678
Demand notes issued to the U.S.Treasury ...................................... 232,459
Trading liabilities .......................................................... 2,081,462
Other borrowed money:
With remaining maturity of one year or less ............................... 863,201
With remaining maturity of more than one year
through three years ..................................................... 449
With remaining maturity of more than three years .......................... 31,080
Bank's liability on acceptances executed and
outstanding ............................................................... 351,286
Subordinated notes and debentures ............................................ 1,308,000
Other liabilities ............................................................ 3,055,031
----------
Total liabilities ............................................................ 54,578,827
==========
EQUITY CAPITAL
Common stock ................................................................. 1,135,284
Surplus ...................................................................... 815,314
Undivided profits and capital reserves ....................................... 3,759,164
Net unrealized holding gains (losses) on
available-for-sale securities ............................................. ( 15,440)
Cumulative foreign currency translation adjustments .......................... ( 30,658)
Total equity capital ......................................................... 5,663,664
-----------
Total liabilities and equity capital ......................................... $60,242,491
===========
</TABLE>
<PAGE> 6
I, Thomas J. Mastro, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Reyni
Alan R. Griffith Directors
Gerald L. Hassell
