-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G85iWYmW163u4SPmkrCxPlLmot6oGRfzVtV4+MxSHgrDB3cJlaTWu/lLUc+iDcqh MaxH565IIAki2vp0ZAleGw== 0000950123-99-004017.txt : 19990504 0000950123-99-004017.hdr.sgml : 19990504 ACCESSION NUMBER: 0000950123-99-004017 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19990430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDMAN SACHS GROUP INC CENTRAL INDEX KEY: 0000886982 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 133501777 FISCAL YEAR END: 1126 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-77541 FILM NUMBER: 99608052 BUSINESS ADDRESS: STREET 1: 85 BROAD ST CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 2129021000 MAIL ADDRESS: STREET 1: 85 BROAD ST CITY: NEW YORK STATE: NY ZIP: 10004 S-1 1 THE GOLDMAN SACHS GROUP, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999 REGISTRATION 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) DELAWARE 6211 13-4019460 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------ 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. ALAN L. BELLER JOHN P. MEAD CHRISTOPHER E. AUSTIN DAVID B. HARMS CHRISTOPHER J. WALTON ROBERT W. REEDER III CLEARY, GOTTLIEB, STEEN & HAMILTON SULLIVAN & CROMWELL ONE LIBERTY PLAZA 125 BROAD STREET NEW YORK, NEW YORK 10006 NEW YORK, NEW YORK 10004 (212) 225-2000 (212) 558-4000
------------------------ 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
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF OF SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER UNIT(3) OFFERING PRICE(3) REGISTRATION FEE(2) - ---------------------------------------------------------------------------------------------------------------------------------- % (euro) Notes due 2009... (euro) 1,000,000,000 100% (euro) 1,000,000,000 $294,402 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
(1) A portion of the Notes to be registered represents Notes that may be offered outside the United States but that may be resold from time to time into the United States. Those Notes are not being registered for the purpose of sales outside the United States. This registration statement also covers an undeterminable amount of the Notes that may be reoffered and resold on an ongoing basis after the initial sale, in market-making transactions by affiliates of the registrant. (2) The Notes will be denominated and payable in euros. For the purpose of calculating the registration fee, euros were converted into U.S. dollars at an exchange rate of $1.0590 for (euro) 1.00, the noon buying rate for cable transfers in New York City on April 26, 1999. (3) Estimated solely for purposes of determining the registration fee. 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This registration statement covers (euros)1,000,000,000 aggregate principal amount of % (euro) Notes due 2009 of The Goldman Sachs Group, Inc. for sale in an initial offering. This registration statement also covers an undeterminable amount of the Notes for resale by affiliates of The Goldman Sachs Group, Inc., including Goldman Sachs International and Goldman, Sachs & Co., in market-making transactions on an ongoing basis after the initial offering has begun. The prospectus to be used in the initial offering follows immediately after this explanatory note. The prospectus to be used in market-making transactions will be identical, except that it will have: - different front and back cover pages; and - a section entitled "Plan of Distribution" instead of the section entitled "Underwriting". The alternate and additional pages of the market-making prospectus follow immediately after the prospectus for the initial offering. i 3 The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion. Dated April 30, 1999. (euro)1,000,000,000 THE GOLDMAN SACHS GROUP, INC. [GOLDMAN SACHS LOGO] % (euro) Notes due 2009 ------------------------ The Goldman Sachs Group, Inc. will pay interest on the Notes on May 15 and November 15 of each year, beginning on November 15, 1999. Goldman Sachs may redeem the Notes before their stated maturity if the principal amount of all outstanding Notes falls below (euro)100,000,000 or if Goldman Sachs becomes obligated to pay additional amounts to non-U.S. investors due to changes in U.S. withholding tax requirements, in either case, at a price equal to 100% of the principal amount redeemed plus accrued interest to the redemption date. The Notes will be issued only in book-entry form through the Cedel and Euroclear systems. Goldman Sachs has filed an application to list the Notes on the Luxembourg Stock Exchange. See "Risk Factors" beginning on page 12 to read about factors you should consider before investing in the Notes. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
Per Note Total -------- ----- Initial public offering price............................... % (euro) Underwriting discount....................................... % (euro) Proceeds, before expenses, to Goldman Sachs................. % (euro)
The initial public offering price set forth above does not include accrued interest, if any. Interest on the Notes will accrue from , 1999 and must be paid by the purchaser if the Notes are delivered after , 1999. ------------------------ Goldman Sachs International, acting through Goldman, Sachs & Co. as its U.S. selling agent, may offer the Notes in the United States. The underwriters expect to deliver the Notes on , 1999. Investors must pay for their Notes in euros. GOLDMAN SACHS INTERNATIONAL ------------------------ Prospectus dated , 1999. 4 This prospectus does not constitute an offer to sell or the solicitation of any offer to buy the Notes offered in any jurisdiction in which such offer or solicitation is unlawful. There are restrictions on the offer and sale of the Notes offered hereby in the United Kingdom. All applicable provisions of the Financial Services Act of 1986 and Public Offers of Securities Regulations 1995 with respect to anything done by any person in relation to the Notes offered hereby, in, from or otherwise involving the United Kingdom must be complied with. See "Underwriting". IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 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. 3 6 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 12-25. THE GOLDMAN SACHS GROUP, INC. Goldman Sachs is a leading global investment banking and securities firm with three principal business lines: - Investment Banking; - Trading and Principal Investments; and - Asset Management and Securities Services. Our goal is to be the advisor of choice for our clients and a leading participant in global financial markets. We provide services worldwide to a substantial and diversified client base, which includes corporations, financial institutions, governments and high net worth individuals. For our fiscal year ended November 27, 1998, our net revenues were $8.5 billion and our pre-tax earnings were $2.9 billion, and for our fiscal quarter ended February 26, 1999, our net revenues were $3.0 billion and our pre-tax earnings were $1.2 billion. As of February 26, 1999, our total assets were $230.6 billion and our partners' capital was $6.6 billion. We have over time produced strong earnings growth and attractive returns on partners' capital through different economic and market conditions. Over the last 15 years, our pre-tax earnings have grown from $462 million in 1983 to $2.9 billion in 1998, representing a compound annual growth rate of 13%. Economic and market conditions can, however, significantly affect our performance. For example, in the second half of fiscal 1998, our performance was adversely affected by turbulence in global financial markets. We have achieved this growth, which has been generated without the benefit of a large acquisition, by maintaining an intense commitment to our clients, focusing on our core businesses and key opportunities, and operating as an integrated franchise. Because we believe that the needs of our clients are global and that international markets have high growth potential, we have built upon our strength in the United States to achieve leading positions in other parts of the world. Today, we have a strong global presence as evidenced by the geographic breadth of our transactions, leadership in our core products and the size of our international operations. As of February 26, 1999, we operated offices in 23 countries and 36% of our 13,000 employees were based outside the United States. We are committed to a distinctive culture and set of core values. These values are reflected in our Business Principles, which emphasize placing our clients' interests first, integrity, commitment to excellence and innovation, and teamwork. 4 7 SUMMARY FINANCIAL DATA ($ in millions)
AS OF OR FOR AS OF OR FOR THREE MONTHS YEAR ENDED NOVEMBER ENDED FEBRUARY ------------------------------ ------------------ 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Net revenues: Investment Banking........................ $ 2,113 $ 2,587 $ 3,368 $ 633 $ 902 Trading and Principal Investments......... 2,693 2,926 2,379 1,182 1,357 Asset Management and Securities Services............................... 1,323 1,934 2,773 657 736 -------- -------- -------- ------- -------- Total net revenues.......................... $ 6,129 $ 7,447 $ 8,520 $ 2,472 $ 2,995 ======== ======== ======== ======= ======== Pre-tax earnings(1)......................... $ 2,606 $ 3,014 $ 2,921 $ 1,022 $ 1,188 Total assets................................ 152,046 178,401 217,380 -- 230,624 Partners' capital........................... 5,309 6,107 6,310 -- 6,612 Ratio of earnings to fixed charges(1)(2).... 1.23x 1.23x 1.21x 1.30x 1.41x
- --------------- Read the table above in conjunction with the footnotes to "Selected Consolidated Financial Data" as well as the following footnotes: (1) Since we have historically operated in partnership form, payments to our profit participating limited partners have been accounted for as distributions of partners' capital rather than as compensation expense. As a result, our pre-tax earnings and compensation and benefits expense have not reflected any payments for services rendered by our managing directors who are profit participating limited partners. Accordingly, our historical pre-tax earnings understate the expected operating costs to be incurred by us after our conversion to corporate form. As a corporation, we will include payments for services rendered by our managing directors who were profit participating limited partners in compensation and benefits expense. For financial information that reflects pro forma compensation and benefits expense as if we had been a corporation, see "Pro Forma Consolidated Financial Information". (2) For purposes of the ratio of earnings to fixed charges, "earnings" represent pre-tax earnings plus fixed charges and "fixed charges" represent interest expense plus that portion of rent expense that, in our opinion, approximates the interest factor included in rent expense. For a pro forma ratio of earnings to fixed charges reflecting our conversion to corporate form, please see "Pro Forma Consolidated Financial Information". The ratio of earnings to fixed charges does not give effect to this offering of Notes, or to our dollar debt offering or our new medium-term note program described below. ------------------------ STRATEGY AND PRINCIPAL BUSINESS LINES Our strategy is to grow our three core businesses -- Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services -- in markets throughout the world. Our leadership position in investment banking provides us with access to governments, financial institutions and corporate clients globally. Trading and principal investing has been an important part of our culture and earnings, and we remain committed to these businesses irrespective of their volatility. Managing wealth is one of the fastest growing segments of the financial services industry and we are positioning our asset management and securities services businesses to take advantage of that growth. INVESTMENT BANKING Investment Banking represented 39% of fiscal 1998 net revenues and 35% of fiscal 1997 net revenues. We are a market leader in both the financial advisory and underwriting businesses, serving over 3,000 clients worldwide. For the period January 1, 1994 to December 31, 1998, we had the industry-leading market share of 25.3% in worldwide 5 8 mergers and acquisitions advisory services, having advised on over $1.7 trillion of transactions. Over the same period, we also achieved number one market shares of 15.2% in underwriting worldwide initial public offerings and 14.4% in underwriting worldwide common stock issues. The source for this market share information is Securities Data Company. TRADING AND PRINCIPAL INVESTMENTS Trading and Principal Investments represented 28% of fiscal 1998 net revenues and 39% of fiscal 1997 net revenues. We make markets in equity and fixed income products, currencies and commodities; enter into swaps and other derivative transactions; engage in proprietary trading and arbitrage; and make principal investments. In trading, we focus on building lasting relationships with our most active clients while maintaining leadership positions in our key markets. We believe our research, market-making and proprietary activities enhance our understanding of markets and ability to serve our clients. ASSET MANAGEMENT AND SECURITIES SERVICES Asset Management and Securities Services represented 33% of fiscal 1998 net revenues and 26% of fiscal 1997 net revenues. We provide global investment management and advisory services; earn commissions on agency transactions; manage merchant banking funds; and provide prime brokerage, securities lending and financing services. Our asset management business has grown rapidly, with assets under supervision increasing from $92.7 billion as of November 25, 1994 to $369.7 billion as of February 26, 1999, representing a compound annual growth rate of 38%. As of February 26, 1999, we had $206.4 billion of assets under management. We manage merchant banking funds that had $15.5 billion of capital commitments as of the end of fiscal 1998. Assets under supervision are comprised of assets under management and other client assets. Assets under management typically generate fees based on a percentage of their value. Other client assets are comprised of assets in brokerage accounts of primarily high net worth individuals, on which we earn commissions. We pursue our strategy to grow our three core businesses through an emphasis on: EXPANDING HIGH VALUE-ADDED BUSINESSES To achieve strong growth and high returns, we seek to build leadership positions in high value-added services such as mergers and acquisitions, executing large and complex transactions for institutional investors and asset management. INCREASING THE STABILITY OF OUR EARNINGS While we plan to continue to grow each of our core businesses, our goal is to gradually increase the stability of our earnings by emphasizing growth in Investment Banking and Asset Management and Securities Services. PURSUING INTERNATIONAL OPPORTUNITIES We believe that our global reach will allow us to take advantage of international growth opportunities. For example, we expect increased business activity as a result of the establishment of the European Economic and Monetary Union, the shift we anticipate toward privatization of pension systems and the changing demographics around the world. LEVERAGING THE FRANCHISE We believe our various businesses are generally stronger and more successful because they are part of the Goldman Sachs franchise. Our culture of teamwork fosters cooperation among our businesses, which allows us to provide our clients with a full range of products and services on a coordinated basis. COMPETITIVE STRENGTHS STRONG CLIENT RELATIONSHIPS We focus on building long-term client relationships. For example, in fiscal 1998, over 75% of our Investment Banking revenues represented business from existing clients. 6 9 DISTINCTIVE PEOPLE AND CULTURE Our most important asset is our people. We seek to reinforce our employees' commitment to our culture and values through recruiting, training, a comprehensive review system and a compensation philosophy that rewards teamwork. GLOBAL REACH We have achieved leading positions in major international markets by capitalizing on our product knowledge and global research, as well as by building a local presence where appropriate. As a result, we are one of the few truly global investment banking and securities firms with the ability to execute large and complex cross-border transactions. INDUSTRY AND ECONOMIC OUTLOOK We believe that significant growth and profit opportunities exist in the financial services industry over the long term. These opportunities derive from long-term trends, including financial market deregulation, the globalization of the world economy, the increasing focus of companies on shareholder value, consolidations in various industries, growth in investable funds and accelerating technology and financial product innovation. We believe that over the last 15 years these trends, coupled with generally declining interest rates and favorable market conditions, have contributed to a substantially higher rate of growth in activity in the financial services industry than the growth in overall economic activity. While the future economic environment may not be as favorable as that experienced in the last 15 years and there may be periods of adverse economic and market conditions, we believe that these trends should continue to affect the financial services industry positively over the long term. The following table sets forth selected key industry indicators: KEY INDUSTRY INDICATORS ($ in billions, except gross domestic product) (volume in millions of shares)
AS OF OR FOR YEAR ENDED DECEMBER 31, ----------------------------------- CAGR(6) 1983 1988 1993 1998 '83-'98 ---- ---- ---- ---- ------- Worldwide gross domestic product (in trillions)(1)......................... $ 10 $ 18 $ 24 $ 29(7) 8%(7) Worldwide mergers and acquisitions(2)... 96 527 460 2,522 24 Worldwide equity issued(2).............. 50 51 172 269 12 Worldwide debt issued(2)................ 146 631 1,546 2,932 22 Worldwide equity market capitalization(3)..................... 3,384 9,728 14,016 27,459 15 NYSE average daily volume............... 85 162 265 674 15 Worldwide pension assets(4)............. $1,900 $3,752 $ 6,560 $10,975 12 U.S. mutual fund assets(5).............. 293 810 2,075 5,530 22
- --------------- (1) Source: The Economist Intelligence Unit, January 1999. (2) Source: Securities Data Company. (3) Source: International Finance Corporation. (4) Source: InterSec Research Corp. (5) Source: Investment Company Institute. (6) Compound annual growth rate. (7) Data as of December 31, 1997; compound annual growth rate 1983-1997. ------------------------ OUR HEADQUARTERS Our headquarters are located at 85 Broad Street, New York, New York 10004, telephone (212) 902-1000. 7 10 THE OFFERING Please refer to "Description of Notes We Are Offering" in this prospectus for more information about the Notes. Notes offered.............. % (euro) Notes due 2009. Issuer..................... The Goldman Sachs Group, Inc. Stated maturity............ May 15, 2009. Currency of payment........ We will make payments on the Notes in euros (E), the currency of the European Economic and Monetary Union. Total principal amount being issued............... (euro) 1,000,000,000. Ranking.................... The Notes will rank equally in right of payment with all other senior, unsecured debt obligations of The Goldman Sachs Group, Inc. Interest rate.............. % annually. Date interest starts accruing................... , 1999. Interest payment dates..... Every May 15 and November 15. First interest payment date....................... November 15, 1999. Regular record dates for interest................. May 1 for May 15 interest; November 1 for November 15 interest. Payment of additional amounts.................... We intend to make all payments on the Notes without deducting U.S. withholding taxes. If any deduction is required on payments to non-U.S. investors, we will pay additional amounts on those payments to the extent described under "Description of Notes We Are Offering -- Payment of Additional Amounts". Redemption features........ We will not be permitted to redeem the Notes before they mature unless: - the principal amount of all outstanding Notes falls below (euro)100,000,000, or - we are obligated to pay additional amounts due to changes in U.S. withholding tax requirements. In either event, we may redeem the outstanding Notes in whole at any time, at a price equal to 100% of their principal amount plus accrued interest to the redemption date. Book-entry issuance, settlement and clearance................ We will issue the Notes only in global form, through the Cedel and Euroclear book-entry clearing systems in Europe. Investors may hold interests in the Notes only through organizations that participate, directly or indirectly, in the Cedel or Euroclear systems. Investors must pay for their Notes in euros, in immediately available funds. Listing.................... The Goldman Sachs Group, Inc. has filed an application to list the Notes on the Luxembourg Stock Exchange. Use of proceeds............ We intend to use the net proceeds from the sale of the Notes to provide additional funds for our operations and for other general corporate purposes, including the repayment of short-term obligations and the portion of long-term obligations coming due during the remainder of this calendar year. 8 11 OUR COMMON STOCK OFFERING Shortly before the closing of this offering, we will convert from partnership to corporate form, with The Goldman Sachs Group, Inc. as the successor parent company, and The Goldman Sachs Group, Inc. will complete an initial public offering of its common stock. In that offering, The Goldman Sachs Group, Inc. expects to sell 42,000,000 shares for its own account and two of its shareholders, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, expect to sell a total of 18,000,000 shares for their accounts. In addition, The Goldman Sachs Group, Inc. will grant the underwriters of that offering options to purchase up to 9,000,000 additional shares of common stock. We expect to receive net proceeds from our common stock offering of approximately $2 billion, based on an assumed initial public offering price that may change and after deducting the underwriting discounts and estimated offering expenses payable by us in our common stock offering. This amount also assumes that the underwriters' options to purchase additional shares are not exercised. We intend to use those proceeds in the manner described below under "Use of Proceeds". We are managed by our principal owners. Simultaneously with our conversion from partnership to corporate form and our common stock offering, we will make equity-based awards to substantially all of our employees. Following those transactions, our employees, including former partners, will own approximately 66% of The Goldman Sachs Group, Inc. None of our employees will be selling shares in our common stock offering. We will also complete a number of other transactions in order to convert from partnership to corporate form at the time of the closing of our common stock offering. For a more detailed description of these and other transactions, see "Certain Relationships and Related Transactions -- Incorporation and Related Transactions", "Management -- The Employee Initial Public Offering Awards" and "Pro Forma Consolidated Financial Information". OUR DOLLAR DEBT OFFERING At or about the time of this offering, we plan to issue approximately $1.0 billion aggregate principal amount of debt securities payable in U.S. dollars in a separate underwritten public offering. Those securities would be general, unsecured obligations of The Goldman Sachs Group, Inc., would rank equally in right of payment with the Notes, would bear interest at a fixed rate payable semi-annually and would have a stated maturity of ten years. If we complete our dollar debt offering, we intend to use the net proceeds of that offering for the purposes described in "Use of Proceeds". We may decide to postpone or cancel our dollar debt offering or to conduct it on terms other than those described above. Thus, we may not receive the proceeds referred to above. OUR NEW MEDIUM-TERM NOTE PROGRAM At or about the time of this offering, we also plan to begin offering debt securities on an ongoing basis under a new medium-term note program. Under that program, we expect to issue up to $15 billion aggregate principal amount of our debt securities over the next two years. Those debt securities would be general, unsecured obligations of The Goldman Sachs Group, Inc. and would rank equally in right of payment with the Notes. The specific terms of those debt securities, including as to maturity and interest, will be fixed at the time of sale. We do not know the principal amount of debt securities we will sell under our new medium-term note program or when sales will occur. 9 12 SUMMARY CONSOLIDATED FINANCIAL DATA The summary historical consolidated income statement and balance sheet data set forth below have been derived from our consolidated financial statements and their notes. Our consolidated financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants, as of November 28, 1997 and November 27, 1998 and for the years ended November 29, 1996, November 28, 1997 and November 27, 1998. Our condensed consolidated financial statements have been reviewed by PricewaterhouseCoopers LLP as of February 26, 1999 and for the three months ended February 26, 1999. These financial statements are included elsewhere in this prospectus, together with the reports thereon of PricewaterhouseCoopers LLP. The summary historical consolidated income statement and balance sheet data set forth below as of November 25, 1994, November 24, 1995 and November 29, 1996 and for the years ended November 25, 1994 and November 24, 1995 have been derived from our audited consolidated financial statements that are not included in this prospectus. The summary historical consolidated income statement and balance sheet data set forth below as of and for the three months ended February 26, 1999 have been derived from our unaudited condensed consolidated financial statements that, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The interim results set forth below for the three months ended February 26, 1999 may not be indicative of results for the full year. The pro forma data set forth below for the year ended November 27, 1998 and as of and for the three months ended February 26, 1999 have been derived from the pro forma data set forth in "Pro Forma Consolidated Financial Information" included elsewhere in this prospectus. In addition to our common stock offering, the pro forma adjustments reflect the transactions described under "Certain Relationships and Related Transactions", compensation and benefits related to services rendered by our managing directors who were profit participating limited partners, the provision for corporate income taxes and the other transactions described under "Pro Forma Consolidated Financial Information". The summary consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Pro Forma Consolidated Financial Information" and the consolidated financial statements and their notes. 10 13 SUMMARY CONSOLIDATED FINANCIAL DATA
AS OF OR FOR YEAR ENDED NOVEMBER AS OF OR FOR --------------------------------------------------- THREE MONTHS 1994 1995 1996 1997 1998 ENDED FEBRUARY 1999 ---- ---- ---- ---- ---- ------------------- (unaudited) ($ in millions) INCOME STATEMENT DATA: Net revenues.................................. $ 3,537 $ 4,483 $ 6,129 $ 7,447 $ 8,520 $ 2,995 Pre-tax earnings(1)........................... 508 1,368 2,606 3,014 2,921 1,188 BALANCE SHEET DATA: Total assets(2)............................... $95,296 $100,066 $152,046 $178,401 $217,380 $230,624 Long-term borrowings.......................... 14,418 13,358 12,376 15,667 19,906 20,405 Partners' capital............................. 4,771 4,905 5,309 6,107 6,310 6,612 PRO FORMA DATA (UNAUDITED)(3): Pro forma net earnings........................ -- -- -- -- $ 1,271 $ 520 Pro forma ratio of earnings to fixed charges(4).................................. -- -- -- -- 1.15x 1.31x Pro forma stockholders' equity as adjusted for our common stock offering................... -- -- -- -- -- $ 6,997 SELECTED DATA AND RATIOS (UNAUDITED): Ratio of earnings to fixed charges(1)(4)...... 1.06x 1.14x 1.23x 1.23x 1.21x 1.41x Assets under supervision: Assets under management..................... $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $206,380 Other client assets......................... 49,061 57,716 76,892 102,033 142,018 163,315 ------- -------- -------- -------- -------- -------- Total assets under supervision................ $92,732 $110,074 $171,491 $237,962 $336,839 $369,695 ======= ======== ======== ======== ======== ========
- --------------- (1) Since we have historically operated in partnership form, payments to our profit participating limited partners have been accounted for as distributions of partners' capital rather than as compensation expense. As a result, our pre-tax earnings and compensation and benefits expense have not reflected any payments for services rendered by our managing directors who are profit participating limited partners. Accordingly, our historical pre-tax earnings understate the expected operating costs to be incurred by us after our conversion to corporate form. As a corporation, we will include payments for services rendered by our managing directors who were profit participating limited partners in compensation and benefits expense. For financial information that reflects pro forma compensation and benefits expense as if we had been a corporation, see "Pro Forma Consolidated Financial Information". (2) Total assets and liabilities were increased by $11.64 billion as of November 27, 1998 and $8.99 billion as of February 26, 1999 due to the adoption of the provisions of Statement of Financial Accounting Standards No. 125 that were deferred by Statement of Financial Accounting Standards No. 127. For a discussion of Statement of Financial Accounting Standards Nos. 125 and 127, see "Accounting Developments" in Note 2 to the audited consolidated financial statements. (3) Reflects such adjustments as are necessary, in the opinion of management, for a fair presentation of the results of operations and stockholders' equity of Goldman Sachs on a pro forma basis. See "Pro Forma Consolidated Financial Information" for more detailed information concerning these adjustments. (4) For purposes of the ratio of earnings to fixed charges, "earnings" represent pre-tax earnings plus fixed charges and "fixed charges" represent interest expense plus that portion of rent expense that, in our opinion, approximates the interest factor included in rent expense. Neither the pro forma ratio of earnings to fixed charges nor the historical ratio of earnings to fixed charges gives effect to this offering of Notes, our dollar debt offering or our new medium-term note program. 11 14 RISK FACTORS An investment in any of our securities, such as the Notes, involves a number of risks, some of which, including market, liquidity, credit, operational, legal and regulatory risks, could be substantial and are inherent in our businesses. You should carefully consider the following information about these risks, together with the other information in this prospectus, before investing in the Notes. HOW THE RISKS WE DESCRIBE IN THIS SECTION COULD AFFECT AN INVESTMENT IN THE NOTES The risks described below could adversely affect the business, operations or financial condition of Goldman Sachs. If that were to occur, an investment in the Notes could also be adversely affected in the following ways: - - 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 occurred, 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. - - The cash available to The Goldman Sachs Group, Inc. to pay its debt, including the Notes, could be adversely affected. 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 adversely affected 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 adversely affect its ability to meet its payment obligations on its debt, including the Notes, in a timely manner. MARKET FLUCTUATIONS COULD ADVERSELY AFFECT OUR BUSINESSES IN MANY WAYS As an investment banking and securities firm, our businesses are materially affected by conditions in the financial markets and economic conditions generally, both in the United States and elsewhere around the world. The equity and debt markets in the United States and elsewhere have achieved record or near record levels, and this favorable business environment will not continue indefinitely. In the event of a market downturn, our businesses could be adversely affected in many ways, including those described below. Our revenues are likely to decline in such circumstances and, if we were unable to reduce expenses at the same pace, our profit margins would erode. For example, in the second half of fiscal 1998, we recorded negative net revenues from our Trading and Principal Investments business and from mid-August to mid-October the number of equity underwritings and announced mergers and acquisitions transactions in which we participated declined substantially due to adverse economic and market conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Environment" for a discussion of the market environment in which we operated during that period. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility. Developments such as lower revenues, declining profit margins and losses from trading and investment activities could negatively affect the credit ratings of -- and, if sufficiently severe, affect our ability to make timely payments on -- the Notes. In the following paragraphs, we describe several ways in which these developments could occur. 12 15 We May Incur Significant Losses from Our Trading and Investment Activities Due to Market Fluctuations and Volatility We generally maintain large trading and investment positions in the fixed income, currency, commodity and equity markets. To the extent that we own assets, i.e., have long positions, in any of those markets, a downturn in those markets could result in losses from a decline in the value of those long positions. Conversely, to the extent that we have sold assets we do not own, i.e., have short positions, in any of those markets, an upturn in those markets could expose us to potentially unlimited losses as we attempt to cover our short positions by acquiring assets in a rising market. We may from time to time have a trading strategy consisting of holding a long position in one asset and a short position in another, from which we expect to earn revenues based on changes in the relative value of the two assets. If, however, the relative value of the two assets changes in a direction or manner that we did not anticipate or against which we are not hedged, we might realize a loss in those paired positions. We incurred significant losses in our Trading and Principal Investments business in the second half of fiscal 1998 from this type of "relative value" trade. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Environment" for a discussion of those losses and the market environment in which we operated during that period. In addition, we maintain substantial trading positions that can be adversely affected by the level of volatility in the financial markets, i.e., the degree to which trading prices fluctuate over a particular period, in a particular market, regardless of market levels. Our Investment Banking Revenues May Decline in Adverse Market or Economic Conditions Unfavorable financial or economic conditions would likely reduce the number and size of transactions in which we provide underwriting, mergers and acquisitions advisory and other services. Our Investment Banking revenues, in the form of financial advisory and underwriting fees, are directly related to the number and size of the transactions in which we participate and would therefore be adversely affected by a sustained market downturn. In particular, our results of operations would be adversely affected by a significant reduction in the number or size of mergers and acquisitions transactions. We May Generate Lower Revenues from Commissions and Asset Management Fees in a Market Downturn A market downturn could lead to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in the revenues we receive from commissions and spreads. In addition, because the fees that we charge for managing our clients' portfolios are in many cases based on the value of those portfolios, a market downturn that reduces the value of our clients' portfolios or increases the amount of withdrawals would reduce the revenue we receive from our asset management business. Holding Large and Concentrated Positions May Expose Us to Large Losses Concentration of risk in the past has increased the losses that we have incurred in our arbitrage, market-making, block trading, underwriting and lending businesses and may continue to do so in the future. Goldman Sachs has committed substantial amounts of capital to these businesses, which often require Goldman Sachs to take large positions in the securities of a particular issuer or issuers in a particular industry, country or region. Moreover, the trend in all major capital markets is towards larger and more frequent commitments of capital in many of these activities. For example, as described under "Business -- Trading and Principal Investments -- Equities", we are experiencing an increase in the number and size of block trades that we execute, and we expect this trend to continue. Our Hedging Strategies May Not Prevent Losses If any of the variety of instruments and strategies we utilize to hedge our exposure to various types of risk are not effective, we may incur losses. Many of our strategies are 13 16 based on historical trading patterns and correlations. For example, if we hold a long position in an asset, we may hedge this position by taking a short position in an asset where the short position has, historically, moved in a direction that would offset a change in value in the long position. However, these strategies may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. We have often hedged our exposure to corporate fixed income securities by taking a short position in U.S. Treasury securities, since historically the value of U.S. Treasury securities has changed in a manner similar to changes in the value of corporate fixed income securities. Due to the move by investors to higher credit quality fixed income securities in mid-August to mid-October 1998, however, the prices for corporate fixed income securities declined while the prices for U.S. Treasury securities increased and, as a result, we incurred losses on both positions. Unexpected market developments also affected other hedging strategies during this time, and unanticipated developments could impact these or different hedging strategies in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Management" for a discussion of the policies and procedures we use to identify, monitor and manage the risks we assume in conducting our businesses and of refinements we have made to our risk management policies and procedures as a result of our recent experience. A Prolonged Market Downturn Could Impair Our Operating Results While we encountered extremely difficult market conditions in mid-August to mid-October 1998, the financial markets rebounded late in the fourth quarter of fiscal 1998. At some time in the future, there may be a more sustained period of market decline or weakness that will leave us operating in a difficult market environment and subject us to the risks that we describe in this section for a longer period of time. Market Risk May Increase the Other Risks That We Face In addition to the potentially adverse effects on our businesses described above, market risk could exacerbate other risks that we face. For example, if we incur substantial trading losses, our need for liquidity could rise sharply while our access to liquidity could be impaired. In addition, in conjunction with a market downturn, our customers and counterparties could incur substantial losses of their own, thereby weakening their financial condition and increasing our credit risk to them. Our liquidity risk and credit risk are described below. OUR RISK MANAGEMENT POLICIES AND PROCEDURES MAY LEAVE US EXPOSED TO UNIDENTIFIED OR UNANTICIPATED RISK We have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future. Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective. Some of our methods of managing risk are based upon our use of observed historical market behavior. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures indicate. For example, the market movements of the late third and early fourth quarters of fiscal 1998 were larger and involved greater divergences in relative asset values than we anticipated. This caused us to experience trading losses that were greater and recurred more frequently than some of our risk measures indicated were likely to occur. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Environment" for a discussion of the market environment in which we operated during the second half of fiscal 1998 and "-- Risk Management" for a discussion of the policies and procedures we use to identify, monitor and manage the risks we assume in conducting our businesses and of refinements we have made to our risk management policies and procedures as a result of our recent experience. 14 17 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, our credit ratings could be adversely affected and, in some cases, our available cash could be diminished. As described at the beginning of this section, this in turn could adversely affect an investment in the Notes. LIQUIDITY RISK COULD IMPAIR OUR ABILITY TO FUND OPERATIONS AND JEOPARDIZE OUR FINANCIAL CONDITION Liquidity, i.e., ready access to funds, is essential to our businesses. In addition to maintaining a cash position, we rely on three principal sources of liquidity: borrowing in the debt markets; access to the repurchase and securities lending markets; and selling securities and other assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity" for a discussion of our sources of liquidity. If we are unable to meet our liquidity needs, our business, operations and financial condition could be adversely affected and this, in turn, could adversely affect the credit ratings of the Notes. Moreover, if our ability to obtain financing or sell assets were sufficiently impaired, the available cash we need to meet our payment obligations on our debt, including the Notes, could be adversely affected. In the following paragraphs, we describe our liquidity needs and the risks we face in meeting them. An Inability to Access the Debt Capital Markets Could Impair Our Liquidity We depend on continuous access to the debt capital markets to finance our day-to-day operations. An inability to raise money in the long-term or short-term debt markets, or to engage in repurchase agreements or securities lending, could have a substantial negative effect on our liquidity. Our access to debt in amounts adequate to finance our activities could be impaired by factors that affect Goldman Sachs in particular or the financial services industry in general. For example, lenders could develop a negative perception of our long-term or short-term financial prospects if we incurred large trading losses, if the level of our business activity decreased due to a market downturn, if regulatory authorities took significant action against us or if we discovered that one of our employees had engaged in serious unauthorized or illegal activity. Our ability to borrow in the debt markets also could be impaired by factors that are not specific to Goldman Sachs, such as a severe disruption of the financial markets or negative views about the prospects for the investment banking, securities or financial services industries generally. We also depend on banks to finance our day-to-day operations. As a result of the recent consolidation in the banking industry, some of our lenders have merged or consolidated with other banks and financial institutions. While we have not been materially adversely affected to date, it is possible that further consolidation could lead to a loss of a number of our key banking relationships and a reduction in the amount of credit extended to us. An Inability to Access the Short-Term Debt Markets Could Impair Our Liquidity We depend on the issuance of commercial paper and promissory notes as a principal source of unsecured short-term funding for our operations. As of February 26, 1999, Goldman Sachs had $21.63 billion of outstanding commercial paper and promissory notes with a weighted-average maturity of approximately 75 days. Our liquidity depends to an important degree on our ability to refinance these borrowings on a continuous basis. Investors who hold our outstanding commercial paper and promissory notes have no obligation to purchase new instruments when the outstanding instruments mature. 15 18 Our Liquidity Could Be Adversely Affected If Our Ability to Sell Assets Is Impaired If we were unable to borrow in the debt capital markets, we would need to liquidate assets in order to meet our maturing liabilities, perhaps including the Notes. In certain market environments, such as times of market volatility or uncertainty, overall market liquidity may decline. In a time of reduced liquidity, we may be unable to sell some of our assets, or we may have to sell assets at depressed prices, which could adversely affect our results of operations and financial condition. Our ability to sell our assets may be impaired by other market participants seeking to sell similar assets into the market at the same time. In the late third and early fourth quarters of fiscal 1998, for example, the markets for some assets were adversely affected by simultaneous attempts by a number of institutions to sell similar assets. A Reduction in Our Credit Ratings Could Adversely Affect Our Liquidity and Competitive Position and Increase Our Borrowing Costs Our borrowing costs and our access to the debt capital markets depend significantly on our credit ratings. These ratings are assigned by rating agencies, which may reduce or withdraw their ratings or place Goldman Sachs on "credit watch" with negative implications at any time. Credit ratings are also important to Goldman Sachs when competing in certain markets and when seeking to engage in longer-term transactions, including over-the-counter derivatives. A reduction in our credit ratings could increase our borrowing costs and limit our access to the capital markets. This, in turn, could reduce our earnings and adversely affect our liquidity. In addition, a reduction in the credit rating of the Notes could adversely affect their market value or your ability to sell the Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity -- Credit Ratings" for additional information concerning our credit ratings. CREDIT RISK EXPOSES US TO LOSSES CAUSED BY FINANCIAL OR OTHER PROBLEMS EXPERIENCED BY THIRD PARTIES We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties include our trading counterparties, customers, clearing agents, exchanges, clearing houses and other financial intermediaries as well as issuers whose securities we hold. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. This risk may arise, for example, from holding securities of third parties; entering into swap or other derivative contracts under which counterparties have long-term obligations to make payments to us; executing securities, futures, currency or commodity trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries; and extending credit to our clients through bridge or margin loans or other arrangements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk 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 adversely affect our revenue and perhaps our ability 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. These developments could also negatively affect the credit ratings of the Notes. In the following paragraphs, we describe the ways in which we are exposed to these credit risks. We May Suffer Significant Losses from Our Credit Exposures In recent years, we have significantly expanded our swaps and other derivatives businesses and placed a greater emphasis on providing credit and liquidity to our clients. As a result, our credit exposures have increased in amount and in duration. In addition, as 16 19 competition in the financial services industry has increased, we have experienced pressure to assume longer-term credit risk, extend credit against less liquid collateral and price more aggressively the credit risks that we take. Our Clients and Counterparties May Be Unable to Perform Their Obligations to Us as a Result of Economic or Political Conditions Country, regional and political risks are components of credit risk, as well as market risk. Economic or political pressures in a country or region, including those arising from local market disruptions or currency crises, may adversely affect the ability of clients or counterparties located in that country or region to obtain foreign exchange or credit and, therefore, to perform their obligations to us. See "-- We Are Exposed to Special Risks in Emerging and Other Markets" for a further discussion of our exposure to these risks. Defaults by a Large Financial Institution Could Adversely Affect Financial Markets Generally and Us Specifically The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships between the institutions. As a result, concerns about, or a default by, one institution could lead to significant liquidity problems or losses in, or defaults by, other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which we interact on a daily basis. The possibility of default by a major market participant in the second half of fiscal 1998 and concerns throughout the financial industry regarding the resulting impact on markets led us to participate in an industry-wide consortium that invested in Long-Term Capital Portfolio, L.P., which is described under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity -- The Balance Sheet". Actual defaults, increases in perceived default risk and other similar events could arise in the future and could have an adverse effect on the financial markets and on Goldman Sachs. The Information That We Use in Managing Our Credit Risk May Be Inaccurate or Incomplete Although we regularly review our credit exposure to specific clients and counterparties and to specific industries, countries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect, such as fraud. We may also fail to receive full information with respect to the trading risks of a counterparty. In addition, in cases where we have extended credit against collateral, we may find that we are undersecured, for example, as a result of sudden declines in market values that reduce the value of collateral. OUR COMPUTER SYSTEMS AND THOSE OF THIRD PARTIES MAY NOT ACHIEVE YEAR 2000 READINESS -- YEAR 2000 READINESS DISCLOSURE With the year 2000 approaching, many institutions around the world are reviewing and modifying their computer systems to ensure that they are Year 2000 compliant. The issue, in general terms, is that many existing computer systems and microprocessors (including those in non-information technology equipment and systems) use only two digits to identify a year in the date field with the assumption that the first two digits of the year are always "19". Consequently, on January 1, 2000, computers that are not Year 2000 compliant may read the year as 1900. Systems that calculate, compare or sort using the incorrect date may malfunction. The Year 2000 problems described below could disrupt our normal funding administration process, resulting in late payments or the payment of wrong amounts on our debt, including the Notes. If sufficiently severe and protracted, these problems could also adversely affect the credit ratings of the Notes. Our Computer Systems May Fail Because we are dependent, to a very substantial degree, upon the proper functioning of our computer systems, a failure of our systems to be Year 2000 compliant would 17 20 have a material adverse effect on us. Failure of this kind could, for example, cause settlement of trades to fail, lead to incomplete or inaccurate accounting, recording or processing of trades in securities, currencies, commodities and other assets, result in generation of erroneous results or give rise to uncertainty about our exposure to trading risks and our need for liquidity. If not remedied, potential risks include business interruption or shutdown, financial loss, regulatory actions, reputational harm and legal liability. The Computer Systems of Third Parties on Which We Depend May Fail We depend upon the proper functioning of third-party computer and non-information technology systems. These parties include trading counterparties, financial intermediaries such as securities and commodities exchanges, depositories, clearing agencies, clearing houses and commercial banks and vendors such as providers of telecommunication services and other utilities. We continue to assess counterparties, intermediaries and vendors with whom we have important financial or operational relationships to determine the extent of their Year 2000 preparedness. We have not yet received sufficient information from all parties about their Year 2000 preparedness to assess the effectiveness of their efforts. Moreover, in many cases, we are not in a position to verify the accuracy or completeness of the information we receive from third parties and as a result are dependent on their willingness and ability to disclose, and to address, their Year 2000 problems. In addition, in some international markets in which we do business, the level of awareness and remediation efforts relating to the Year 2000 issue may be less advanced than in the United States. If third parties with whom we interact have Year 2000 problems that are not remedied, problems could include the following: - - in the case of vendors, disruption of important services upon which Goldman Sachs depends, such as telecommunications and electrical power; - - in the case of third-party data providers, receipt of inaccurate or out-of-date information that would impair our ability to perform critical data functions, such as pricing our securities or other assets; - - in the case of financial intermediaries, such as exchanges and clearing agents, failed trade settlements, inability to trade in certain markets and disruption of funding flows; - - in the case of banks and other lenders, disruption of capital flows potentially resulting in liquidity stress; and - - in the case of counterparties and customers, financial and accounting difficulties for those parties that expose Goldman Sachs to increased credit risk and lost business. Disruption or suspension of activity in the world's financial markets is also possible. Our Revenues May Be Adversely Affected If Market Activity Decreases Shortly Before and After the Year 2000 We believe that uncertainty about the success of remediation efforts generally may cause many market participants to reduce the level of their market activities temporarily as they assess the effectiveness of these efforts during a "phase-in" period beginning in late 1999. We believe that lenders are likely to take similar steps, which will result in a reduction in available funding sources. Consequently, there may be a downturn in customer and general market activity for a short period of time before and after January 1, 2000. If this occurs, our net revenues may be adversely affected, possibly materially, depending on how long the reduction in activity continues and how broadly it affects the markets. In addition, we expect to reduce our own trading activities and the size of our balance sheet in order to manage the number and type of our transactions that settle during this period and our related funding needs. This also could reduce our net revenues. We cannot predict the magnitude of the impact that these kinds of reductions would have on our businesses. We May Be Exposed to Litigation as a Result of Year 2000 Problems We may be exposed to litigation with our customers and counterparties as a result of Year 2000 problems. For example, litigation 18 21 could arise from problems relating to our internal systems or to external systems on which we depend, as well as from problems involving companies in which our clients or the funds we manage hold investments. Our Year 2000 Program May Not Be Effective and Our Estimates of Timing and Cost May Not Be Accurate Our Year 2000 program may not be effective and our estimates about the timing and cost of completing our program may not be accurate. For a description of our program and the steps that remain to be taken, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Management -- Operational and Year 2000 Risks -- Year 2000 Readiness Disclosure". OTHER OPERATIONAL RISKS MAY DISRUPT OUR BUSINESSES, RESULT IN REGULATORY ACTION AGAINST US OR LIMIT OUR GROWTH We face operational risk arising from mistakes made in the confirmation or settlement of transactions or from transactions not being properly recorded, evaluated or accounted for. Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions we process have become increasingly complex. Consequently, we rely heavily on our financial, accounting and other data processing systems. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses. In recent years, we have substantially upgraded and expanded the capabilities of our data processing systems and other operating technology, and we expect that we will need to continue to upgrade and expand in the future to avoid disruption of, or constraints on, our operations. If sufficiently severe and protracted, problems caused by operational risks could adversely affect the credit ratings of the Notes. Severe and protracted problems of this kind could also reduce the cash available to pay our debt, including the Notes, in a timely manner. LEGAL AND REGULATORY RISKS ARE INHERENT AND SUBSTANTIAL IN OUR BUSINESSES Substantial legal liability or a significant regulatory action against Goldman Sachs could have a material financial effect or cause significant reputational harm to Goldman Sachs, which in turn could seriously harm our business prospects. In that event, the credit ratings of the Notes could be adversely affected and, in some cases, our ability to meet our payment obligations on our debt, including the Notes, in a timely manner could be impaired. 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 19 22 magnitude often remain unknown for substantial periods of time. We incur significant legal expenses every year in defending against litigation, and we expect to continue to do so in the future. See "Business -- Legal Matters" for a discussion of some of the legal matters in which we are currently involved. Extensive Regulation of Our Businesses Limits Our Activities and May Subject Us to Significant Penalties The financial services industry is subject to extensive regulation. Goldman Sachs is subject to regulation by governmental and self-regulatory organizations in the United States and in virtually all other jurisdictions in which it operates around the world. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with Goldman Sachs and are not designed to protect our shareholders. Consequently, these regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements. We face the risk of significant intervention by regulatory authorities, including extended investigation and surveillance activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties. Among other things, we could be fined or prohibited from engaging in some of our business activities. See "Business -- Regulation" for a further discussion of the regulatory environment in which we conduct our businesses. Legal Restrictions on Our Clients May Reduce the Demand for Our Services New laws or regulations or changes in enforcement of existing laws or regulations applicable to our clients may also adversely affect our businesses. For example, changes in antitrust enforcement could affect the level of mergers and acquisitions activity and changes in regulation could restrict the activities of our clients and, therefore, the services we provide on their behalf. HOLDERS OF NOTES MAY BE ADVERSELY AFFECTED 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 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. HOLDERS OF NOTES MAY BE ADVERSELY AFFECTED 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 20 23 example, if there were a bankruptcy or liquidation proceeding with respect to any partnership subsidiary in which The Goldman Sachs Group, Inc. is a general partner and the assets of that subsidiary were insufficient to meet all its outstanding liabilities and obligations, The Goldman Sachs Group, Inc.'s own assets could become available to the subsidiary's creditors. This could reduce the assets of The Goldman Sachs Group, Inc. that are available to satisfy The Goldman Sachs Group, Inc.'s direct creditors, including investors in the Notes. WE MAY BE ABLE TO OBTAIN WAIVERS OF SOME OF OUR COVENANTS UNDER THE NOTES WITHOUT YOUR APPROVAL The indenture governing the Notes permits us to issue an unlimited amount of debt securities in different series from time to time. The Notes will be a single, distinct series of debt securities under the indenture. If we want to make some types of changes to the indenture or obtain a waiver of compliance with our covenants under it, we must obtain the approval of the holders of a majority in principal amount of all series of debt securities that we issue under the indenture and that are affected by the change or waiver, taken together as a single class. In many cases, the approval of those holders will be sufficient for us to make the change or to obtain the waiver, even if it affects the Notes and the holders of a majority in principal amount of the Notes do not grant their approval. For a description of provisions governing consents and waivers, see "Description of Notes We Are Offering -- Modification and Waiver of Covenants -- Changes Requiring Majority Approval". EMPLOYEE MISCONDUCT COULD HARM GOLDMAN SACHS AND IS DIFFICULT TO DETECT AND DETER There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur. Misconduct by employees could include binding Goldman Sachs to transactions that exceed authorized limits or present unacceptable risks, or hiding from Goldman Sachs unauthorized or unsuccessful activities, which, in either case, may result in unknown and unmanaged risks or losses. Employee misconduct could also involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee misconduct could hurt our business, operations or financial condition. If these problems were severe enough, they could adversely affect the credit ratings of the Notes or our ability to pay our debt, including the Notes, in a timely manner. THE FINANCIAL SERVICES INDUSTRY IS INTENSELY COMPETITIVE AND RAPIDLY CONSOLIDATING The financial services industry -- and all of our businesses -- are intensely competitive, and we expect them to remain so. We compete on the basis of a number of factors, including transaction execution, our products and services, innovation, reputation and price. We have experienced intense price competition in some of our businesses in recent years, such as underwriting fees on investment grade debt offerings and privatizations. We believe we may experience pricing pressures in these and other areas in the future as some of our competitors seek to obtain market share by reducing prices. If we were unable to compete effectively, or if competition became too costly, our business and operations could suffer. This in turn could adversely affect 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 21 24 of these firms have the ability to offer a wide range of products, from loans, deposit-taking and insurance to brokerage, asset management and investment banking services, which may enhance their competitive position. They also have the ability to support investment banking and securities products with commercial banking, insurance and other financial services revenues in an effort to gain market share, which could result in pricing pressure in our businesses. Consolidation Has Increased Our Need for Capital This trend toward consolidation and convergence has significantly increased the capital base and geographic reach of our competitors. This trend has also hastened the globalization of the securities and other financial services markets. As a result, we have had to commit capital to support our international operations and to execute large global transactions. Our Ability to Expand Internationally Will Depend on Our Ability to Compete Successfully with Local Financial Institutions We believe that some of our most significant challenges and opportunities will arise outside the United States, as described under "Industry and Economic Outlook". In order to take advantage of these opportunities, we will have to compete successfully with financial institutions based in important non-U.S. markets, particularly in Europe. Some of these institutions are larger, better capitalized and have a stronger local presence and a longer operating history in these markets. Our Revenues May Decline Due to Competition from Alternative Trading Systems Securities and futures transactions are now being conducted through the Internet and other alternative, non-traditional trading systems, and it appears that the trend toward alternative trading systems will continue and probably accelerate. A dramatic increase in computer-based or other electronic trading may adversely affect our commission and trading revenues, reduce our participation in the trading markets and associated access to market information and lead to the creation of new and stronger competitors. WE ARE EXPOSED TO SPECIAL RISKS IN EMERGING AND OTHER MARKETS In conducting our businesses in major markets around the world, including many developing markets in Asia, Latin America and Eastern Europe, we are subject to political, economic, legal, operational and other risks that are inherent in operating in other countries. These risks range from difficulties in settling transactions in emerging markets to possible nationalization, expropriation, price controls and other restrictive governmental actions. We also face the risk that exchange controls or similar restrictions imposed by foreign governmental authorities may restrict our ability to convert local currency received or held by us in their countries into U.S. dollars or other currencies, or to take those dollars or other currencies out of those countries. To date, a relatively small part of our businesses has been conducted in emerging and other markets. As we expand our businesses in these areas, our exposure to these risks will increase. If our business or operations were hurt by events in emerging and other markets described below, the credit rating of the Notes could be adversely affected. If the effect of these events were severe enough, the funds available to meet our payment obligations on our debt, including the Notes, in a timely manner could be reduced. Turbulence in Emerging Markets May Adversely Affect Our Businesses In the last several years, various emerging market countries have experienced severe economic and financial disruptions, including significant devaluations of their currencies and low or negative growth rates in their economies. The possible effects of these conditions include an adverse impact on our businesses and increased volatility in financial markets generally. Moreover, economic or market problems in a single country or region are increasingly affecting other markets generally. For example, the economic crisis in Russia in August 1998 adversely affected other emerging markets and led to turmoil in financial markets worldwide. See "Management's Discussion and Analysis of Financial 22 25 Condition and Results of Operations -- Business Environment" for a discussion of the business environment in which we operated during the second half of fiscal 1998. A continuation of these situations could adversely affect global economic conditions and world markets and, in turn, could adversely affect our businesses. Among the risks are regional or global market downturns and, as noted above, increasing liquidity and credit risks, particularly in Japan where the economy continues to be weak and we have significant exposure. Compliance with Local Laws and Regulations May Be Difficult In many countries, the laws and regulations applicable to the securities and financial services industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market. Our inability to remain in compliance with local laws in a particular foreign market could have a significant and negative effect not only on our businesses in that market but also on our reputation generally. These uncertainties may also make it difficult for us to structure our transactions in such a way that the results we expect to achieve are legally enforceable in all cases. See "-- Legal and Regulatory Risks Are Inherent and Substantial in Our Businesses -- Our Exposure to Legal Liability Is Significant" for additional information concerning these matters and "Business -- Regulation" for a discussion of the regulatory environment in which we conduct our businesses. OUR CONVERSION TO CORPORATE FORM MAY ADVERSELY AFFECT OUR ABILITY TO RECRUIT, RETAIN AND MOTIVATE KEY EMPLOYEES Our performance is largely dependent on the talents and efforts of highly skilled individuals. Competition in the financial services industry for qualified employees is intense. Our continued ability to compete effectively in our businesses depends on our ability to attract new employees and to retain and motivate our existing employees. In connection with our common stock offering and the conversion of Goldman Sachs from partnership to corporate form, the managing directors who were profit participating limited partners will receive substantial amounts of common stock in exchange for their interests in Goldman Sachs. Because these shares of common stock will be received in exchange for partnership interests, ownership of these shares will not be dependent upon these partners' continued employment. However, these shares will be subject to certain restrictions on transfer under a shareholders' agreement and a portion may be pledged to support these partners' obligations under noncompetition agreements. The transfer restrictions under the shareholders' agreement may, however, be waived, as described under "Certain Relationships and Related Transactions -- Shareholders' Agreement -- Transfer Restrictions" and "-- Waivers". The steps we have taken to encourage the continued service of these individuals after our common stock offering may not be effective. For a description of the compensation plan for our senior professionals to be implemented after our common stock offering, see "Management -- The Partner Compensation Plan". In connection with our common stock offering and conversion of Goldman Sachs from partnership to corporate form, employees, other than the managing directors who were profit participating limited partners, will receive grants of restricted stock units, stock options or interests in a defined contribution plan. The incentives to attract, retain and motivate employees provided by these awards or by future arrangements may not be as effective as the opportunity, which existed prior to conversion, to become a partner of Goldman Sachs. See "Management -- The Employee Initial Public Offering Awards" for a description of these awards. WE EXPECT TO RECORD A SUBSTANTIAL PRE-TAX LOSS IN THE SECOND QUARTER OF FISCAL 1999 We expect to record a substantial pre-tax loss in the second quarter of fiscal 1999 due to a number of nonrecurring items described under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations". 23 26 BECAUSE THE NOTES ARE PAYABLE IN EUROS, THEY MAY NOT BE AN APPROPRIATE INVESTMENT FOR ALL INVESTORS The Notes are denominated and payable in euros, the currency of the 11 countries participating in the European Economic and Monetary Union. This means that investors must pay for the Notes in euros and, unless euros are unavailable, we will make all payments on the Notes in euros. Investors who reside in the United States or other non-EMU countries should consult their own financial and legal advisors as to the currency-related risks entailed by an investment in the Notes. The information in this risk factor is directed primarily to investors who are residents of the United States or other non-EMU countries, except for the risk described under "-- The Notes Permit Us to Make Payments in U.S. Dollars If We Are Unable to Obtain Euros". The Notes are not an appropriate investment for investors who are unsophisticated about foreign currency transactions. An Investment in the Notes Involves Currency-Related Risks Because the Notes are payable in euros, an investment in the Notes entails significant risks that are not associated with an investment in debt securities payable solely in U.S. dollars. These risks include the possibility of significant changes in rates of exchange between the euro and the U.S. dollar or other currencies, and the possibility that governmental authorities could impose foreign exchange controls or other conditions that affect the euro. These risks depend on factors over which we have no control, such as economic and political events within the EMU countries and the supply of and demand for the euro in the global currency markets. Changes in Currency Exchange Rates Can Be Volatile and Unpredictable In recent years, rates of exchange between the U.S. dollar and other currencies, including some of the national currencies of the EMU countries, have been volatile. This volatility may continue to affect the rate of exchange between the euro and the U.S. dollar and other currencies. Depreciation of the euro against the U.S. dollar would result in a decrease in the U.S. dollar-equivalent value of payments made on the Notes, including the principal payable at maturity. This in turn could cause the market value of the Notes to fall. Depreciation of the euro against the U.S. dollar could result in a loss to investors on a U.S.-dollar basis. The Euro Is a New Currency with a Limited Exchange Rate History The euro was adopted as the official currency of the 11 EMU countries only on January 1, 1999. Consequently, the currency exchange rate history for the euro is very brief. The value of the euro relative to the U.S. dollar and other currencies that has prevailed in the currency exchange markets to date may give little or no indication of the relative value that will prevail in the future. Government Policy Can Adversely Affect the Euro and the Value of the Notes Exchange rates between the euro and other currencies, including the U.S. dollar, can either float or be fixed by governmental authorities, such as the European Central Bank and other governmental authorities in the EMU countries. From time to time, these authorities could use a variety of techniques, such as intervention in the currency markets or imposition of regulatory controls or taxes, to affect the exchange rate of the euro. They may also issue a new currency to replace the euro, alter its exchange rate or exchange characteristics by devaluation or revaluation or add to or eliminate currencies that are currently included in the euro. Thus, the U.S. dollar-equivalent value of the Notes could be significantly and unpredictably affected by governmental actions. Even in the absence of governmental action directly affecting currency exchange rates, political or economic developments in the EMU countries or elsewhere could lead to significant and sudden changes in the euro-dollar exchange rate -- and therefore in the U.S. dollar-equivalent value of the Notes -- as participants in the global currency markets move to buy or sell euros or U.S. dollars in reaction to those developments. 24 27 The Notes Permit Us to Make Payments in U.S. Dollars If We Are Unable to Obtain Euros The Notes provide that, if euros or any single currency that succeeds the euro in the EMU countries are not available to us on each of the two business days before a payment on the Notes comes due because of circumstances beyond our control, we will be entitled to make the payment in U.S. dollars. These circumstances could include the imposition of exchange controls or our inability to obtain euros because of a disruption in the currency markets. If we make payment in U.S. dollars, the exchange rate we would use would be based on the noon buying rate in New York City for cable transfers of euros, as of whatever date the exchange rate is then most recently available from the Federal Reserve Bank of New York. The most recently available rate may be for a date substantially before the payment date. As a result, the amount of dollars received on the payment date may not reflect currency market conditions at the time of payment. We describe these matters in "Description of Notes We Are Offering -- Payment Mechanics". We Will Not Adjust the Notes to Compensate for the Euro-U.S. Dollar Exchange Rate Except as described above, we will not make any adjustment or change in the terms of the Notes in the event of any change in exchange rates for the euro, whether in the event of any devaluation, revaluation or imposition of exchange or other regulatory controls or taxes or in the event of other developments affecting the euro, the U.S. dollar or any other currency. Consequently, investors will bear the risk that their investment in the Notes may be adversely affected by these types of events. In a Lawsuit for Payment on the Notes, Investors May Bear Currency Exchange Risk Under Section 27 of the New York Judiciary Law, a state court in the State of New York rendering a judgment on a Note would be required to render the judgment in euros; however, the judgment would be converted into U.S. dollars at the exchange rate prevailing on the date of entry of the judgment. Consequently, in a lawsuit for payment on the Notes, investors would bear currency exchange risk until a judgment is entered and we cannot predict how long it would take to obtain a judgment. In courts outside of New York, investors may not be able to obtain judgment in euros. For example, a judgment for money in an action based on a Note denominated in a currency other than U.S. dollars in many other U.S. federal or state courts ordinarily would be enforced in the United States only in U.S. dollars. In those cases, the date used to determine the rate of conversion of the euro into U.S. dollars would depend upon various factors, including which court renders the judgment. YOU MAY HOLD YOUR INTERESTS IN THE NOTES ONLY THROUGH THE CEDEL OR EUROCLEAR SYSTEM IN EUROPE We will issue the Notes only in book-entry form through the Cedel and Euroclear book-entry clearance systems in Europe. You will not be able to hold an interest in the Notes through any clearing system in the United States. Trading in the Notes, as well as the receipt of payments and notices relating to the Notes, will be governed by the rules and procedures of Cedel and Euroclear, and time-zone differences between the United States and Europe may mean that U.S. investors who wish to effect a transaction in the Notes on a particular day may be unable to do so until the next day on which Cedel or Euroclear is open for business. THERE HAS BEEN NO PRIOR MARKET FOR THE NOTES The Notes are a new issue of securities with no established trading market. We cannot assure you that any trading market for the Notes will develop. While Goldman Sachs International has advised us that it intends to make a market in the Notes, it is not obligated to do so and may discontinue market-making at any time without notice. 25 28 USE OF PROCEEDS We expect to receive net proceeds from the sale of the Notes in this offering of approximately (euro)1 billion. We intend to use the net proceeds from this offering to provide additional funds for our operations and for other general corporate purposes, including the repayment of short-term obligations and the portion of long-term obligations coming due during the remainder of this calendar year. Until we apply the proceeds to these uses, we expect to invest them in short-term marketable securities. We intend to use the net proceeds from our dollar debt offering for the same purposes. We do not expect to receive any proceeds from subsequent resales of the Notes by Goldman Sachs International, Goldman, Sachs & Co. or any of our other affiliates in market-making transactions. We expect our affiliates to retain the proceeds of their market-making resales and not pay the proceeds to us. We intend to use the net proceeds from our common stock offering to provide additional funds for our operations and for other general corporate purposes, although we have not yet determined a specific use. Pending specific application of the net proceeds, we intend to use them to purchase short-term marketable securities. 26 29 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following Pro Forma Consolidated Financial Information is based upon the historical consolidated financial statements of Goldman Sachs. In addition to our common stock offering, this information reflects the pro forma effects of the following items: - - the incorporation transactions and the related transactions described under "Certain Relationships and Related Transactions -- Incorporation and Related Transactions"; - - compensation to managing directors who were profit participating limited partners; - - compensation in the form of restricted stock units awarded to employees in lieu of ongoing cash compensation; - - the provision for corporate income taxes; - - the redemption of our senior limited partnership interests; - - cash distributions by The Goldman Sachs Group, L.P. to its partners in the second quarter of fiscal 1999 in accordance with its partnership agreement, including distributions for partner income taxes related to earnings in the first quarter of fiscal 1999, capital withdrawals by the managing directors who were profit participating limited partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association and distributions to satisfy obligations to retired limited partners; and - - the recognition of net tax assets. These items are collectively referred to as the "Pro Forma Adjustments". The Pro Forma Consolidated Income Statement Information does not give effect to the following items because of their non-recurring nature: - - the restricted stock units awarded to employees based on a formula; - - the initial irrevocable contribution of shares of common stock to the defined contribution plan; - - the recognition of net tax assets; and - - a contribution to the Goldman Sachs Fund, a charitable foundation. The Pro Forma Consolidated Balance Sheet Information, however, does give effect to these non-recurring items. This Pro Forma Consolidated Financial Information, including the pro forma ratio of earnings to fixed charges, does not give effect to this offering, our dollar debt offering or our new medium-term note program. The Pro Forma Adjustments are based upon available information and certain assumptions that management believes are reasonable. The Pro Forma Consolidated Financial Information and accompanying notes should be read in conjunction with the consolidated financial statements and their notes. THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION PRESENTED IS NOT NECESSARILY INDICATIVE OF THE RESULTS OF OPERATIONS OR FINANCIAL POSITION THAT MIGHT HAVE OCCURRED HAD THE PRO FORMA ADJUSTMENTS ACTUALLY TAKEN PLACE AS OF THE DATES SPECIFIED, OR THAT MAY BE EXPECTED TO OCCUR IN THE FUTURE. 27 30 PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION (unaudited) (in millions, except per share data)
YEAR ENDED NOVEMBER 27, 1998 --------------------------------------------------------------------------- PRO FORMA ADJUSTMENT AS ADJUSTED FOR OUR FOR OUR COMMON COMMON PRO FORMA STOCK STOCK HISTORICAL ADJUSTMENTS PRO FORMA OFFERING OFFERING ---------- ----------- ------------ ------------- ------------- Total revenues.............................. $22,478 $ -- $22,478 $ -- $22,478 Interest expense, principally on short-term funding................................... 13,958 28(a) 13,986 -- 13,986 ------- ------- ------- ----- ------- Revenues, net of interest expense........... 8,520 (28) 8,492 -- 8,492 Compensation and benefits, excluding employee initial public offering awards... 3,838 303(b) 4,141 -- 4,141 Employee initial public offering awards..... -- 435(c) 435 -- 435 Other operating expenses.................... 1,761 -- 1,761 -- 1,761 ------- ------- ------- ----- ------- Total operating expenses.................... 5,599 738 6,337 -- 6,337 Pre-tax earnings............................ 2,921 (766) 2,155 -- 2,155 Provision for taxes......................... 493 391(d) 884 -- 884 ------- ------- ------- ----- ------- Net earnings................................ $ 2,428 $(1,157) $ 1,271 $ -- $ 1,271 ======= ======= ======= ===== ======= Ratio of earnings to fixed charges.......... 1.21x 1.15x 1.15x Shares outstanding: Basic..................................... 424(e) 42(f) 466 Diluted................................... 428(e) 42(f) 470 Earnings per share: Basic..................................... $ 3.00 $ 2.73 Diluted................................... 2.97 2.70
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION (unaudited) (in millions, except per share data)
THREE MONTHS ENDED FEBRUARY 26, 1999 ------------------------------------------------------------------------- PRO FORMA ADJUSTMENT AS ADJUSTED FOR OUR FOR OUR PRO FORMA COMMON STOCK COMMON STOCK HISTORICAL ADJUSTMENTS PRO FORMA OFFERING OFFERING ---------- ----------- ------------ ------------ ------------ Total revenues......................... $5,856 $ -- $ 5,856 $ -- $5,856 Interest expense, principally on short- term funding......................... 2,861 7(a) 2,868 -- 2,868 ------ ------- ------- --------- ------ Revenues, net of interest expense...... 2,995 (7) 2,988 -- 2,988 Compensation and benefits, excluding employee initial public offering awards............................... 1,275 191(b) 1,466 -- 1,466 Employee initial public offering awards............................... -- 109(c) 109 -- 109 Other operating expenses............... 532 -- 532 -- 532 ------ ------- ------- --------- ------ Total operating expenses............... 1,807 300 2,107 -- 2,107 Pre-tax earnings....................... 1,188 (307) 881 -- 881 Provision for taxes.................... 181 180(d) 361 -- 361 ------ ------- ------- --------- ------ Net earnings........................... $1,007 $ (487) $ 520 $ -- $ 520 ====== ======= ======= ========= ====== Ratio of earnings to fixed charges..... 1.41x 1.31x 1.31x Shares outstanding: Basic................................ 428(e) 42(f) 470 Diluted.............................. 438(e) 42(f) 480 Earnings per share: Basic................................ $ 1.22 $ 1.11 Diluted.............................. 1.19 1.08
The accompanying notes are an integral part of the Pro Forma Consolidated Financial Information. 28 31 PRO FORMA CONSOLIDATED BALANCE SHEET INFORMATION (unaudited) (in millions, except per share data)
AS OF FEBRUARY 26, 1999 ----------------------------------------------------------------------- PRO FORMA ADJUSTMENT AS ADJUSTED FOR OUR FOR OUR PRO FORMA COMMON STOCK COMMON STOCK HISTORICAL ADJUSTMENTS PRO FORMA OFFERING OFFERING ---------- ----------- ---------- ------------ ------------ Cash and cash equivalents.............. $ 3,345 $ (200)(g) $ 134 $1,989(f) $ 2,123 (891)(h) (888)(i) (1,232)(k) Other.................................. 227,279 1,764 (l) 229,043 -- 229,043 -------- ------- ---------- ------ -------- Total assets........................... $230,624 $(1,447) $ 229,177 $1,989 $231,166 ======== ======= ========== ====== ======== Long-term borrowings................... $ 20,405 $ 371 (a) $ 20,776 $ -- $ 20,776 Other.................................. 203,228 165 (b) 203,393 -- 203,393 -------- ------- ---------- ------ -------- Total liabilities...................... 223,633 536 224,169 -- 224,169 Partners' capital, partners' capital allocated for income taxes and potential withdrawals, and accumulated other comprehensive income............................... 6,991 (371)(a) (891)(h) (888)(i) (3,609)(j) (1,232)(k) -------- ------- ---------- ------ -------- Total partnership capital.............. 6,991 (6,991) -- -- -- Common stock and nonvoting common stock, par value $0.01 per share..... -- 4 (j) 4 -- 4 Restricted stock units................. -- 3,169 (m) 3,169 -- 3,169 Additional paid-in capital............. -- 3,605 (j) 4,233 1,989(f) 6,222 628 (m) Retained earnings...................... -- (165)(b) (733) -- (733) (200)(g) 1,764 (l) (2,132)(m) Unearned compensation.................. -- (1,665)(m) (1,665) -- (1,665) -------- ------- ---------- ------ -------- Total stockholders' equity............. -- 5,008 5,008 1,989 6,997 Total liabilities, partnership capital and stockholders' equity............. $230,624 $(1,447) $ 229,177 $1,989 $231,166 ======== ======= ========== ====== ======== Book value per share................... $ 11.82 $ 15.02
The accompanying notes are an integral part of the Pro Forma Consolidated Financial Information. 29 32 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION NOTE 1: BASIS OF PRESENTATION As permitted by the rules and regulations of the SEC, the Pro Forma Consolidated Financial Information is presented on a condensed basis. The Pro Forma Consolidated Balance Sheet Information was prepared as if the Pro Forma Adjustments had occurred as of February 26, 1999. Book value per share equals stockholders' equity divided by the shares of common stock and nonvoting common stock outstanding, including the shares of common stock underlying the restricted stock units awarded to employees based on a formula, of 423,768,581 prior to our common stock offering and 465,768,581 as adjusted for our common stock offering. Our nonvoting common stock will have no voting rights (except as required by law) but will otherwise have the same rights and privileges, including dividend rights, as the common stock. See Note 2(e) below for a further discussion of shares outstanding. The Pro Forma Consolidated Income Statement Information for the fiscal year ended November 27, 1998 and the three-month fiscal period ended February 26, 1999 was prepared as if the Pro Forma Adjustments had taken place at the beginning of fiscal 1998. For pro forma purposes, our common stock offering and, where applicable, the related transactions reflect an assumed initial public offering price of $50.00 per share. For purposes of the pro forma ratio of earnings to fixed charges, "earnings" represent pre-tax earnings plus fixed charges and "fixed charges" represent interest expense plus that portion of rent expense that, in our opinion, approximates the interest factor included in rent expense. Neither the pro forma ratio of earnings to fixed charges nor the historical ratio of earnings to fixed charges gives effect to this offering of Notes, our dollar debt offering or our new medium-term note program. NOTE 2: PRO FORMA ADJUSTMENTS AND ADJUSTMENT FOR OUR COMMON STOCK OFFERING (a) RETIRED LIMITED PARTNERS EXCHANGE OF INTERESTS FOR DEBENTURES. Adjustment to reflect the issuance of junior subordinated debentures to the retired limited partners in exchange for their interests in The Goldman Sachs Group, L.P. and certain affiliates. These junior subordinated debentures will have a principal amount of $295 million, an initial carrying value of $371 million and an effective interest rate of 7.5%. The annual interest expense to be recorded on these debentures in the first year will be $28 million. (b) COMPENSATION AND BENEFITS, EXCLUDING EMPLOYEE INITIAL PUBLIC OFFERING AWARDS. Since Goldman Sachs has operated as a partnership, there is no meaningful historical measure of the compensation and benefits that would have been paid, in corporate form, to the managing directors who were profit participating limited partners for services rendered in fiscal 1998 and in the three months ended February 26, 1999. Accordingly, management has estimated these amounts, which are substantially performance-based, by reference to a pro forma ratio of total compensation and benefits to net revenues that it deemed appropriate for Goldman Sachs as a whole, given the historical operating results in these periods. As a result, additional compensation and benefits expense related to the managing directors who were profit participating limited partners of $427 million in fiscal 1998 and $242 million in the three months ended February 26, 1999 has been recorded on the Pro Forma Consolidated Income Statement Information. The future compensation and benefits related to services rendered by the managing directors who were profit participating limited partners will be based upon measures of financial performance, including net revenues, pre-tax earnings and the ratio of compensation and benefits to net revenues, as described under "Management -- The Partner Compensation Plan -- Determination of Salary and Bonus". Management anticipates that, consistent with industry practice, it will adjust 30 33 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) the form and structure of its compensation arrangements to achieve a relationship of compensation and benefits to net revenues within a range that it believes is appropriate given prevailing market conditions. In addition to the employee initial public offering awards, restricted stock units will also be granted to employees in lieu of a portion of ongoing cash compensation. Of the total restricted stock units assumed to be granted in lieu of cash compensation, 50% will require future service as a condition to the delivery of the underlying shares of common stock. In accordance with Accounting Principles Board Opinion No. 25, the restricted stock units with future service requirements will be recorded as compensation expense over the four-year service period following the date of grant. Goldman Sachs expects to record this expense over the service period as follows: 52%, 28%, 14% and 6% in years one, two, three and four, respectively. If these stock-based awards had been made from the beginning of fiscal 1998, historical compensation expense would have been reduced by $124 million in fiscal 1998 and $51 million in the three months ended February 26, 1999 because a portion of cash compensation recorded in these periods would have been replaced by restricted stock units with future service requirements. These reductions are reflected in the Pro Forma Consolidated Income Statement Information. The adjustment of $165 million to the Pro Forma Consolidated Balance Sheet Information reflects the additional compensation and benefits that we would have recorded assuming the Pro Forma Adjustments had occurred as of February 26, 1999. This adjustment includes $232 million in compensation and benefits related to the managing directors who were profit participating limited partners offset by a reduction of $67 million related to the issuance of restricted stock units to employees, in lieu of a portion of cash compensation, for which future service is required as a condition to the delivery of the underlying shares of common stock. This adjustment to the Pro Forma Consolidated Balance Sheet Information excludes the compensation expense of $26 million in the first quarter of fiscal 1999 related to the portion of restricted stock units that, for pro forma income statement purposes only, were assumed to be awarded in fiscal 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Operating Expenses" for a discussion of the actual expense we expect to record in the second quarter of fiscal 1999. (c) EXPENSE RELATED TO EMPLOYEE INITIAL PUBLIC OFFERING AWARDS. Adjustment to reflect the amortization of the 33,303,595 restricted stock units awarded to employees on a discretionary basis. These restricted stock units will have a value of $1,665 million, approximately 26% of which will be amortized as a non-cash expense in the twelve months following the date of grant. The remaining 74% of the value of these restricted stock units will be amortized over the next four years as follows: 26%, 26%, 15% and 7% in years two, three, four and five, respectively. The options to purchase 40,000,028 shares of common stock awarded to employees on a discretionary basis will be accounted for pursuant to Accounting Principles Board Opinion No. 25, as permitted by paragraph 5 of Statement of Financial Accounting Standards No. 123. Since these options will have no intrinsic value on the date of grant, no compensation expense will be recognized. The estimated fair value of these discretionary options on the date of grant is $667 million using a Black-Scholes option pricing model. If Statement of Financial Accounting Standards No. 123 had been applied, compensation expense of $174 million and $44 million would have been included in the Pro Forma Consolidated Income Statement Information in fiscal 1998 and the three months ended February 26, 1999, respectively. See "Management -- The Employee Initial Public Offering Awards" for a description of these awards. (d) PRO FORMA PROVISION FOR INCOME TAXES. Adjustment to reflect a pro forma provision for income taxes for Goldman 31 34 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) Sachs in corporate form at an effective tax rate of 41%. (e) PRO FORMA COMMON STOCK AND NON-VOTING COMMON STOCK. Shares outstanding, computed on a weighted-average basis, after giving effect to the Pro Forma Adjustments. For the purpose of calculating basic earnings per share and book value per share, shares outstanding prior to our common stock offering includes the nonvoting common stock, the shares of common stock irrevocably contributed to the defined contribution plan and, pursuant to Statement of Financial Accounting Standards No. 128, the shares of common stock underlying the restricted stock units awarded to employees on a discretionary basis since future service is not required as a condition to the delivery of the underlying shares of common stock. With respect to the three months ended February 26, 1999, pro forma basic common shares outstanding also includes the shares of common stock underlying the restricted stock units assumed to be awarded in lieu of ongoing cash compensation in fiscal 1998 for which future service would not have been required as a condition to the delivery of the underlying shares of common stock. Pro forma diluted shares outstanding prior to our common stock offering reflects the dilutive effect of the common stock deliverable pursuant to the restricted stock units awarded to employees on a discretionary basis, and, with respect to the three months ended February 26, 1999, the dilutive effect of the shares of common stock underlying the restricted stock units assumed to be awarded in lieu of ongoing cash compensation in fiscal 1998 for which future service would have been required as a condition to the delivery of the underlying shares of common stock. (f) ADJUSTMENT FOR OUR COMMON STOCK OFFERING. Shares as adjusted to reflect the issuance of 42,000,000 shares of common stock offered by The Goldman Sachs Group, Inc. in our common stock offering. Net proceeds from our common stock offering reflect the deduction of underwriting discounts and of estimated expenses payable by Goldman Sachs in connection with our common stock offering. The adjustment for our common stock offering excludes 9,000,000 shares of common stock issuable upon exercise of the underwriters' options to purchase additional shares in our common stock offering. (g) CHARITABLE CONTRIBUTION. Adjustment to reflect the charitable contribution of $200 million. (h) RETIRED LIMITED PARTNER EXCHANGES OF INTERESTS FOR CASH. Adjustment to reflect the payment of $891 million in cash to the retired limited partners in exchange for their interests in The Goldman Sachs Group, L.P. and certain affiliates. (i) REDEMPTION OF SENIOR LIMITED PARTNERSHIP INTERESTS FOR CASH. Adjustment to reflect the redemption of the senior limited partnership interests for cash of $888 million by The Goldman Sachs Group, L.P. prior to the incorporation transactions described under "Certain Relationships and Related Transactions -- Incorporation and Related Transactions -- Incorporation Transactions". (j) PARTNER EXCHANGES OF INTERESTS FOR SHARES. Adjustment of $3,609 million to reflect the issuance of 265,019,073 shares of common stock to the managing directors who were profit participating limited partners, 47,270,551 shares of common stock to retired limited partners, 29,961,934 shares of common stock and 7,903,480 shares of nonvoting common stock to Sumitomo Bank Capital Markets, Inc. and 30,975,421 shares of common stock to Kamehameha Activities Association, in exchange for their respective interests in The Goldman Sachs Group, L.P. and certain affiliates. (k) CASH DISTRIBUTIONS. Adjustment to reflect cash distributions of $1,232 million by The Goldman Sachs Group, L.P. to its partners, including Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, in the second quarter of fiscal 1999 in accordance with its partnership agreement, including distributions for partner income taxes related to earnings in the first quarter of fiscal 1999, capital withdrawals by 32 35 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) the managing directors who were profit participating limited partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association and distributions to satisfy obligations to certain retired limited partners. Goldman Sachs expects that additional cash distributions for partner income taxes related to earnings in the second quarter of fiscal 1999 will be significant due, in part, to certain expenses that are not deductible by the partners. Goldman Sachs expects to record a substantial tax asset on the consummation of our common stock offering related to these expenses. These cash distributions and the related tax asset are not reflected in the Pro Forma Consolidated Balance Sheet Information. (l) NET TAX ASSETS. Adjustment to reflect the addition to retained earnings related to the recognition of a net tax asset of $1,764 million under Statement of Financial Accounting Standards No. 109 at an effective tax rate of 41%. The components of this net tax asset, which will be included in "Other assets" on the consolidated statement of financial condition, are (i) a net benefit of $808 million related to the conversion of The Goldman Sachs Group, L.P. to corporate form, (ii) a benefit of $874 million related to the 30,070,535 restricted stock units awarded to employees based on a formula and the initial irrevocable contribution of 12,567,587 shares of common stock to the defined contribution plan and (iii) a benefit of $82 million related to the charitable contribution. As discussed in Note 2(k) above, Goldman Sachs expects to record a substantial tax asset on the consummation of our common stock offering related to certain expenses that are not deductible by the partners in fiscal 1999. The tax asset associated with these expenses in the second quarter of fiscal 1999 is not reflected in the Pro Forma Consolidated Balance Sheet Information. (m) EFFECT ON STOCKHOLDERS' EQUITY OF EMPLOYEE INITIAL PUBLIC OFFERING AWARDS. Adjustment to reflect the effect on the components of stockholders' equity, excluding the tax benefit described in Note 2(l) above, of (i) the restricted stock units awarded to employees based on a formula, (ii) the initial irrevocable contribution of shares of common stock to the defined contribution plan and (iii) the restricted stock units awarded to employees on a discretionary basis. The following table sets forth each of these components as of February 26, 1999:
COMMON STOCK ADDITIONAL AND NONVOTING RESTRICTED PAID-IN RETAINED UNEARNED COMMON STOCK STOCK UNITS CAPITAL EARNINGS COMPENSATION ------------- ----------- ---------- -------- ------------ (in millions) Restricted stock units awarded based on a formula............................. $-- $1,504 $ -- $(1,504) $ -- Contribution of shares of common stock to the defined contribution plan...... -- -- 628 (628) -- Restricted stock units awarded on a discretionary basis................... -- 1,665 -- -- (1,665) -- ------ ---- ------- ------- Total Adjustment........................ $-- $3,169 $628 $(2,132) $(1,665) == ====== ==== ======= =======
33 36 CAPITALIZATION The following table sets forth the consolidated capitalization of Goldman Sachs as of February 26, 1999 on an historical basis, and on a pro forma basis after giving effect to the Pro Forma Adjustments, described under "Pro Forma Consolidated Financial Information", and as further adjusted for: - - the sale of 42,000,000 shares of common stock by The Goldman Sachs Group, Inc. in our common stock offering at an assumed initial public offering price of $50.00 per share, the midpoint of the currently assumed range of initial public offering prices for that offering, and after deduction of the underwriting discounts and estimated expenses payable by Goldman Sachs in our common stock offering; - - the sale of the Notes in this offering; and - - the issuance of $1.0 billion aggregate principal amount of our debt securities, payable in U.S. dollars, in our dollar debt offering. The table below does not give effect to our new medium-term note program. This table should be read in conjunction with the consolidated financial statements and their notes and the Pro Forma Consolidated Financial Information and their notes, and assumes no exercise of the underwriters' options to purchase additional shares in our common stock offering.
AS OF FEBRUARY 26, 1999 --------------------------------------------------- PRO FORMA AS ADJUSTED FOR OUR COMMON STOCK OFFERING, THIS OFFERING AND OUR HISTORICAL PRO FORMA DOLLAR DEBT OFFERING ---------- --------- ----------------------- ($ in millions) Short-term borrowings (including commercial paper)(1)....... $33,863 $33,863 $ 33,863 ======= ======= ========= Long-term borrowings: Senior debt other than the Notes and dollar debt securities(2)........................................... $20,405 $20,405 $ 20,405 Notes to be sold in this offering(3)...................... -- -- 1,059 Debt securities to be sold in our dollar debt offering.... -- -- 1,000 Junior subordinated debentures(4)......................... -- 371 371 ------- ------- --------- Total long-term borrowings......................... 20,405 20,776 22,835 Partners' capital........................................... 6,612 -- -- Stockholders' equity: Preferred stock, par value $0.01 per share; 150,000,000 shares authorized, no shares issued and outstanding..... -- -- -- Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 427,794,566 shares issued and outstanding(5).......................................... -- 4 4 Restricted stock units; 63,374,130 units issued and outstanding(6).......................................... -- 3,169 3,169 Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized and 7,903,480 shares issued and outstanding.................................. -- 0 0 Additional paid-in capital................................ -- 4,233 6,222 Retained earnings......................................... -- (733) (733) Unearned compensation(7).................................. (1,665) (1,665) ------- ------- --------- Total stockholders' equity......................... -- 5,008 6,997 ------- ------- --------- Total capitalization............................. $27,017 $25,784 $ 29,832 ======= ======= =========
- --------------- (1) Includes current portion of long-term borrowings of $6,285 million. See Note 4 to the condensed consolidated financial statements as of February 26, 1999 for further information regarding Goldman Sachs' short-term borrowings. (2) Includes subordinated debt of Goldman, Sachs & Co. of $275 million. (Footnotes continued on following page) 34 37 (3) Euros have been converted to dollars at the rate of $1.0590 for (euro)1.00, the noon buying rate for cable transfers in New York City on April 26, 1999. (4) Consists of junior subordinated debentures issued to the retired limited partners as part of the incorporation transactions. See "Certain Relationships and Related Transactions -- Incorporation and Related Transactions" for further information regarding the issuance of the debentures. (5) Common stock outstanding includes 12,567,587 shares of common stock irrevocably contributed to the defined contribution plan. Common stock outstanding excludes 40,000,028 shares of common stock deliverable pursuant to the options awarded to employees on a discretionary basis. See "Management -- The Employee Initial Public Offering Awards" for more detailed information regarding these awards. (6) Restricted stock units include 30,070,535 shares of common stock underlying the restricted stock units awarded to employees based on a formula and 33,303,595 shares of common stock underlying the restricted stock units awarded to employees on a discretionary basis. (7) Unearned compensation relates to the award of the restricted stock units awarded to employees on a discretionary basis. 35 38 SELECTED CONSOLIDATED FINANCIAL DATA The selected historical consolidated income statement and balance sheet data set forth below have been derived from Goldman Sachs' consolidated financial statements and their notes. Goldman Sachs' consolidated financial statements have been audited by PricewaterhouseCoopers LLP, independent public accountants, as of November 28, 1997 and November 27, 1998 and for the years ended November 29, 1996, November 28, 1997 and November 27, 1998. Goldman Sachs' consolidated financial statements have been reviewed by PricewaterhouseCoopers LLP as of February 26, 1999 and for the three months ended February 27, 1998 and February 26, 1999. These financial statements are included elsewhere in this prospectus, together with the reports thereon of PricewaterhouseCoopers LLP. The selected historical consolidated income statement and balance sheet data set forth below as of November 25, 1994, November 24, 1995 and November 29, 1996 and for the years ended November 25, 1994 and November 24, 1995 have been derived from audited consolidated financial statements of Goldman Sachs not included in this prospectus. The selected historical consolidated income statement and balance sheet data set forth below as of and for the three months ended February 26, 1999 and for the three months ended February 27, 1998 have been derived from Goldman Sachs' unaudited condensed consolidated financial statements that, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The interim results set forth below for the three months ended February 26, 1999 may not be indicative of results for the full year. The pro forma data set forth below for the year ended November 27, 1998 and as of and for the three months ended February 26, 1999 have been derived from the pro forma data set forth in "Pro Forma Consolidated Financial Information" included elsewhere in this prospectus. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Pro Forma Consolidated Financial Information" and the consolidated financial statements and their notes.
AS OF OR FOR THREE MONTHS AS OF OR FOR YEAR ENDED NOVEMBER ENDED FEBRUARY --------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- (unaudited) ($ in millions) INCOME STATEMENT DATA: Total revenues.................................. $12,452 $ 14,324 $ 17,289 $ 20,433 $ 22,478 $ 5,903 $ 5,856 Interest expense................................ 8,915 9,841 11,160 12,986 13,958 3,431 2,861 ------- -------- -------- -------- -------- -------- -------- Net revenues.................................... 3,537 4,483 6,129 7,447 8,520 2,472 2,995 Compensation and benefits(1).................... 1,789 2,005 2,421 3,097 3,838 1,100 1,275 Other operating expenses........................ 1,240 1,110 1,102 1,336 1,761 350 532 ------- -------- -------- -------- -------- -------- -------- Pre-tax earnings(1)............................. $ 508 $ 1,368 $ 2,606 $ 3,014 $ 2,921 $ 1,022 $ 1,188 ======= ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA: Total assets(2)................................. $95,296 $100,066 $152,046 $178,401 $217,380 -- $230,624 Long-term borrowings............................ 14,418 13,358 12,376 15,667 19,906 -- 20,405 Total liabilities(2)............................ 89,981 94,686 145,753 171,864 210,996 -- 223,633 Partners' capital............................... 4,771 4,905 5,309 6,107 6,310 -- 6,612 PRO FORMA DATA (UNAUDITED)(3): Pro forma net earnings.......................... -- -- -- -- $ 1,271 -- $ 520 Pro forma ratio of earnings to fixed charges(4).................................... -- -- -- -- 1.15x -- 1.31x Pro forma stockholders' equity as adjusted for our common stock offering..................... -- -- -- -- -- -- $ 6,997
36 39 SELECTED CONSOLIDATED FINANCIAL DATA
AS OF OR FOR THREE MONTHS AS OF OR FOR YEAR ENDED NOVEMBER ENDED FEBRUARY --------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- ($ in millions) SELECTED DATA AND RATIOS (UNAUDITED): Ratio of earnings to fixed charges(1)(4)........ 1.06x 1.14x 1.23x 1.23x 1.21x 1.30x 1.41x Employees: United States................................. 5,822 5,356 5,818 6,879 8,349 7,008 8,244 International................................. 3,176 2,803 3,159 3,743 4,684 3,891 4,634 ------- -------- -------- -------- -------- -------- -------- Total employees(5).............................. 8,998 8,159 8,977 10,622 13,033 10,899 12,878 ======= ======== ======== ======== ======== ======== ======== Assets under supervision: Assets under management....................... $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $151,189 $206,380 Other client assets........................... 49,061 57,716 76,892 102,033 142,018 114,928 163,315 ------- -------- -------- -------- -------- -------- -------- Total assets under supervision.................. $92,732 $110,074 $171,491 $237,962 $336,839 $266,117 $369,695 ======= ======== ======== ======== ======== ======== ========
- --------------- (1) Since we have historically operated in partnership form, payments to our profit participating limited partners have been accounted for as distributions of partners' capital rather than as compensation expense. As a result, our pre-tax earnings and compensation and benefits expense have not reflected any payments for services rendered by our managing directors who are profit participating limited partners. Accordingly, our historical pre-tax earnings understate the expected operating costs to be incurred by us after our conversion to corporate form. As a corporation, we will include payments for services rendered by our managing directors who were profit participating limited partners in compensation and benefits expense. For financial information that reflects pro forma compensation and benefits expense as if we had been a corporation, see "Pro Forma Consolidated Financial Information". (2) Total assets and liabilities were increased by $11.64 billion as of November 27, 1998 and $8.99 billion as of February 26, 1999 due to the adoption of the provisions of Statement of Financial Accounting Standards No. 125 that were deferred by Statement of Financial Accounting Standards No. 127. For a discussion of Statement of Financial Accounting Standards Nos. 125 and 127, see "Accounting Developments" in Note 2 to the audited consolidated financial statements. (3) Reflects such adjustments as are necessary, in the opinion of management, for a fair presentation of the results of operations and stockholders' equity of Goldman Sachs on a pro forma basis. See "Pro Forma Consolidated Financial Information" for more detailed information concerning these adjustments. (4) For purposes of the ratio of earnings to fixed charges, "earnings" represent pre-tax earnings plus fixed charges and "fixed charges" represent interest expense plus that portion of rent expense that, in our opinion, approximates the interest factor included in rent expense. Neither the pro forma ratio of earnings to fixed charges nor the historical ratio of earnings to fixed charges gives effect to this offering of Notes, our dollar debt offering or our new medium-term note program. (5) Excludes employees of Goldman Sachs' two property management subsidiaries, The Archon Group, L.P. and Archon Group (France) S.C.A. Substantially all of the costs of these employees are reimbursed to Goldman Sachs by the real estate investment funds to which the two companies provide property management services. In addition, as of February 26, 1999, we had 3,400 temporary staff and consultants. For more detailed information regarding our employees, see "Business -- Employees". 37 40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Goldman Sachs is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base. Our activities are divided into three principal business lines: - - Investment Banking, which includes financial advisory services and underwriting; - - Trading and Principal Investments, which includes fixed income, currency and commodities ("FICC"), equities and principal investments (principal investments reflect primarily our investments in our merchant banking funds); and - - Asset Management and Securities Services, which includes asset management, securities services and commissions. All references to 1996, 1997 and 1998 refer to our fiscal year ended, or the date, as the context requires, November 29, 1996, November 28, 1997 and November 27, 1998, respectively, and all references to February 1998 and February 1999 refer to our three-month fiscal period ended, or the date, as the context requires, February 27, 1998 and February 26, 1999, respectively. When we use the terms "Goldman Sachs", "we" and "our", we mean, prior to the principal incorporation transactions that are described under "Certain Relationships and Related Transactions -- Incorporation and Related Transactions -- Incorporation Transactions", The Goldman Sachs Group, L.P., a Delaware limited partnership, and its consolidated subsidiaries and, after the incorporation transactions, The Goldman Sachs Group, Inc., a Delaware corporation, and its consolidated subsidiaries. BUSINESS ENVIRONMENT Economic and market conditions can significantly affect our performance. For a number of years leading up to the second half of 1998, we operated in a generally favorable macroeconomic environment characterized by low inflation, low interest rates and strong equity markets in the United States and many international markets. This favorable economic environment provided a positive climate for our investment banking activities, as well as for our customer-driven and proprietary trading activities. Economic conditions were also favorable for wealth creation which contributed positively to growth in our asset management businesses. From mid-August to mid-October 1998, the Russian economic crisis, the turmoil in Asian and Latin American emerging markets and the resulting move to higher credit quality fixed income securities by many investors led to substantial declines in global financial markets. Investors broadly sold credit-sensitive products, such as corporate and high-yield debt, and bought higher-rated instruments, such as U.S. Treasury securities, which caused credit spreads to widen dramatically. This market turmoil also caused a widespread decline in global equity markets. As a major dealer in fixed income securities, Goldman Sachs maintains substantial inventories of corporate and high-yield debt. Goldman Sachs regularly seeks to hedge the interest rate risk on these positions through, among other strategies, short positions in U.S. Treasury securities. In the second half of 1998, we suffered losses from both the decline in the prices of corporate and high-yield debt instruments that we owned and the increase in the prices of the U.S. Treasury securities in which we had short positions. This market turmoil also led to trading losses in our fixed income relative value trading positions. Relative value trading positions are intended to profit from a perceived temporary dislocation in the relationship between the values of different financial instruments. From mid-August to mid-October 1998, the components of these relative value positions moved in directions that we did not anticipate and the volatilities of some of our positions increased to three times prior levels. When Goldman Sachs and other market participants with similar positions simultaneously sought to reduce positions and exposures, this caused a substantial reduction in market liquidity and a continuing decline in prices. 38 41 In the second half of 1998, we also experienced losses in equity arbitrage and in the value of a number of merchant banking investments. Later in the fourth quarter of 1998, market conditions improved as the U.S. Federal Reserve cut interest rates, the International Monetary Fund finalized a credit agreement with Brazil and a consortium of 14 financial institutions, including Goldman Sachs, recapitalized Long-Term Capital Portfolio, L.P. For a further discussion of Long-Term Capital Portfolio, L.P., see "-- Liquidity -- The Balance Sheet" below. Our earnings in the second half of 1998 were adversely affected by market conditions from mid-August to mid-October. In this difficult business environment, Trading and Principal Investments recorded net revenues of $464 million in the third quarter of 1998 and net revenues of negative $663 million in the fourth quarter of 1998. As a result, Trading and Principal Investments did not make a significant contribution to pre-tax earnings in 1998. In the first quarter of 1999, we operated in a generally favorable macroeconomic environment characterized by low inflation and low interest rates. Global financial markets recovered from the turbulent conditions of the second half of 1998, leading to narrowing credit spreads and an increase in mergers and acquisitions and other corporate activity. The macroeconomic environment in the first quarter of 1999 was particularly favorable in the United States, where inflationary pressures were minimal and interest rates were left unchanged by the U.S. Federal Reserve. Economic growth in Europe was sluggish despite a simultaneous cut in interest rates by 11 European central banks in December and the successful establishment of the European Economic and Monetary Union in January. Markets in Asia and Latin America were generally characterized by continuing economic and financial difficulties, particularly in Japan and Brazil. In a number of Asian emerging markets, however, economic and market conditions stabilized in the first quarter of 1999. RESULTS OF OPERATIONS Management believes that the best measure by which to assess Goldman Sachs' historical profitability is pre-tax earnings because, as a partnership, we generally have not been subject to U.S. federal or state income taxes. See "-- Provision for Taxes" below and Note 2 to the audited consolidated financial statements for a further discussion of our provision for taxes. Since historically we have operated as a partnership, payments to our profit participating limited partners have been accounted for as distributions of partners' capital rather than as compensation expense. As a result, our compensation and benefits expense has not reflected any payments for services rendered by managing directors who are profit participating limited partners and has therefore understated the expected operating costs to be incurred by us after our conversion to corporate form. As a corporation, we will include these payments to managing directors who were profit participating limited partners in compensation and benefits expense, as discussed under "Pro Forma Consolidated Financial Information". See "Management -- The Partner Compensation Plan" for a further discussion of the plan to be adopted for the purpose of compensating our managing directors who were profit participating limited partners. Moreover, in connection with our common stock offering, we will record the effect of the following non-recurring items in the second quarter of 1999: - - the award of the restricted stock units to employees based on a formula; - - the initial irrevocable contribution of shares of common stock to the defined contribution plan; - - the recognition of net tax assets; and - - the contribution to the Goldman Sachs Fund, a charitable foundation. We also expect to record additional expense in the second quarter of 1999 equal to (i) 50% of the estimated compensation and benefits of the managing directors who were profit participating limited partners in 1999 based on the annualized results for the first half of 1999 offset by (ii) the effect of issuing 39 42 restricted stock units to employees in lieu of cash compensation, for which future service is required as a condition to the delivery of the underlying shares of common stock. In accordance with Accounting Principles Board Opinion No. 25, these restricted stock units will be recorded as compensation expense over the four-year vesting period following the date of grant. As a result, we expect to record a substantial pre-tax loss in the second quarter of 1999. See "Risk Factors -- We Expect to Record a Substantial Pre-Tax Loss in the Second Quarter of Fiscal 1999". The composition of our historical net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary over the shorter term due to fluctuations in economic and market conditions. As a result, period-to-period comparisons may not be meaningful. See "Risk Factors" for a discussion of factors that could affect our future performance. OVERVIEW The following table sets forth our net revenues and pre-tax earnings: FINANCIAL OVERVIEW (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY -------------------------- ------------------ 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Net revenues................................ $6,129 $7,447 $8,520 $2,472 $2,995 Pre-tax earnings............................ 2,606 3,014 2,921 1,022 1,188
------------------------ FEBRUARY 1999 VERSUS FEBRUARY 1998. Our net revenues were $2.99 billion in the three-month period ended February 1999, an increase of 21% compared to the same period in 1998. Net revenue growth was strong in Investment Banking, which increased 42%, primarily due to higher market levels of mergers and acquisitions and underwriting activity. Net revenues in Trading and Principal Investments increased 15% as higher net revenues in FICC and equities more than offset a reduction in principal investments. Net revenues in Asset Management and Securities Services increased 12% due to increased assets under management and higher customer balances in securities services. Pre-tax earnings increased 16% to $1.19 billion for the period. 1998 VERSUS 1997. Our net revenues were $8.52 billion in 1998, an increase of 14% compared to 1997. Net revenue growth was strong in Investment Banking, which increased 30%, due to higher levels of mergers and acquisitions activity, and in Asset Management and Securities Services, which increased 43%, due to increased commissions, higher customer balances in securities services and increased assets under management. Net revenues in Trading and Principal Investments decreased 19% compared to the prior year, due primarily to a 30% reduction of net revenues in FICC. Pre-tax earnings in 1998 were $2.92 billion compared to $3.01 billion in the prior year. 1997 VERSUS 1996. Our net revenues were $7.45 billion in 1997, an increase of 22% compared to 1996. Net revenue growth was strong in Asset Management and Securities Services, which increased 46%, due to increased commissions and asset management fees and higher assets under management and customer balances in securities services. Net revenues in Investment Banking increased 22% due to increased levels of mergers and acquisitions and debt underwriting activity. Net revenues in Trading and Principal Investments increased 9% over the prior year, due to higher net revenues in FICC and principal investments. Pre-tax earnings were $3.01 billion in 1997, an increase of 16% over the prior year. 40 43 The following table sets forth the net revenues of our principal business lines: NET REVENUES BY PRINCIPAL BUSINESS LINE (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY -------------------------- ------------------ 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Investment Banking...................... $2,113 $2,587 $3,368 $ 633 $ 902 Trading and Principal Investments....... 2,693 2,926 2,379 1,182 1,357 Asset Management and Securities Services.............................. 1,323 1,934 2,773 657 736 ------ ------ ------ ------ ------ Total net revenues...................... $6,129 $7,447 $8,520 $2,472 $2,995 ====== ====== ====== ====== ======
------------------------ Net revenues in our principal business lines represent total revenues less allocations of interest expense to specific securities, commodities and other positions in relation to the level of financing incurred by each position. Interest expense is allocated to Trading and Principal Investments and the securities services component of Asset Management and Securities Services. Net revenues may not be indicative of the relative profitability of any principal business line. INVESTMENT BANKING Goldman Sachs provides a broad range of investment banking services to a diverse group of corporations, financial institutions, governments and individuals. Our investment banking activities are divided into two categories: - - FINANCIAL ADVISORY. Financial advisory includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs; and - - UNDERWRITING. Underwriting includes public offerings and private placements of equity and debt securities. The following table sets forth the net revenues of our Investment Banking business: INVESTMENT BANKING NET REVENUES (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY ------------------------------ ------------------ 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Financial advisory.................... $ 931 $1,184 $1,774 $363 $522 Underwriting.......................... 1,182 1,403 1,594 270 380 ------ ------ ------ ---- ---- Total Investment Banking.............. $2,113 $2,587 $3,368 $633 $902 ====== ====== ====== ==== ====
------------------------ FEBRUARY 1999 VERSUS FEBRUARY 1998. The Investment Banking business achieved net revenues of $902 million in the three-month period ended February 1999, an increase of 42% compared to the same period in 1998. Net revenue growth was strong in both financial advisory and underwriting, particularly in the communications, media and entertainment, healthcare and financial institutions groups. Our Investment Banking business was particularly strong in Europe and the United States. 41 44 Financial advisory revenues increased 44% compared to the same period in 1998, primarily due to higher market levels of mergers and acquisitions activity as the trend toward consolidation continued in various industries. Underwriting revenues increased 41%, primarily due to increased levels of equity underwriting activity in Europe. 1998 VERSUS 1997. The Investment Banking business achieved net revenues of $3.37 billion in 1998, an increase of 30% compared to 1997. Net revenue growth was strong in financial advisory and, to a lesser extent, in underwriting as Goldman Sachs' global presence and strong client base enabled it to capitalize on higher levels of activity in many industry groups, including communications, media and entertainment, financial institutions, general industrials and retail. Net revenue growth in our Investment Banking business was strong in all major regions in 1998 compared to the prior year. Financial advisory revenues increased 50% compared to 1997 due to increased revenues from mergers and acquisitions advisory assignments, which principally resulted from consolidation within various industries and generally favorable U.S. and European stock markets. Despite a substantial decrease in the number of industry-wide underwriting transactions in August and September of 1998, underwriting revenues increased 14% for the year, primarily due to increased revenues from equity and high-yield corporate debt underwriting activities. 1997 VERSUS 1996. The Investment Banking business achieved net revenues of $2.59 billion in 1997, an increase of 22% compared to 1996. Net revenue growth was strong in both financial advisory and underwriting, particularly in the financial institutions, general industrials and real estate groups. Financial advisory revenues increased 27% compared to 1996 primarily due to increased revenues from mergers and acquisitions activity in the market as a whole. Underwriting revenues increased 19% primarily due to increased revenues from investment grade and high-yield debt underwriting, which resulted from lower interest rates. Revenues from equity underwriting activities increased modestly over 1996 levels. TRADING AND PRINCIPAL INVESTMENTS Our Trading and Principal Investments business facilitates customer transactions and takes proprietary positions through market-making in and trading of fixed income and equity products, currencies, commodities, and swaps and other derivatives. The Trading and Principal Investments business includes the following: - - FICC. We make markets in and trade fixed income products, currencies and commodities, structure and enter into a wide variety of derivative transactions and engage in proprietary trading and arbitrage activities; - - EQUITIES. We make markets in and trade equities and equity-related products, structure and enter into equity derivative transactions and engage in proprietary trading and equity arbitrage; and - - PRINCIPAL INVESTMENTS. Principal investments primarily represents net revenues from our investments in our merchant banking funds. Net revenues from principal investments do not include management fees and the increased share of the income and gains from our merchant banking funds to which Goldman Sachs is entitled when the return on investments exceeds certain threshold returns to fund investors. These management fees and increased shares of income and gains are included in the net revenues of Asset Management and Securities Services. Substantially all of our inventory is marked-to-market daily and, therefore, its value and our net revenues are subject to fluctuations based on market movements. In addition, net revenues derived from our principal investments in privately held concerns and in real estate may fluctuate significantly depending on the revaluation or sale of these investments in any given period. 42 45 The following table sets forth the net revenues of our Trading and Principal Investments business: TRADING AND PRINCIPAL INVESTMENTS NET REVENUES (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY -------------------------- ------------------ 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- FICC..................................... $1,749 $2,055 $1,438 $ 741 $ 876 Equities................................. 730 573 795 365 455 Principal investments.................... 214 298 146 76 26 ------ ------ ------ ------ ------ Total Trading and Principal Investments............................ $2,693 $2,926 $2,379 $1,182 $1,357 ====== ====== ====== ====== ======
------------------------ FEBRUARY 1999 VERSUS FEBRUARY 1998. The Trading and Principal Investments business achieved net revenues of $1.36 billion in the three-month period ended February 1999, an increase of 15% compared to the same period in 1998. Strong performances in FICC and equities more than offset a net revenue reduction in principal investments. Net revenues in FICC increased 18% compared to the same period in 1998, primarily due to higher net revenues from market-making and trading of currencies, corporate bonds and mortgage-backed securities, partially offset by lower net revenues from fixed income derivatives. Net revenues in equities increased 25% compared to the same period in 1998, primarily due to increased market-making net revenues resulting from strong over-the-counter transaction volume in Europe and the United States. Net revenues from principal investments decreased 66%, due to lower gains on the disposition of investments and a reduction in net revenues related to the mark-to-market of our principal investments. 1998 VERSUS 1997. Net revenues in Trading and Principal Investments were $2.38 billion in 1998, a decrease of 19% compared to 1997. This decrease in net revenues was concentrated in the second half of the year. See "-- Business Environment" above for a discussion of the losses suffered in Trading and Principal Investments in the second half of 1998. For the full year, significant net revenue reductions in FICC and principal investments were partially offset by increased net revenues in equities. Net revenues in FICC decreased 30% compared to 1997 due to an extraordinarily difficult environment in the second half of 1998. The net revenue reduction in FICC was concentrated in fixed income arbitrage and high-yield debt trading, which experienced losses in 1998 due to a reduction in liquidity and widening credit spreads in the second half of the year. An increase in net revenues from market-making and trading in fixed income derivatives, currencies and commodities partially offset this decline. Net revenues in equities increased 39% compared to 1997 as higher net revenues in derivatives and European shares were partially offset by losses in equity arbitrage. The derivatives business generated significantly higher net revenues due, in part, to strong customer demand for over-the-counter products, particularly in Europe. Net revenues from European shares increased as Goldman Sachs benefited from generally favorable equity markets and increased customer demand. The equity arbitrage losses were due principally to the underperformance of various equity positions versus their benchmark hedges, to widening of spreads in a variety of relative value trades and to lower prices for event-oriented securities resulting from a re- 43 46 duction in announced mergers and acquisitions and other corporate activity in the second half of 1998. Net revenues from principal investments declined 51% compared to 1997 as investments in certain publicly held companies decreased in value during the second half of 1998. This decrease was partially offset by an increase in gains on the disposition of investments, compared to the prior year. 1997 VERSUS 1996. The Trading and Principal Investments business achieved net revenues of $2.93 billion in 1997, an increase of 9% compared to 1996. Strong performances in FICC and principal investments more than offset a net revenue reduction in equities. Net revenues in FICC increased 17% compared to 1996 due principally to higher net revenues from market-making and trading in currencies, fixed income derivatives and commodities. Fixed income arbitrage activities also contributed to net revenue growth in FICC. Net revenues from market-making in and trading of emerging market debt securities and corporate bonds declined in 1997 compared to 1996. Net revenues in equities decreased 22% in 1997 compared to 1996 due principally to reductions in net revenues from derivatives and convertibles resulting from volatility in the global equity markets in October and November 1997 and declining asset values in Japan in late November 1997. This reduction was partially offset by increased net revenues from higher customer trading volume in certain European over-the-counter markets. Net revenues from principal investments increased 39% in 1997 compared to 1996, as certain companies in which we invested through our merchant banking funds completed initial public offerings and our positions in other publicly held companies increased in value. ASSET MANAGEMENT AND SECURITIES SERVICES Asset Management and Securities Services is comprised of the following: - - ASSET MANAGEMENT. Asset management generates management fees by providing investment advisory services to a diverse and rapidly growing client base of institutions and individuals; - - SECURITIES SERVICES. Securities services includes prime brokerage, financing services and securities lending and our matched book businesses, all of which generate revenue primarily in the form of fees or interest rate spreads; and - - COMMISSIONS. Commission-based businesses include agency transactions for clients on major stock and futures exchanges. Revenues from the increased share of the income and gains derived from our merchant banking funds are also included in commissions. The following table sets forth the net revenues of our Asset Management and Securities Services business: ASSET MANAGEMENT AND SECURITIES SERVICES NET REVENUES (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY -------------------------- ------------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Asset management............................. $ 242 $ 458 $ 675 $139 $202 Securities services.......................... 354 487 730 170 207 Commissions.................................. 727 989 1,368 348 327 ------ ------ ------ ---- ---- Total Asset Management and Securities Services................................... $1,323 $1,934 $2,773 $657 $736 ====== ====== ====== ==== ====
Goldman Sachs' assets under supervision are comprised of assets under management and other client assets. Assets under management typically generate fees based on 44 47 a percentage of their value and include our mutual funds, separate accounts managed for institutional and individual investors, our merchant banking funds and other alternative investment funds. Other client assets are comprised of assets in brokerage accounts of primarily high net worth individuals, on which we earn commissions. The following table sets forth our assets under supervision: ASSETS UNDER SUPERVISION (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY -------------------------------- -------------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Assets under management.......... $ 94,599 $135,929 $194,821 $151,189 $206,380 Other client assets.............. 76,892 102,033 142,018 114,928 163,315 -------- -------- -------- -------- -------- Total assets under supervision... $171,491 $237,962 $336,839 $266,117 $369,695 ======== ======== ======== ======== ========
------------------------ FEBRUARY 1999 VERSUS FEBRUARY 1998. The Asset Management and Securities Services business achieved net revenues of $736 million in the three-month period ended February 1999, an increase of 12% compared to the same period in 1998. Strong performances in asset management and securities services more than offset a net revenue reduction in commissions. Asset management revenues increased 45% compared to the same period in 1998, primarily reflecting a 43% increase in average assets under management. In the 1999 period, approximately half of the increase in assets under management was attributable to net asset inflows, with the balance reflecting market appreciation. Net revenues from securities services increased 22% during the period, primarily due to growth in our securities borrowing and lending businesses. Commission revenues decreased 6%, as an increase in equity commissions was more than offset by a reduction in revenues from the increased share of income and gains from our merchant banking funds compared to a particularly strong period in the prior year. 1998 VERSUS 1997. The Asset Management and Securities Services business achieved net revenues of $2.77 billion in 1998, an increase of 43% compared to 1997. All major components of the business line exhibited strong net revenue growth. Asset management revenues increased 47% during this period, reflecting a 41% increase in average assets under management over 1997. In 1998, approximately 80% of the increase in assets under management was attributable to net asset inflows, with the remaining 20% reflecting market appreciation. Net revenues from securities services increased 50%, primarily due to growth in our securities borrowing and lending businesses. Commission revenues increased 38% as generally strong and highly volatile equity markets resulted in increased transaction volumes in listed equity securities. Revenues from the increased share of income and gains from our merchant banking funds also contributed significantly to the increase in commission revenues. 1997 VERSUS 1996. The Asset Management and Securities Services business achieved net revenues of $1.93 billion in 1997, an increase of 46% compared to 1996. All major components of the business line exhibited strong net revenue growth. Asset management revenues increased 89% during this period, reflecting a 73% increase in average assets under management due to strong net asset inflows, market appreciation and assets added through the acquisitions of Liberty Investment Management in January 1997 and Commodities Corporation in June 1997. Net revenue growth in securities services was 38%, principally reflecting growth in our securities borrowing and lending businesses. Commission revenues increased 36% as customer trading volumes increased significantly on many of the world's principal stock exchanges, includ- 45 48 ing those in the United States where industry-wide volumes increased substantially in the third and fourth quarters of 1997. Revenues from the increased share of income and gains from our merchant banking funds also contributed significantly to the increase in commission revenues. OPERATING EXPENSES In recent years, our operating expenses have increased as a result of numerous factors, including higher levels of compensation, expansion of our asset management business, increased worldwide activities, greater levels of business complexity and additional systems and consulting costs relating to various technology initiatives. Since we have historically operated in partnership form, payments to our profit participating limited partners have been accounted for as distributions of partners' capital rather than as compensation expense. As a result, our compensation and benefits expense has not reflected any payments for services rendered by our managing directors who are profit participating limited partners. Accordingly, our historical compensation and benefits, the principal component of our operating expenses, will increase significantly after our conversion to corporate form since, as a corporation, we will include these payments to our managing directors who were profit participating limited partners in compensation and benefits expense. We expect to record additional expense in the second quarter of 1999 equal to (i) 50% of the estimated compensation and benefits of the managing directors who were profit participating limited partners in 1999 based on the annualized results for the first half of 1999 offset by (ii) the effect of issuing restricted stock units to employees, in lieu of cash compensation, for which future service is required as a condition to the delivery of the underlying shares of common stock. In accordance with Accounting Principles Board Opinion No. 25, these restricted stock units will be recorded as compensation expense over the four-year vesting period following the date of grant. In addition, we expect to record non-cash compensation expense related to the amortization of the restricted stock units awarded to employees on a discretionary basis over the five-year period following the consummation of our common stock offering. The non-cash expense related to these restricted stock units is a fixed amount that is not dependent on our operating results in any given period. See "Pro Forma Consolidated Financial Information" for a further discussion of these items. The following table sets forth our operating expenses and number of employees: OPERATING EXPENSES AND EMPLOYEES ($ in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY ---------------------------- ------------------ 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Compensation and benefits............... $2,421 $ 3,097 $ 3,838 $ 1,100 $ 1,275 Brokerage, clearing and exchange fees... 278 357 424 93 111 Market development...................... 137 206 287 54 77 Communications and technology........... 173 208 265 58 78 Depreciation and amortization........... 172 178 242 42 97 Occupancy............................... 154 168 207 44 78 Professional services and other......... 188 219 336 59 91 ------ ------- ------- ------- ------- Total operating expenses................ $3,523 $ 4,433 $ 5,599 $ 1,450 $ 1,807 ====== ======= ======= ======= ======= Employees at period end(1).............. 8,977 10,622 13,033 10,899 12,878
- --------------- (1) Excludes employees of Goldman Sachs' two property management subsidiaries, The Archon Group, L.P. and Archon Group (France) S.C.A. Substantially all of the costs of these employees are reimbursed to Goldman Sachs by the real estate investment funds to which the two companies provide property management services. In addition, as of February 1999, we had approximately 3,400 temporary staff and consultants. For more detailed information regarding our employees, see "Business -- Employees". 46 49 FEBRUARY 1999 VERSUS FEBRUARY 1998. Operating expenses were $1.81 billion in the three-month period ended February 1999, an increase of 25% over the same period in 1998, primarily due to increased compensation and benefits and higher other operating expenses due to, among other things, Goldman Sachs' increased worldwide activities. Compensation and benefits decreased as a percentage of net revenues to 43% from 44% in the same period in 1998. Employment levels increased 18% compared to the same period in 1998, with particularly strong growth in investment banking and asset management. Expenses associated with our temporary staff and consultants were $98 million for the three-month period ended February 1999, an increase of 55%, reflecting preparations for the Year 2000 and greater levels of business activity. Brokerage, clearing and exchange fees increased 19%, primarily due to higher transaction volumes in fixed income derivatives and futures contracts. Market development expenses increased 43% and professional services and other expenses increased 54%, due to higher levels of business activity. Communications and technology expenses increased 34%, reflecting higher telecommunications and market data costs associated with higher employment levels and additional spending on technology initiatives. Depreciation and amortization increased significantly due to certain fixed asset write-offs and to capital expenditures on telecommunications and technology-related equipment and leasehold improvements in support of Goldman Sachs' increased worldwide activities. Occupancy expenses increased 77%, reflecting additional office space needed to accommodate higher employment levels. 1998 VERSUS 1997. Operating expenses were $5.60 billion in 1998, an increase of 26% over 1997, primarily due to increased compensation and benefits expense. Compensation and benefits increased as a percentage of net revenues to 45% from 42% in 1997, principally as a result of increases in employment levels and in expenses associated with temporary staff and consultants. Employment levels increased 23% during the year, with particularly strong growth in asset management. Expenses associated with our temporary staff and consultants were $330 million in 1998, an increase of 85% compared to 1997, reflecting greater business activity, Goldman Sachs' global expansion and consulting costs associated with various technology initiatives, including preparations for the Year 2000 and the establishment of the European Economic and Monetary Union. Brokerage, clearing and exchange fees increased 19%, primarily due to higher transaction volumes in European and U.S. equities and futures contracts. Market development expenses increased 39% and professional services and other expenses increased 53%, due to higher levels of business activity and Goldman Sachs' global expansion. Communications and technology expenses increased 27%, reflecting higher telecommunications and market data costs associated with higher employment levels and additional spending on technology initiatives. Depreciation and amortization increased 36%, principally due to capital expenditures on telecommunications and technology-related equipment and leasehold improvements. Occupancy expenses increased 23%, reflecting additional office space needed to accommodate higher employment levels. 1997 VERSUS 1996. Operating expenses were $4.43 billion in 1997, an increase of 26% over 1996, primarily due to increased compensation and benefits expense. Compensation and benefits increased as a percentage of net revenues to 42% from 40% in 1996. This increase primarily reflected higher compensation due to higher profit levels and an 18% increase in employment levels across Goldman Sachs due to higher levels of market activity and our global expansion into new businesses and markets. Expenses associated with our temporary staff and consultants also contributed to the increase in compensation and benefits as a percentage of net revenues. These expenses were $178 million in 1997, an increase of 55% compared to 1996, reflecting greater business 47 50 activity, Goldman Sachs' global expansion and consulting costs associated with various technology initiatives. Brokerage, clearing and exchange fees increased 28%, primarily due to higher transaction volumes in global equities, derivatives and currencies. Market development expenses increased 50% and professional services and other expenses increased 16%, due to higher levels of business activity and Goldman Sachs' global expansion. Communications and technology expenses increased 20%, reflecting higher telecommunications and market data costs associated with higher employment levels and additional spending on technology initiatives. Depreciation and amortization increased 3%. Occupancy expenses increased 9%, reflecting additional office space needed to accommodate higher employment levels. PROVISION FOR TAXES The Goldman Sachs Group, L.P., as a partnership, generally has not been subject to U.S. federal and state income taxes. The earnings of The Goldman Sachs Group, L.P. and certain of its subsidiaries have been subject to the 4% New York City unincorporated business tax. In addition, certain of our non-U.S. subsidiaries have been subject to income taxes in their local jurisdictions. The amount of our provision for income and unincorporated business taxes has varied significantly from year to year depending on the mix of earnings among our subsidiaries. For information on the pro forma effective tax rate of Goldman Sachs under corporate form, see "Pro Forma Consolidated Financial Information". GEOGRAPHIC DATA For a summary of the total revenues, net revenues, pre-tax earnings and identifiable assets of Goldman Sachs by geographic region, see Note 9 to the audited consolidated financial statements. CASH FLOWS Our cash flows are primarily related to the operating and financing activities undertaken in connection with our trading and market-making transactions. YEAR ENDED NOVEMBER 1998 Cash and cash equivalents increased to $2.84 billion in 1998. Cash of $62 million was provided by operating activities. Cash of $656 million was used for investing activities, primarily for leasehold improvements and the purchase of telecommunications and technology-related equipment and certain financial instruments. Financing activities provided $2.10 billion of cash, reflecting an increase in the net issuance of long-term and short-term borrowings, partially offset by a decrease in net repurchase agreements, distributions to partners, cash outflows related to partners' capital allocated for income taxes and potential withdrawals and the termination of our profit participation plans. See Note 8 to the audited consolidated financial statements for a discussion of the termination of the profit participation plans. YEAR ENDED NOVEMBER 1997 Cash and cash equivalents decreased to $1.33 billion in 1997. Operating activities provided cash of $70 million. Cash of $693 million was used for investing activities, primarily for the purchase of certain financial instruments and technology-related equipment. Cash of $258 million was used for financing activities, principally due to a decrease in net repurchase agreements, distributions to partners and cash outflows related to partners' capital allocated for income taxes and potential withdrawals, partially offset by the net issuance of long-term and short-term borrowings. YEAR ENDED NOVEMBER 1996 Cash and cash equivalents increased to $2.21 billion in 1996. Cash of $14.63 billion was used for operating activities, primarily to fund higher net trading assets due to increased levels of business activity. Cash of $218 million was used for investing activities, primarily for the purchase of technology-related equipment and leasehold improvements. Financing activities provided $16.10 billion of cash, reflecting an increase in net 48 51 repurchase agreements and the net issuance of long-term borrowings, partially offset by distributions to partners and cash outflows related to partners' capital allocated for income taxes and potential withdrawals. LIQUIDITY MANAGEMENT OVERSIGHT OF LIQUIDITY Management believes that one of the most important issues for a company in the financial services sector is access to liquidity. Accordingly, Goldman Sachs has established a comprehensive structure to oversee its liquidity and funding policies. The Finance Committee has responsibility for establishing and assuring compliance with our asset and liability management policies and has oversight responsibility for managing liquidity risk, the size and composition of our balance sheet and our credit ratings. See "-- Risk Management -- Risk Management Structure" below for a further description of the committees that participate in our risk management process. The Finance Committee meets monthly, and more often when necessary, to evaluate our liquidity position and funding requirements. Our Treasury Department manages the capital structure, funding, liquidity and relationships with creditors and rating agencies on a global basis. The Treasury Department works jointly with our global funding desk in managing our borrowings. The global funding desk is primarily responsible for our transactional short-term funding activity. LIQUIDITY POLICIES In order to maintain an appropriate level of liquidity, management has implemented several liquidity policies as outlined below. DIVERSIFICATION OF FUNDING SOURCES AND LIQUIDITY PLANNING. Goldman Sachs maintains diversified funding sources with both banks and non-bank lenders globally. Management believes that Goldman Sachs' relationships with its lenders are critical to its liquidity. We maintain close contact with our primary lenders to keep them advised of significant developments that affect us. Goldman Sachs also has access to diversified funding sources with over 800 creditors, including banks, insurance companies, mutual funds, bank trust departments and other asset managers. We monitor our creditors to maintain broad and diversified credit, and no single creditor represented more than 5% of our uncollateralized funding sources as of November 1998. Uncollateralized funding sources principally include our short-term and long-term borrowings and letters of credit. We access liquidity in a variety of markets in the United States as well as in Europe and Asia. In addition, we make extensive use of the repurchase agreement market and have raised debt in the private placement, the SEC's Rule 144A and the commercial paper markets, as well as through Eurobonds, money broker loans, commodity-based financings, letters of credit and promissory notes. We also intend to begin raising debt in the public securities market, including through this offering, our dollar debt offering and our new medium-term note program. We seek to structure our liabilities to avoid significant amounts of debt coming due on any one day or during any single week or year. In addition, we maintain and update annually a liquidity crisis plan that provides guidance in the event of a liquidity crisis. The annual update of this plan is reviewed and approved by our Finance Committee. ASSET LIQUIDITY. Goldman Sachs maintains a highly liquid balance sheet. Many of our assets are readily funded in the repurchase agreement markets, which generally have proven to be a consistent source of funding, even in periods of market stress. Substantially all of our inventory turns over rapidly and is marked-to-market daily. We maintain long-term borrowings and partners' capital substantially in excess of our less liquid assets. DYNAMIC LIQUIDITY MANAGEMENT. Goldman Sachs seeks to manage the composition of its asset base and the maturity profile of its funding to ensure that it can liquidate its assets prior to its liabilities coming due, even in times of liquidity stress. We have traditionally been able to fund our liquidity needs through collateralized funding, such 49 52 as repurchase transactions and securities lending, as well as short-term and long-term borrowings and partners' capital. To further evaluate the adequacy of our liquidity management policies and guidelines, we perform weekly "stress funding" simulations of disruptions to our access to unsecured credit. EXCESS LIQUIDITY. In addition to maintaining a highly liquid balance sheet and a significant portion of longer-term liabilities to assure liquidity even during adverse conditions, we seek to maintain a liquidity cushion that consists principally of unencumbered U.S. government and agency obligations to ensure the availability of immediate liquidity. This pool of highly liquid assets averaged $14.17 billion during 1998 and $12.54 billion during 1997. LIQUIDITY RATIO MAINTENANCE. It is Goldman Sachs' policy to further manage its liquidity by maintaining a "liquidity ratio" of at least 100%. This ratio measures the relationship between the loan value of our unencumbered assets and our short-term unsecured liabilities. The maintenance of this liquidity ratio is intended to ensure that we could fund our positions on a fully secured basis in the event that we were unable to replace our unsecured debt maturing within one year. Under this policy, we seek to maintain unencumbered assets in an amount that, if pledged or sold, would provide the funds necessary to replace unsecured obligations that are scheduled to mature (or where holders have the option to redeem) within the coming year. INTERCOMPANY FUNDING. Most of the liquidity of Goldman Sachs is raised by The Goldman Sachs Group, L.P., which then lends the necessary funds to its subsidiaries and affiliates. We carefully manage our intercompany exposure by generally requiring intercompany loans to have maturities equal to or shorter than the maturities of the aggregate borrowings of The Goldman Sachs Group, L.P. This policy ensures that the subsidiaries' obligations to The Goldman Sachs Group, L.P. will generally mature in advance of The Goldman Sachs Group, L.P.'s third-party long-term borrowings. In addition, many of the advances made to our subsidiaries and affiliates are secured by marketable securities or other liquid collateral. We generally fund our equity investments in subsidiaries with partners' capital. THE BALANCE SHEET Goldman Sachs maintains a highly liquid balance sheet that fluctuates significantly between financial statement dates. In the fourth quarter of 1998, we temporarily decreased our total assets to reduce risk and increase liquidity in response to difficult conditions in the global financial markets. Our total assets were $230.62 billion as of February 1999 and $217.38 billion as of November 1998. Our balance sheet size as of February 1999 and November 1998 increased by $8.99 billion and $11.64 billion, respectively, due to the adoption of the provisions of Statement of Financial Accounting Standards No. 125 that were deferred by Statement of Financial Accounting Standards No. 127. For a discussion of Statement of Financial Accounting Standards Nos. 125 and 127, see "-- Accounting Developments" below and Note 2 to the audited consolidated financial statements. As of February 1999 and November 1998, we held approximately $999 million and $1.04 billion, respectively, in high-yield debt securities and $1.39 billion and $1.49 billion, respectively, in bank loans, all of which are valued on a mark-to-market basis. These assets may be relatively illiquid during times of market stress. We seek to diversify our holdings of these assets by industry and by geographic location. As of February 1999 and November 1998, we held approximately $1.04 billion and $1.17 billion, respectively, of emerging market securities, and $103 million and $109 million, respectively, in emerging market loans, all of which are valued on a mark-to-market basis. Of the $1.14 billion and $1.28 billion in emerging market securities and loans, as of February 1999 and November 1998, respectively, approximately $778 million and $968 million were sovereign obligations, many of which are collateralized as to principal at stated maturity. 50 53 In September 1998, a consortium of 14 banks and brokerage firms, including Goldman Sachs, made an equity investment in Long-Term Capital Portfolio, L.P., a major market participant. The objectives of this investment were to provide sufficient capital to permit Long-Term Capital Portfolio, L.P. to continue active management of its positions and, over time, to reduce risk exposures and leverage, to return capital to the participants in the consortium and ultimately to realize the potential value of the portfolio. We invested $300 million in Long-Term Capital Portfolio, L.P. CREDIT RATINGS Goldman Sachs relies upon the debt capital markets to fund a significant portion of its day-to-day operations. The cost and availability of debt financing is influenced by our credit ratings. Credit ratings are also important to us when competing in certain markets and when seeking to engage in longer-term transactions, including over-the-counter derivatives. A reduction in our credit ratings could increase our borrowing costs and limit our access to the capital markets. This, in turn, could reduce our earnings and adversely affect our liquidity. LONG-TERM DEBT As of November 1998, our consolidated long-term borrowings were $19.91 billion. Substantially all of these borrowings were unsecured and consisted principally of senior borrowings with maturities extending to 2024. The weighted average maturity of our long-term borrowings as of November 1998 was approximately four years. Substantially all of our long-term borrowings are swapped into U.S. dollar obligations with short-term floating rates of interest in order to minimize our exposure to interest rates and foreign exchange movements. See Note 5 to the audited consolidated financial statements for further information regarding our long-term borrowings. REGULATED SUBSIDIARIES Many of our principal subsidiaries are subject to extensive regulation in the United States and elsewhere. Goldman, Sachs & Co., a registered U.S. broker-dealer, is regulated by the SEC, the Commodity Futures Trading Commission, the Chicago Board of Trade, the NYSE and the NASD. Goldman Sachs International, a registered United Kingdom broker-dealer, is subject to regulation by the Securities and Futures Authority Limited and the Financial Services Authority. Goldman Sachs (Japan) Ltd., a Tokyo-based broker-dealer, is subject to regulation by the Japanese Ministry of Finance, the Financial Supervisory Agency, the Tokyo Stock Exchange, the Tokyo International Financial Futures Exchange and the Japan Securities Dealers Association. Several other subsidiaries of Goldman Sachs are regulated by securities, investment advisory, banking and other regulators and authorities around the world. Compliance with the rules of these regulators may prevent us from receiving distributions, advances or repayment of liabilities from these subsidiaries. See Note 8 to the audited consolidated financial statements and Note 5 to the unaudited condensed consolidated financial statements for further information regarding our regulated subsidiaries. RISK MANAGEMENT Goldman Sachs has a comprehensive risk management process to monitor, evaluate and manage the principal risks assumed in conducting its activities. These risks include market, credit, liquidity, operational, legal and reputational exposures. RISK MANAGEMENT STRUCTURE Goldman Sachs seeks to monitor and control its risk exposure through a variety of separate but complementary financial, credit, operational and legal reporting systems. We believe that we have effective procedures for evaluating and managing the market, credit and other risks to which we are exposed. Nonetheless, the effectiveness of our policies and procedures for managing risk exposure can never be completely or accurately predicted or fully assured. For example, unexpectedly large or rapid movements or disruptions in one or more markets or other unforeseen developments can have a material 51 54 adverse effect on our results of operations and financial condition. The consequences of these developments can include losses due to adverse changes in inventory values, decreases in the liquidity of trading positions, higher volatility in our earnings, increases in our credit risk to customers and counterparties and increases in general systemic risk. See "Risk Factors -- Market Fluctuations Could Adversely Affect Our Businesses in Many Ways" for a discussion of the effect that market fluctuations can have on our businesses. Goldman Sachs has established risk control procedures at several levels throughout the organization. Trading desk managers have the first line of responsibility for managing risk within prescribed limits. These managers have in-depth knowledge of the primary sources of risk in their individual markets and the instruments available to hedge our exposures. In addition, a number of committees described in the following table are responsible for establishing trading limits, monitoring adherence to these limits and for general oversight of our risk management process. 52 55
- ----------------------------------------------------------------------------------------------------- COMMITTEE FUNCTION - ----------------------------------------------------------------------------------------------------- Management Committee All risk control functions ultimately report to the Management Committee. Through both direct and delegated authority, the Management Committee approves all of Goldman Sachs': - operating activities; - trading risk parameters; and - customer review guidelines. - ----------------------------------------------------------------------------------------------------- Risk Committees The Firmwide Risk Committee: - periodically reviews the activities of existing businesses; - approves new businesses and products; - approves divisional market risk limits and reviews business unit market risk limits; - approves inventory position limits for selected country exposures and business units; - approves sovereign credit risk limits and credit risk limits by ratings group; and - reviews scenario analyses based on abnormal or "catastrophic" market movements. The FICC Risk Committee sets market risk limits for individual business units and sets issuer-specific net inventory position limits. The Equities Risk Committee sets market risk limits for individual business units that consist of gross and net inventory position limits and, for equity derivatives, limits based on market move scenario analysis. The Asset Management Control Oversight Committee and the Asset Management Risk Committee oversee various operational, credit, pricing and business practices issues. - ----------------------------------------------------------------------------------------------------- Global Compliance and Control The Global Compliance and Control Committee provides Committee oversight of our compliance and control functions, including internal audit, reviews our legal, reputational, operational and control risks, and periodically reviews the activities of existing businesses. - ----------------------------------------------------------------------------------------------------- Commitments Committee The Commitments Committee approves: - equity and non-investment grade debt underwriting commitments; - loans extended by Goldman Sachs; and - unusual financing structures and transactions that involve significant capital exposure. The Commitments Committee has delegated to the Credit Department the authority to approve underwriting commitments for investment grade debt and certain other products. - ----------------------------------------------------------------------------------------------------- Credit Policy Committee The Credit Policy Committee establishes and reviews broad credit policies and parameters that are implemented by the Credit Department. - ----------------------------------------------------------------------------------------------------- Finance Committee The Finance Committee is responsible for oversight of our capital, liquidity and funding needs and for setting certain inventory position limits. - -----------------------------------------------------------------------------------------------------
53 56 Segregation of duties and management oversight are fundamental elements of our risk management process. Accordingly, departments that are independent of the revenue producing units, such as the Firmwide Risk, Credit, Controllers, Global Operations, Central Compliance, Management Controls and Legal Departments, in part perform risk management functions, which include monitoring, analyzing and evaluating risk. MARKET RISK The potential for changes in the market value of our trading positions is referred to as "market risk". Our trading positions result from underwriting, market-making and proprietary trading activities. The broadly defined categories of market risk include exposures to interest rates, currency rates, equity prices and commodity prices. - - Interest rate risks primarily result from exposures to changes in the level, slope and curvature of the yield curve, the volatility of interest rates, mortgage prepayment speeds and credit spreads. - - Currency rate risks result from exposures to changes in spot prices, forward prices and volatilities of currency rates. - - Equity price risks result from exposures to changes in prices and volatilities of individual equities, equity baskets and equity indices. - - Commodity price risks result from exposures to changes in spot prices, forward prices and volatilities of commodities, such as electricity, natural gas, crude oil, petroleum products and precious and base metals. We seek to manage these risk exposures through diversifying exposures, controlling position sizes and establishing hedges in related securities or derivatives. For example, we may hedge a portfolio of common stock by taking an offsetting position in a related equity-index futures contract. The ability to manage an exposure may, however, be limited by adverse changes in the liquidity of the security or the related hedge instrument and in the correlation of price movements between the security and related hedge instrument. In addition to applying business judgment, senior management uses a number of quantitative tools to manage our exposure to market risk. These tools include: - - risk limits based on a summary measure of market risk exposure referred to as Value-at-Risk or "VaR"; - - risk limits based on a scenario analysis that measures the potential effect of a significant widening of credit spreads on our trading net revenues; - - inventory position limits for selected business units and country exposures; and - - scenario analyses which measure the potential effect on our trading net revenues of abnormal market movements. We also estimate the broader potential impact of a sustained market downturn on our investment banking and merchant banking activities. VaR. VaR is the potential loss in value of Goldman Sachs' trading positions due to adverse movements in markets over a defined time horizon with a specified confidence level. For the VaR numbers reported below, a one-day time horizon and a 95% confidence level were used. This means that there is a one in 20 chance that daily trading net revenues will fall below the expected daily trading net revenues by an amount at least as large as the reported VaR. Thus, shortfalls from expected trading net revenues on a single trading day greater than the reported VaR would be anticipated to occur, on average, about once a month. Shortfalls on a single day can exceed reported VaR by significant amounts. Shortfalls can also accumulate over a longer time horizon such as a number of consecutive trading days. For a discussion of the limitations of our risk measures, see "Risk Factors -- Our Risk Management Policies and Procedures May Leave Us Exposed to Unidentified or Unanticipated Risk". The VaR numbers below are shown separately for interest rate, currency, equity and 54 57 commodity products, as well as for our overall trading positions. These VaR numbers include the underlying product positions and related hedges, which may include positions in other product areas. For example, the hedge of a foreign exchange forward may include an interest rate futures position and the hedge of a long corporate bond position may include a short position in the related equity. VaR METHODOLOGY, ASSUMPTIONS AND LIMITATIONS. The modeling of the risk characteristics of our trading positions involves a number of assumptions and approximations. While management believes that these assumptions and approximations are reasonable, there is no uniform industry methodology for estimating VaR, and different assumptions and/or approximations could produce materially different VaR estimates. We use historical data to estimate our VaR and, to better reflect asset volatilities and correlations, these historical data are weighted to give greater importance to more recent observations. Given its reliance on historical data, VaR is most effective in estimating risk exposures in markets in which there are no sudden fundamental changes or shifts in market conditions. An inherent limitation of VaR is that past changes in market risk factors, even when weighted toward more recent observations, may not produce accurate predictions of future market risk. For example, the asset volatilities to which we were exposed in the second half of 1998 were substantially larger than those reflected in the historical data used during that time period to estimate our VaR. Moreover, VaR calculated for a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day. VaR also should be evaluated in light of the methodology's other limitations. For example, when calculating the VaR numbers shown below, we assume that asset returns are normally distributed. Non-linear risk exposures on options and the potentially mitigating impact of intra-day changes in related hedges would likely produce non-normal asset returns. Different distributional assumptions could produce a materially different VaR. The following table sets forth our daily VaR for substantially all of our trading positions: DAILY VaR (in millions)
AS OF NOVEMBER RISK CATEGORIES 1998 --------------- -------- Interest rates.............................................. $ 27.3 Currency rates.............................................. 9.0 Equity prices............................................... 25.3 Commodity prices............................................ 7.0 Diversification effect(1)................................... (25.7) ------ Firmwide.................................................... $ 42.9 ======
- --------------- (1) Equals the difference between firmwide daily VaR and the sum of the daily VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated. ------------------------ The daily VaR for substantially all of our trading positions as of February 1999 was not materially different from our daily VaR as of November 1998. For a discussion of what our daily VaR would have been as of November 1998 had we used our volatility and correlation data as of May 29, 1998, see "Business -- Trading and Principal Investments -- Trading Risk Management -- Risk Reduction". 55 58 NON-TRADING RISK The market risk associated with our non-trading financial instruments, including investments in our merchant banking funds, is measured using a sensitivity analysis that estimates the potential reduction in our net revenues associated with hypothetical market movements. As of February 1999 and November 1998, non-trading market risk was not material. RECENT ENHANCEMENTS TO RISK MANAGEMENT While VaR continues to be a core tool in our risk management process, management has increased its emphasis on the supplemental measures described below: - - CREDIT SPREAD LIMITS. In addition to VaR, the Firmwide Risk Committee now sets market risk limits based on a scenario analysis of widening credit spreads similar to those experienced in the second half of 1998; and - - SCENARIO ANALYSES. Management is using scenario analyses that reflect more extreme market conditions, such as large increases in market volatility as well as substantial and sustained adverse movements in the volatility and correlation of our relative value positions. Notwithstanding these measures, we continue to hold trading positions that are substantial in both number and size, and are subject to significant market risk. In addition, management may choose to increase Goldman Sachs' risk levels in the future. See "Risk Factors -- Market Fluctuations Could Adversely Affect Our Businesses in Many Ways" and "-- Our Risk Management Policies and Procedures May Leave Us Exposed to Unidentified or Unanticipated Risk" for a discussion of the risks associated with our trading positions. VALUATION OF TRADING INVENTORY Substantially all of our inventory positions are marked-to-market on a daily basis and changes are recorded in net revenues. The individual business units are responsible for pricing the positions they manage. The Controllers Department, in conjunction with the Firmwide Risk Department, regularly performs pricing reviews. TRADING NET REVENUES DISTRIBUTION The following chart sets forth the frequency distribution for substantially all of our daily trading net revenues for the year ended November 1998: [DAILY TRADING NET REVENUES BAR CHART] DAILY TRADING NEW REVENUES
Daily Trading Net Revenues in Millions of Dollars Number of Days - ---------------------------------------------------------------------- less than (60) ..................................... 9 (60)-(40) .......................................... 5 (40)-(20) .......................................... 22 (20)-0 ............................................. 31 0-20 ............................................... 87 20-40 .............................................. 67 40-60 .............................................. 24 greater than 60 .................................... 6 DAILY TRADING NET REVENUES (IN MILLIONS OF DOLLARS)
56 59 CREDIT RISK Credit risk represents the loss that we would incur if a counterparty or issuer of securities or other instruments we hold fails to perform its contractual obligations to us. To reduce our credit exposures, we seek to enter into netting agreements with counterparties that permit us to offset receivables and payables with such counterparties. We do not take into account any such agreements when calculating credit risk, however, unless management believes a legal right of setoff exists under an enforceable master netting agreement. For most businesses, counterparty credit limits are established by the Credit Department, which is independent of the revenue-producing departments, based on guidelines set by the Firmwide Risk and Credit Policy Committees. Our global credit management systems monitor current and potential credit exposure to individual counterparties and on an aggregate basis to counterparties and their affiliates. The systems also provide management with information regarding overall credit risk by product, industry sector, country and region. RISK LIMITS Business unit risk limits are established by the risk committees and may be further segmented by the business unit managers to individual trading desks. Market risk limits are monitored on a daily basis by the Firmwide Risk Department and are reviewed regularly by the appropriate risk committee. Limit violations are reported to the appropriate risk committee and the appropriate business unit managers. Inventory position limits are monitored by the Controllers Department and position limit violations are reported to the appropriate business unit managers and the Finance Committee. When inventory position limits are used to monitor market risk, they are also monitored by the Firmwide Risk Department and violations are reported to the appropriate risk committee. DERIVATIVE CONTRACTS Derivative contracts are financial instruments, such as futures, forwards, swaps or option contracts, that derive their value from underlying assets, indices, reference rates or a combination of these factors. Derivative instruments may be entered into by Goldman Sachs in privately negotiated contracts, which are often referred to as over-the-counter derivatives, or they may be listed and traded on an exchange. Most of our derivative transactions are entered into for trading purposes. We use derivatives in our trading activities to facilitate customer transactions, to take proprietary positions and as a means of risk management. We also enter into non-trading derivative contracts to manage the interest rate and currency exposure on our long-term borrowings. Derivatives are used in many of our businesses, and we believe that the associated market risk can only be understood relative to the underlying assets or risks being hedged, or as part of a broader trading strategy. Accordingly, the market risk of derivative positions is managed with all of our other non-derivative risk. Derivative contracts are reported on a net-by-counterparty basis on our consolidated statements of financial condition where management believes a legal right of setoff exists under an enforceable master netting agreement. For an over-the-counter derivative, our credit exposure is directly with our counterparty and continues until the maturity or termination of such contract. The following table sets forth the distribution, by credit rating, of substantially all of our exposure with respect to over-the-counter derivatives as of November 1998, after taking into consideration the effect of netting agreements. The categories shown reflect our in- 57 60 ternally determined public rating agency equivalents. OVER-THE-COUNTER DERIVATIVE CREDIT EXPOSURES ($ in millions)
CREDIT RATING EQUIVALENT AMOUNT PERCENTAGE - ------------------------ ------ ---------- AAA/Aaa............................................... $ 2,170 12% AA/Aa2................................................ 5,571 30 A/A2.................................................. 4,876 26 BBB/Baa2.............................................. 3,133 17 BB/Ba2 or lower....................................... 1,970 11 Unrated(1)............................................ 730 4 ------- --- $18,450 100% ======= ===
- --------------- (1) In lieu of making an individual assessment of such counterparties' credit, we make a determination that the collateral held in respect of such obligations is sufficient to cover our exposure. In making this determination, we take into account various factors, including legal uncertainties and market volatility. ------------------------ As of November 1998, we held approximately $2.97 billion in collateral against these over-the-counter derivative exposures. This collateral consists predominantly of cash and U.S. government and agency securities and is usually received by us under agreements entitling us to require additional collateral upon specified increases in exposure or the occurrence of negative credit events. In addition to obtaining collateral and seeking netting agreements, we attempt to mitigate default risk on derivatives by entering into agreements that enable us to terminate or reset the terms of transactions after specified time periods or upon the occurrence of credit-related events, and by seeking third- party guarantees of the obligations of some counterparties. Derivatives transactions may also involve the legal risk that they are not authorized or appropriate for a counterparty, that documentation has not been properly executed or that executed agreements may not be enforceable against the counterparty. We attempt to minimize these risks by obtaining advice of counsel on the enforceability of agreements as well as on the authority of a counterparty to effect the derivative transaction. OPERATIONAL AND YEAR 2000 RISKS OPERATIONAL RISK. Goldman Sachs may face reputational damage, financial loss or regulatory risk in the event of an operational failure or error. A systems failure or failure to enter a trade properly into our records may result in an inability to settle transactions in a timely manner or a breach of regulatory requirements. Settlement errors or delays may cause losses due to damages owed to counterparties or movements in prices. These operational and systems risks may arise in connection with our own systems or as a result of the failure of an agent acting on our behalf. The Global Operations Department is responsible for establishing, maintaining and approving policies and controls with respect to the accurate inputting and processing of transactions, clearance and settlement of transactions, the custody of securities and other instruments and the detection and prevention of employee errors or improper or fraudulent activities. Its personnel work closely with the Information Technology Department in creating systems to enable appropriate supervision and management of its policies. The Global Operations Department is also responsible, together with other areas of Goldman Sachs, including the Legal and Compliance Departments, for ensuring com- 58 61 pliance with applicable regulations with respect to the clearance and settlement of transactions and the margining of positions. The Network Management Department oversees our relationships with our clearance and settlement agents, regularly reviews agents' performance and meets with these agents to review operational issues. YEAR 2000 READINESS DISCLOSURE. Goldman Sachs has determined that it will be required to modify or replace portions of its information technology systems, both hardware and software, and its non-information technology systems so that they will properly recognize and utilize dates beyond December 31, 1999. We presently believe that with modifications to existing software, conversions to new software and replacement of some hardware, the Year 2000 issue will be satisfactorily resolved in our own systems worldwide. However, if such modifications and conversions are not made or are not completed on a timely basis, the Year 2000 issue would have a material adverse effect on Goldman Sachs. Moreover, even if these changes are successful, failure of third parties to which we are financially or operationally linked to address their own Year 2000 problems would also have a material adverse effect on Goldman Sachs. For a description of the Year 2000 issue and some of the related risks, including possible problems that could arise, see "Risk Factors -- Our Computer Systems and Those of Third Parties May Not Achieve Year 2000 Readiness -- Year 2000 Readiness Disclosure". Recognizing the broad scope and complexity of the Year 2000 problem, we have established a Year 2000 Oversight Committee to promote awareness and ensure the active participation of senior management. This Committee, together with numerous sub-committees chaired by senior managers throughout Goldman Sachs and our Global Year 2000 Project Office, is responsible for planning, managing and monitoring our Year 2000 efforts on a global basis. Our Management Controls Department assesses the scope and sufficiency of our Year 2000 Program and verifies that the principal aspects of our Year 2000 program are being implemented according to plan. Our Year 2000 plans are based on a five-phase approach, which includes awareness; inventory, assessment and planning; remediation; testing; and implementation. The awareness phase (in which we defined the scope and components of the problem, our methodology and approach and obtained senior management support and funding) was completed in September 1997. We also completed the inventory, assessment and planning phase for our systems in September 1997. By the end of March 1999, we completed the remediation, testing and implementation phases for 99% of our mission-critical systems, and we plan to complete these three phases for the remaining 1% by the end of June 1999. In March 1999, we completed the first cycle of our internal integration testing with respect to critical securities and transaction flows. This cycle, which related to U.S. products, was completed successfully with no material problem. The remaining cycle, which will relate primarily to non-U.S. products, is to be completed in June 1999. This testing is intended to validate that our systems can successfully perform critical business functions beginning in January 2000. With respect to our non-mission-critical systems, we expect to complete our Year 2000 efforts during calendar 1999. For technology products that are supplied by third-party vendors, we have completed an inventory, ranked products according to their importance and developed a strategy for achieving Year 2000 readiness for substantially all non-compliant versions of software and hardware. While this process included collecting information from vendors, we are not relying solely on vendors' verifications that their products are Year 2000 compliant or ready. As of March 31, 1999, we had substantially completed testing and implementation of vendor-supplied technology products that we consider mission-critical. With respect to telecommunications carriers, we are relying on information provided by these vendors as to whether they are Year 2000 compliant because these vendors have indicated that they will not test with individual companies. We are also addressing Year 2000 issues that may exist outside our own technology activities, including our facilities, external ser- 59 62 vice providers and other third parties with which we interface. We have inventoried and ranked our customers, business and trading partners, utilities, exchanges, depositories, clearing and custodial banks and other third parties with which we have important financial and operational relationships. We are continuing to assess the Year 2000 preparedness of these customers, business and trading partners and other third parties. By the end of March 1999, we had participated in approximately 115 "external", i.e., industry-wide or point-to-point, tests with exchanges, clearing houses and other industry utilities, as well as the "Beta" test sponsored by the Securities Industry Association for its U.S. members in July 1998. We successfully completed all of these tests with no material problems. By the end of June 1999, we expect to have participated in approximately 60 additional external tests, including the Securities Industry Association "Streetwide" test scheduled to be completed in April 1999 and other major industry tests in those global markets where we conduct significant business. Acknowledging that a Year 2000 failure, whether internal or external, could have an adverse effect on the ability to conduct day-to-day business, we are employing a comprehensive and global approach to contingency planning. Our contingency planning objective is to identify potential system failure points that support processes that are critical to our mission and to develop contingency plans for those failures that may reasonably be expected to occur, with the general goal of ensuring, to the maximum extent practical, that minimum acceptable levels of service can be maintained by us. In the event of system failures, our contingency plans will not guarantee that existing levels of service will be fully maintained, especially if these failures involve external systems or processes over which we have little or no direct control or involve multiple failures across a variety of systems. We anticipate that contingency plans for our core business units will be substantially completed during June 1999, and by September 30, 1999 for the rest of our businesses. In addition, we are developing contingency plans for funding and balance sheet management and other related activities. We expect our contingency plans to include establishing additional sources of liquidity that could be drawn upon in the event of systems disruption. We are also developing a crisis management group to guide us through the transition period. We expect to reduce trading activity in the period leading up to January 2000 to minimize the impact of potential Year 2000-related failures. A reduction in trading activity by us or by other market participants in anticipation of possible Year 2000 problems could adversely affect our results of operations, as discussed under "Risk Factors -- Our Computer Systems and Those of Third Parties May Not Achieve Year 2000 Readiness -- Year 2000 Readiness Disclosure". We have incurred and expect to continue to incur expenses allocable to internal staff, as well as costs for outside consultants, to complete the remediation and testing of internally developed systems and the replacement and testing of third-party products and services, including non-technology products and services, in order to achieve Year 2000 compliance. We currently estimate that these costs will total approximately $150 million, a substantial majority of which has been spent to date. These estimates include the cost of technology personnel but do not include the cost of most non-technology personnel involved in our Year 2000 effort. The remaining cost of our Year 2000 program is expected to be incurred in 1999 and early 2000. The Year 2000 program costs will continue to be funded through operating cash flow. These costs are expensed as incurred. We do not expect that the costs associated with implementing our Year 2000 program will have a material adverse effect on our results of operations, financial condition, liquidity or capital resources. The costs of the Year 2000 program and the date on which we plan to complete the Year 2000 modifications are based on current estimates, which reflect numerous assumptions about future events, including the continued availability of resources, the timing and effectiveness of third-party remediation plans and other factors. We can give no assurance 60 63 that these estimates will be achieved, and actual results could differ materially from our plans. Specific factors that might cause material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct relevant computer source codes and embedded chip technology, the results of internal and external testing and the timeliness and effectiveness of remediation efforts of third parties. In order to focus attention on the Year 2000 problem, management has deferred several technology projects that address other issues. However, we do not believe that this deferral will have a material adverse effect on our results of operations or financial condition. ACCOUNTING DEVELOPMENTS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", effective for transactions occurring after December 31, 1996. Statement of Financial Accounting Standards No. 125 establishes standards for distinguishing transfers of financial assets that are accounted for as sales from transfers that are accounted for as secured borrowings. The provisions of Statement of Financial Accounting Standards No. 125 relating to repurchase agreements, securities lending transactions and other similar transactions were deferred by the provisions of Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", and became effective for transactions entered into after December 31, 1997. This Statement requires that the collateral obtained in certain types of secured lending transactions be recorded on the balance sheet with a corresponding liability reflecting the obligation to return such collateral to its owner. Effective January 1, 1998, we adopted the provisions of Statement of Financial Accounting Standards No. 125 that were deferred by Statement of Financial Accounting Standards No. 127. The adoption of this standard increased our total assets and liabilities by $8.99 billion and $11.64 billion as of February 1999 and November 1998, respectively. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share", effective for periods ending after December 15, 1997, with restatement required for all prior periods. Statement of Financial Accounting Standards No. 128 establishes new standards for computing and presenting earnings per share. This Statement replaces primary and fully diluted earnings per share with "basic earnings per share", which excludes dilution, and "diluted earnings per share", which includes the effect of all potentially dilutive common shares and other dilutive securities. Because we have not historically reported earnings per share, this Statement will have no impact on our historical financial statements. This Statement will, however, apply to our financial statements that are prepared after our common stock offering. See "Pro Forma Consolidated Financial Information" for a calculation of pro forma earnings per share. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", effective for fiscal years beginning after December 15, 1997, with reclassification of earlier periods required for comparative purposes. Statement of Financial Accounting Standards No. 131 establishes the criteria for determining an operating segment and establishes the disclosure requirements for reporting information about operating segments. We intend to adopt this standard at the end of fiscal 1999. This Statement is limited to issues of reporting and presentation and, therefore, will not affect our results of operations or financial condition. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", effective for fiscal years beginning after December 15, 61 64 1997, with restatement of disclosures for earlier periods required for comparative purposes. Statement of Financial Accounting Standards No. 132 revises certain employers' disclosures about pension and other post-retirement benefit plans. We intend to adopt this standard at the end of fiscal 1999. This Statement is limited to issues of reporting and presentation and, therefore, will not affect our results of operations or financial condition. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", effective for fiscal years beginning after December 15, 1998. Statement of Position No. 98-1 requires that certain costs of computer software developed or obtained for internal use be capitalized and amortized over the useful life of the related software. We currently expense the cost of all software development in the period in which it is incurred. We intend to adopt this Statement in fiscal 2000 and are currently assessing its effect. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for fiscal years beginning after June 15, 1999. Statement of Financial Accounting Standards No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This Statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting designation. We intend to adopt this standard in fiscal 2000 and are currently assessing its effect. 62 65 INDUSTRY AND ECONOMIC OUTLOOK As a global provider of financial services, Goldman Sachs is affected by overall macroeconomic and market conditions in various regions around the world. For a number of years, we have operated in a generally favorable macroeconomic environment characterized by low inflation, low and declining interest rates and strong equity markets. In particular, the U.S. economy, the largest in the world and an important influence on overall world economic activity, has been undergoing one of the longest periods of post-war economic expansion. As of March 1999, the current U.S. expansion had lasted 96 months compared to a post-war average period of expansion of 46 months. Recognizing that the favorable macroeconomic and market environments will be subject to periodic reversals, which may significantly and adversely affect our businesses, we believe that significant growth and profit opportunities exist for financial intermediaries in the United States and abroad. These opportunities derive from several long-term trends, including the following: - - DEREGULATION. Financial market deregulation, including the elimination of bank deposit interest rate ceilings and the expansion of commercial banks and other financial institutions into securities underwriting activities, has resulted in the creation of new and broader sources of credit, which have reduced the variability and the cyclicality in the supply of credit. This, in turn, has in the past reduced volatility in economic activity, leading to longer economic expansions with increased investment spending, resulting in higher levels of capital raising; - - GLOBALIZATION. Heightened global competition has created a need for cross-border capabilities and economies of scale, resulting in increased joint venture and mergers and acquisitions activity; - - FOCUS ON SHAREHOLDER VALUE. Increasing focus on shareholder value has fueled an increase in restructuring and strategic initiatives, yielding additional financial advisory and capital-raising opportunities; - - CONSOLIDATION. Moderate growth, limited pricing flexibility and the need for economies of scale have substantially increased consolidation opportunities in certain industries, and record levels of profit have provided companies with the resources to pursue strategic combinations, creating substantial demand for mergers and acquisitions advisory services and subsequent capital raising; - - DEMOGRAPHICS. Changing demographics in the United States and other developed economies have increased the pool of savings available for private investment and the need for increased funding of pension plans due to the aging of the population, creating substantial demand for investment products and services; and - - FINANCIAL PRODUCT INNOVATION. Technology and financial expertise have led to the development of new financial products better tailored to the risk/reward requirements of investors, increasing trading flows and proprietary investment opportunities. We believe that over the last 15 years these trends, coupled with generally declining interest rates and favorable market conditions, have contributed to a substantially higher rate of growth in activity in the financial services industry than the growth in overall economic activity. The future economic environment may not be as favorable as that experienced in the last 15 years and, in particular, the period of declining interest rates in the United States may not continue. There may also be periods of adverse economic and market conditions. Nonetheless, we believe that these trends should continue to affect the financial services industry positively over the long term. However, see "Risk Factors -- Market Fluctuations Could Adversely Affect Our Businesses in Many Ways" for a discussion of the effect that adverse economic conditions and market fluctuations can have on our businesses. 63 66 The following table sets forth selected key industry indicators: KEY INDUSTRY INDICATORS ($ in billions, except gross domestic product) (volume in millions of shares)
AS OF OR FOR YEAR ENDED DECEMBER 31, -------------------------------------- CAGR(8) 1983 1988 1993 1998 '83-'98 ---- ---- ---- ---- ------- GENERAL ECONOMIC ACTIVITY: (in trillions) Worldwide gross domestic product(1).............. $ 10 $ 18 $ 24 $ 29(9) 8%(9) U.S. gross domestic product(2)................... 4 5 7 9 6 ADVISORY ACTIVITIES/FINANCING: Worldwide mergers and acquisitions(3)............ 96 527 460 2,522 24 Worldwide equity issued(3)....................... 50 51 172 269 12 Worldwide debt issued(3)......................... 146 631 1,546 2,932 22 WORLD EQUITY MARKETS: Worldwide equity market capitalization(4)........ 3,384 9,728 14,016 27,459 15 U.S. market capitalization(4).................... 1,898 2,794 5,136 13,451 14 FT/S&P Actuaries World Indices(TM) -- The World Index(5)....................................... NA 129 178 359 11 Dow Jones Industrial Average..................... 1,259 2,169 3,754 9,181 14 S&P 500.......................................... 165 278 466 1,229 14 NYSE average daily volume........................ 85 162 265 674 15 INVESTED FUNDS: Worldwide pension assets(6)...................... $1,900 $3,752 $ 6,560 $10,975 12 Number of U.S. mutual funds(7)................... 1,026 2,715 4,558 7,343 14 U.S. mutual fund assets(7)....................... $ 293 $ 810 $ 2,075 $ 5,530 22
- --------------- (1) Source: The Economist Intelligence Unit, January 1999. (2) Source: U.S. Department of Commerce, Bureau of Economic Analysis. (3) Source: Securities Data Company. (4) Source: International Finance Corporation. (5) Index is calculated on a local currency basis based on total returns. CAGR is based on 1988-1998 data. The FT/S&P Actuaries World Indices are owned by FTSE International Limited, Goldman, Sachs & Co. and Standard & Poor's Ratings Services. The Indices are compiled by FTSE International and Standard & Poor's Ratings Services in conjunction with the Faculty of Actuaries and the Institute of Actuaries. (6) Source: InterSec Research Corp. (7) Source: Investment Company Institute. (8) Compound annual growth rate. (9) Data as of December 31, 1997; CAGR 1983-1997. 64 67 We believe scale, global resources and leading market positions are important competitive advantages for financial intermediaries in this environment. In addition, we believe that circumstances in certain regions should provide opportunities for financial intermediaries. EUROPE The European Economic and Monetary Union commenced on January 1, 1999 and created a monetary union in Europe with a single currency. As a result, we believe that over time a pan-European capital market will develop that is likely to rival that of the United States in size and liquidity. We believe that financial intermediaries generally are expected to benefit from a number of anticipated developments, including: - - pan-European consolidation and financial restructuring yielding an increase in mergers and acquisitions activity; - - an increase in third-party assets under management and a major shift towards investments in equity securities due to an expected move to private pension fund systems, changing demographics and the elimination of intra-European Economic and Monetary Union currency risk; - - a reallocation of equity portfolios to reflect pan-European indices; - - the establishment of a European high-yield market to fund the growth of emerging high-growth industries and to satisfy investors' demands for higher yield; and - - increased equity issuance and higher equity trading volumes. ASIA Since 1997, the currency weakness and disruptions, the deterioration in certain of the region's banking systems, the weakness in the property sector in many of the region's countries, as well as slowing consumer income growth, have led to a significant and continuing weakening of these economies and their stock markets. These developments have adversely affected the economic and market conditions in the region and at times have affected economic and market conditions elsewhere. We believe, however, that financial intermediaries could have significant opportunities in this region if stability improves and the economies, which represent approximately 60% of the world's population, resume their growth. In the near term, these potential opportunities could include: - - an increase in mergers and acquisitions and other financial advisory services in connection with corporate restructurings; - - an increase in trading opportunities as financial intermediaries meet the liquidity needs of their clients; and - - an increase in capital raising as Asian corporations and governments access the international capital markets rather than the regional banking system to refinance and to fund future growth. In the longer term, these potential opportunities could include: - - the emergence of corporate and real estate principal investment opportunities as a result of corporate and government restructurings; and - - an increase in third-party assets under management and a major shift towards investments in equity securities due to an anticipated move to private pension fund systems, changing demographics and the relaxation of foreign exchange restrictions. 65 68 BUSINESS OVERVIEW Goldman Sachs is a leading global investment banking and securities firm with three principal business lines: - - Investment Banking; - - Trading and Principal Investments; and - - Asset Management and Securities Services. Our goal is to be the advisor of choice for our clients and a leading participant in global financial markets. We provide services worldwide to a substantial and diversified client base, which includes corporations, financial institutions, governments and high net worth individuals. Because we believe that the needs of our clients are global and that international markets have high growth potential, we have built upon our strength in the United States to achieve leading positions in other parts of the world. Today, we have a strong global presence as evidenced by the geographic breadth of our transactions, leadership in our core products and the size of our international operations. As of February 1999, we operated offices in 23 countries and 36% of our 13,000 employees were based outside the United States. We are committed to a distinctive culture and set of core values. These values are reflected in our Business Principles, which emphasize placing our clients' interests first, integrity, commitment to excellence and innovation, and teamwork. Goldman Sachs is managed by its principal owners. Simultaneously with the closing of our common stock offering we will grant restricted stock units, stock options or interests in a defined contribution plan to substantially all of our employees. Following our common stock offering, our employees, including former partners, will own approximately 66% of Goldman Sachs. None of our employees will be selling shares in our common stock offering. Goldman Sachs is the successor to a commercial paper business founded in 1869 by Marcus Goldman. Since then, we have grown our business as a participant and intermediary in securities and other financial activities to become one of the leading firms in the industry. In 1989, The Goldman Sachs Group, L.P. was formed to serve as the parent company of the Goldman Sachs organization. As of November 30, 1996, The Goldman Sachs Group, L.P. was restructured. On that date, the non-retiring former general partners of The Goldman Sachs Group, L.P. converted their general partner interests into limited partner interests and became profit participating limited partners of The Goldman Sachs Group, L.P. Concurrently, The Goldman Sachs Corporation was admitted as The Goldman Sachs Group, L.P.'s sole general partner. The common stock of The Goldman Sachs Corporation is owned by our managing directors who are profit participating limited partners, all of whom are active in our businesses. The Goldman Sachs Group, Inc. was formed to succeed to the business of The Goldman Sachs Group, L.P. Simultaneously with the closing of our common stock offering, we will complete a number of transactions in order to convert from partnership to corporate form. See "Certain Relationships and Related Transactions -- Incorporation and Related Transactions" for additional information concerning these transactions. MARKET SHARE DATA Except as otherwise indicated, all amounts with respect to the volume, number and market share of mergers and acquisitions and underwriting transactions and related ranking information have been derived from information compiled and classified by Securities Data Company. Securities Data Company obtains and gathers its information from sources it considers reliable, but Securities Data Company does not guarantee the accuracy or completeness of the information. In the case of mergers and acquisitions, data are based upon the dollar value of announced transactions for the period indicated, taken as a whole, with full credit to each of the 66 69 advisors to each party in a transaction. In the case of underwritings, data are based upon the dollar value of total proceeds raised (exclusive of any option to purchase additional shares) with equal credit to each bookrunner for the period indicated, taken as a whole. As a result of this method of compiling data, percentages may add to more than 100%. STRATEGY AND PRINCIPAL BUSINESS LINES Our strategy is to grow our three core businesses -- Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services -- in markets throughout the world. Our leadership position in investment banking provides us with access to governments, financial institutions and corporate clients globally. Trading and principal investing has been an important part of our culture and earnings, and we remain committed to these businesses irrespective of their volatility. Managing wealth is one of the fastest growing segments of the financial services industry and we are positioning our asset management and securities services businesses to take advantage of that growth. Our assets under supervision, for example, have grown from $92.7 billion as of November 1994 to $369.7 billion as of February 1999, representing a compound annual growth rate of 38%. Our business lines are comprised of various product and service offerings that are set forth in the following chart: PRIMARY PRODUCTS AND ACTIVITIES BY BUSINESS LINE
TRADING AND PRINCIPAL ASSET MANAGEMENT AND INVESTMENT BANKING INVESTMENTS SECURITIES SERVICES ------------------ --------------------- -------------------- - -- Equity and debt -- Bank loans -- Commissions underwriting -- Commodities -- Institutional and high net - -- Financial restructuring -- Currencies worth asset management advisory services -- Equity and fixed income -- Margin lending - -- Mergers and acquisitions derivatives -- Matched book advisory services -- Equity and fixed income -- Merchant banking fees - -- Real estate advisory securities -- Increased shares of services -- Principal investments merchant banking fund income -- Proprietary arbitrage and gains -- Mutual funds -- Prime brokerage -- Securities lending
------------------------ INVESTMENT BANKING Investment Banking represented 39% of 1998 net revenues and 35% of 1997 net revenues. We are a market leader in both the financial advisory and underwriting businesses, serving over 3,000 clients worldwide. For the period January 1, 1994 to December 31, 1998, we had the industry-leading market share of 25.3% in worldwide mergers and acquisitions advisory services, having advised on over $1.7 trillion of transactions. Over the same period, we also achieved number one market shares of 15.2% in underwriting worldwide initial public offerings and 14.4% in underwriting worldwide common stock issues. TRADING AND PRINCIPAL INVESTMENTS Trading and Principal Investments represented 28% of 1998 net revenues and 39% of 1997 net revenues. We make markets in equity and fixed income products, currencies and commodities; enter into swaps and other derivative transactions; engage in proprietary trading and arbitrage; and make principal investments. In trading, we focus on building lasting relationships with our most active clients while maintaining leadership positions in our key markets. We believe our research, market-making and proprietary activities enhance our understanding of markets and ability to serve our clients. ASSET MANAGEMENT AND SECURITIES SERVICES Asset Management and Securities Services represented 33% of 1998 net revenues and 26% of 1997 net revenues. We provide global investment management and advisory services; earn commissions on agency transactions; manage merchant banking funds; and provide prime brokerage, securities lending and financing services. Our asset management business has grown rapidly, with assets under supervision increasing from $92.7 bil- 67 70 lion as of November 25, 1994 to $369.7 billion as of February 26, 1999, representing a compound annual growth rate of 38%. As of February 26, 1999, we had $206.4 billion of assets under management. We manage merchant banking funds that had $15.5 billion of capital commitments as of the end of 1998. We pursue our strategy to grow our three core businesses through an emphasis on: EXPANDING HIGH VALUE-ADDED BUSINESSES To achieve strong growth and high returns, we seek to build leadership positions in high value-added services for our clients. For example, we have substantially increased the number of professionals in investment banking to improve and expand our ability to execute mergers and acquisitions, initial public offerings and high-yield financings. In trading, we structure and execute large and complex transactions for institutional investors, pension funds and corporate clients around the world. In asset management, we emphasize equity and alternative investment products and use our established international presence to build a global asset management franchise. INCREASING THE STABILITY OF OUR EARNINGS We seek to balance the stability of our earnings with return on equity and long-term earnings growth. We believe our trading businesses are key ingredients to our success. While we plan to continue to grow our trading businesses, the financial market shocks of the past year underscored the importance of our strategy of emphasizing growth in our investment banking, asset management and securities services businesses. Through a greater relative emphasis on these businesses, our goal is to gradually increase the stability of our earnings. PURSUING INTERNATIONAL OPPORTUNITIES We believe that our global reach will allow us to take advantage of growth in international markets. In Europe, for example, we anticipate that the recent establishment of the European Economic and Monetary Union will, over time, create a large pan-European market rivaling the U.S. capital markets in size and liquidity. We believe this will generate increased activity across our businesses in the region. In Asia, we believe that an increase in corporate restructurings and in the need for liquidity will increase our mergers and acquisitions and trading opportunities. In the longer term, we anticipate additional opportunities in asset management activities due to a shift we anticipate toward the privatization of pension systems and in demographics. LEVERAGING THE FRANCHISE We believe our various businesses are generally stronger and more successful because they are part of the Goldman Sachs franchise. Our culture of teamwork fosters cooperation among our businesses, which allows us to provide our clients with a full range of products and services on a coordinated basis. Our investment bankers, for example, refer clients who are selling their businesses to those in Goldman Sachs who manage wealth. In addition, our merchant banking investments in companies lead to future clients for investment banking. COMPETITIVE STRENGTHS STRONG CLIENT RELATIONSHIPS We focus on building long-term client relationships. In 1998, over 75% of our Investment Banking revenues represented business from existing clients. We also aggressively pursue new client relationships as evidenced by the over 400 investment banking transactions we completed for first-time clients in 1998. In our trading businesses, we structure and execute transactions across a wide array of markets and countries to meet our clients' needs. In our asset management business, we managed assets for three of the five largest pension pools in the United States as ranked as of September 30, 1998 by Pensions & Investments and maintain accounts for 41% of the 1998 "Forbes 400 List of the Richest Americans". DISTINCTIVE PEOPLE AND CULTURE Our most important asset is our people. We seek to reinforce our employees' commitment to our culture and values through recruiting, training, a comprehensive 360-degree review system and a compensation phi- 68 71 losophy that rewards teamwork. We were ranked number seven in Fortune magazine's "The 100 Best Companies to Work for in America" in January 1999 and were ranked number three in Fortune magazine's 1999 "The Top 50 MBA Dream Companies", the highest-ranked investment banking and securities firm in each case. GLOBAL REACH Over the past decade, we have made a significant commitment to building a worldwide business. We have achieved leading positions in major international markets by capitalizing on our product knowledge and global research, as well as by building a local presence where appropriate. In doing so, we have become one of the few truly global investment banking and securities firms with the ability to execute large and complex cross-border transactions. We had the number one market share of 23.2% in cross-border mergers and acquisitions for the period January 1, 1994 to December 31, 1998. In addition, in Japan, we were the largest non-Japanese mutual fund manager as of the end of February 1999, according to The Investment Trusts Association. ------------------------ SUMMARY FINANCIAL DATA (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY -------------------------- ------------------ 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Net revenues: Investment Banking................ $2,113 $2,587 $3,368 $ 633 $ 902 Trading and Principal Investments.................... 2,693 2,926 2,379 1,182 1,357 Asset Management and Securities Services....................... 1,323 1,934 2,773 657 736 ------ ------ ------ ------ ------ Total net revenues.................. $6,129 $7,447 $8,520 $2,472 $2,995 ====== ====== ====== ====== ======
------------------------ INVESTMENT BANKING Goldman Sachs provides a broad range of investment banking services to a diverse group of over 3,000 clients worldwide, including corporations, financial institutions, governments and individuals. Our investment banking activities are divided into two categories: - - FINANCIAL ADVISORY. Financial advisory includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs; and - - UNDERWRITING. Underwriting includes public offerings and private placements of equity and debt securities. The following table sets forth the net revenues of our Investment Banking business: INVESTMENT BANKING NET REVENUES (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY -------------------------- ------------ 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Financial advisory...................... $ 931 $1,184 $1,774 $363 $522 Underwriting............................ 1,182 1,403 1,594 270 380 ------ ------ ------ ---- ---- Total Investment Banking................ $2,113 $2,587 $3,368 $633 $902 ====== ====== ====== ==== ====
69 72 In Investment Banking, we provide our clients with quality advice and execution as part of our effort to develop and maintain long-term relationships as their lead investment bank. ORGANIZATION We have continuously adapted our organizational structure to meet changing market dynamics and our clients' needs. Our current structure, which is organized along regional, execution and industry groups, seeks to combine client-focused investment bankers with execution and industry expertise. Because our businesses are global, we have adapted our organization to meet the demands of our clients in each geographic region. Through our commitment to teamwork, we believe that we provide services in an integrated fashion for the benefit of our clients. We believe an important competitive advantage in our marketing effort is Investment Banking Services, a core group of professionals who focus on developing and maintaining strong client relationships. These bankers, who are organized regionally and/or by industry group, work with senior executives of our clients to identify areas where Goldman Sachs can provide capital-raising, financial advisory or other products and services. The broad base of experience and knowledge of our Investment Banking Services professionals enables them to analyze our clients' objectives efficiently and to bring to bear the appropriate resources of Goldman Sachs to satisfy those objectives. Our Corporate Finance, Debt and Equity Capital Markets, Leveraged Finance and Mergers and Acquisitions groups bring product expertise and innovation to clients in a variety of industries. These groups are responsible for the execution of specific client transactions as well as the building of strong client relationships. In an effort to serve our clients' needs in targeted industries, we have established several industry focus groups. These include: Chemicals; Communications, Media and Entertainment; Energy and Power; Financial Institutions; Healthcare; High Technology; Hotels and Gaming; Real Estate; Retailing; and Transportation. Drawing on specialized knowledge of industry-specific trends, these groups provide the full range of investment banking products and services to our clients. Reflecting our commitment to innovation, Investment Banking has established a New Products group whose professionals focus on creating new financial products. These professionals have particular expertise in integrating finance with accounting, tax and securities laws and work closely with other investment banking teams to provide innovative solutions to difficult client problems. Our structuring expertise has proven to be particularly valuable in addressing client needs in areas such as complex cross-border mergers and acquisitions and convertible and other hybrid equity financings. FINANCIAL ADVISORY Financial advisory includes a broad range of advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs. Goldman Sachs is a leading investment bank in worldwide mergers and acquisitions. During calendar 1998, we advised on 340 mergers and acquisitions transactions with a combined value of $957 billion. Our mergers and acquisitions capabilities are evidenced by our significant share of assignments in large, complex transactions where we provide multiple services, including "one-stop" acquisition financing, currency hedging and cross-border structuring expertise. Goldman Sachs advised on seven of the ten largest mergers and acquisitions transactions through December 31, 1998. We have also been successful in Europe, including in intra-country transactions, and we are a leading mergers and acquisitions advisor in France, Germany and Spain. 70 73 The following table illustrates our leadership in the mergers and acquisitions advisory market for the indicated period taken as a whole: GOLDMAN SACHS' MERGERS AND ACQUISITIONS MARKET DATA For the period January 1, 1994 through December 31, 1998 ($ in billions)
MARKET NUMBER OF CATEGORY RANK(1) SHARE VOLUME TRANSACTIONS -------- ------- ------ ------ ------------ Worldwide......................................... 1 25.3% $1,715 1,334 Worldwide, transactions over $500 million......... 1 34.8 1,593 470 Worldwide, transactions over $1 billion........... 1 38.4 1,470 297 United States..................................... 1 32.8 1,316 907 United States, transactions over $500 million..... 1 41.3 1,228 339 United States, transactions over $1 billion....... 1 44.3 1,142 221
- --------------- (1) Rank in any one year during the period presented may vary from the rank for the period taken as a whole. ------------------------ Mergers and acquisitions is an example of how one activity can generate cross-selling opportunities for other areas of Goldman Sachs. For example, a client we are advising in a purchase transaction may seek our assistance in obtaining financing and in hedging interest rate or foreign currency risks associated with the acquisition. In the case of dispositions, owners and senior executives of the acquired company often will seek asset management services. In these cases, our high net worth relationship managers provide comprehensive advice on investment alternatives and execute the client's desired strategy. UNDERWRITING From January 1, 1994 through March 31, 1999, Goldman Sachs has served as lead manager in transactions that have raised more than $1 trillion of capital for clients worldwide. We underwrite a wide range of securities and other instruments, including common and preferred stock, convertible securities, investment grade debt, high-yield debt, sovereign and emerging markets debt, municipal debt, bank loans, asset-backed securities and real estate-related securities, such as mortgage-backed securities and the securities of real estate investment trusts. 71 74 EQUITY UNDERWRITING. Equity underwriting has been a long-term core strength of Goldman Sachs. The following table illustrates our leadership position in equity underwriting for the indicated period taken as a whole: GOLDMAN SACHS' EQUITY UNDERWRITING MARKET DATA For the period January 1, 1994 through December 31, 1998 ($ in billions)
TOTAL MARKET PROCEEDS NUMBER OF CATEGORY RANK(1) SHARE RAISED ISSUES(2) -------- ------- ------ -------- --------- Worldwide initial public offerings....................... 1 15.2% $ 44 300 Worldwide initial public offerings, proceeds over $500 million................................................ 1 23.3 25 59 Worldwide public common stock offerings.................. 1 14.4 101 634 U.S. initial public offerings............................ 1 15.3 31 179 U.S. initial public offerings, proceeds over $500 million................................................ 1 30.1 16 29 U.S. public common stock offerings....................... 2 14.3 71 381
- --------------- (1) Rank in any one year during the period presented may vary from the rank for the period taken as a whole. (2) The number of issues reflects the number of tranches; an offering by a single issuer could have multiple tranches. ------------------------ As with mergers and acquisitions, we have been particularly successful in winning mandates for large, complex equity underwritings. As evidenced in the chart above, our market share of initial public offerings with total proceeds over $500 million is substantially higher than our market share of all initial public offerings. We believe our leadership in large initial public offerings reflects our expertise in complex transactions, research strengths, track record and distribution capabilities. In the international arena, we have also acted as lead manager on many of the largest initial public offerings. We were named the Asian Equity House of the Year by International Financing Review in 1998. We believe that a key factor in our equity underwriting success is the close working relationship between the investment bankers, research analysts and sales force as coordinated by our Equity Capital Markets group. Goldman Sachs' equities sales force is one of the most experienced and effective sales organizations in the industry. With 350 institutional sales professionals and 420 high net worth relationship managers located in every major market around the world, Goldman Sachs has relationships with a large and diverse group of investors. Global Investment Research is critical to our ability to succeed in the equity underwriting business. We believe that high quality equity research is a significant competitive advantage in the market for new equity issues. In this regard, Goldman Sachs' research has been consistently ranked among the industry's global leaders. See "-- Global Investment Research" for detailed information regarding our Global Investment Research Department. DEBT UNDERWRITING. We engage in the underwriting and origination of various types of debt instruments that we broadly categorize as follows: investment grade debt for corporations, governments, municipalities and agencies; leveraged finance, which includes high-yield debt and bank loans for non-investment grade issuers; emerging market debt, which includes corporate and sovereign issues; and asset-backed securities. We have employed a focused approach in debt underwriting, emphasizing high value-added areas in servicing our clients. We believe that the leveraged finance market is a key growth opportunity for our debt underwriting business. Over the last three years, we have more than doubled the number of debt underwriting professionals dedicated to this area. 72 75 The table below sets forth our rank, market position, our total proceeds raised and the number of debt transactions in which we have acted as underwriter in the following areas for the indicated period taken as a whole: GOLDMAN SACHS' DEBT UNDERWRITING MARKET DATA For the period January 1, 1994 through December 31, 1998 ($ in billions)
TOTAL MARKET PROCEEDS NUMBER OF CATEGORY(1) RANK(5) SHARE RAISED ISSUES(6) ----------- ------- ------ -------- --------- Worldwide debt(2).................................. 3 8.4% $695 4,684 Worldwide straight debt(3)......................... 3 8.9 559 4,165 U.S. investment grade straight debt(3)............. 3 12.0 419 3,590 U.S. investment grade industrial straight debt(3).......................................... 1 19.5 81 517 U.S. high-yield debt(4)............................ 5 8.0 33 184
- --------------- (1) All categories include publicly registered and Rule 144A issues. (2) Includes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. (3) "Straight debt" excludes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and municipal debt. (4) Excludes issues with both investment grade and non-investment grade ratings, often referred to as "split-rated issues". (5) Rank in any one year during the period presented may vary from the rank for the period taken as a whole. (6) The number of issues reflects the number of tranches; an offering by a single issuer could have multiple tranches. ------------------------ TRADING AND PRINCIPAL INVESTMENTS Our Trading and Principal Investments business facilitates customer transactions and takes proprietary positions through market-making in and trading of fixed income and equity products, currencies, commodities, and swaps and other derivatives. In order to meet the needs of our clients, our Trading and Principal Investments business is diversified across a wide range of products. For example, we make markets in traditional investment grade debt securities, structure complex derivatives and securitize mortgages and insurance risk. A fundamental tenet of our approach is that we believe our willingness and ability to take risk distinguishes us and substantially enhances our client relationships. Our Trading and Principal Investments business includes the following: - - FIXED INCOME, CURRENCY AND COMMODITIES. Goldman Sachs makes markets in and trades fixed income products, currencies and commodities, structures and enters into a wide variety of derivative transactions and engages in proprietary trading and arbitrage activities; - - EQUITIES. Goldman Sachs makes markets in and trades equities and equity-related products, structures and enters into equity derivative transactions and engages in proprietary trading and equity arbitrage; and - - PRINCIPAL INVESTMENTS. Principal investments primarily represents Goldman Sachs' net revenues from its investments in its merchant banking funds. 73 76 The following table sets forth the net revenues of our Trading and Principal Investments business: TRADING AND PRINCIPAL INVESTMENTS NET REVENUES (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY -------------------------- ---------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- FICC................................ $1,749 $2,055 $1,438 $ 741 $ 876 Equities............................ 730 573 795 365 455 Principal investments............... 214 298 146 76 26 ------ ------ ------ ------ ------ Total Trading and Principal Investments....................... $2,693 $2,926 $2,379 $1,182 $1,357 ====== ====== ====== ====== ======
------------------------ FIXED INCOME, CURRENCY AND COMMODITIES FICC is a large and diversified operation through which we engage in a variety of customer-driven market-making and proprietary trading and arbitrage activities. FICC's principal products are: - - Bank loans - - Commodities - - Currencies - - Derivatives - - Emerging market debt - - Global government securities - - High-yield securities - - Investment grade corporate securities - - Money market instruments - - Mortgage securities and loans - - Municipal securities We generate trading net revenues from our customer-driven business in three ways. First, in large, highly liquid markets we undertake a high volume of transactions for modest spreads. Second, by capitalizing on our strong market relationships and capital position, we also undertake transactions in less liquid markets where spreads are generally larger. Finally, we generate net revenues from structuring and executing transactions that address complex client needs. In our proprietary activities, we assume a variety of risks and devote substantial resources to identify, analyze and benefit from these exposures. We leverage our strong research capabilities and capitalize on our proprietary analytical models to analyze information and make informed trading judgments. We seek to benefit from perceived disparities in the value of assets in the trading markets and from macroeconomic and company-specific trends. FICC has established itself as a leading market participant by using a three-part approach to deliver high quality service to its clients. First, we offer broad market-making, research and market knowledge to our clients on a global basis. Second, we create innovative solutions to complex client problems by drawing upon our structuring and trading expertise. Third, we use our expertise to take positions in markets when we believe the return is at least commensurate with the risk. A core activity in FICC is market-making in a broad array of securities and products. For example, we are a primary dealer in many of the largest government bond markets around the world, including the United States, Japan, the United Kingdom and Canada; we are a member of the major futures exchanges; and we have interbank dealer status in the currency markets in New York, London, Tokyo and Hong Kong. Our willingness to make markets in a broad range of fixed income, currency and commodity products and their derivatives is crucial both to our client relationships and to support our underwriting business by providing secondary market liquidity. Our clients value counterparties that are active in the marketplace and are willing to provide liquidity and research-based points of view. In addition, we believe that our significant investment in research capabilities 74 77 and proprietary analytical models are critical to our ability to provide advice to our clients. Our research capabilities include quantitative and qualitative analyses of global economic, currency and financial market trends, as well as credit analyses of corporate and sovereign fixed income securities. Our clients often confront complex problems that require creative approaches. We assist our clients who seek to hedge or reallocate their risks and profit from expected price movements. To do this we bring to bear the ability of our experienced professionals to understand the needs of our clients and our ability to manage the risks associated with complex solutions to problems. In recognition of our ability to meet these client needs, we were ranked by Institutional Investor in February 1999 as the number two derivatives dealer for the second straight year. In addition, we were named by Euroweek in January 1999 as the "Best provider of swaps and other derivatives". EQUITIES Goldman Sachs engages in a variety of market-making, proprietary trading and arbitrage activities in equity securities and equity-related products (such as convertible securities and equity derivative instruments) on a global basis. Goldman Sachs makes markets and positions blocks of stock to facilitate customers' transactions and to provide liquidity in the marketplace. Goldman Sachs is a member of most of the major stock exchanges, including New York, London, Frankfurt, Tokyo and Hong Kong. As agent, we execute brokerage transactions in equity securities for institutional and individual customers that generate commission revenues. Commissions earned on agency transactions are recorded in Asset Management and Securities Services. In equity trading, as in FICC, we generate net revenues from our customer-driven business in three ways. First, in large, highly liquid principal markets, such as the over-the-counter market for equity securities, we undertake a high volume of transactions for modest spreads. In the Nasdaq National Market, we were the second largest market maker by aggregate volume, among the top 100 most actively traded stocks in calendar 1998. Second, by capitalizing on our strong market relationships and capital position, we also undertake large transactions, such as block trades and positions in securities, in which we benefit from spreads that are generally larger. Finally, we also benefit from structuring complex transactions. Goldman Sachs was a pioneer and is a leader in the execution of large block trades (trades of 50,000 or more shares) in the United States and abroad. In calendar 1998, we executed over 50 block trades of at least $100 million each. We have been able to capitalize on our expertise in block trading, our global distribution network and our willingness to commit capital to effect increasingly large and complex customer transactions. We expect corporate consolidation and restructuring and increased demand for certainty and speed of execution by sellers and issuers of securities to increase both the frequency and size of sales of large blocks of equity securities. We believe that we are well positioned to benefit from this trend. Block transactions, however, expose us to increased risks, including those arising from holding large and concentrated positions and decreasing spreads. See "Risk Factors -- Market Fluctuations Could Adversely Affect Our Businesses in Many Ways -- Holding Large and Concentrated Positions May Expose Us to Large Losses" for a discussion of the risks associated with holding a large position in a single issuer and "Risk Factors -- The Financial Services Industry Is Intensely Competitive and Rapidly Consolidating" for a discussion of the competitive risks that we face. We are active in the listed options and futures markets, and we structure, distribute and execute over-the-counter derivatives on market indices, industry groups and individual company stocks to facilitate customer transactions and our proprietary activities. We develop quantitative strategies and render advice with respect to portfolio hedging and restructuring and asset allocation transactions. We also create specially tailored instruments to enable sophisticated investors to undertake hedging strategies and establish or 75 78 liquidate investment positions. We are one of the leading participants in the trading and development of equity derivative instruments. We are an active participant in the trading of futures and options on most of the major exchanges in the United States, Europe and Asia. Equity arbitrage has long been an important part of our equity franchise. Our strategy is based on making investments on a global basis through a diversified portfolio across different markets and event categories. This business focuses on event-oriented special situations where we are not acting as an advisor and on relative value trades. These special situations include mergers and acquisitions, corporate restructurings, recapitalizations and legal and regulatory events. Equity arbitrage leverages our global infrastructure and network of research analysts to analyze carefully a broad range of trading and investment strategies across a wide variety of markets. Investment decisions are the product of rigorous fundamental, situational and, frequently, regulatory and legal analysis. Although market conditions led us to decrease the number and size of positions maintained by our equity arbitrage business during 1998, we believe that over time, as opportunities present themselves, our equity arbitrage business will likely increase its activity. TRADING RISK MANAGEMENT We believe that our trading and market-making capabilities are key ingredients to our success. While these businesses have generally earned attractive returns, we have in the past incurred significant trading losses in periods of market turbulence, such as in 1994 and 1998. Our trading risk management process seeks to balance our ability to profit from trading positions with our exposure to potential losses. Risk management includes input from all levels of Goldman Sachs, from the trading desks to the Firmwide Risk Committee. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Management" for a further discussion of our risk management policies and procedures. 1998 EXPERIENCE. From mid-August to mid-October 1998, the Russian economic crisis, the turmoil in Asian and Latin American emerging markets and the resulting move to higher quality fixed income securities by many investors led to substantial declines in global financial markets. Investors broadly sold credit-sensitive products, such as corporate and high-yield debt, and bought higher-rated instruments, such as U.S. Treasury securities, which caused credit spreads to widen dramatically. This market turmoil also caused a widespread decline in global equity markets. As a major dealer in fixed income securities, we maintain substantial inventories of corporate and high-yield debt. We regularly seek to hedge the interest rate risk on these positions through, among other strategies, short positions in U.S. Treasury securities. In the second half of 1998, we suffered losses from both the decline in the prices of corporate and high-yield debt instruments that we owned and the increase in the prices of the U.S. Treasury securities in which we had short positions. These market shocks also led to trading losses in our fixed income relative value trading positions. Relative value trading positions are intended to profit from a perceived temporary dislocation in the relationship between the values of different financial instruments. From mid-August to mid-October 1998, the components of these relative value positions moved in directions that we did not anticipate and the volatilities of certain positions increased to three times prior levels. When we and other market participants with similar positions simultaneously sought to reduce positions and exposures, this caused a substantial reduction in market liquidity and a continuing decline in prices. In the second half of 1998, we also experienced losses in equity arbitrage and in the value of a number of merchant banking investments. RISK REDUCTION. Over the course of this period, we actively reduced our positions and exposure to severe market disruptions of the type described above. Our current scenario models estimate our exposure to a substantial widening in credit spreads and adverse 76 79 movements in relative value trades of the type experienced in mid-August to mid-October 1998. These models indicate that, as of November 1998, our exposure to a potential reduction in net trading revenues as a result of these events was over 40% lower than in August 1998. In addition, the daily VaR of substantially all of our trading positions declined from $47 million as of May 29, 1998 to $43 million as of November 1998. The November 1998 daily VaR reflects the reduction in positions discussed above, offset by the higher market volatility, changes in correlation and other market conditions experienced in the second half of 1998. If the daily VaR as of November 1998 had been determined using the volatility and correlation data as of May 29, 1998, the daily VaR would have been $31 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Management" for a discussion of VaR and its limitations. As part of the continuous effort to refine our risk management policies and procedures, we have recently made a number of adjustments to the way that we evaluate risk and set risk limits. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Management -- Market Risk" for a further discussion of our policies and procedures for evaluating market risk and setting related limits. Notwithstanding these actions, we continue to hold trading positions that are substantial in both number and size, and are subject to significant market risk. In addition, management may choose to increase our risk levels in the future. See "Risk Factors -- Market Fluctuations Could Adversely Affect Our Businesses in Many Ways" and "-- Our Risk Management Policies and Procedures May Leave Us Exposed to Unidentified or Unanticipated Risk" for a discussion of the risks associated with our trading positions. PRINCIPAL INVESTMENTS In connection with our merchant banking activities, we invest with our clients by making principal investments in funds that we raise and manage. As of November 1998, we had committed $2.8 billion, of which $1.7 billion had been funded, of the $15.5 billion total equity capital committed for our merchant banking funds. The funds' investments generate capital appreciation or depreciation and, upon disposition, realized gains or losses. See "-- Asset Management and Securities Services -- Merchant Banking" for a discussion of our merchant banking funds. As of November 1998, our aggregate carrying value of principal investments held directly or through our merchant banking funds was approximately $1.4 billion, which was comprised of corporate principal investments with an aggregate carrying value of approximately $609 million and real estate investments with an aggregate carrying value of approximately $753 million. ASSET MANAGEMENT AND SECURITIES SERVICES Asset Management and Securities Services is comprised of the following: - - ASSET MANAGEMENT. Asset management generates management fees by providing investment advisory services to a diverse and rapidly growing client base of institutions and individuals; - - SECURITIES SERVICES. Securities services includes prime brokerage, financing services and securities lending and our matched book businesses, all of which generate revenue primarily in the form of fees or interest rate spreads; and - - COMMISSIONS. Commission-based businesses include agency transactions for clients on major stock and futures exchanges. Revenues from the increased share of income and gains derived from our merchant banking funds are also included in commissions. 77 80 The following table sets forth the net revenues of our Asset Management and Securities Services business: ASSET MANAGEMENT AND SECURITIES SERVICES NET REVENUES (in millions)
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY -------------------------- ------------ 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Asset management........................ $ 242 $ 458 $ 675 $139 $202 Securities services..................... 354 487 730 170 207 Commissions............................. 727 989 1,368 348 327 ------ ------ ------ ---- ---- Total Asset Management and Securities Services.............................. $1,323 $1,934 $2,773 $657 $736 ====== ====== ====== ==== ====
------------------------ ASSET MANAGEMENT Goldman Sachs is seeking to build a premier global asset management business. We offer a broad array of investment strategies and advice across all major asset classes: global equity; fixed income, including money markets; currency; and alternative investment products (i.e., investment vehicles with non-traditional investment objectives and/or strategies). Assets under supervision are comprised of assets under management and other client assets. Assets under management typically generate fees based on a percentage of their value and include our mutual funds, separate accounts managed for institutional and individual investors, our merchant banking funds and other alternative investment funds. Other client assets are comprised of assets in brokerage accounts of primarily high net worth individuals, on which we earn commissions. Over the last five years, we have rapidly grown our assets under supervision, as set forth in the graph below: ASSETS UNDER SUPERVISION [PROJECT ECHO BAR GRAPH] (in billions)
Assets under management Other client assets Totals '1994' 44 49 $ 93 '1995' 52 58 110 '1996' 94 77 171 '1997' 136 102 238 '1998' 195 142 337 February 1999 207 163 370
78 81 As of February 1999, equities and alternative investments represented 51% of our total assets under management. Since 1996, these two asset classes have been the primary drivers of our growth in assets under management. The following table sets forth the amount of assets under management by asset class: ASSETS UNDER MANAGEMENT BY ASSET CLASS (in billions)
AS OF AS OF NOVEMBER FEBRUARY ------------------------------------ -------- 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ASSET CLASS Equity............................... $ 6 $ 9 $34 $ 52 $ 69 $ 73 Fixed income and currency............ 17 19 26 36 50 53 Money markets........................ 18 20 27 31 46 48 Alternative investment(1)............ 3 4 8 17 30 32 --- --- --- ---- ---- ---- Total................................ $44 $52 $95 $136 $195 $206 === === === ==== ==== ====
----------------------- (1) Includes private equity, real estate, quantitative asset allocation and other funds that we manage. ------------------------ Since the beginning of 1996, we have increased the resources devoted to our asset management business, including adding over 850 employees. In addition, over the past three years, Goldman Sachs has made three asset management acquisitions in order to expand its geographic reach and broaden its global equity and alternative investment portfolio management capabilities. Our global reach has been important in growing assets under management. From November 1996 to February 1999, our assets under management, excluding our merchant banking funds, sourced from outside the United States grew by over $35 billion. As of February 1999, we managed approximately $46 billion sourced from Europe. In Japan, deregulation, high individual savings rates and low local rates of return have been important drivers of growth for our asset management business during the 1990s. Over the last three years, we have built a significant asset management business in Japan, and, as of February 1999, we managed $23 billion of assets sourced from Japan. In Japan, as of the end of February 1999, we were the largest non-Japanese investment trust manager, according to The Investment Trusts Association, and we managed four of the top 15 open-ended mutual funds ranked by mutual fund assets, according to IFIS Inc. We believe that substantial opportunities exist to grow our asset management business in Japan, by increasing our institutional client base and expanding the third-party distribution network through which we offer our mutual funds. CLIENTS. Our primary clients are institutions, high net worth individuals and retail investors. We access clients through both direct and third-party channels. 79 82 The table below sets forth the amount of assets under supervision by distribution channel and client category as of November 1998: ASSETS UNDER SUPERVISION BY DISTRIBUTION CHANNEL (in billions)
ASSETS UNDER SUPERVISION(1) PRIMARY INVESTMENT VEHICLES -------------- --------------------------- - - Directly distributed -- Institutional....................... $ 121 Separate managed accounts Commingled vehicles -- High net worth individuals.......... 156 Brokerage accounts Limited partnerships Separate managed accounts - - Third-party distributed -- Institutional and retail............ 48 Mutual funds ------ Total.................................... $ 325 ======
- --------------- (1) Excludes $12 billion in our merchant banking funds. ------------------------ Our institutional clients include corporations, insurance companies, pension funds, foundations and endowments. We managed assets for three of the five largest pension pools in the United States as ranked as of September 30, 1998 by Pensions & Investments, and we have 18 clients for whom we manage at least $1 billion each. In the individual high net worth area, we have established approximately 10,000 high net worth accounts worldwide, including accounts with 41% of the 1998 "Forbes 400 List of the Richest Americans". We believe this is a high growth opportunity because this market (defined as the market for individual investors with a net worth in excess of $5 million) is highly fragmented and growing rapidly and accounts for approximately $10 trillion of investable assets according to a study by McKinsey & Co. At the center of our effort is a team of over 420 relationship managers, located in 12 U.S. and six international offices. These professionals have an average of over seven years of experience at Goldman Sachs and have exhibited low turnover and superior productivity relative to the industry average. In the third-party distribution channel, we distribute our mutual funds on a worldwide basis through banks, brokerage firms, insurance companies and other financial intermediaries. As of December 31, 1998, we were the third largest manager in the U.S. institutional money market sector according to information compiled by Strategic Insight. In Japan, we also utilize a third-party distribution network consisting principally of the largest Japanese brokerage firms. MERCHANT BANKING Goldman Sachs has an established successful record in the corporate and real estate merchant banking business, having raised $15.5 billion of committed capital for 15 private investment funds, as of November 1998, of which $9.0 billion had been funded. We have committed $2.8 billion and funded $1.7 billion of these amounts; our clients, including pension plans, endowments, charitable institutions and high net worth individuals, have provided the remainder. Some of these investment funds pursue, on a global basis, long-term investments in equity and debt securities in privately negotiated transactions, leveraged buyouts and acquisitions. As of November 1998, these funds had total committed capital of $7.7 billion, which includes two funds with $1.0 billion of committed 80 83 capital that are in the process of being wound down. Other funds, with total committed capital of $7.8 billion as of November 1998, invest in real estate operating companies and debt and equity interests in real estate assets. Our strategy with respect to each merchant banking fund is to invest opportunistically to build a portfolio of investments that is diversified by industry, product type, geographic region and transaction structure and type. Our merchant banking funds leverage our long-standing relationships with companies, investors, entrepreneurs and financial intermediaries around the world to source potential investment opportunities. In addition, our merchant banking funds and their portfolio companies have generated business for other areas of Goldman Sachs, including equity underwriting, leveraged and other financing fees and merger advisory fees. Located in eight offices around the world, our investment professionals identify, manage and sell investments on behalf of our merchant banking funds. Goldman Sachs has two subsidiaries that manage real estate assets, The Archon Group, L.P. and Archon Group (France) S.C.A. In addition, our merchant banking professionals work closely with other departments and benefit from the expertise of specialists in debt and equity research, investment banking, leveraged and mortgage finance and equity capital markets. Merchant banking activities generate three revenue streams. First, we receive a management fee that is generally a percentage of a fund's committed capital, invested capital, total gross acquisition cost or asset value. These annual management fees, which are included in our asset management revenues, have historically been a recurring source of revenue. Second, we receive from each fund, after that fund has achieved a minimum return for fund investors, an increased share of the fund's income and gains that is a percentage, typically 20%, of the capital appreciation and gains from the fund's investments. Revenues from the increased share of the fund's income and gains are included in commissions. Third, Goldman Sachs, as a substantial investor in these funds, is allocated its proportionate share of the funds' unrealized appreciation or depreciation arising from changes in fair value as well as gains and losses upon realization. These items are included in Trading and Principal Investments. SECURITIES SERVICES Securities services consists predominantly of Global Securities Services, which provides prime brokerage, financing services and securities lending to a diversified U.S. and international customer base, including hedge funds, pension funds and high net worth individuals. Securities services also includes our matched book businesses. We offer prime brokerage services to our clients, allowing them the flexibility to trade with most brokers while maintaining a single source for financing and portfolio reports. Our prime brokerage activities provide multi-product clearing and custody in 50 markets, consolidated multi-currency accounting and reporting and offshore fund administration and servicing for our most active clients. Additionally, we provide financing to our clients through margin loans collateralized by securities held in the client's account. In recent years, we have significantly increased our prime brokerage client base. Securities lending activities principally involve the borrowing and lending of equity securities to cover customer and Goldman Sachs' short sales and to finance Goldman Sachs' long positions. In addition, we are an active participant in the securities lending broker-to-broker business and the third-party agency lending business. Trading desks in New York, Boston, London, Tokyo and Hong Kong provide 24-hour coverage in equity markets worldwide. We believe the rapidly developing international stock lending market presents a significant growth opportunity for us. Lenders of securities include pension plan sponsors, mutual funds, insurance companies, investment advisors, endowments, bank trust departments and individuals. We have entered into exclusive relationships with certain lenders that have given us access to large pools of securities, some of which are often hard to locate in the general lender 81 84 market, providing us with a competitive advantage. We believe that a significant cause of the growth in short sales, which require the borrowing of securities, has been the rapid increase in complex trading strategies, such as index arbitrage, convertible bond and warrant arbitrage, option strategies, and sector and market neutral strategies where shares are sold short to hedge exposure from derivative instruments. COMMISSIONS Goldman Sachs generates commissions by executing agency transactions on major stock and futures exchanges worldwide. We effect agency transactions for clients located throughout the world. In recent years, aggregate commissions have increased as a result of growth in transaction volume on the major exchanges. As discussed above, commissions also include the increased share of income and gains from merchant banking funds as well as commissions earned from brokerage transactions for high net worth individuals. For a discussion regarding our increased share of the income and gains from our merchant banking funds, see "-- Merchant Banking" above, and for a discussion regarding high net worth individuals, see "-- Asset Management -- Clients" above. In anticipation of continued growth in electronic connectivity and online trading, Goldman Sachs has made strategic investments in alternative trading systems to gain experience and participate in the development of this market. See "Risk Factors -- The Financial Services Industry Is Intensely Competitive and Rapidly Consolidating -- Our Revenues May Decline Due to Competition from Alternative Trading Systems" for a discussion of the competitive risks posed by alternative trading systems generally. GLOBAL INVESTMENT RESEARCH Our Global Investment Research Department provides fundamental research on economies, debt and equity markets, commodities markets, industries and companies on a worldwide basis. For over two decades, we have committed the resources on a global scale to develop an industry-leading position for our investment research products. We believe that investment research is a significant factor in our strong competitive position in debt and equity underwritings and in our generation of commission revenues. Major investors worldwide recognize Goldman Sachs for its value-added research products, which are highly rated in client polls across the Americas, Europe and Asia. Our Research Department is the only one to rank in the top three in each of the last 15 calendar years in Institutional Investor's "All- America Research Team" survey. In December 1998, the Research Department also achieved top honors for global investment research from Institutional Investor. In Europe, based on the Institutional Investor "1999 All-Europe Research Team" survey, the Research Department ranked number one for coverage of pan-European sectors and number three in European Strategy and Economics. Global Investment Research employs a team approach that provides equity research coverage of approximately 2,300 companies worldwide, 53 economies and 26 stock markets. This is accomplished through four groups: - - the Economic Research group, which formulates macroeconomic forecasts for economic activity, foreign exchange, and interest rates based on the globally coordinated views of its regional economists; - - the Portfolio Strategy group, which forecasts equity market returns and provides recommendations on both asset allocation and industry representation; - - the Company/Industry group, which provides fundamental analysis, forecasts and investment recommendations for companies and industries worldwide. Equity research analysts are organized regionally by sector and globally into more than 20 industry teams, which allows for extensive collaboration and knowledge sharing on important investment themes; and - - the Commodities Research group, which provides research on the global commodity markets. 82 85 INTERNET STRATEGY We believe that Internet technology and electronic commerce will, over time, change the ways that securities are traded and distributed, creating both opportunities and challenges for our businesses. In response, we have a program of internal development and external investment. Internally, we are extending our global electronic trading and information distribution capabilities to our clients via the Internet. These capabilities cover many of our fixed income, equities and mutual fund products in markets around the world. We are also using the Internet to improve the ease and quality of communication with our institutional and high net worth clients. For example, investors have on-line access to our investment research, mutual fund data and valuation models and our high net worth clients are increasingly accessing their portfolio information over the Internet. We have also recently established GS-Online(SM), which, in conjunction with Goldman, Sachs & Co., will act as an underwriter of securities offerings via the Internet and other electronic means. GS-Online(SM) will deal initially only with other underwriters and syndicate members and not with members of the public. Externally, we have invested in electronic commerce concerns such as Bridge Information Systems, Inc., TradeWeb LLC, Archipelago L.L.C., The BRASS Utility, L.L.C., OptiMark Technologies Inc. and, most recently, Wit Capital Group, Inc. Through these investments, we gain an increased understanding of business developments and opportunities in this emerging sector. For a discussion of how Goldman Sachs could be adversely affected by these developments, see "Risk Factors -- The Financial Services Industry Is Intensely Competitive and Rapidly Consolidating -- Our Revenues May Decline Due to Competition from Alternative Trading Systems". INFORMATION TECHNOLOGY Technology is fundamental to our overall business strategy. Goldman Sachs is committed to the ongoing development, maintenance and use of technology throughout the organization, with expenditures, including employee costs, of approximately $970 million in 1998 and a budget of $1.2 billion in 1999. We have developed significant software and systems over the past several years. Our technology initiatives can be broadly categorized into three efforts: - - enhancing client service through increased connectivity and the provision of high value-added, tailored services; - - risk management; and - - overall efficiency and control. We have tailored our services to our clients by providing them with electronic access to our products and services. For example, we developed the GS Financial Workbench(SM), an Internet web site that clients and employees can use to download research reports, access earnings and valuation models, submit trades, monitor accounts, build and view presentations, calculate derivative prices and view market data. First made available in early 1995, the GS Financial Workbench(SM) represents a joint effort among all of our business areas to create one comprehensive site for clients and employees to access our products and services. We have also developed software that enables us to monitor and analyze our market and credit risks. This risk management software not only analyzes market risk on firmwide, divisional and trading desk levels, but also breaks down our risk into its underlying exposures, permitting management to evaluate exposures on the basis of specific interest rate, currency rate, equity price or commodity price changes. To assist further in the management of our credit exposures, data from many sources are aggregated daily into credit management systems that give senior management and professionals in the Credit and Controllers Departments the ability to receive timely information with respect to credit exposures worldwide, including netting information, and the ability to analyze complex risk situations effectively. Our software accesses these data, allows for quick analysis at the level of individual trades and interacts with other Goldman Sachs systems. 83 86 Technology has been a significant factor in improving the overall efficiency of many areas of Goldman Sachs. By automating many trading procedures, we have substantially increased our efficiency and accuracy. We currently have projects under way to ensure that our technology is Year 2000 compliant. See "Risk Factors -- Our Computer Systems and Those of Third Parties May Not Achieve Year 2000 Readiness -- Year 2000 Readiness Disclosure" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Management -- Operational and Year 2000 Risks -- Year 2000 Readiness Disclosure" for a further discussion of the risks we face in achieving Year 2000 readiness and our progress to date. EMPLOYEES Management believes that one of the strengths and principal reasons for the success of Goldman Sachs is the quality and dedication of its people and the shared sense of being part of a team. Goldman Sachs was ranked number seven in Fortune magazine's "The 100 Best Companies to Work for in America" in January 1999 and was ranked number three in Fortune magazine's 1999 "The Top 50 MBA Dream Companies", the highest ranking investment banking and securities firm in each case. We strive to maintain a work environment that fosters professionalism, excellence, diversity and cooperation among our employees worldwide. Instilling the Goldman Sachs culture in all employees is a continuous process, of which training is an essential part. We recently opened a 34,000 square foot training center in New York City, near our world headquarters. All employees are offered the opportunity to participate in education and periodic seminars that we sponsor at various locations throughout the world. We also sponsor off-site meetings for the various business units that are designed to promote collaboration among co-workers. Another important part of instilling the Goldman Sachs culture in all employees is our employee review process. Employees are reviewed by supervisors, co-workers and employees they supervise in a 360-degree review process that is integral to our team approach. In 1998, over 140,000 reviews were completed, evidencing the comprehensive nature of this process. We also believe that good citizenship is an important part of being a member of the Goldman Sachs team. To that end, we established our Community TeamWorks initiative in 1997. As part of Community TeamWorks, all employees are offered the opportunity to spend a day working at a charitable organization of their choice while continuing to receive their full salary for that day. In 1998, approximately two-thirds of our employees participated in Community TeamWorks. The commitment of our partners to the community is also demonstrated by their having given over $90 million in each of the last two years to charities, including private foundations. As of February 1999, we had approximately 13,000 employees. In addition, The Archon Group, L.P. and Archon Group (France) S.C.A., subsidiaries of Goldman Sachs that provide real estate services for our real estate investment funds, had a total of approximately 1,260 employees as of February 1999. Goldman Sachs is reimbursed for substantially all of the costs of these employees by these funds. See "Management -- The Employee Initial Public Offering Awards" for a discussion of the steps taken by Goldman Sachs to encourage the continued service of its employees after our common stock offering and see "Risk Factors -- Our Conversion to Corporate Form May Adversely Affect Our Ability to Recruit, Retain and Motivate Key Employees" for a discussion of the factors that may have an adverse impact on the effectiveness of these efforts. COMPETITION The financial services industry -- and all of our businesses -- are intensely competitive, and we expect them to remain so. Our competitors are other brokers and dealers, investment banking firms, insurance companies, investment advisors, mutual funds, hedge funds, commercial banks and merchant banks. We compete with some of our com- 84 87 petitors globally and with some others on a regional, product or niche basis. We compete on the basis of a number of factors, including transaction execution, our products and services, innovation, reputation and price. Competition is also intense for the attraction and retention of qualified employees. Our ability to continue to compete effectively in our businesses will depend upon our ability to attract new employees and retain and motivate our existing employees. See "-- Employees" for a discussion of our efforts in this regard. In recent years there has been substantial consolidation and convergence among companies in the financial services industry. In particular, a number of large commercial banks, insurance companies and other broad-based financial services firms have established or acquired broker-dealers or have merged with other financial institutions. Many of these firms have the ability to offer a wide range of products, from loans, deposit-taking and insurance to brokerage, asset management and investment banking services, which may enhance their competitive position. They also have the ability to support investment banking and securities products with commercial banking, insurance and other financial services revenues in an effort to gain market share, which could result in pricing pressure in our businesses. This trend toward consolidation and convergence has significantly increased the capital base and geographic reach of our competitors. This trend has also hastened the globalization of the securities and other financial services markets. As a result, we have had to commit capital to support our international operations and to execute large global transactions. We believe that some of our most significant challenges and opportunities will arise outside the United States. See "Industry and Economic Outlook" for a discussion of these challenges and opportunities. In order to take advantage of these opportunities, we will have to compete successfully with financial institutions based in important non-U.S. markets, particularly in Europe. Some of these institutions are larger, better capitalized and have a stronger local presence and a longer operating history in these markets. We have experienced intense price competition in some of our businesses in recent years. For example, equity and debt underwriting discounts have been under pressure for a number of years and the ability to execute trades electronically, through the Internet and other alternative trading systems may increase the pressure on trading commissions. It appears that this trend toward alternative trading systems will continue and perhaps accelerate. Similarly, underwriting spreads in Latin American and other privatizations have been subject to considerable pressure in the last year. We believe that we may experience pricing pressures in these and other areas in the future as some of our competitors seek to obtain market share by reducing prices. See "Risk Factors -- The Financial Services Industry Is Intensely Competitive and Rapidly Consolidating" for a discussion of the competitive risks we face in our businesses. REGULATION Goldman Sachs' business is, and the securities and commodity futures and options industries generally are, subject to extensive regulation in the United States and elsewhere. As a matter of public policy, regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets, not with protecting the interests of Goldman Sachs' shareholders or creditors. In the United States, the SEC is the federal agency responsible for the administration of the federal securities laws. Goldman, Sachs & Co. is registered as a broker-dealer and as an investment adviser with the SEC and as a broker-dealer in all 50 states and the District of Columbia. Self-regulatory organizations, such as the NYSE, adopt rules and examine broker-dealers, such as Goldman, Sachs & Co. In addition, state securities and other regulators also have regulatory or oversight authority over Goldman, Sachs & Co. Similarly, our businesses are also subject to 85 88 regulation by various non-U.S. governmental and regulatory bodies and self-regulatory authorities in virtually all countries where we have offices. Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers' funds and securities, capital structure, record-keeping, the financing of customers' purchases and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect the mode of operation and profitability of Goldman Sachs. The U.S. and non-U.S. government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or its directors, officers or employees. Occasionally, our subsidiaries have been subject to investigations and proceedings, and sanctions have been imposed for infractions of various regulations relating to our activities, none of which has had a material adverse effect on us or our businesses. The commodity futures and options industry in the United States is subject to regulation under the Commodity Exchange Act, as amended. The Commodity Futures Trading Commission is the federal agency charged with the administration of the Commodity Exchange Act and the regulations thereunder. Goldman, Sachs & Co. is registered with the Commodity Futures Trading Commission as a futures commission merchant, commodity pool operator and commodity trading advisor. As a registered broker-dealer and member of various self-regulatory organizations, Goldman, Sachs & Co. is subject to the SEC's uniform net capital rule, Rule 15c3-1. This rule specifies the minimum level of net capital a broker-dealer must maintain and also requires that at least a minimum part of its assets be kept in relatively liquid form. Goldman, Sachs & Co. is also subject to the net capital requirements of the Commodity Futures Trading Commission and various securities and commodity exchanges. See Note 8 to the audited consolidated financial statements and Note 5 to the unaudited condensed consolidated financial statements for a discussion of our net capital. The SEC and various self-regulatory organizations impose rules that require notification when net capital falls below certain predefined criteria, dictate the ratio of subordinated debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the SEC's uniform net capital rule imposes certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of capital. In January 1999, the SEC adopted revisions to its uniform net capital rule and related regulations that permit the registration of over-the-counter derivatives dealers as broker-dealers. An over-the-counter derivatives dealer can, upon adoption of a risk management framework in accordance with the new rules, utilize a capital requirement based upon proprietary models for estimating market risk exposures. We have established Goldman Sachs Financial Markets, L.P. and are in the process of registering this company with the SEC as an over-the-counter derivatives dealer to conduct in a more capital efficient manner certain over-the-counter derivative businesses now conducted in other affiliates. Goldman Sachs is an active participant in the international fixed income and equity markets. Many of our affiliates that participate in those markets are subject to comprehensive regulations that include some form of capital adequacy rule and other customer protection rules. For example, Goldman Sachs provides investment services in and from the United Kingdom under a regulatory regime that is undergoing comprehensive restructuring aimed at implementing the Finan- 86 89 cial Services Authority as the United Kingdom's unified regulator. The relevant Goldman Sachs entities in London are at present regulated by the Securities and Futures Authority Limited in respect of their investment banking, individual asset management, brokerage and principal trading activities, and the Investment Management Regulatory Organization in respect of their institutional asset management and fund management activities. Some of these Goldman Sachs entities are also regulated by the London Stock Exchange and other United Kingdom securities and commodities exchanges of which they are members. It is expected, however, that commencing in 2000 the responsibilities of the Securities and Futures Authority Limited and Investment Management Regulatory Organization will be taken over by the Financial Services Authority. The investment services that are subject to oversight by United Kingdom regulators are regulated in accordance with European Union directives requiring, among other things, compliance with certain capital adequacy standards, customer protection requirements and conduct of business rules. These standards, requirements and rules are similarly implemented, under the same directives, throughout the European Union and are broadly comparable in scope and purpose to the regulatory capital and customer protection requirements imposed under the SEC and Commodity Futures Trading Commission rules. European Union directives also permit local regulation in each jurisdiction, including those in which we operate, to be more restrictive than the requirements of such directives and these local requirements can result in certain competitive disadvantages to Goldman Sachs. In addition, the Japanese Ministry of Finance and the Financial Supervisory Agency in Japan as well as German, French and Swiss banking authorities, among others, regulate various of our subsidiaries and also have capital standards and other requirements comparable to the rules of the SEC. Compliance with net capital requirements of these and other regulators could limit those operations of our subsidiaries that require the intensive use of capital, such as underwriting and trading activities and the financing of customer account balances, and also could restrict our ability to withdraw capital from our regulated subsidiaries, which in turn could limit our ability to repay debt, including the Notes. See "Risk Factors -- Legal and Regulatory Risks Are Inherent and Substantial in Our Businesses", "-- Holders of Notes May Be Adversely Affected Because The Goldman Sachs Group, Inc. Is a Holding Company" and "-- Holders of Notes May Be Adversely Affected Because We Depend on Funds from Our Regulated Subsidiaries" for a discussion of limitations on our ability to receive funds from regulated subsidiaries. LEGAL MATTERS We are involved in a number of judicial, regulatory and arbitration proceedings (including those described below) concerning matters arising in connection with the conduct of our businesses. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but might be material to our operating results for any particular period, depending, in part, upon the operating results for such period. MOBILEMEDIA SECURITIES LITIGATION Goldman, Sachs & Co. has been named as a defendant in a purported class action lawsuit commenced on December 6, 1996 and pending in the U.S. District Court for the District of New Jersey. This lawsuit was brought on behalf of purchasers of common stock of MobileMedia Corporation in an underwritten offering in 1995 and purchasers of senior subordinated notes of MobileMedia Communications Inc. in a concurrent underwritten offering. Defendants are MobileMedia Corporation, certain of its officers and directors, and the lead underwriters, including Goldman, Sachs & Co. MobileMedia Corporation is currently reorganizing in bankruptcy. Goldman, Sachs & Co. underwrote 2,242,500 shares of common stock, for a total price of approximately $53 million, and Goldman Sachs International underwrote 718,750 shares, for a total price of approxi- 87 90 mately $17 million. Goldman, Sachs & Co. underwrote approximately $38 million in principal amount of the senior subordinated notes. The consolidated class action complaint alleges violations of the disclosure requirements of the federal securities laws and seeks compensatory and/or rescissory damages. In light of MobileMedia Corporation's bankruptcy, the action against it has been stayed. Defendants' motion to dismiss was denied in October 1998. ANTITRUST MATTERS RELATING TO UNDERWRITINGS Goldman, Sachs & Co. is one of numerous financial services companies that have been named as defendants in certain purported class actions brought in the U.S. District Court for the Southern District of New York by purchasers of securities in public offerings, who claim that the defendants engaged in conspiracies in violation of federal antitrust laws in connection with these offerings. The plaintiffs in each instance seek treble damages as well as injunctive relief. One of the actions, which was commenced on August 21, 1998, alleges that the defendants have conspired to discourage or restrict the resale of securities for a period after the offerings, including by imposing "penalty bids". Defendants moved to dismiss the complaint in November 1998. The plaintiffs amended their complaint in February 1999, modifying their claims in various ways, including limiting the proposed class to retail purchasers of public offerings. Several other actions were commenced, beginning on November 3, 1998, that allege that the defendants, many of whom are also named in the other action discussed above, have conspired to fix at 7% the discount that underwriting syndicates receive from issuers of shares in certain offerings. Goldman, Sachs & Co. received a Civil Investigative Demand on April 29, 1999 from the U.S. Department of Justice requesting information with respect to its investigation of an alleged conspiracy among securities underwriters to fix underwriting fees. ROCKEFELLER CENTER PROPERTIES, INC. LITIGATION Several former shareholders of Rockefeller Center Properties, Inc. brought purported class actions in the U.S. District Court for the District of Delaware and the Delaware Chancery Court arising from the acquisition of Rockefeller Center Properties, Inc. by an investor group in July 1996. The defendants in the actions include, among others, Goldman, Sachs & Co., Whitehall Real Estate Partnership V, a fund advised by Goldman, Sachs & Co., a Goldman, Sachs & Co. managing director and other members of the investor group. The federal court actions, which have since been consolidated, were filed beginning on November 15, 1996, and the state court action was filed on May 29, 1998. The complaints generally allege that the proxy statement disseminated to former Rockefeller Center Properties, Inc. stockholders in connection with the transaction was deficient, in violation of the disclosure requirements of the federal securities laws. The plaintiffs are seeking, among other things, unspecified damages, rescission of the acquisition, and/or disgorgement. In a series of decisions, the federal court has granted summary judgment dismissing all the claims in the federal action. The plaintiffs have appealed those rulings. The state action has been stayed pending disposition of the federal action. REICHHOLD CHEMICALS LITIGATION Reichhold Chemicals, Inc. and Reichhold Norway ASA brought a claim on March 30, 1998 in the Commercial Court in London against Goldman Sachs International in relation to the plaintiffs' 1997 purchase of the polymer division of one of Goldman Sachs International's Norwegian clients, Jotun A/S. The plaintiffs claim that they overpaid by $40 million based upon misrepresentations concerning the financial performance of the polymer division. In November 1998, the Commercial Court granted Goldman Sachs International's application for a stay of the action pending the outcome of arbitration proceedings between 88 91 Reichhold Chemicals, Inc. and Reichhold Norway ASA, on the one hand, and Jotun A/S in Norway, on the other. The stay order is currently being reviewed by an appellate court. MATTERS RELATING TO MUNICIPAL SECURITIES Goldman, Sachs & Co., together with a number of other firms active in the municipal securities area, has received requests beginning in June 1995 for information from the SEC and certain other federal and state agencies and authorities with respect to the pricing of escrow securities sold by Goldman, Sachs & Co. to certain municipal bond issuers in connection with the advanced refunding of municipal securities. Goldman, Sachs & Co. understands that certain municipal bond issuers to which Goldman, Sachs & Co. sold escrow securities have also received such inquiries. There have been published reports that an action under the Federal False Claims Act was filed in February 1995 alleging unlawful and undisclosed overcharges in certain advance refunding transactions by a private plaintiff on behalf of the United States and that Goldman, Sachs & Co., together with a number of other firms, is a named defendant in that action. The complaint was reportedly filed under seal while the government determines whether it will pursue the claims directly. Goldman, Sachs & Co. is also one of many municipal underwriting firms that have been named as defendants in a purported class action brought on November 24, 1998 in the U.S. District Court for the Middle District of Florida by the Clerk of Collier County, Florida on behalf of municipal issuers which purchased escrow securities since October 1986 in connection with advance refundings. The amended complaint alleges that the securities were excessively "marked up" in violation of the Investment Advisers Act and Florida law, and seeks to recover the difference between the actual and alleged "fair" prices. The defendants moved to dismiss the complaint on April 30, 1999. AMF SECURITIES LITIGATION The Goldman Sachs Group, L.P., Goldman, Sachs & Co. and a Goldman, Sachs & Co. managing director have been named as defendants in a purported class action lawsuit commenced on April 27, 1999 in the U.S. District Court for the Southern District of New York. This lawsuit was brought on behalf of purchasers of stock of AMF Bowling, Inc. in an underwritten initial public offering of 15,525,000 shares of common stock in November 1997 at a price of $19.50 per share. Defendants are AMF Bowling, Inc., certain officers and directors of AMF Bowling, Inc. (including the Goldman, Sachs & Co. managing director), and the lead underwriters of the offering (including Goldman, Sachs & Co.). The complaint alleges violations of the disclosure requirements of the federal securities laws and seeks compensatory damages and/or rescission. The complaint asserts that The Goldman Sachs Group, L.P. and the Goldman, Sachs & Co. managing director are liable as controlling persons under the federal securities laws because certain funds managed by Goldman Sachs owned a majority of the outstanding common stock of AMF Bowling, Inc. and the managing director served as its chairman at the time of the offering. PROPERTIES Our principal executive offices are located at 85 Broad Street, New York, New York, and comprise approximately 969,000 square feet of leased space, pursuant to a lease agreement expiring in June 2008 (with an option to renew for up to 20 additional years). We also occupy over 500,000 square feet at each of 1 New York Plaza and 10 Hanover Square in New York, New York, pursuant to lease agreements expiring in September 2004 (with an option to renew for ten years) and June 2018, respectively. We also have a 15-year lease for approximately 590,000 square feet at 180 Maiden Lane in New York, New York, that expires in March 2014. In total, we lease over 3.1 million square feet in the New York area, having more than doubled our space since November 1996. We have additional offices in the United States and elsewhere in the Americas. Together, these 89 92 offices comprise approximately 650,000 square feet of leased space. Consistent with Goldman Sachs' global approach to its business, we also have offices in Europe, Asia, Africa and Australia. In Europe, we have offices that total approximately 790,000 square feet. Our largest presence in Europe is in London, where we lease approximately 639,000 square feet through various leases, with the principal one, for Peterborough Court, expiring in 2016. An additional 396,000 square feet of leased space in London is expected to be occupied during 2001. In Asia, we have offices that total approximately 360,000 square feet. Our largest offices in these regions are in Tokyo and Hong Kong. In Tokyo, we currently lease approximately 175,000 square feet under leases that expire between November 1999 and June 2005. In Hong Kong, we currently lease approximately 103,000 square feet under a lease that expires in May 2000. We recently entered into a new 12-year lease in Hong Kong for approximately 190,000 square feet. There are also significant expansion efforts underway in Tokyo and Singapore. Our space requirements have increased significantly over the last several years. Currently, Goldman Sachs is at or near capacity at most of its locations. As a result, we have been actively leasing additional space to support our anticipated growth. Based on our progress to date, we believe that we will be able to acquire additional space to meet our anticipated needs. 90 93 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is information concerning the persons who will be the directors and executive officers of Goldman Sachs as of the date of this prospectus. We anticipate appointing additional directors over time who are not employees of Goldman Sachs or affiliated with management.
NAME AGE POSITION ---- --- -------- Henry M. Paulson, Jr. 53 Director, Chairman and Chief Executive Officer Robert J. Hurst 53 Director and Vice Chairman John A. Thain 43 Director, President and Co-Chief Operating Officer John L. Thornton 45 Director, President and Co-Chief Operating Officer Sir John Browne 51 Director James A. Johnson 55 Director John L. Weinberg 74 Director Robert J. Katz 51 General Counsel Gregory K. Palm 50 General Counsel Robin Neustein 45 Chief of Staff Leslie M. Tortora 42 Chief Information Officer David A. Viniar 43 Chief Financial Officer Barry L. Zubrow 46 Chief Administrative Officer
------------------------ Executive officers are appointed by and serve at the pleasure of our board of directors. A brief biography of each director and executive officer follows. Mr. Paulson has been Co-Chairman and Chief Executive Officer or Co-Chief Executive Officer of The Goldman Sachs Group, L.P. since June 1998 and served as Chief Operating Officer from December 1994 to June 1998. From 1990 to November 1994, he was Co-Head of Investment Banking. Mr. Hurst has been Vice Chairman of The Goldman Sachs Group, L.P. since February 1997 and has served as Head or Co-Head of Investment Banking since 1990. He is also a director of VF Corporation and IDB Holding Corporation Ltd. Mr. Thain has been President of The Goldman Sachs Group, L.P. since March 1999 and Co-Chief Operating Officer since January 1999. From December 1994 to March 1999, he served as Chief Financial Officer and Head of Operations, Technology and Finance. From July 1995 to September 1997, he was also Co-Chief Executive Officer for European Operations. In 1990, Mr. Thain transferred from FICC to Operations, Technology and Finance to assume responsibility for Controllers and Treasury. From 1985 to 1990, Mr. Thain was in FICC where he established and served as Co-Head of the Mortgage Securities Department. Mr. Thain is a director of The Depository Trust Company. Mr. Thornton has been President of The Goldman Sachs Group, L.P. since March 1999 and Co-Chief Operating Officer of The Goldman Sachs Group, L.P. since January 1999. From August 1998 until January 1999, he had oversight responsibility for International Operations. From September 1996 until August 1998, he was Chairman, Goldman Sachs -- Asia, in addition to his senior strategic responsibilities in Europe. From July 1995 to September 1997, he was Co-Chief Executive Officer for European Operations. From 1994 to 1995, he was Co-Head of Investment Banking in Europe and from 1992 to 1994 was Head of European Investment Banking Services. Mr. Thornton is also a director of the Ford Motor Company, BSkyB PLC, Laura Ashley PLC and the Pacific Century Group. Sir John Browne has been Group Chief Executive of BP Amoco p.l.c. since January 91 94 1999. He was Group Chief Executive of The British Petroleum Company from 1995 to 1999, having served as a Managing Director since 1991. Sir John is also a director of SmithKline Beecham p.l.c. and the Intel Corporation, a member of the supervisory board of DaimlerChrysler AG and a trustee of the British Museum. Mr. Johnson has been Chairman of the Executive Committee of the Board of Directors of Fannie Mae since January 1999. He was Chairman and Chief Executive Officer of Fannie Mae from February 1991 through December 1998. Mr. Johnson is also a director of the Cummins Engine Company, Dayton Hudson Corporation, UnitedHealth Group and Kaufman and Broad Home Corporation, Chairman of the John F. Kennedy Center for the Performing Arts and Chairman of the Board of Trustees of The Brookings Institution. Mr. Weinberg has been Senior Chairman of The Goldman Sachs Group, L.P. since 1990. From 1984 to 1990, he was Senior Partner and Chairman and, from 1976 to 1984, he served both as Senior Partner and Co-Chairman. Mr. Weinberg is also a director of Knight-Ridder, Inc., Providian Financial Corp. and Tricon Global Restaurants, Inc. Mr. Katz has been General Counsel of The Goldman Sachs Group, L.P. or its predecessor since 1988. From 1980 to 1988, Mr. Katz was a partner in Sullivan & Cromwell. Mr. Palm has been General Counsel of The Goldman Sachs Group, L.P. since 1992. He also has senior oversight responsibility for Compliance and Management Controls, and is Co-Chairman of the Global Compliance and Control Committee. From 1982 to 1992, Mr. Palm was a partner in Sullivan & Cromwell. Ms. Neustein has been Chief of Staff to the senior partners of The Goldman Sachs Group, L.P. since 1992. From 1991 to 1992, Ms. Neustein managed strategic projects for the senior partners. Prior to then, she was in Investment Banking. Ms. Tortora has been Chief Information Officer of The Goldman Sachs Group, L.P. and the Head of Information Technology since March 1999. She has headed Goldman Sachs' global technology efforts since 1994. Mr. Viniar has been Chief Financial Officer of The Goldman Sachs Group, L.P. and Co-Head of Operations, Finance and Resources since March 1999. From July 1998 until then, he was Deputy Chief Financial Officer and from 1994 until then, he was Head of Finance, with responsibility for Controllers and Treasury. From 1992 to 1994, Mr. Viniar was Head of Treasury and immediately prior to then was in the Structured Finance Department of Investment Banking. Mr. Zubrow has been Chief Administrative Officer of The Goldman Sachs Group, L.P. and Co-Head of Operations, Finance and Resources since March 1999. From 1994 until then he was chief credit officer and Head of the Credit Department. From 1992 to 1994, Mr. Zubrow was Head of the Midwest Group in the Corporate Finance Department of Investment Banking. In addition, Jon S. Corzine, 52, currently is a Director and Co-Chairman of Goldman Sachs, but will resign both positions immediately prior to the date of our common stock offering. After seeing through the completion of our common stock offering, a project Mr. Corzine believes is of great importance to Goldman Sachs, he is leaving Goldman Sachs to pursue other interests. Mr. Corzine has been Co-Chairman of The Goldman Sachs Group, L.P. since June 1998 and served as Chairman and Chief Executive Officer of The Goldman Sachs Group, L.P. from December 1994 to June 1998 and Co-Chief Executive Officer from June 1998 to January 1999. Mr. Corzine is a member of the NASD's Board of Governors. There are no family relationships between any of the executive officers or directors of Goldman Sachs. THE MANAGEMENT AND PARTNERSHIP COMMITTEES In January 1999, the Management and Partnership Committees were constituted as part of Goldman Sachs' overall governance structure. The Management Committee, which is chaired by Mr. Paulson, has responsibility 92 95 for policy, strategy and management of our businesses. In addition to Messrs. Paulson, Thain, Thornton and Hurst, Ms. Neustein and Ms. Tortora, the members of this committee and their principal positions within Goldman Sachs are: Lloyd C. Blankfein (Co-Head, FICC), Richard A. Friedman (Co-Head, Merchant Banking), Steven "Mac" M. Heller (Co-Chief Operating Officer, Investment Banking), Robert S. Kaplan (Co-Chief Operating Officer, Investment Banking), John P. McNulty (Co-Head, Asset Management), Michael P. Mortara (Co-Head, FICC), Daniel M. Neidich (Co-Head, Merchant Banking), Mark Schwartz (President, Goldman Sachs -- Japan), Robert K. Steel (Co-Head, Equities) and Patrick J. Ward (Co-Head, Equities and Deputy Chairman -- Europe). Mr. Katz is counsel to the Management Committee. The Partnership Committee, which is chaired by Messrs. Thain and Thornton, oversees personnel development and career management issues. It focuses on such matters as recruiting, training, performance evaluation, diversity, mobility and succession planning and, together with the Management Committee, is expected to become integral in the process of selecting and compensating managing directors. In addition to Messrs. Thain and Thornton and Ms. Neustein, the members of this committee and their principal positions within Goldman Sachs are: David W. Blood (Head, Asset Management -- Europe), Gary D. Cohn (Head, FICC Commodities and Emerging Markets), W. Mark Evans (Co-Head, Investment Research), Jacob D. Goldfield (Head, FICC -- Europe), David B. Heller (Head, Equities Derivatives Trading), Philip D. Murphy (President, Goldman Sachs -- Asia), Simon M. Robertson (President, Goldman Sachs -- Europe), Esta E. Stecher (Head, Tax), John S. Weinberg (Co-Head, Investment Banking Services), Peter A. Weinberg (Co-Chief Operating Officer, Investment Banking and Deputy Chairman -- Europe) and Jon Winkelried (Head, Leveraged Finance). Mr. Palm is counsel to the Partnership Committee. INFORMATION REGARDING THE BOARD OF DIRECTORS Our charter will provide for a classified board of directors consisting of three classes. The term of the initial Class I directors will terminate on the date of the 2000 annual meeting of shareholders, the term of the initial Class II directors will terminate on the date of the 2001 annual meeting of shareholders and the term of the initial Class III directors will terminate on the date of the 2002 annual meeting of shareholders. Messrs. Thain and Thornton will be members of Class I, Sir John Browne and Messrs. Johnson and Weinberg will be members of Class II and Messrs. Hurst and Paulson will be members of Class III. Beginning in 2000, at each annual meeting of shareholders, successors to the class of directors whose term expires at that annual meeting will be elected for a three-year term and until their respective successors have been elected and qualified. A director may be removed only for cause by the affirmative vote of the holders of not less than 80% of the outstanding shares of capital stock entitled to vote in the election of directors. It is anticipated that our board of directors will meet at least quarterly. Members of our board of directors who are employees of Goldman Sachs or any of its subsidiaries will not be compensated for service on the board of directors or any committee thereof. Upon completion of our common stock offering, Mr. Weinberg will continue in his role as Senior Chairman under an agreement pursuant to which he will provide senior advisory services to Goldman Sachs, receive annual compensation of $2 million and participate in various employee benefit plans. The agreement expires November 24, 2000, unless earlier terminated by either party on 90 days' notice. Mr. Weinberg has had similar arrangements with Goldman Sachs since 1990. COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors will have an Audit Committee, composed of directors who are not employed by Goldman Sachs or affiliated with management. The Audit Committee will review the results and scope of the audit and other services provided by our independent 93 96 auditors as well as review our accounting and control procedures and policies. Our board of directors will also have a Compensation Committee. The Compensation Committee will oversee the compensation and benefits of the management and employees of Goldman Sachs and will consist entirely of non-employee directors. Our board of directors may from time to time establish other committees to facilitate the management of Goldman Sachs. EXECUTIVE COMPENSATION Prior to our common stock offering, our business was carried on in partnership form. As a result, meaningful individual compensation information for directors and executive officers of Goldman Sachs based on operating in corporate form is not available for periods prior to our common stock offering. However, Goldman Sachs does not believe that the aggregate compensation that will be paid in fiscal 1999 to the continuing named executive officers referred to below will exceed levels that are customary for similarly situated executives in the investment banking industry. The following table sets forth compensation information for our Chief Executive Officer, three of our continuing executive officers named under "-- Directors and Executive Officers" and two former executive officers of The Goldman Sachs Group, L.P. (the "named executive officers"). FISCAL 1998 COMPENSATION INFORMATION(1)
NAME AND PRINCIPAL POSITION - --------------------------- Henry M. Paulson, Jr.,...................................... $12,700,000 1998: Co-Chairman and Co-Chief Executive Officer (1999: Director, Chairman and Chief Executive Officer) Robert J. Hurst,............................................ 11,300,000 1998: Vice Chairman (1999: Director and Vice Chairman) John A. Thain,.............................................. 11,200,000 1998: Chief Financial Officer (1999: Director, President and Co-Chief Operating Officer) John L. Thornton,........................................... 9,900,000 1998: Chairman of International Operations (1999: Director, President and Co-Chief Operating Officer) Jon S. Corzine(2)........................................... 12,800,000 1998: Co-Chairman and Co-Chief Executive Officer Roy J. Zuckerberg(3)........................................ 11,000,000 1998: Vice Chairman
------------------------- (1) The amounts in the table represent compensation for fiscal 1998 only and do not include that portion of each named executive officer's total partnership return from The Goldman Sachs Group, L.P. in 1998 attributable to a return on his invested capital or to his share of the income from investments made by Goldman Sachs in prior years that was allocated to the individuals who were partners in those years. The return on invested capital for each named executive officer was determined using a rate of 12%, the actual fixed rate of return that was paid in 1998 to our retired limited partners on their long-term capital. (2) Mr. Corzine is leaving Goldman Sachs after the completion of our common stock offering. (3) Mr. Zuckerberg retired in November 1998. ---------------------- Aggregate compensation paid to key employees who are not named executive officers may exceed that paid to the named executive officers. Each of Messrs. Paulson, Hurst, Thain, Thornton, Corzine and Zuckerberg has accrued benefits under the employees' pension plan entitling him to receive annual benefits upon retirement at age 65 of $10,533, $10,533, $7,074, $11,801, $9,942 and $7,721, respectively. These benefits had accrued prior to November 1992 and none of these executive officers has earned additional 94 97 benefits under the pension plan since November 1992. EMPLOYMENT, NONCOMPETITION AND PLEDGE AGREEMENTS Goldman Sachs is entering into employment agreements with each profit participating limited partner who continues as a managing director and pledge agreements and agreements relating to noncompetition and other covenants with all of the managing directors who are profit participating limited partners, whether or not they retire, including, in both cases, each managing director who is a member of our board of directors or is an executive officer. The following are descriptions of the material terms of the employment, noncompetition and pledge agreements with the managing directors who were profit participating limited partners. You should, however, refer to the exhibits that are a part of the registration statement for a copy of the form of each agreement. See "Available Information". EMPLOYMENT AGREEMENTS Each employment agreement has an initial term extending through November 24, 2000 (thereafter no set term), requires each continuing managing director who was a profit participating limited partner to devote his or her entire working time to the business and affairs of Goldman Sachs and generally may be terminated at any time by either that managing director or Goldman Sachs on 90 days' prior written notice. Goldman Sachs has entered into similar employment agreements with all other managing directors, except that they have no set term. NONCOMPETITION AGREEMENTS Each noncompetition agreement provides as follows: CONFIDENTIALITY. Each managing director who was a profit participating limited partner is required to protect and use "confidential information" in accordance with the restrictions placed by Goldman Sachs on its use and disclosure. NONCOMPETITION. During the period ending 12 months after the date a managing director who was a profit participating limited partner ceases to be employed by Goldman Sachs, that managing director may not: - - form, or acquire a 5% or greater ownership, voting or profit participation interest in, any competitive enterprise; or - - associate with any competitive enterprise and in connection with such association engage in, or directly or indirectly manage or supervise personnel engaged in, any activity that had a relationship to that managing director's activities at Goldman Sachs. When we refer to a "competitive enterprise", we are referring to any business enterprise that engages in any activity, or owns a significant interest in any entity that engages in any activity, that competes with any activity in which we are engaged. NONSOLICITATION. During the period ending 18 months after the date a managing director who was a profit participating limited partner ceases to be employed by Goldman Sachs, that managing director may not, directly or indirectly, in any manner: - - solicit any client with whom that managing director worked, or whose identity became known to him or her in connection with his or her employment with Goldman Sachs, to transact business with a competitive enterprise or reduce or refrain from doing any business with Goldman Sachs; - - interfere with or damage any relationship between Goldman Sachs and any client or prospective client; or - - solicit any employee of Goldman Sachs to apply for, or accept employment with, any competitive enterprise. TRANSFER OF CLIENT RELATIONSHIPS. Each managing director who was a profit participating limited partner is required, upon termination of his or her employment, to take all actions and do all things reasonably requested by Goldman Sachs during a 90-day cooperation period to maintain for Goldman Sachs the business, goodwill and business 95 98 relationships with Goldman Sachs' clients with which he or she worked. LIQUIDATED DAMAGES. In the case of any breach of the noncompetition or nonsolicitation provisions prior to the fifth anniversary of the date of the consummation of our common stock offering, the breaching managing director will be liable for liquidated damages. The amount of liquidated damages for each managing director who initially serves on the board of directors, the Management Committee or the Partnership Committee of Goldman Sachs is $15 million, and the amount of liquidated damages for each other managing director who was a profit participating limited partner is $10 million. These liquidated damages are in addition to the forfeiture of any future equity-based awards that may occur as a result of the breach of any noncompetition or nonsolicitation provisions contained in those awards. PLEDGE AGREEMENT The liquidated damages provisions of each noncompetition agreement will be secured by a pledge of stock or other assets with an initial value equal to 100% of the applicable liquidated damages amount. Each pledge agreement will terminate on the earliest to occur of: - - the death of the relevant managing director; - - the expiration of the 24-month period following the termination of the employment of the relevant managing director; or - - the fifth anniversary of the date of the consummation of our common stock offering. NONEXCLUSIVITY AND ARBITRATION The liquidated damages and pledge arrangements discussed above are not exclusive of any injunctive relief that Goldman Sachs may be entitled to for a breach of a noncompetition agreement and, after the termination of the pledge agreement, Goldman Sachs will be entitled to all available remedies for a breach of a noncompetition agreement. The employment, noncompetition and pledge agreements generally provide that any disputes thereunder will be resolved by binding arbitration. THE EMPLOYEE INITIAL PUBLIC OFFERING AWARDS On the date of the consummation of our common stock offering, we intend to provide 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 will receive a grant of restricted stock units awarded based on a formula, with respect to which up to an aggregate of 30,070,535 shares of common stock will be deliverable; - - certain senior employees, principally managing directors who were not profit participating limited partners, will be selected to participate in the defined contribution plan described below, to which Goldman Sachs will make an initial irrevocable contribution of 12,567,587 shares of common stock; - - certain employees will receive a grant of restricted stock units awarded on a discretionary basis, with respect to which up to an aggregate of 33,303,595 shares of common stock will be deliverable; and - - certain employees will receive a grant of options to purchase shares of common stock awarded on a discretionary basis, with respect to which up to an aggregate of 40,000,028 shares of common stock will be deliverable. The restricted stock units awarded to employees based on a formula, the restricted stock units awarded to employees on a discretionary basis and the options to purchase shares of common stock awarded to employees on a discretionary basis will be granted under the stock incentive plan described below. The restricted stock units awarded to employees on a discretionary and a formula basis described below will confer only the rights of a general unsecured creditor of Goldman Sachs and no rights as a shareholder of Goldman Sachs until the common stock underlying such award is delivered. Any shares of common stock acquired by a managing director pursuant to the 96 99 awards will be subject to the shareholders' agreement described in "Certain Relationships and Related Transactions -- Shareholders' Agreement". FORMULA AWARDS The common stock underlying the restricted stock units awarded based on a formula generally will be deliverable in equal installments on or about the first, second and third anniversaries of the date of the consummation of our common stock offering, although the common stock may be deliverable earlier in the event of certain terminations of employment following a change in control. While no additional service will be required to obtain delivery of the underlying common stock (i.e., the award is "vested"), delivery of the common stock will be conditioned on the grantee's satisfying certain requirements, including not being terminated under the circumstances described in the award agreement prior to delivery of the common stock and not violating any policy of Goldman Sachs (including in respect of confidentiality and hedging) or otherwise acting in a manner detrimental to Goldman Sachs (including violating noncompetition or nonsolicitation provisions of the award). While these restricted stock units are outstanding, amounts equal to regular cash dividends that would have been paid on the common stock underlying these units if the common stock had been actually issued will be paid in cash at about the same time that the dividends are paid generally to the shareholders. These amounts will be recorded as compensation expense since the underlying shares of common stock will not have been issued. Pursuant to Accounting Principles Board Opinion No. 25, we will record non-cash compensation expense of $1,504 million related to the restricted stock units awarded based on a formula on the date of grant, since future service is not required as a condition to the delivery of the underlying shares of common stock. For purposes of calculating both basic earnings per share (pursuant to Statement of Financial Accounting Standards No. 128) and book value per share, the shares of common stock underlying the restricted stock units awarded based on a formula are included in common stock outstanding for the reason described above. DISCRETIONARY AWARDS RESTRICTED STOCK UNITS AWARDED ON A DISCRETIONARY BASIS. The restricted stock units awarded on a discretionary basis will vest, and the underlying common stock will be delivered, in equal installments on or about the third, fourth and fifth anniversaries of the date of consummation of our common stock offering if the grantee has satisfied certain conditions and the grantee's employment with Goldman Sachs has not been terminated, with certain exceptions for terminations of employment due to death, retirement, extended absence or following a change in control. While these restricted stock units are outstanding, amounts equal to regular cash dividends that would have been paid on the common stock underlying these units if the common stock had been actually issued will be paid in cash at about the same time that the dividends are paid generally to the shareholders. These amounts will be recorded as compensation expense since the underlying shares of common stock will not have been issued. Pursuant to Accounting Principles Board Opinion No. 25, we will record non-cash compensation expense of $1,665 million related to the restricted stock units awarded on a discretionary basis over the related service period. For purposes of calculating both basic earnings per share (pursuant to Statement of Financial Accounting Standards No. 128) and book value per share, the shares of common stock underlying these restricted stock units are excluded from common stock outstanding since future service is required as a condition to the delivery of the underlying shares of common stock. The dilutive effect of these restricted stock units is, however, included in diluted shares outstanding using the treasury stock method. DISCRETIONARY OPTIONS. The options to purchase shares of common stock awarded on a discretionary basis will be granted with an exercise price generally equal to the initial public offering price per share in our common stock offering, although in certain non-U.S. jurisdictions certain employees may be 97 100 granted discretionary options with a lower exercise price. These discretionary options will generally be exercisable in equal installments commencing on or about the third, fourth and fifth anniversaries of the date of the consummation of our common stock offering if the grantee has satisfied certain conditions and the grantee's employment with Goldman Sachs has not been terminated, with certain exceptions for terminations of employment due to death, retirement, extended absence or following a change in control. These discretionary options will thereafter generally remain exercisable, subject to satisfaction of certain conditions, until the tenth anniversary of the date of the consummation of our common stock offering or, if earlier, upon expiration of a period, as specified in the award agreement, following termination of employment. These discretionary options will be accounted for pursuant to Accounting Principles Board Opinion No. 25, as permitted by paragraph 5 of Statement of Financial Accounting Standards No. 123. Since these options will have no intrinsic value on the date of grant, no compensation expense will be recognized. CONTRIBUTION TO THE DEFINED CONTRIBUTION PLAN. On the date of the consummation of our common stock offering, Goldman Sachs will make an initial irrevocable contribution of 12,567,587 shares of common stock to the defined contribution plan. Certain senior employees, principally managing directors who are not profit participating limited partners, will be selected to participate in the defined contribution plan. The right to receive shares will vest, and the underlying common stock will be distributable to participants in the defined contribution plan, in equal installments on or about the third, fourth and fifth anniversaries of the initial contribution if the participant has satisfied certain conditions and the participant's employment with Goldman Sachs has not been terminated, with certain exceptions for terminations of employment due to death or following a change in control. Dividends paid on shares allocated to participants will be distributed currently. We will record non-cash compensation expense of $628 million related to the initial irrevocable contribution of shares of common stock to the defined contribution plan. This non-cash expense will be recognized on the date it is funded in accordance with Statement of Financial Accounting Standards No. 87. CHANGE IN CONTROL The restricted stock units awarded based on a formula, the restricted stock units awarded on a discretionary basis, the options to purchase shares of common stock awarded on a discretionary basis and the defined contribution plan provide that (i) if a change in control occurs and (ii) within 18 months thereafter a grantee's or participant's employment is terminated by Goldman Sachs other than for cause or the grantee or participant terminates employment for good reason, in each case, as determined by Goldman Sachs: - - the common stock underlying any outstanding restricted stock units awarded based on a formula will be delivered; - - any outstanding restricted stock units awarded on a discretionary basis will vest and the common stock underlying these restricted stock units will be delivered; - - any outstanding unexercised options to purchase shares of common stock awarded on a discretionary basis will become exercisable and will be exercisable for a period of one year following such termination of employment (but in no event later than the tenth anniversary of the date of the consummation of our common stock offering) and thereafter terminate; and - - under the defined contribution plan, any unvested portion of the common stock attributable to the initial contribution by Goldman Sachs to the defined contribution plan will vest and be distributed. "Change in control" means the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving The Goldman Sachs Group, Inc. or sale or other disposition of all or substantially all of the assets of The Goldman Sachs Group, Inc. to an entity that is not an affiliate of The Goldman Sachs 98 101 Group, Inc. that, in each case, requires shareholder approval under the law of The Goldman Sachs Group, Inc.'s jurisdiction of organization, unless immediately following such transaction, either: - - at least 50% of the total voting power of the surviving entity or its parent entity, if applicable, is represented by securities of The Goldman Sachs Group, Inc. that were outstanding immediately prior to the transaction; or - - at least 50% of the members of the board of directors of the surviving entity, or its parent entity, if applicable, following the transaction were incumbent directors (including directors whose election or nomination was approved by the incumbent directors) of The Goldman Sachs Group, Inc. at the time of the board of directors' approval of the execution of the initial agreement providing for the transaction. "Cause" includes, among other things, the grantee's or participant's conviction of certain misdemeanors or felonies, violation of applicable laws and violation of any policy of Goldman Sachs, including policies with respect to hedging and confidentiality. "Good reason" means a materially adverse alteration in the grantee's or participant's position or in the nature or status of the grantee's or participant's responsibilities from those in effect immediately prior to the change in control, as determined by Goldman Sachs, or certain relocations by Goldman Sachs of a grantee's or participant's principal place of employment. THE STOCK INCENTIVE PLAN The following is a description of the material terms of the stock incentive plan. You should, however, refer to the exhibits that are a part of the registration statement for a copy of the stock incentive plan. See "Available Information". TYPES OF AWARDS. The stock incentive plan provides for grants of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended), nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and other awards. The stock incentive plan also permits the making of loans to purchase shares of common stock. SHARES SUBJECT TO THE STOCK INCENTIVE PLAN; OTHER LIMITATIONS ON AWARDS. Subject to adjustment as described below, the total number of shares of common stock of The Goldman Sachs Group, Inc. that may be issued under the stock incentive plan through its fiscal year ending in 2002 may not exceed 300,000,000 shares and, in each fiscal year thereafter, may not exceed five percent (5%) of the issued and outstanding shares of common stock, determined as of the last day of the immediately preceding fiscal year, increased by the number of shares available for awards in previous fiscal years but not covered by awards granted in such years. These shares may be authorized but unissued common stock or authorized and issued common stock held in Goldman Sachs' treasury or otherwise acquired for the purposes of the stock incentive plan. If any award is forfeited or is otherwise terminated or canceled without the delivery of shares of common stock, if shares of common stock are surrendered or withheld from any award to satisfy a grantee's income tax or other withholding obligations, or if shares of common stock owned by a grantee are tendered to pay the exercise price of awards, then such shares will again become available under the stock incentive plan. No more than 200,000,000 shares of common stock may be available for delivery in connection with the exercise of incentive stock options. The maximum number of shares of common stock with respect to which options or stock appreciation rights may be granted to an individual grantee in 1999 is 3,500,000 shares of common stock and, in each fiscal year that follows, is 110% of the maximum number of shares of common stock applicable for the preceding fiscal year. Our Stock Incentive Plan Committee has the authority to adjust the terms of any outstanding awards and the number of shares of common stock issuable under the stock incentive plan for any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse 99 102 stock split, stock dividend, spin-off, combination or reclassification of the common stock, or any other event that the Stock Incentive Plan Committee determines affects our capitalization. ELIGIBILITY. Awards may be made to any director, officer or employee of Goldman Sachs, including any prospective employee, and to any consultant or advisor to Goldman Sachs selected by the Stock Incentive Plan Committee. ADMINISTRATION. The stock incentive plan will be administered by our board of directors or by the Stock Incentive Plan Committee, a committee appointed by our board of directors. The Stock Incentive Plan Committee will have the authority to construe, interpret and implement the stock incentive plan, and prescribe, amend and rescind rules and regulations relating to the stock incentive plan. The determination of the Stock Incentive Plan Committee on all matters relating to the stock incentive plan or any award agreement will be final and binding. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The Stock Incentive Plan Committee may grant incentive stock options and nonqualified stock options to purchase shares of common stock from Goldman Sachs (at the price set forth in the award agreement), and stock appreciation rights in such amounts, and subject to such terms and conditions, as the Stock Incentive Plan Committee may determine. No grantee of an option or stock appreciation right will have any of the rights of a shareholder of The Goldman Sachs Group, Inc. with respect to shares subject to their award until the issuance of the shares. RESTRICTED STOCK. The Stock Incentive Plan Committee may grant restricted shares of common stock in amounts, and subject to terms and conditions, as the Stock Incentive Plan Committee may determine. The grantee will have the rights of a shareholder with respect to the restricted stock, subject to any restrictions and conditions as the Stock Incentive Plan Committee may include in the award agreement. RESTRICTED STOCK UNITS. The Stock Incentive Plan Committee may grant restricted stock units in amounts, and subject to terms and conditions, as the Stock Incentive Plan Committee may determine. Recipients of restricted stock units have only the rights of a general unsecured creditor of Goldman Sachs and no rights as a shareholder of The Goldman Sachs Group, Inc. until the common stock underlying the restricted stock units is delivered. OTHER EQUITY-BASED AWARDS. The Stock Incentive Plan Committee may grant other types of equity-based awards, including the grant of unrestricted shares, in amounts, and subject to terms and conditions, as the Stock Incentive Plan Committee may determine. These awards may involve the transfer of actual shares of common stock, or the payment in cash or otherwise of amounts based on the value of shares of common stock, and may include awards designed to comply with, or take advantage of certain benefits of, the local laws of non-U.S. jurisdictions. CHANGE IN CONTROL. The Stock Incentive Plan Committee may provide in any award agreement for provisions relating to a change in control of The Goldman Sachs Group, Inc. or any of its subsidiaries or affiliates, including, without limitation, the acceleration of the exercisability of, or the lapse of restrictions with respect to, the award. DIVIDEND EQUIVALENT RIGHTS. The Stock Incentive Plan Committee may in its discretion include in the award agreement a dividend equivalent right entitling the grantee to receive amounts equal to the dividends that would be paid, during the time such award is outstanding, on the shares of common stock covered by such award as if such shares were then outstanding. NONASSIGNABILITY. Except to the extent otherwise provided in the award agreement or approved by the Stock Incentive Plan Committee, no award or right granted to any person under the stock incentive plan will be assignable or transferable other than by will or by the laws of descent and distribution, and all awards and rights will be exercisable during the life of the grantee only by the grantee or the grantee's legal representative. 100 103 AMENDMENT AND TERMINATION. Except as otherwise provided in an award agreement, the board of directors may from time to time suspend, discontinue, revise or amend the stock incentive plan and the Stock Incentive Plan Committee may amend the terms of any award in any respect. U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE STOCK INCENTIVE PLAN. The following is a brief description of the material U.S. federal income tax consequences generally arising with respect to awards. The grant of an option or stock appreciation right will create no tax consequences for the participant or Goldman Sachs. Upon exercising an option, other than an incentive stock option, the participant will generally recognize ordinary income equal to the difference between the exercise price and the fair market value of the shares acquired on the date of exercise and Goldman Sachs generally will be entitled to a tax deduction in the same amount. A participant generally will not recognize taxable income upon exercising an incentive stock option and Goldman Sachs will not be entitled to any tax deduction with respect to an incentive stock option if the participant holds the shares for the applicable periods specified in the Internal Revenue Code of 1986, as amended. With respect to other awards, upon the payment of cash or the issuance of shares or other property that is either not restricted as to transferability or not subject to a substantial risk of forfeiture (e.g., delivery under the restricted stock units), the participant will generally recognize ordinary income equal to the cash or the fair market value of shares or other property delivered. Goldman Sachs generally will be entitled to a deduction in an amount equal to the ordinary income recognized by the participant. THE DEFINED CONTRIBUTION PLAN The defined contribution plan is not intended to be qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, and is not subject to the Employee Retirement Income Security Act of 1974, as amended. The following is a description of the material terms of the defined contribution plan. You should, however, refer to the exhibits that are a part of the registration statement for a copy of the defined contribution plan. See "Available Information". ELIGIBILITY AND PARTICIPATION. Our board of directors or the Defined Contribution Plan Committee, a committee appointed by our board of directors, will select the employees to participate in the defined contribution plan. CONTRIBUTIONS. Goldman Sachs will make an initial irrevocable contribution to the Defined Contribution Plan Trust, the trust underlying the defined contribution plan, of 12,567,587 shares of common stock simultaneously with the consummation of our common stock offering. Goldman Sachs may contribute additional shares of common stock or cash to the Defined Contribution Plan Trust from time to time in its sole discretion. We currently intend to make ongoing contributions to the defined contribution plan and to reallocate forfeitures under the defined contribution plan to participants. ALLOCATION OF CONTRIBUTIONS. There will be established an account in the name of each participant and a separate, unallocated account to which any forfeitures of common stock will be credited pending reallocation to participants. The Defined Contribution Plan Committee will designate the number of shares of common stock allocable to the account of each participant. Any common stock remaining in the unallocated account as of the last day of each plan year due to forfeitures and any distributions received on common stock credited to the unallocated account will be reallocated among the accounts of participants who are employed by Goldman Sachs on the last day of each plan year pro rata to each such participant's share of Goldman Sachs contributions, for that plan year, or on such other formulaic basis as the Defined Contribution Plan Committee may determine. VOTING AND TENDERING OF COMMON STOCK. Shares of common stock allocated to participants who are parties to the shareholders' agreement referred to below will be voted in accordance with the shareholders' agreement and will be tendered by the trustee of the 101 104 Defined Contribution Plan Trust in accordance with confidential instructions provided by the participants if the transfer restrictions under the shareholders' agreement are waived (and will not be tendered if the transfer restrictions are not waived). See "Certain Relationships and Related Transactions -- Shareholders' Agreement" for a discussion of those provisions. Any shares of common stock allocated to accounts of participants who are not subject to the shareholders' agreement will be voted and tendered by the trustee of the Defined Contribution Plan Trust in accordance with confidential instructions provided by the participant. Shares held in participants' accounts with respect to which the trustee of the Defined Contribution Plan Trust does not receive voting or tendering directions will not be voted or tendered. Shares of common stock held in the unallocated account will be voted or tendered by the trustee in the same proportion as the shares of common stock allocated to participants' accounts with respect to which voting or tendering instructions are received. DIVIDENDS. Any cash dividends on shares of common stock allocated to a participant's account will be distributed to each participant after the end of the calendar quarter in which such dividend is received. VESTING AND DISTRIBUTION. With respect to the initial contribution of common stock to the defined contribution plan, the right to receive shares of common stock allocated to a participant's account generally will become vested, and the common stock generally will be distributable, in equal installments on or about the third, fourth and fifth anniversaries of the date of such contribution if the participant satisfies certain conditions and the participant's employment with Goldman Sachs has not been terminated, with certain exceptions for termination due to death or following a change in control. With respect to contributions to the defined contribution plan (other than the initial contribution), the Defined Contribution Plan Committee may determine the dates on which the right to receive common stock (or cash) allocated to a participant's account will vest and be distributable. ADMINISTRATION OF THE DEFINED CONTRIBUTION PLAN. The defined contribution plan will be administered by the Defined Contribution Plan Committee. Our board of directors may, however, determine allocations of contributions or resolve to otherwise administer the defined contribution plan. AMENDMENTS. Subject to limitations with respect to contributions previously made to the defined contribution plan, our board of directors reserves the right to modify, alter, amend or terminate the defined contribution plan or the Defined Contribution Plan Trust. No modification or amendment of the defined contribution plan may be made which would cause or permit any part of the assets of the Defined Contribution Plan Trust to be used for, or diverted to, purposes other than for the exclusive benefit of participants or their beneficiaries, or which would cause any part of the assets of the Defined Contribution Plan Trust to revert to or become the property of Goldman Sachs. LIMIT ON LIABILITY. All distributions under the defined contribution plan will be paid or provided solely from the assets of the Defined Contribution Plan Trust and Goldman Sachs will have no responsibility or liability to any participant or beneficiary relating to the common stock or other assets of the Defined Contribution Plan Trust. The agreement establishing the Defined Contribution Plan Trust will provide that no creditor of Goldman Sachs will have any rights to the assets of the Defined Contribution Plan Trust. U.S. FEDERAL INCOME TAX CONSEQUENCES. The following is a brief description of the material U.S. federal income tax consequences generally arising with respect to participation in the defined contribution plan. A participant in the defined contribution plan will recognize ordinary income upon the vesting of shares of common stock allocated to such participant's account in an amount equal to the fair market value of the vested shares. Goldman Sachs will generally be entitled to a deduction equal to the fair market value of the shares at the time of the contribution in the taxable year in which the participant recognizes income under the defined contribution plan in respect of the vesting of shares of common stock. 102 105 THE PARTNER COMPENSATION PLAN OVERVIEW To perpetuate the sense of partnership and teamwork that exists among our senior professionals, and to reinforce the alignment of employee and shareholder interests, our board of directors has adopted a partner compensation plan for the purpose of compensating senior professionals. The partner compensation plan will be administered by our board of directors or the Partner Compensation Plan Committee, a committee appointed by our board of directors. Individuals will be selected to participate in the partner compensation plan for a one-or two-fiscal year cycle. Upon selection to the partner compensation plan, participants will be allocated a percentage interest in a pool for annual bonus payments in addition to base salaries. The size of the pool will be established by the Partner Compensation Plan Committee annually, taking into account our results of operations and other measures of financial performance. The Partner Compensation Plan Committee may also retain an unallocated percentage of the pool that it may allocate among participants at fiscal year end in its sole discretion. By linking the participant's annual bonus payments to our results as a whole, as opposed to the results of any participant's individual business unit, we believe it will provide additional incentives for teamwork. Further, we believe that the tying of the bonus payments to overall financial results will more closely align the interests of the participants with our shareholders. Finally, we believe that the retention of a percentage of the pool for allocation among participants at fiscal year end in amounts determined at the sole discretion of the Partner Compensation Plan Committee will provide appropriate compensation flexibility. The following is a description of the material terms of the partner compensation plan. You should, however, refer to the exhibits that are a part of the registration statement for a copy of the partner compensation plan. See "Available Information". ELIGIBILITY AND PARTICIPATION Consistent with our historical practice of partnership elections, the initial cycle will be through the end of fiscal 2000. It is expected that the participants in the initial cycle will consist of the continuing managing directors who were profit participating limited partners. Prior to the one- or two-fiscal year cycle commencing with fiscal 2001, and on or before each succeeding cycle, the Partner Compensation Plan Committee will determine the participants in the partner compensation plan. Individual participants may also be added from time to time outside the annual or biennial selection process. DETERMINATION OF SALARY AND BONUS The aggregate amount of compensation to be included in the partner compensation plan for each fiscal year will be determined by the Partner Compensation Plan Committee, taking into account measures of our financial performance it deems appropriate (which in 1999 will include a full year's results), including, but not limited to, earnings per share, return on average common equity, pre-tax income, pre-tax operating income, net revenues, net income, profits before taxes, book value per share, stock price, earnings available to common shareholders and ratio of compensation and benefits to net revenues. Prior to the commencement of the first fiscal year in any one- or two-fiscal year cycle, and prior to the completion of our common stock offering in the case of the initial cycle, the Partner Compensation Plan Committee will determine both the salaries of and the percentage of the partner compensation plan pool that may be allocable to any particular participant. The percentage allocated to any particular participant is expected to be applicable for each fiscal year within the applicable cycle. Any remaining portion of the partner compensation plan pool not so allocated will be allocated to individual participants at the end of the fiscal year in amounts determined by the Partner Compensation Plan Committee. Amounts payable under the partner compensation plan will be satisfied in cash or as awards under the stock incentive plan, as determined by the Partner Compensation Plan Committee and recommended to the Stock Incentive Plan Committee. 103 106 PRINCIPAL SHAREHOLDERS The following table sets forth as of the date of this prospectus certain information regarding the beneficial ownership of our common stock by: - - each person who is known to Goldman Sachs to be the beneficial owner of more than 5% of our common stock; - - each director and named executive officer of Goldman Sachs; and - - all directors and executive officers of Goldman Sachs as a group. This information gives effect to our common stock offering, and to the incorporation transactions and the related transactions that are described and defined under "Certain Relationships and Related Transactions -- Incorporation and Related Transactions". Except as otherwise indicated, the persons or entities listed below have sole voting and investment power with respect to the shares beneficially owned by them. None of our employees are selling shares in our common stock offering. For purposes of this table, information as to the shares of common stock is calculated based on 427,794,566 shares of common stock outstanding immediately after the closing of our common stock offering and assumes that the underwriters' options to purchase additional shares in our common stock offering are not exercised. For purposes of this table, "beneficial ownership" is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, pursuant to which a person or group of persons is deemed to have "beneficial ownership" of any shares of common stock that such person has the right to acquire within 60 days after the date of this prospectus. For purposes of computing the percentage of outstanding shares of common stock held by each person or group of persons named below, any shares which such person or persons has the right to acquire within 60 days after the date of this prospectus are deemed to be outstanding but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
SHARES BENEFICIALLY OWNED ---------------------- NAME NUMBER PERCENT - ---- ------ ------- 5% Shareholder: Kamehameha Activities Association(1)...................... 21,975,421 5.1% Directors and named executive officers: Henry M. Paulson, Jr.(2).................................. 4,132,235 * Robert J. Hurst(2)........................................ 3,835,124 * John A. Thain(2).......................................... 3,101,426 * John L. Thornton(2)....................................... 3,012,541 * Sir John Browne(2)........................................ 0 -- James A. Johnson(2)....................................... 0 -- John L. Weinberg(2)....................................... 444,444 * Jon S. Corzine(3)......................................... 4,414,198 1.0 Roy J. Zuckerberg(4)...................................... 3,026,974 * All directors and continuing executive officers as a group (13 persons)(5)........................................... 26,152,648 6.1
- --------------- * Less than 1% of the outstanding shares of common stock. 104 107 (1) 567 South King Street, Suite 150, Honolulu, Hawaii 96813. Kamehameha Activities Association in the ordinary course of business is an investor in a number of Goldman Sachs' merchant banking funds and from time to time is a party to other transactions with Goldman Sachs. These investments and transactions are negotiated on an arm's-length basis and contain customary terms and conditions. (2) c/o The Goldman Sachs Group, Inc., 85 Broad Street, New York, New York 10004. Excludes any shares of common stock subject to the shareholders' agreement referred to below that are owned by other parties to the shareholders' agreement. While each of Messrs. Paulson, Hurst, Thain and Thornton is a party to the shareholders' agreement and is a member of the Shareholders' Committee, each disclaims beneficial ownership of the shares of common stock subject to the shareholders' agreement other than those specified above for each such person individually, and each disclaims beneficial ownership of the shares of common stock subject to the voting agreements between Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, respectively, on the one hand, and Goldman Sachs, on the other hand. See "Certain Relationships and Related Transactions -- Shareholders' Agreement" for a discussion of the shareholders' agreement and the voting agreements. (3) Mr. Corzine, who is leaving Goldman Sachs after the completion of our common stock offering, served as Chairman or Co-Chairman and Chief Executive Officer or Co-Chief Executive Officer of The Goldman Sachs Group, L.P. during fiscal 1998. (4) Mr. Zuckerberg, who retired in November 1998, served as Vice Chairman of The Goldman Sachs Group, L.P. during fiscal 1998. (5) Total excludes the shares of common stock beneficially owned by Messrs. Corzine and Zuckerberg, former executive officers of The Goldman Sachs Group, L.P. Each continuing executive officer is a party to the shareholders' agreement and each disclaims beneficial ownership of the shares of common stock subject to the shareholders' agreement other than those specified above, and each disclaims beneficial ownership of the shares of common stock subject to the voting agreements between Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, respectively, on the one hand, and Goldman Sachs, on the other hand. See "Certain Relationships and Related Transactions -- Shareholders' Agreement" for a discussion of the shareholders' agreement and the voting agreements. 105 108 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following are descriptions of the material provisions of the agreements and other documents discussed below. You should, however, refer to the exhibits that are a part of the registration statement for a copy of each agreement and document. See "Available Information". INCORPORATION AND RELATED TRANSACTIONS Simultaneously with the consummation of our common stock offering, we will complete a number of transactions in order to have The Goldman Sachs Group, Inc. succeed to the business of The Goldman Sachs Group, L.P. The principal incorporation transactions and related transactions are summarized below. INCORPORATION TRANSACTIONS Pursuant to our plan of incorporation: - - The Goldman Sachs Corporation, which is the general partner of The Goldman Sachs Group, L.P., will merge into The Goldman Sachs Group, Inc. In this transaction, the managing directors who were profit participating limited partners and who are shareholders of The Goldman Sachs Corporation will receive common stock and the other shareholders of The Goldman Sachs Corporation will receive common stock; - - The managing directors who were profit participating limited partners will exchange their interests in The Goldman Sachs Group, L.P. and certain affiliates for 265,019,073 shares of common stock (these amounts include shares issuable in the merger of The Goldman Sachs Corporation into The Goldman Sachs Group, Inc.); - - The retired limited partners of Goldman Sachs will exchange their interests in The Goldman Sachs Group, L.P. and certain affiliates for cash, junior subordinated debentures or common stock (or a combination thereof). It is expected that these transactions will result in the payment of approximately $891 million in cash and the issuance of $295 million principal amount of junior subordinated debentures and of 47,270,551 shares of common stock (these amounts include the shares of common stock and cash issuable to the retired limited partners in the merger of The Goldman Sachs Corporation into The Goldman Sachs Group, Inc.); - - Sumitomo Bank Capital Markets, Inc. will exchange its interests in The Goldman Sachs Group, L.P. and Goldman, Sachs & Co. for 29,961,934 shares of common stock and 7,903,480 shares of nonvoting common stock; - - Kamehameha Activities Association will exchange its interests in The Goldman Sachs Group, L.P. for 30,975,421 shares of common stock; and - - After all the interests of The Goldman Sachs Group, L.P. have been transferred to The Goldman Sachs Group, Inc., The Goldman Sachs Group, L.P. will be merged into The Goldman Sachs Group, Inc. RELATED TRANSACTIONS - - The restricted stock units awarded to employees based on a formula or on a discretionary basis as well as options to purchase shares of common stock awarded on a discretionary basis will be granted, the initial irrevocable contribution of shares of common stock to the defined contribution plan will be made and certain senior employees, principally managing directors who are not profit participating limited partners, will be selected to participate in the defined contribution plan; and - - After the consummation of our common stock offering, we will make a $200 million cash contribution to the Goldman Sachs Fund, a charitable foundation. The Goldman Sachs Fund, which has been in existence for over 30 years, is the entity that has historically conducted charitable initiatives for Goldman Sachs. The Goldman Sachs Fund is subject to United States federal tax rules that prohibit it from engaging in any act of self-dealing or any activities that result in an impermissible benefit to private persons. While the Goldman Sachs Fund has no specific intention to contribute to organizations with which Goldman Sachs' executive officers or directors are affiliated, 106 109 the Goldman Sachs Fund may in the future make contributions to educational and other organizations with which Goldman Sachs' directors or executive officers are involved. SHAREHOLDERS' AGREEMENT PERSONS AND SHARES COVERED Each profit participating limited partner, other than Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, and each other person who is or becomes a managing director on the date of the consummation of our common stock offering or thereafter will be a party to the shareholders' agreement. After the consummation of our common stock offering, not less than 281,000,000 shares of common stock will be subject to the shareholders' agreement. The shares covered by the shareholders' agreement will include generally all shares of common stock acquired from Goldman Sachs by a party to the shareholders' agreement, including: - - any shares of common stock received by the managing directors who were profit participating limited partners pursuant to the incorporation transactions, except for certain shares that aggregate less than 140,000 shares; - - any shares of common stock received from the defined contribution plan; - - any shares of common stock received pursuant to the restricted stock units awarded to employees based on a formula, the restricted stock units awarded on a discretionary basis or the options to purchase shares of common stock awarded on a discretionary basis; and - - unless otherwise determined by our board of directors and the Shareholders' Committee referred to below, any shares of common stock received from Goldman Sachs through any other employee compensation, benefit or similar plan. Shares of common stock purchased in the open market or in a subsequent underwritten public offering will not be subject to the shareholders' agreement. The Shareholders' Committee may also exclude from the application of all or part of the shareholders' agreement all or any portion of the common stock acquired by a managing director who is a new employee of Goldman Sachs. TRANSFER RESTRICTIONS Each party to the shareholders' agreement will agree, among other things, to: - - have beneficial ownership while he or she is a managing director of at least 25% of the cumulative number of his or her shares that are beneficially owned or acquired, and are or become subject to the shareholders' agreement; and - - comply with the underwriters' 180-day lock-up arrangement in connection with our common stock offering. The profit participating limited partners, other than Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, will be subject to additional restrictions on their ability to transfer shares received in connection with the incorporation transactions described under "-- Incorporation and Related Transactions -- Incorporation Transactions". Under these additional restrictions, each of these persons has agreed that he or she will not transfer any of these shares, other than up to 140,000 shares in the aggregate that will be excluded from these restrictions, until the third anniversary of the date of the consummation of our common stock offering. These restrictions will lapse in equal installments on each of the third, fourth and fifth anniversaries of the date of the consummation of our common stock offering. All transfer restrictions applicable to a party to the shareholders' agreement, except for the underwriters' 180-day lock-up, terminate upon death. WAIVERS Except in the case of a third-party tender or exchange offer, the additional transfer restrictions applicable to profit participating limited partners, other than Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, may be waived or terminated at any time by the Shareholders' Committee. The Shareholders' Committee also has the power to waive the other transfer restrictions 107 110 to permit parties to the shareholders' agreement to: - - participate as sellers in underwritten public offerings of common stock and tender and exchange offers and share repurchase programs by Goldman Sachs; - - transfer shares to charities, including charitable foundations; - - transfer shares held in employee benefit plans; and - - transfer shares in specific transactions (for example, to immediate family members and trusts) or circumstances. In the case of a third-party tender or exchange offer, all transfer restrictions may be waived or terminated: - - if our board of directors is recommending acceptance or is not making any recommendation with respect to acceptance of the tender or exchange offer, by a majority of the voting interests referred to below; or - - if our board of directors is recommending rejection of the tender or exchange offer, by 66 2/3% of the outstanding voting interests referred to below. In the case of a tender or exchange offer by Goldman Sachs, a majority of the outstanding voting interests may also elect to waive or terminate the transfer restrictions. In any event, the underwriters' 180-day lock-up may not be waived without the consent of the underwriters. VOTING Prior to any vote of the shareholders of Goldman Sachs, the shareholders' agreement requires a separate, preliminary vote of the voting interests on each matter upon which a vote of the shareholders is proposed to be taken. Each share subject to the shareholders' agreement will be voted in accordance with the majority of the votes cast by the voting interests in the preliminary vote. In elections of directors, each share subject to the shareholders' agreement will be voted in favor of the election of those persons receiving the highest numbers of votes cast by the voting interests in the preliminary vote. Prior to January 1, 2001, "voting interests" means all shares that are subject to the shareholders' agreement. Thereafter, "voting interests" means all shares subject to the shareholders' agreement held by all managing directors. OTHER RESTRICTIONS The shareholders' agreement also prevents the persons subject to the shareholders' agreement from engaging in the following activities relating to any securities of Goldman Sachs with any person who is not a person subject to the shareholders' agreement or a director or employee of Goldman Sachs: - - participating in a proxy solicitation; - - depositing any shares subject to the shareholders' agreement in a voting trust or subjecting any of these shares to any voting agreement or arrangement; - - forming, joining or in any way participating in a "group"; or - - proposing certain transactions with Goldman Sachs or seeking the removal of any of our directors or any change in the composition of our board of directors. TERM, AMENDMENT AND CONTINUATION The shareholders' agreement is to continue in effect until the earlier of January 1, 2050 and the time it is terminated by the vote of 66 2/3% of the outstanding voting interests referred to above. The additional transfer restrictions applicable to profit participating limited partners, other than Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, will not terminate upon the expiration or termination of the shareholders' agreement unless previously waived or terminated or unless subsequently waived or terminated by our board of directors. The shareholders' agreement may generally be amended at any time by a majority of the outstanding voting interests referred to above. Unless otherwise terminated, in the event of any transaction in which a third party succeeds to the business of Goldman Sachs and in which persons subject to the shareholders' agreement hold securities of the third party, the shareholders' agreement will remain in full force and effect as to the securities of the third party, and the third party shall succeed to the rights and obliga- 108 111 tions of Goldman Sachs under the shareholders' agreement. INFORMATION REGARDING THE SHAREHOLDERS' COMMITTEE The terms and provisions of the shareholders' agreement will be administered by the Shareholders' Committee. The Shareholders' Committee will initially consist of the persons subject to the shareholders' agreement who are both employees of Goldman Sachs and members of our board of directors. It is possible that over time all or a majority of the members of the Shareholders' Committee will not be members of our board of directors. Members of the Shareholders' Committee are entitled to indemnification from Goldman Sachs in their capacities as members of the Shareholders' Committee. VOTING AGREEMENT Both Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association have agreed to vote their shares of common stock in the same manner as a majority of the shares of common stock held by the managing directors of Goldman Sachs are voted. The obligations of Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association under the voting agreements are enforceable by The Goldman Sachs Group, Inc. The managing directors will have no right to enforce the voting agreements. INSTRUMENT OF INDEMNIFICATION In connection with our common stock offering, Goldman Sachs will enter into an instrument of indemnification. The instrument of indemnification will cover certain former partners of Goldman Sachs, including the managing directors who were profit participating limited partners, each current director and executive officer of Goldman Sachs, the retired limited partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association. Under the instrument of indemnification, in the event any indemnitee is, or is threatened to be, made a party to any action, suit or proceeding by reason of the fact that such indemnitee was a general or limited partner, shareholder, member, director, officer, employee or agent of The Goldman Sachs Group, L.P. or certain of its affiliates or subsidiaries or is serving or served, at the request of The Goldman Sachs Group, L.P. or certain of its affiliates or subsidiaries, in any of these capacities in another enterprise, Goldman Sachs is, subject to certain exceptions, obligated to indemnify and hold such indemnitee harmless from any losses, damages or expenses incurred by such indemnitee in the action, suit or proceeding. The instrument of indemnification does not duplicate the obligations of Goldman Sachs under the tax indemnification agreement described below. The indemnification obligation of Goldman Sachs under the instrument of indemnification also extends to the indemnification obligations that certain indemnitees, including each current director and executive officer of The Goldman Sachs Group, Inc., may have to other indemnitees. The instrument of indemnification also provides that Goldman Sachs will, subject to certain exceptions, release each indemnitee from all actions, suits or other claims that The Goldman Sachs Group, L.P. may have had or which Goldman Sachs, as a successor to The Goldman Sachs Group, L.P., may have arising out of an indemnitee's partnership or other interest in The Goldman Sachs Group, L.P. or certain of its affiliates or subsidiaries or arising out of the conduct of such indemnitee while engaged in the conduct of the business of The Goldman Sachs Group, L.P. or its affiliates or subsidiaries. DIRECTOR AND OFFICER INDEMNIFICATION We will enter into an agreement that provides indemnification to our directors and officers and to the directors and certain officers of the general partner of The Goldman Sachs Group, L.P., members of our Management Committee or our Partnership Committee or the former Executive Committee of The Goldman Sachs Group, L.P. and all other persons requested or authorized by our board of directors or the board of directors of the general partner of The Goldman Sachs Group, L.P. to take actions on behalf of us, The Goldman Sachs Group, L.P. or the general partner of The Goldman Sachs Group, L.P. in connection with the plan of incorpora- 109 112 tion, the registration statement and certain other registration statements for all losses, damages, costs and expenses incurred by the indemnified person arising out of the relevant registration statements or the transactions contemplated by the plan of incorporation. This agreement is in addition to 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 partners of The Goldman Sachs Group, L.P., rather than Goldman Sachs, generally will be liable for adjustments to taxes (including U.S. federal and state income taxes) attributable to the operations of The Goldman Sachs Group, L.P. and its affiliates prior to our common stock offering. In connection with our common stock offering, we will enter into a tax indemnification agreement to indemnify certain former limited partners of The Goldman Sachs Group, L.P., including the managing directors who were profit participating limited partners, each current director and executive officer of The Goldman Sachs Group, Inc., the retired limited partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, against certain increases in each tax indemnitee's taxes that relate to activities of The Goldman Sachs Group, L.P. or certain of its affiliates in respect of periods prior to our common stock offering. We will be required to make additional payments to offset any taxes payable by a tax indemnitee in respect of payments made pursuant to the tax indemnification agreement only to the extent the payments made to that tax indemnitee exceed a fixed amount. Any such payment of additional taxes by Goldman Sachs will be offset by any tax benefit received by the tax indemnitee. The tax indemnification agreement includes provisions that permit Goldman Sachs to control any tax proceeding or contest which might result in Goldman Sachs being required to make a payment under the tax indemnification agreement. The incorporation transactions described under "-- Incorporation and Related Transactions -- Incorporation Transactions" are structured in a manner that is not expected to result in a significantly disproportionate tax or other burden to any partner of The Goldman Sachs Group, L.P. If the incorporation transactions were to have a disproportionate effect on any partner, Goldman Sachs may, but is not required to, make special payments and arrangements with any person who incurs a disproportionate tax or other burden. 110 113 DESCRIPTION OF NOTES WE ARE OFFERING Please note that in this section entitled "Description of Notes We Are Offering", references to The Goldman Sachs Group, Inc., we, our and us refer only to The Goldman Sachs Group, Inc. and not to its consolidated subsidiaries. Also, in this section, references to Holders mean those who have Notes registered in their own names, on the books that we or the trustee maintain for this purpose, and not those who own beneficial interests in Notes issued in book-entry form through Cedel or Euroclear, or in Notes registered in street name. Owners of beneficial interests in the Notes should read the subsection entitled "-- Legal Ownership of Notes". FINANCIAL TERMS OF THE NOTES The specific financial terms of the Notes that we are offering are as follows: - - TITLE OF THE NOTES: % (euro) Notes due 2009 - - ISSUER OF THE NOTES: The Goldman Sachs Group, Inc. - - CURRENCY OF THE NOTES: We will make all payments on the Notes in euros (euro), the currency of the European Economic and Monetary Union, unless euros are not available. In that case, we will make the payments in U.S. dollars as described under "-- Payment Mechanics -- When Euros Are Not Available". - - TOTAL PRINCIPAL AMOUNT BEING ISSUED: (euro) 1,000,000,000 - - DUE DATE FOR PRINCIPAL: May 15, 2009 - - INTEREST RATE: % annually - - DATE INTEREST STARTS ACCRUING: - - DUE DATES FOR INTEREST: every May 15 and November 15 - - FIRST DUE DATE FOR INTEREST: November 15, 1999 - - REGULAR RECORD DATES FOR INTEREST: every May 1 and November 1 - - ADDITIONAL AMOUNTS: We intend to pay principal and interest without deducting U.S. withholding taxes. If we are required to deduct from payments to non-U.S. investors, however, we will pay additional amounts on those payments, but only to the extent described below under "-- Payment of Additional Amounts". - - REDEMPTION: We will not have the option to redeem the Notes before they mature, except in the following situations: - the principal amount of all outstanding Notes falls below (euro) 100,000,000 or - we become obligated to pay additional amounts because of changes in U.S. withholding tax requirements. - - FORM OF NOTES: We will issue the Notes only in global form, through the Cedel and Euroclear book-entry clearing systems in Europe, and you will not be permitted to withdraw Notes from those systems except in the limited situations we describe below under "-- We Will Issue the Notes in Global Form". ADDITIONAL INFORMATION ABOUT YOUR NOTE THE NOTES WILL BE ISSUED UNDER THE INDENTURE As required by U.S. federal law for all bonds and notes of companies that are publicly offered, the Notes are governed by a document called the indenture. The indenture is a contract between us and The Bank of New York, which acts as trustee. The trustee has two main roles: - - First, the trustee can enforce your rights against us if we default. There are limitations on the extent to which the trustee acts on your behalf, which we describe below under "-- Default, Remedies and Waiver of Default". 111 114 - - Second, the trustee performs administrative duties for us, such as sending you interest payments and notices. WE MAY ISSUE OTHER SERIES OF DEBT SECURITIES The indenture permits us to issue different series of debt securities from time to time. The Notes will be a single, distinct series of debt securities. The specific terms of each other series may differ from those of the Notes. The indenture does not limit the aggregate amount of debt securities that we may issue, nor does it limit the number of other series or the aggregate amount of any particular series. The indenture and the Notes do not limit our ability to incur other debt or to issue other securities. Also, we are not subject to financial or similar restrictions by the terms of the Notes, except as we describe below under "-- Restrictive Covenant". When we refer to a series of debt securities, we mean a series, such as the Notes, issued under the indenture. HOW THE NOTES RANK AGAINST OTHER DEBT The Notes will not be secured by any property or assets of The Goldman Sachs Group, Inc. or its subsidiaries. Thus, by owning these Notes, you are one of our unsecured creditors. 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. The specific terms of other debt, including those of other series we may issue under the indenture, however, will differ from those of the Notes. For example, other debt will have different due dates for principal and interest and may permit holders to accelerate the maturity in different circumstances. An investment in the Notes involves risks because we are a holding company and because our principal U.S. subsidiary, Goldman, Sachs & Co., is a partnership in which we are a general partner. We summarize these risks above under "Risk Factors -- Holders of Notes May Be Adversely Affected Because The Goldman Sachs Group, Inc. Is a Holding Company", "-- Holders of Notes May Be Adversely Affected Because We Depend on Funds from Our Regulated Subsidiaries" and "-- We May Be Liable to Creditors of Our Partnership Subsidiaries". STATED MATURITY AND MATURITY The day on which the principal amount of the Notes is scheduled to become due is called the stated maturity of the principal. The principal may become due sooner, by reason of redemption or acceleration after a default. The day on which the principal actually becomes due, whether at the stated maturity or earlier, is called the maturity of the principal. We also use the terms stated maturity and maturity to refer to the dates when interest payments become due. For example, we may refer to a regular interest payment date when an installment of interest is scheduled to become due as the "stated maturity" of that installment. When we refer to the "stated maturity" or the "maturity" of the Notes without specifying a particular payment, we mean the stated maturity or maturity, as the case may be, of the principal. THIS SECTION IS ONLY A SUMMARY The indenture and its associated documents, including the Notes, contain the full legal text of the matters described in this section. The indenture and the Notes are governed by New York law. A copy of the indenture has been filed with the SEC as part of our registration statement. See "Available Information" below for information on how to obtain a copy. Because this section provides only a summary, it does not describe every aspect of the indenture and the Notes. For example, in this section, we use terms that have been given special meaning in the indenture. In this section, however, we describe the meaning for only the more important of those terms. SPECIAL CURRENCY CONSIDERATIONS The Notes are denominated and payable in euros. This means that investors must pay 112 115 for the Notes in euros and, unless euros are unavailable, we will make all interest and principal payments on the Notes in euros. Investors -- particularly those who reside in the United States or other countries outside the EMU -- should carefully consider the currency risks of investing in the Notes. We describe these risks under "Risk Factors -- Because the Notes Are Payable in Euros, They May Not Be an Appropriate Investment For All Investors". The euro became the legal currency for the 11 countries participating in the European Economic and Monetary Union on January 1, 1999. During a transitional period from January 1, 1999 to December 31, 2001, and for a maximum period of six months after 2001, the former national currencies of the eleven EMU countries will continue to be legal tender in their country of issue, at rates irrevocably fixed on December 31, 1998. Dealers in the currency exchange markets provide bid and offer quotations for the exchange rate of the euro for most of the world's currencies on a daily basis. On April 26, 1999, the noon buying rate for cable transfers in New York City was $1.0590 for one euro. During the first quarter of 1999, the noon buying rate for euros fluctuated from a high of $1.1812 for one euro, to a low of $1.0716 for one euro. Investors in the Notes will have to pay for the Notes in euros. The underwriters may arrange for the conversion of U.S. dollars and other currencies into euros to enable U.S. and other non-EMU investors to pay for their Notes. Those conversions will be made, however, on terms and conditions selected by the underwriters. Those conversions may also be subject to any applicable laws and regulations. All costs of conversion will be borne by the investors. LEGAL OWNERSHIP OF NOTES We refer to those who have Notes registered in their own names, on the books that we or the trustee maintain for this purpose, as the "Holders" of those Notes. Those persons are the legal holders of those Notes. We refer to those who, indirectly through others, own beneficial interests in Notes that are not registered in their own names as indirect holders of those Notes. As we discuss below, indirect holders are not legal holders, and investors in Notes issued in book-entry form or in street name will be indirect holders. BOOK-ENTRY HOLDERS We will issue the Notes in book-entry form. This means the Notes will be represented by one or more global Notes registered in the name of a financial institution that holds them as common depositary on behalf of two securities clearing systems in Europe -- Cedel in Luxembourg and Euroclear in Brussels, Belgium. Cedel and Euroclear maintain book-entry records of the beneficial interests in the Notes, for the benefit of other financial institutions that participate in their book-entry systems. These participating institutions, in turn, hold beneficial interests in the Notes on behalf of themselves or their customers. Under the indenture, only the person in whose name a Note is registered is recognized as the Holder of that Note. Consequently, for Notes issued in global form, we will recognize only the common depositary as the Holder of the Notes and we will make all payments on the Notes to the common depositary. The common depositary passes along the payments it receives to Cedel and Euroclear, which in turn pass them to their participants. These participants then pass the payments along to their customers who are the beneficial owners. The common depositary, Cedel, Euroclear and their participants do so under agreements they have made with one another or with their customers; they are not obligated to do so under the terms of the Notes. As a result, investors will not own Notes directly. Instead, they will own beneficial interests in a global Note, through a bank, broker or other financial institution that participates in the Cedel or Euroclear system or holds an interest through a participant. As long as the Notes are issued in global form, investors will be indirect holders, and not Holders, of the Notes. 113 116 STREET NAME HOLDERS If in the future we terminate the global Notes, investors may choose to hold their Notes in their own names or in street name. Notes held by an investor in street name would be registered in the name of a bank, broker or other financial institution that the investor chooses, and the investor would hold only a beneficial interest in those Notes through an account he or she maintains at that institution. For Notes held in street name, we will recognize only the intermediary banks, brokers and other financial institutions in whose names the Notes are registered as the Holders of those Notes and we will make all payments on those Notes to them. These institutions pass along the payments they receive to their customers who are the beneficial owners, but only because they agree to do so in their customer agreements or because they are legally required to do so. Investors who hold Notes in street name will be indirect holders, not Holders, of those Notes. LEGAL HOLDERS Our obligations, as well as the obligations of the trustee and those of any third parties employed by us or the trustee, run only to the Holders of the Notes. We do not have obligations to investors who hold beneficial interests in global Notes, in street name or by any other indirect means. This will be the case whether an investor chooses to be an indirect holder of a Note or has no choice because we are issuing the Notes only in global form. For example, once we make a payment or give a notice to the Holder, we have no further responsibility for the payment or notice even if that Holder is required, under agreements with book-entry system participants or customers or by law, to pass it along to the indirect holders but does not do so. Similarly, if we want to obtain the approval of the Holders for any purpose -- e.g., to amend the indenture or to relieve us of the consequences of a default or of our obligation to comply with a particular provision of the indenture -- we would seek the approval only from the Holders, and not the indirect holders, of the Notes. Whether and how the Holders contact the indirect holders is up to the Holders. When we refer to you, we mean those who invest in the Notes being offered by this prospectus, whether they are the Holders or only indirect holders of those Notes. When we refer to your Notes, we mean the Notes in which you hold a direct or indirect interest. SPECIAL CONSIDERATIONS FOR INDIRECT HOLDERS If you hold Notes through a bank, broker or other financial institution, either in book-entry form or in street name, you should check with your own institution to find out: - - how it handles securities payments and notices; - - whether it imposes fees or charges; - - how it would handle a request for the Holders' consent, if ever required; - - whether and how you can instruct it to send you Notes registered in your own name so you can be a Holder, if that is permitted in the future; - - how it would exercise rights under the Notes if there were a default or other event triggering the need for Holders to act to protect their interests; and - - if the Notes are in book-entry form, how the depositary's rules and procedures will affect these matters. WE WILL ISSUE THE NOTES IN GLOBAL FORM We have chosen to issue the Notes in book-entry form. This means all the Notes will be represented, at least initially, by one or more global Notes. WHAT IS A GLOBAL NOTE? A global Note is a Note that we deposit with and register in the name of a financial institution, or its nominee, that acts as a depositary for the book-entry clearing systems that we select for the Notes. We have selected Cedelbank, S.A., of Luxembourg, known as Cedel, and Morgan Guaranty Trust Company of New York, acting out of its 114 117 Brussels, Belgium, office, as operator of the Euroclear system, known as Euroclear, to be the only book-entry clearing systems for the Notes, at least initially. Cedel and Euroclear, in turn, have selected the financial institution named on the inside back cover page of this prospectus to act as their common depositary for the Notes. Initially, therefore, we will register the Notes in the name of, and deposit them with, that financial institution. We refer to the financial institution that holds the Notes as depositary for a book-entry clearance system as the depositary. Cedel and Euroclear may change the institution that acts as depositary on their behalf. We also may change the depositary if we decide to have the Notes held through book-entry clearing systems other than Cedel or Euroclear. As long as the Notes are held through Cedel and Euroclear, no global Note may be transferred to or registered in the name of anyone other than a common depositary or separate depositaries selected by Cedel and Euroclear, by Cedel and Euroclear themselves or by nominees or successors of those organizations. Any of those entities holding a global Note as depositary for Cedel or Euroclear would then be the depositary for that global Note. Similarly, if we elected to have the Notes held through a book-entry system other than Cedel and Euroclear, the global Notes could not be transferred to or registered in the name of anyone other than the financial institution that acted as the depositary for that system, or its nominee or successor, which would then be the depositary for as long as the Notes were held through that system. As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and Holder of all the Notes, and investors will be permitted to own only beneficial interests in a global Note. Beneficial interests must be held by means of an account with a broker, bank or other financial institution that in turn has an account with Cedel or Euroclear, or with another institution that does. Thus, an investor whose Note is represented by a global Note will not be a Holder of the Note, but only an indirect holder of a beneficial interest in the global Note. The Notes will be represented by one or more global Notes at all times unless and until the global Notes are terminated. We describe the situations in which this can occur below under "-- When a Global Note Will Be Terminated". If termination occurs, we may issue the Notes through another book-entry clearing system or decide that the Notes may no longer be held through any book-entry clearing system. SPECIAL CONSIDERATIONS FOR GLOBAL NOTES As an indirect holder, an investor's rights relating to a global Note will be governed by the account rules of the investor's financial institution and those of Cedel, Euroclear and the depositary, as well as general laws relating to securities transfers. We do not recognize this type of investor as a Holder of Notes and instead deal only with the depositary that holds the global Note. Because the Notes will be issued only in the form of global Notes, an investor should be aware of the following: - - An investor cannot get Notes registered in his or her own name, and cannot get non-global certificates for his or her interest in the Notes, except in the special situations we describe below. - - An investor will be an indirect holder and must look to his or her own bank or broker for payments on the Notes and protection of his or her legal rights relating to the Notes, as we describe above under "-- Legal Ownership of Notes". - - An investor may not be able to sell interests in the Notes to some insurance companies and other institutions that are required by law to own their securities in non-book-entry form. - - 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. 115 118 - - The policies of Cedel or Euroclear, as applicable, and of the depositary, which may change from time to time, will govern payments, transfers, exchanges and other matters relating to an investor's interest in a global Note. We and the trustee have no responsibility for any aspect of the actions of Cedel or Euroclear, or of the depositary, or for their records of ownership interests in a global Note. We and the trustee also do not supervise Cedel, Euroclear or the depositary in any way. - - Cedel and Euroclear will require that those who purchase and sell interests in a global Note within their book-entry systems use immediately available funds. - - Financial institutions that participate in Cedel or Euroclear, and through which investors hold their interests in the global Notes, may also have their own policies affecting payments, notices and other matters relating to the Notes. There may be more than one financial intermediary in the chain of ownership for an investor. We do not monitor and are not responsible for the actions of any of those intermediaries. WHEN A GLOBAL NOTE WILL BE TERMINATED In a few special situations described below, a global Note will be terminated and interests in it will be exchanged for certificates in non-global form representing the Notes it represented. After that exchange, the choice of whether to hold the Notes directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global Note transferred on termination to their own names, so that they will be Holders. We have described the rights of Holders and street name investors above under "-- Legal Ownership of Notes". The special situations for termination of global Notes are as follows: - - if Cedel and Euroclear notify us that they are unwilling or unable to continue acting as clearing systems for the global Notes, and we do not appoint another institution to act as a clearing system within 60 days; - - if the depositary notifies us at any time that it is unwilling or unable to continue as the common depositary for Cedel and Euroclear, and those systems do not appoint another institution to act as their common depositary within 60 days; - - if we notify the trustee that we wish to terminate the global Notes; or - - if an event of default has occurred and has not been cured or waived; we discuss defaults later under "-- Default, Remedies and Waiver of Default". If a global Note is terminated, only the depositary, based on instructions from Cedel or Euroclear, and not we or the trustee, is responsible for deciding the names of the institutions in whose names the Notes represented by the global Note will be registered and, therefore, who will be the Holders of those Notes. YOU CAN HOLD INTERESTS IN GLOBAL NOTES ONLY THROUGH CEDEL OR EUROCLEAR As long as the depositary holds the global Notes for Cedel and Euroclear, you may hold an interest in a global Note only through an organization that participates, directly or indirectly, in Cedel or Euroclear. If you are a participant in either of those systems, you may hold your interest directly in that system. If you are not a participant, you may hold your interest indirectly through organizations that are participants in that system. If you hold your interest indirectly, you should note that Cedel and Euroclear will have no record of you or of your relationship with the direct participant in their systems. You will not be able to hold your interests through any securities clearance systems in the United States. Cedel and Euroclear are securities clearance systems in Europe. Cedel and Euroclear will hold interests in the global Notes on behalf of the participants in their systems, through securities accounts they maintain in their own names for their customers on their own books or on the books of the depositary. Cedel and Euroclear clear and settle securities transactions between their participants 116 119 through electronic, book-entry delivery of securities against payment. CEDEL AND EUROCLEAR RULES WILL APPLY TO THE GLOBAL NOTES Cedel and Euroclear will credit the payments we make on your Note to the account of your Cedel or Euroclear participant in accordance with that system's rules and procedures. The participant's account will be credited only to the extent that the depositary passes along our payments to Cedel and Euroclear. Payments, notices and other communications or deliveries relating to the Notes made through Cedel or Euroclear must comply with the rules and procedures of those systems and of the depositary. We understand that, at present, those systems' rules and procedures applicable to trades in conventional eurobonds will apply to trades in the Notes, with settlement in immediately available funds. The description of the clearing systems in this section reflects our understanding of the rules and procedures of Cedel and Euroclear as currently in effect. Those systems could change their rules and procedures at any time. We have no control over those systems or their participants and we take no responsibility for their activities. SPECIAL TIMING CONSIDERATIONS FOR TRANSACTIONS IN CEDEL AND EUROCLEAR Investors will be able to make and receive deliveries, payments and other communications involving the Notes through Cedel and Euroclear only on days when those systems are open for business. Those systems may not be open for business on days when banks, brokers and other institutions are open for business in the United States. In addition, because of time-zone differences, U.S. investors who wish to effect a transfer of their interests in the Notes, or to receive or make a payment or delivery with respect to the Notes, on a particular day may find that the transaction will not be effected until the next business day in Luxembourg or Brussels, as applicable. PAYMENT OF ADDITIONAL AMOUNTS We intend to make all payments on the Notes without deducting U.S. withholding taxes. If we are required by law to do so on payments to non-U.S. investors, however, we will pay additional amounts on those payments to the extent described in this section. We will pay additional amounts only to holders of Notes who are United States aliens. The term United States alien means any person who, for U.S. federal income tax purposes, is: - - a nonresident alien individual; - - a foreign corporation; - - a foreign partnership; or - - an estate or trust that is not subject to U.S. federal income tax on a net income basis on income or gain from a Note. If the holder of a Note is a United States alien, we will pay to that holder all additional amounts that may be necessary so that every net payment of interest or principal on that Note will not be less than the amount provided for in that Note. By net payment we mean the amount we or our paying agent pay the holder after deducting or withholding an amount for or on account of any present or future tax, assessment or other governmental charge imposed with respect to that payment by a U.S. taxing authority. Our obligation to pay additional amounts is subject to several important exceptions, however. We will NOT pay additional amounts to any holder for or on account of any of the following: - - any tax, assessment or other governmental charge imposed solely because at any time there is or was a connection between the holder -- or between a fiduciary, settlor, beneficiary or member of the holder, if the holder is an estate, trust or partnership -- and the United States (other than the mere receipt of a payment or the ownership or holding of a Note), including because the holder -- or the fiduciary, settlor, benefici- 117 120 ary or member -- at any time, for U.S. federal income tax purposes: -- is or was a citizen or resident or is or was treated as a resident of the United States; -- is or was present in the United States; -- is or was engaged in a trade or business in the United States; -- has or had a permanent establishment in the United States; -- is or was a domestic or foreign personal holding company, a passive foreign investment company or a controlled foreign corporation; -- is or was a corporation that accumulates earnings to avoid U.S. federal income tax; or -- is or was a "ten percent shareholder" of The Goldman Sachs Group, Inc.; - - any tax, assessment or other governmental charge imposed solely because of a change in applicable law or regulation, or in any official interpretation or application of applicable law or regulation, that becomes effective more than 15 days after the day on which the payment becomes due or is duly provided for, whichever occurs later; - - any estate, inheritance, gift, sales, excise, transfer, wealth or personal property tax, or any similar tax, assessment or other governmental charge; - - any tax, assessment or other governmental charge imposed solely because the holder or any other person fails to comply with any certification, identification or other reporting requirement concerning the nationality, residence, identity or connection with the United States of the holder or any beneficial owner of the Note, if compliance is required by statute, by regulation of the U.S. Treasury department or by an applicable income tax treaty to which the United States is a party, as a precondition to exemption from the tax, assessment or other governmental charge; - - any tax, assessment or other governmental charge that can be paid other than by deduction or withholding from a payment on the Note; - - any tax, assessment or other governmental charge imposed solely because the payment is to be made by a particular paying agent (which term may include us) and would not be imposed if made by another paying agent; or - - any combination of the taxes, assessments or other governmental charges described above. In addition, we will not pay additional amounts with respect to any payment of principal or interest to any United States alien who is a fiduciary or a partnership, or who is not the sole beneficial owner of the payment, to the extent that we would not have to pay additional amounts to any beneficiary or settlor of the fiduciary or any member of the partnership, or to any beneficial owner of the payment, if that person or entity were treated as the holder of the Note for this purpose. When we refer to a U.S. taxing authority, we mean the United States of America or any state, other jurisdiction or taxing authority in the United States. When we refer to the United States in the discussion of additional amounts above and in the discussion of redemption for tax reasons below, we mean the United States of America, including the states and the District of Columbia, together with the territories, possessions and all other areas subject to the jurisdiction of the United States of America. When we refer to any payment of interest or principal on a Note, this includes any additional amount that may be payable in respect of that payment. WHEN WE CAN REDEEM THE NOTES We will not be permitted to redeem the Notes before their stated maturity, except in the situations described in the two subsections below. The Notes will not be entitled to the benefit of any sinking fund -- that is, we will not deposit money on a regular basis into any separate custodial account to repay your Note. In addition, you will not be entitled to require us to buy your Note from you before its stated maturity. 118 121 REDEMPTION IF OUTSTANDING AMOUNT FALLS BELOW (euro) 100 MILLION If the aggregate principal amount of all the outstanding Notes ever falls below (euro) 100,000,000, we may, at our option, redeem the remaining outstanding Notes on any day we select after that time. If we do so, we must redeem all the Notes outstanding on the redemption date, at a redemption price equal to 100% of their principal amount plus accrued but unpaid interest to the redemption date. In addition, we must give the trustee and the Holders of the remaining Notes written notice of redemption, not less than 30 days or more than 60 days before the redemption date we select. We will give the notice in the manner described below in "-- Notices". We or our affiliates may purchase Notes from investors who are willing to sell from time to time, either in the open market at prevailing prices or in private transactions at negotiated prices. For example, we currently expect Goldman Sachs International and Goldman, Sachs & Co. to make a market in the Notes by purchasing and reselling Notes from time to time. Notes that we or our subsidiaries purchase may, at our discretion, be held, resold or cancelled. If The Goldman Sachs Group, Inc. or its subsidiaries purchase and cancel enough Notes, the principal amount of the outstanding Notes would fall below (euro) 100,000,000, and we would then be entitled to redeem the remaining Notes on any day after that time as described above. REDEMPTION FOR TAX REASONS We will be entitled, at our option, to redeem the outstanding Notes in whole if at any time we become obligated to pay additional amounts on any Notes on the next interest payment date, but only if our obligation results from a change in the laws or regulations of the United States of America, of any jurisdiction in the United States or of any U.S. taxing authority, or from a change in any official interpretation or application of those laws or regulations, that becomes effective or is announced after the date of this prospectus. If we redeem the Notes in these circumstances, we will do so at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus accrued interest to the redemption date. If we become entitled to redeem the Notes in these circumstances, we may do so at any time on a redemption date of our choice. However, we must give the Holders of the Notes notice of the redemption not less than 30 days or more than 60 days before the redemption date and not more than 90 days before the next date on which we would be obligated to pay additional amounts. In addition, our obligation to pay additional amounts must remain in effect when we give the notice of redemption. MERGERS AND SIMILAR TRANSACTIONS We are generally permitted to merge or consolidate with another firm. We are also permitted to sell substantially all our assets to another firm. We may not take any of these actions, however, unless all the following conditions are met: - - If the successor firm in the transaction is not The Goldman Sachs Group, Inc., the successor firm must be organized as a corporation, partnership, trust, limited liability company or other similar entity and must expressly assume The Goldman Sachs Group, Inc.'s obligations under the Notes and the indenture. The successor firm may be organized under the laws of any jurisdiction, whether in the United States or elsewhere. - - Immediately after the transaction, no default under the Notes has occurred and is continuing. For this purpose, "default under the Notes" means an event of default or an event that would be an event of default if the requirements for giving us default notice and for our default having to continue for a specific period of time were disregarded. We describe these matters below under "-- Default, Remedies and Waiver of Default". If the conditions described above are satisfied, we will not need to obtain the approval of the Holders in order to merge or consolidate or to sell all or substantially all our assets. Also, these conditions will apply only 119 122 if we wish to merge or consolidate with another firm or sell all or substantially all our assets. We will not need to satisfy these conditions if we enter into other types of transactions, including any transaction in which we acquire the stock or assets of another firm, any transaction that involves a change of control of The Goldman Sachs Group, Inc. but in which we do not merge or consolidate and any transaction in which we sell less than substantially all our assets. Also, if we merge, consolidate or sell all or substantially all our assets and the successor firm is a non-U.S. entity, neither we nor any successor would have any obligation to compensate you for any resulting adverse tax consequences relating to the Notes, other than an obligation to pay additional amounts to non-U.S. investors in respect of U.S. withholding tax requirements, to the extent described above under "-- Payment of Additional Amounts". RESTRICTIVE COVENANT In the indenture, we promise not to create or guarantee any debt for borrowed money that is secured by a lien on the voting or profit participating equity ownership interests that we or any of our subsidiaries own in Goldman, Sachs & Co. (or in any subsidiary that beneficially owns or holds, directly or indirectly, those interests in Goldman, Sachs & Co.), unless we also secure the Notes on an equal or priority basis with the other secured debt. Our promise, however, is subject to an important exception: we may secure debt for borrowed money with liens on those interests without securing the Notes if our board of directors determines that the liens do not materially detract from or interfere with the then-present value or control of those interests. Except as noted above, the indenture does not restrict our ability to put liens on our interests in our subsidiaries other than Goldman, Sachs & Co., nor does it restrict our ability to sell or otherwise dispose of our interests in any of our subsidiaries, including Goldman, Sachs & Co. In addition, the restriction on liens applies only to liens that secure debt for borrowed money. For example, liens imposed by operation of law, such as liens to secure statutory obligations for taxes or workers' compensation benefits, or liens we create to secure obligations to pay legal judgments or surety bonds, would not be covered by this restriction. DEFAULT, REMEDIES AND WAIVER OF DEFAULT You will have special rights if an event of default with respect to the Notes occurs and is not cured, as described in this subsection. EVENTS OF DEFAULT When we refer to an event of default, we mean any of the following: - - We do not pay the principal on any Note on its due date. - - We do not pay interest on any Note within 30 days after its due date. - - We remain in breach of our covenant described under "-- Restrictive Covenant" above, or any other covenant we make in the indenture for the benefit of the 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 Notes. - - We file for bankruptcy or other events of bankruptcy, insolvency or reorganization relating to The Goldman Sachs Group, Inc. occur. Those events must arise under U.S. federal or state law, unless we merge, consolidate or sell our assets as described above and the successor firm is a non-U.S. entity. If that happens, then those events must arise under U.S. federal or state law or the law of the jurisdiction in which the successor firm is legally organized. REMEDIES IF AN EVENT OF DEFAULT OCCURS If an event of default has occurred and has not been cured or waived, the trustee or the Holders of not less than 25% in principal amount of the Notes 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 120 123 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 Notes. If the maturity of the Notes is accelerated and a judgment for payment has not yet been obtained, the Holders of a majority in principal amount of the Notes may cancel the acceleration for all the Notes. If an event of default occurs, the trustee will have special duties. In that situation, the trustee will be obligated to use those of its rights and powers under the indenture, and to use the same degree of care and skill in doing so, that a prudent person would use in that situation in conducting his or her own affairs. Except as described in the prior paragraph, the trustee is not required to take any action under the indenture at the request of any Holders unless the Holders offer the trustee reasonable protection from expenses and liability. This is called an indemnity. If the trustee receives an indemnity that is reasonably satisfactory to it, the Holders of a majority in principal amount of the Notes 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 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 the 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 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 the Notes. You are entitled, however, at any time to bring a lawsuit for the payment of money due on your Note on or after its due date. WAIVER OF DEFAULT The Holders of not less than a majority in principal amount of the Notes may waive a default for all the Notes. If this happens, the default will be treated as if it has not occurred. No one can waive a payment default on any Note, however, without the approval of the particular Holder of that Note. WE WILL GIVE THE TRUSTEE INFORMATION ABOUT DEFAULTS ANNUALLY Each year, we will give the trustee a written statement of two of our officers, certifying that to their knowledge we are in compliance with the indenture and the Notes, or else specifying any default known to them. Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of the maturity. MODIFICATION AND WAIVER OF COVENANTS There are three types of changes we can make to the indenture and the Notes. CHANGES REQUIRING EACH HOLDER'S APPROVAL First, there are changes that cannot be made without the approval of each Holder of 121 124 a Note affected by the change. Here is a list of those types of changes: - - change the stated maturity for any principal or interest payment on a Note; - - reduce the principal amount, the interest rate or the redemption price for a Note; - - permit redemption of a Note if not previously permitted; - - change the currency of any payment on a Note other than as permitted by the Note; - - change the place of any payment on a Note; - - impair the Holder's right to sue for payment of any amount due on its Note; - - reduce the percentage in principal amount of the Notes and any other affected series of debt securities, taken together, the approval of whose Holders is needed to change the indenture or the Notes; - - reduce the percentage in principal amount of the Notes and any other affected series of debt securities, taken separately or together, as the case may be, the approval of whose Holders is needed to waive our compliance with the indenture or to waive defaults; and - - change the provisions of the indenture dealing with modification and waiver in any other respect, except to increase any required percentage referred to above or to add to the provisions that cannot be changed or waived without approval. CHANGES NOT REQUIRING APPROVAL The second type of change does not require any approval by Holders of 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 Notes would require the following approval: - - If the change affects only the Notes, it must be approved by the Holders of a majority in principal amount of the Notes. - - If the change affects the 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 Notes and all other series affected by the change, with the Notes and the other series voting together as one class for this purpose. In each case, the required approval must be given by written consent. Most changes fall into this category. The same majority approval would be required for us to obtain a waiver of any of our covenants in the indenture. Our covenants include the promises we make about merging and putting liens on our interests in Goldman, Sachs & Co., which we describe above under "-- Mergers and Similar Transactions" and "-- Restrictive Covenant". If the Holders approve a waiver of a covenant, we will not have to comply with it. The Holders, however, cannot approve a waiver of any provision in a particular Note, or in the indenture as it affects that Note, that we cannot change without the approval of the Holder of that Note as described above in "-- Changes Requiring Each Holder's Approval", unless that Holder approves the waiver. Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the Notes or request a waiver. 122 125 SPECIAL RULES FOR ACTION BY HOLDERS When Holders take any action under the indenture, such as giving a notice of default, declaring an acceleration, approving any change or waiver or giving the trustee an instruction, we will apply the following rules. We may apply similar rules to other series of debt securities issued under the indenture. ONLY OUTSTANDING NOTES ARE ELIGIBLE Only Holders of outstanding Notes will be eligible to participate in any action by Holders. 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; or - - if we or one of our affiliates, such as Goldman Sachs International or Goldman, Sachs & Co., is the beneficial owner. In some situations, Holders of debt securities of other series may be eligible to participate in an action by Holders of Notes. In that event, we may follow special rules in calculating the principal amount of their debt securities that is to be treated as outstanding for the purposes described above. This may happen, for example, if the principal amount is payable in a foreign currency, increases over time or is not to be fixed until maturity. DETERMINING RECORD DATES FOR ACTION BY HOLDERS We will generally be entitled to set any day as a record date for the purpose of determining the Holders that are entitled to take action under the indenture. In certain limited circumstances, only the trustee will be entitled to set a record date for action by Holders. If we or the trustee set a record date for an approval or other action to be taken by Holders, that vote or action may be taken only by persons or entities who are Holders on the record date and must be taken during the period that we specify for this purpose, or that the trustee specifies if it sets the record date. We or the trustee, as applicable, may shorten or lengthen this period from time to time. This period, however, may not extend beyond the 180th day after the record date for the action. In addition, record dates for any global Note may be set in accordance with procedures established by the depositary, Cedel or Euroclear from time to time. FORM, EXCHANGE AND TRANSFER If any Notes cease to be issued in global form, those Notes will be issued: - - only in fully registered form; - - without interest coupons; and - - in denominations of (euro) 1,000 and multiples of (euro) 1,000. Holders may exchange their Notes for Notes of smaller denominations or combined into fewer Notes of larger denominations, as long as the total principal amount is not changed. Holders may exchange or transfer their Notes at the office of the trustee. We have appointed the trustee to act as our agent for registering Notes in the names of Holders and transferring Notes. If the global Notes are terminated and we issue Notes in non-global form, Holders of the non-global Notes can transfer those Notes at the offices of Banque Internationale a Luxembourg or its successor as our transfer agent in Luxembourg, but only for as long as the Notes are listed on the Luxembourg Stock Exchange. We may appoint another entity to perform these functions or perform them ourselves. Holders will not be required to pay a service charge to transfer or exchange their Notes, but they may be required to pay for any tax or other governmental charge associated with the exchange or transfer. The transfer or exchange will be made only if our transfer agent is satisfied with the Holder's proof of legal ownership. We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts. 123 126 As long as the Notes are issued in global form, only the depositary, Cedel and Euroclear will be entitled to transfer and exchange Notes as described in this subsection, since it will be the sole Holder of the Notes. PAYMENT MECHANICS WHO RECEIVES PAYMENT? We will pay interest on the Notes on the interest payment dates stated above under "-- Financial Terms of the Notes", and at maturity. Each payment of interest due on an interest payment date or at maturity will include interest accrued from and including the last date to which interest has been paid or made available for payment, or from the issue date, if none has been paid or made available for payment, to but excluding the relevant payment date. We will compute interest on the Notes on the basis of a 360-day year of twelve 30-day months. If interest is due on a Note on an interest payment date, we will pay the interest to the Holder in whose name the Note is registered at the close of business on the regular record date relating to the interest payment date. If interest is due at maturity but on a day that is not an interest payment date, we will pay the interest to the person or entity entitled to receive the principal of the Note. If principal is due on a Note at maturity, we will pay the amount to the Holder of the Note against surrender of the Note at the proper place of payment. REGULAR RECORD DATES FOR INTEREST The regular record date relating to an interest payment date for any Note will be the May 1 or November 1 next preceding the interest payment date, whether or not that preceding day is a business day. For the purpose of determining the Holder at the close of business on a regular record date when business is not being conducted, the close of business will mean 5:00 P.M., New York City time, on that day. HOW WE WILL MAKE PAYMENTS PAYMENTS ON GLOBAL NOTES. As long as the Notes are issued in global form, we will make payments on the Notes in accordance with the applicable policies of the depositary, Cedel and Euroclear, as in effect from time to time. Under those policies, we will pay directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in a global Note. An indirect holder's right to receive those payments will be governed by the rules and practices of the depositary, Cedel and Euroclear, and their participants, as described above under "-- We Will Issue the Notes in Global Form". PAYMENTS ON NON-GLOBAL NOTES. If the global Notes are terminated and we issue Notes in non-global form, we will make payments on the Notes as follows. Except as described in the next paragraph, we will pay any amount that becomes due on a Note by wire transfer of immediately available funds on the due date to a euro account at a bank that is designated by the Holder and is acceptable to us and the trustee. To request wire payment, the Holder must give the paying agent appropriate wire transfer instructions at least five business days before the requested wire payment is due. In the case of any interest payment due on an interest payment date, the instructions must be given by the person or entity who is the Holder on the relevant regular record date. In the case of any other payment, payment will be made only after the Note is surrendered to the paying agent. Any wire instructions, once properly given, will remain in effect unless and until new instructions are given in the manner described above. If a Holder fails to give instructions as described above, we will notify the Holder at the address in the trustee's records and will make the payment within five business days after the Holder provides appropriate instructions. Any late payment made in these circumstances will be treated under the indenture as if made on the due date, and no interest will accrue on the late payment from the due date to the date paid. WHEN EUROS ARE NOT AVAILABLE. We will make all payments on the Notes in euros or 124 127 any single currency that succeeds the euro in the EMU countries, except as follows. If euros or any successor currency are not available to us on each of the two business days before a payment is to be made on the Notes due to circumstances beyond our control -- such as the imposition of exchange controls or a disruption in the currency markets -- we will be entitled to satisfy our obligation to make the payment in euros by making the payment in U.S. dollars on the basis of the most recently available exchange rate. The exchange rate we use will be the noon buying rate for cable transfers in New York City for the euro as quoted by the Federal Reserve Bank of New York on the then-most recent day on which that bank has quoted that rate. The foregoing will apply to any Note, whether in global or non-global form, and to any payment, including a payment at maturity. Any payment made under the circumstances and in the manner described above will not result in a default under any Note or the indenture. Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on the Notes. PAYMENT WHEN OFFICES ARE CLOSED If any payment is due on a Note on a day that is not a business day, we will make the payment on the next day that is a business day. Payments postponed to the next business day in this situation will be treated under the indenture as if they were made on the original due date. Postponement of this kind will not result in a default under the Notes or the indenture, and no interest will accrue on the postponed amount from the original due date to the next day that is a business day. When we refer to a business day, we mean each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York City or any other relevant location generally are authorized or obligated by law, regulation or executive order to close. By other relevant location, we mean each of Brussels, Belgium, for as long as the Notes are held through Euroclear, and Luxembourg, for as long as the Notes are held through Cedel or are listed on the Luxembourg Stock Exchange and that exchange so requires. If the Notes cease to be held in global form, the reference to other relevant location will also mean each office of a paying agent, but only with respect to a payment to be made at that office, and each office of a transfer agent, but only with respect to any actions to occur at that office. PAYING AGENT If we issue Notes in non-global form, we may appoint one or more financial institutions to act as our paying agents, and at whose designated offices the Notes may be surrendered for payment at their maturity. We call each of those offices a paying agent. We may add, replace or terminate paying agents from time to time. We may also choose to act as our own paying agent. Initially, we have appointed the trustee, at its corporate trust office in New York City, as a paying agent. We must notify you of changes in the paying agents. For as long as the Notes are listed on the Luxembourg Stock Exchange, we will also maintain a paying agent in Luxembourg. We have initially appointed Banque Internationale a Luxembourg, acting out of its corporate office in Luxembourg, or its successor, as that paying agent. We will notify you of any change in our Luxembourg paying agent by publication in Luxembourg. UNCLAIMED PAYMENTS Regardless of who acts as paying agent, all money paid by us to a paying agent that remains unclaimed at the end of two years after the amount is due to a Holder will be repaid to us. After that two-year period, the Holder may look only to us for payment and not to the trustee, any other paying agent or anyone else. NOTICES As long as we issue the Notes in global form, notices to be given to Holders will be 125 128 given to the depositary, in accordance with its applicable policies as in effect from time to time. If we issue the Notes in non-global form, notices to be given to Holders will be sent by mail to the respective addresses of the Holders as they appear in the trustee's records, and will be deemed given when mailed. As long as the Notes are listed on the Luxembourg Stock Exchange and its rules require, we will also give notices to Holders by publication in a daily newspaper of general circulation in Luxembourg. We expect that newspaper to be, but it need not be, the Luxemburger Wort. If publication in Luxembourg is not practical, we will make the publication elsewhere in Western Europe. By "daily newspaper" we mean a newspaper that is published on each day, other than a Saturday, Sunday or holiday, in Luxembourg or, when applicable, elsewhere in Western Europe. You will be presumed to have received these notices on the date we first publish them. If we are unable to give notice as described in this paragraph because the publication of any newspaper is suspended or it is otherwise impractical for us to publish the notice, then we or the trustee, acting on our instructions, will give Holders notice in another form. That alternate form of notice will be sufficient notice to you. Neither the failure to give any notice to a particular Holder, nor any defect in a notice given to a particular Holder, will affect the sufficiency of any notice given to another Holder. Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive notices. OUR RELATIONSHIP WITH THE TRUSTEE The Bank of New York is initially serving as the trustee, for the Notes and all other series of debt securities to be issued under the indenture. The Bank of New York has provided commercial banking and other services for us and our affiliates in the past and may do so in the future. Among other things, The Bank of New York provides us with a line of credit, holds debt securities issued by us and serves as trustee or agent with regard to other debt obligations of The Goldman Sachs Group, Inc. or its subsidiaries. 126 129 UNITED STATES TAXATION This summary describes the material United States federal income tax consequences of owning Notes and is the opinion of Sullivan & Cromwell, counsel to The Goldman Sachs Group, Inc. It applies to you only if you hold your Notes as capital assets for tax purposes. This summary 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 summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations under the Internal Revenue Code, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. Please consult your own tax advisor concerning the consequences of owning these Notes in your particular circumstances under the Internal Revenue Code and the laws of any other taxing jurisdiction. UNITED STATES HOLDERS This section 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 section does not apply to you and you should refer to "-- United States Alien Holders" below. PAYMENTS OF INTEREST. You will be taxed on any interest on your Note as ordinary income at the time you receive the interest or it accrues, depending on your method of accounting for tax purposes. If you are a taxpayer that uses the cash receipts and disbursements method of accounting for tax purposes, you must recognize income equal to the U.S. dollar value of the interest payment, based on the exchange rate in effect on the date of receipt, regardless of whether you actually convert the payment into U.S. dollars. If you are a taxpayer that uses an accrual method of accounting for tax purposes, you may determine the amount of income that you recognize by using one of two methods. Under the first method, you will determine the amount of income accrued based on the average exchange rate in effect during the interest accrual period or, with respect to an accrual period that spans two taxable years, that part of the period within the taxable year. If you elect the second method, you would determine the amount of income accrued on the basis of the exchange rate in effect on the last day of the accrual period or, in the case of an accrual period that spans two taxable years, the exchange rate in effect on the last day of the part of the period within the taxable year. Additionally, under this second method, if you receive a payment of 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 127 130 method, it will apply to all debt instruments that you hold at the beginning of the first taxable year to which the election applies and to all debt instruments that you subsequently acquire. You may not revoke this election without the consent of the Internal Revenue Service. When you actually receive an interest payment, including a payment attributable to accrued but unpaid interest upon the sale or retirement of your Note, you will recognize ordinary income or loss measured by the difference, if any, between the exchange rate that you used to accrue interest income and the exchange rate in effect on the date of receipt, regardless of whether you actually convert the payment into U.S. dollars. However, you may not treat this ordinary income gain or loss as an adjustment to the interest income you receive. In addition, if you acquire your Note at a price other than the initial offering price, the rules relating to market discount or acquisition premium may also apply to your Note. This may occur, for example, if you purchase your Note in a market-making transaction. PURCHASE, SALE AND RETIREMENT OF NOTES. When you sell your Note or your Note is retired, you will generally recognize gain or loss equal to the difference between the amount you realize on the sale or retirement and the U.S. dollar cost of your Note. The amount you realize will be the U.S. dollar value of such amount on: - - the date payment is received, if you are a cash basis taxpayer and the Notes are not traded on an established securities market, as defined in the applicable Treasury regulations; - - the date of disposition, if you are an accrual basis taxpayer; or - - the settlement date for the sale, if you are a cash basis taxpayer, or an accrual basis United States holder that so elects, and the Notes are traded on an established securities market, as defined in the applicable Treasury regulations. The U.S. dollar cost of your Note will generally be the U.S. dollar value of the purchase price on the date of purchase. However, if you are a cash basis taxpayer, or an accrual basis taxpayer if you so elect, and your Note is traded on an established securities market, as defined in the applicable Treasury regulations, the U.S. dollar cost of your Note will be the U.S. dollar value of the purchase price on the settlement date of your purchase. This gain or loss will be capital gain or loss, except to the extent attributable to changes in exchange rates, as described in the next paragraph, or to accrued but unpaid interest or described below under "-- Market Discount". Capital gain of a non-corporate United States holder is generally taxed at a maximum rate of 20% where the property is held for more than one year. You must treat any portion of the gain or loss that you recognize on the sale or retirement of a Note as ordinary income or loss to the extent attributable to changes in exchange rates. However, you only take exchange gain or loss into account to the extent of the total gain or loss you realize on the transaction. MARKET DISCOUNT. You will be treated as if you purchased your Note at a market discount, and your Note will be a market discount Note, if the Note's principal amount exceeds the price you paid for your Note by at least 1/4 of 1% of your Note's principal amount multiplied by the number of complete years to the Note's maturity. If your Note's principal amount does not exceed the price you paid for the Note by 1/4 of 1% multiplied by the number of complete years to the Note's maturity, the excess constitutes de minimis market discount, and the rules discussed below are not applicable to you. You must treat any gain you recognize on the maturity or disposition of your market discount Note as ordinary income to the 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 128 131 after the first day of the first taxable year to which the election applies. You may not revoke this election without the consent of the Internal Revenue Service. If you own a market discount Note and do not make this election, you will generally be required to defer deductions for interest on borrowings allocable to your Note in an amount not exceeding the accrued market discount on your Note until maturity or disposition of your Note. You will accrue market discount on your market discount Note on a straight-line basis unless you elect to accrue market discount using a constant-yield method. If you make this election, it will apply only to the Note with respect to which it is made and you may not revoke it. If you are an accrual-basis taxpayer, you should be aware that the Clinton administration has recently proposed legislation that would require you to include market discount in income currently over the life of your Note, subject to certain limitations. If enacted, this proposal would only be effective if you acquire your market discount Note on or after the date of enactment. We do not yet know whether this proposal will be enacted or when it will become effective if enacted. NOTES PURCHASED AT A PREMIUM. If you purchase your Note for an amount in excess of its principal amount, you may elect to treat the excess as amortizable bond premium. If you make this election, you will reduce the amount required to be included in your income each year with respect to interest on your Note by the amount of amortizable bond premium allocable to that year, based on your Note's yield to maturity. Gain or loss recognized that is attributable to changes in exchange rates between the time your amortized bond premium offsets interest income and the time of the acquisition of your Note is generally taxable as ordinary income or loss. If you make an election to amortize bond premium, it will apply to all debt instruments, other than debt instruments the interest on which is excludible from gross income, that you hold at the beginning of the first taxable year to which the election applies or thereafter acquire, and you may not revoke it without the consent of the Internal Revenue Service. EXCHANGE OF EUROS. Your tax basis in the euros received as interest on your Note or on the sale or retirement of your Note will equal the U.S. dollar value of the euros when the interest is received or at the time of the sale or retirement. If you purchase euros, you generally will have a tax basis equal to the U.S. dollar value of the euros on the date of your purchase. If you sell or dispose of euros, including if you use euros to purchase Notes or exchange euros for U.S. dollars, any gain or loss will generally be ordinary income or loss. BACKUP WITHHOLDING AND INFORMATION REPORTING. In general, if you are a non-corporate United States holder, we and other payors are required to report to the Internal Revenue Service all payments of principal and interest on your Note. In addition, the proceeds of the sale of your Note before maturity within the United States will be reported to the Internal Revenue Service. Additionally, backup withholding at a rate of 31% will apply to any payments if you fail to provide an accurate certified taxpayer identification number, or you are notified by the Internal Revenue Service that you have failed to report all interest and dividends required to be shown on your federal income tax returns. UNITED STATES ALIEN HOLDERS This summary describes the tax consequences to a United States alien holder. You are a United States alien holder if you are the beneficial owner of a Note and are, for United States federal income tax purposes: - - a nonresident alien individual; - - a foreign corporation; - - a foreign partnership; or - - an estate or trust that is not subject to United States federal income tax on a net income basis on income or gain from a Note. Under present United States federal income and estate tax law, and subject to the discussion of backup withholding below, if 129 132 you are a United States alien holder of a Note: - - we and other payors will not be required to deduct United States withholding tax from payments of principal and interest to you if, in the case of interest: 1. you do not actually or constructively own 10% or more of the total combined voting power of all classes of stock of The Goldman Sachs Group, Inc. entitled to vote, 2. you are not a controlled foreign corporation that is related to us through stock ownership, and a. you certify to us or a U.S. payor under penalties of perjury, that you are not a United States holder and provide your name and address, or b. a non-U.S. securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business and holds the Note certifies to us or a U.S. payor under penalties of perjury that a similar statement has been received from you by it or by a similar financial institution between it and you and furnishes the payor with a copy thereof; and - - no deduction for any United States federal withholding tax will be made from any gain that you realize on the sale or exchange of your Note. Further, a Note held by an individual, who at death is not a citizen or resident of the United States will not be includible in the individual's gross estate for United States federal estate tax purposes if: - - the decedent did not actually or constructively own 10% or more of the total combined voting power of all classes of stock of The Goldman Sachs Group, Inc. entitled to vote at the time of death; and - - the income on the Note would not have been effectively connected with a United States trade or business of the decedent at the same time. If you receive a payment after December 31, 2000, recently finalized Treasury regulations will apply. Under these final withholding regulations, after December 31, 2000, you may use an alternative method to satisfy the certification requirement described above. Additionally, if you are a partner in a foreign partnership, after December 31, 2000, you, in addition to the foreign partnership, must provide the certification described above, and the partnership must provide certain information, including a United States taxpayer identification number. The Internal Revenue Service will apply a look-through rule in the case of tiered partnerships. You are generally exempt from backup withholding and information reporting on Internal Revenue Service Form 1099 with respect to any payments of principal or interest made by us and other payors, provided that you provide the certification described above, and provided further that the payor does not have actual knowledge that you are a United States person. We and other payors, however, may report payments of interest on your Notes on Internal Revenue Service Form 1042-S. In general, payment of the proceeds from the sale of Notes to or through a United States office of a broker is subject to both United States backup withholding and information reporting. If, however, you are a United States alien holder, you will not be subject to information reporting and backup withholding if you certify as to your non-United States status under penalties of perjury or otherwise establish an exemption. Payments of the proceeds from the sale by a United States alien holder of a Note made to or through a foreign office of a broker will not be subject to information reporting or backup withholding. However, information reporting, but not backup withholding, may apply to a payment made outside the United States of the proceeds of a sale of a Note through an office outside the United States if the broker is: - - a United States person; - - a controlled foreign corporation for United States tax purposes; 130 133 - - 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 the holder or beneficial owner is a non-U.S. person or otherwise establishes an exemption and, after December 31, 2000, does not have actual knowledge that you are a U.S. person. If you receive payment of the proceeds from the sale of a Note to or through the United States office of a broker, the payment is subject to information reporting and backup withholding unless you certify as to your non- United States status, under penalties of perjury, or otherwise establish an exemption. 131 134 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 The validity of the Notes offered and sold in this offering will be passed upon for The Goldman Sachs Group, Inc. by Sullivan & Cromwell, New York, New York and for the underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York. Certain legal matters will be passed upon for The Goldman Sachs Group, Inc. by one of its General Counsel, Robert J. Katz or Gregory K. Palm. Sullivan & Cromwell has in the past represented, and continues to represent, one or more of the underwriters and their affiliates in a variety of matters. Cleary, Gottlieb, Steen & Hamilton has in the past represented, and continues to represent, Goldman Sachs in a variety of matters. EXPERTS The financial statements of Goldman Sachs as of November 28, 1997 and November 27, 1998 and for each of the three years in the period ended November 27, 1998 included in this prospectus and the financial statement schedule included in the registration statement have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The historical consolidated income statement data and balance sheet data set forth in "Selected Consolidated Financial Data" for each of the five years in the period ended November 27, 1998 included in this prospec- tus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. With respect to the unaudited condensed consolidated financial statements of Goldman Sachs as of and for the three months ended February 26, 1999 and for the three months ended February 27, 1998, included in this prospectus, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated April 9, 1999 appearing herein states that they did not audit and they do not express an opinion on the unaudited condensed consolidated finan- 132 135 cial statements. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited historical financial information because this report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933. Except as otherwise indicated, all amounts with respect to the volume, number and market share of mergers and acquisitions and underwriting transactions and related ranking information included in this prospectus have been derived from information compiled and classified by Securities Data Company and have been so included in reliance on Securities Data Company's authority as experts in compiling and classifying information as to securities transactions. 133 136 AVAILABLE INFORMATION As a result of its common stock offering, The Goldman Sachs Group, Inc. will be required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any documents filed by us at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our filings with the SEC will also be available to the public through the SEC's Internet site at http://www.sec.gov and through the NYSE, 20 Broad Street, New York, New York 10005. As long as the Notes are listed on the Luxembourg Stock Exchange, copies of our filings with the SEC will also be available free of charge from our listing agent in Luxembourg, Banque Internationale a Luxembourg, 69 route d'Esch, L-1470 Luxembourg. We have filed with the SEC a registration statement on Form S-1 relating to the Notes. 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. 134 137 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Consolidated Financial Statements as of November 27, 1998 and November 28, 1997 and for the three years in the period ended November 27, 1998 Report of Independent Accountants........................... F-2 Consolidated Statements of Earnings......................... F-3 Consolidated Statements of Financial Condition.............. F-4 Consolidated Statements of Changes in Partners' Capital..... F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7 Condensed Consolidated Financial Statements as of February 26, 1999 and for the three months ended February 26, 1999 and February 27, 1998 (unaudited) Review Report of Independent Accountants.................... F-24 Condensed Consolidated Statements of Earnings............... F-25 Condensed Consolidated Statement of Financial Condition..... F-26 Condensed Consolidated Statement of Changes in Partners' Capital................................................... F-27 Condensed Consolidated Statements of Cash Flows............. F-28 Notes to Condensed Consolidated Financial Statements........ F-29
F-1 138 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners, The Goldman Sachs Group, L.P.: In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of earnings, changes in partners' capital and cash flows (included on pages F-3 to F-23 of this prospectus) present fairly, in all material respects, the consolidated financial position of The Goldman Sachs Group, L.P. and Subsidiaries (the "Firm") as of November 27, 1998 and November 28, 1997, and the results of their consolidated operations and their consolidated cash flows for the three years in the period ended November 27, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Firm's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated statements of financial condition as of November 29, 1996, November 24, 1995 and November 25, 1994, and the related consolidated statements of earnings, changes in partners' capital and cash flows for the years ended November 24, 1995 and November 25, 1994 (none of which are presented herein); and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the selected historical consolidated income statement and balance sheet data for each of the five years in the period ended November 27, 1998 (included on pages 36 and 37 of this prospectus) is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York January 22, 1999. F-2 139 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED NOVEMBER ----------------------------------- 1996 1997 1998 ---- ---- ---- (in millions) REVENUES: Investment banking........................................ $ 2,113 $ 2,587 $ 3,368 Trading and principal investments......................... 2,496 2,303 2,015 Asset management and securities services.................. 981 1,456 2,085 Interest income........................................... 11,699 14,087 15,010 ------- ------- ------- Total revenues.................................. 17,289 20,433 22,478 Interest expense, principally on short-term funding....... 11,160 12,986 13,958 ------- ------- ------- Revenues, net of interest expense............... 6,129 7,447 8,520 OPERATING EXPENSES: Compensation and benefits................................. 2,421 3,097 3,838 Brokerage, clearing and exchange fees..................... 278 357 424 Market development........................................ 137 206 287 Communications and technology............................. 173 208 265 Depreciation and amortization............................. 172 178 242 Occupancy................................................. 154 168 207 Professional services and other........................... 188 219 336 ------- ------- ------- Total operating expenses........................ 3,523 4,433 5,599 Pre-tax earnings.......................................... 2,606 3,014 2,921 Provision for taxes....................................... 207 268 493 ------- ------- ------- Net earnings.............................................. $ 2,399 $ 2,746 $ 2,428 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 140 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF NOVEMBER -------------------- 1997 1998 ---- ---- (in millions) ASSETS: Cash and cash equivalents................................... $ 1,328 $ 2,836 Cash and securities segregated in compliance with U.S. federal and other regulations (principally U.S. government obligations).............................................. 4,903 7,887 Receivables from brokers, dealers and clearing organizations............................................. 3,754 4,321 Receivables from customers and counterparties............... 10,060 14,953 Securities borrowed......................................... 51,058 69,158 Securities purchased under agreements to resell............. 39,376 37,484 Right to receive securities................................. -- 7,564 Financial instruments owned, at fair value: Commercial paper, certificates of deposit and time deposits............................................... 1,477 1,382 U.S. government, federal agency and sovereign obligations............................................ 25,736 24,789 Corporate debt............................................ 11,321 10,744 Equities and convertible debentures....................... 11,870 11,066 State, municipal and provincial obligations............... 1,105 918 Derivative contracts...................................... 13,788 21,299 Physical commodities...................................... 1,092 481 Other assets................................................ 1,533 2,498 -------- -------- $178,401 $217,380 ======== ======== LIABILITIES AND NET WORTH: Short-term borrowings, including commercial paper........... $ 21,008 $ 27,430 Payables to brokers, dealers and clearing organizations..... 952 730 Payables to customers and counterparties.................... 22,995 36,179 Securities loaned........................................... 17,627 21,117 Securities sold under agreements to repurchase.............. 44,057 36,257 Obligation to return securities............................. -- 9,783 Financial instruments sold, but not yet purchased, at fair value: U.S. government, federal agency and sovereign obligations............................................ 22,371 22,360 Corporate debt............................................ 1,708 1,441 Equities and convertible debentures....................... 6,357 6,406 Derivative contracts...................................... 15,964 24,722 Physical commodities...................................... 78 966 Other liabilities and accrued expenses...................... 3,080 3,699 Long-term borrowings........................................ 15,667 19,906 -------- -------- 171,864 210,996 Commitments and contingencies Partners' capital allocated for income taxes and potential withdrawals............................................... 430 74 Partners' capital........................................... 6,107 6,310 -------- -------- $178,401 $217,380 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 141 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEAR ENDED NOVEMBER ----------------------------- 1996 1997 1998 ---- ---- ---- (in millions) Partners' capital, beginning of year........................ $ 4,905 $ 5,309 $ 6,107 Additions: Net earnings.............................................. 2,399 2,746 2,428 Capital contributions..................................... 4 89 9 ------- ------- ------- Total additions................................... 2,403 2,835 2,437 Deductions: Returns on capital and certain distributions to partners............................................... (473) (557) (619) Termination of the Profit Participation Plans............. -- -- (368) Transfers to partners' capital allocated for income taxes and potential withdrawals, net......................... (1,526) (1,480) (1,247) ------- ------- ------- Total deductions.................................. (1,999) (2,037) (2,234) ------- ------- ------- Partners' capital, end of year.............................. $ 5,309 $ 6,107 $ 6,310 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 142 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER ------------------------------- 1996 1997 1998 ---- ---- ---- (in millions) Cash flows from operating activities: Net earnings.............................................. $ 2,399 $ 2,746 $ 2,428 Non-cash items included in net earnings: Depreciation and amortization........................... 172 178 242 Deferred income taxes................................... 85 32 23 Changes in operating assets and liabilities: Cash and securities segregated in compliance with U.S. federal and other regulations.......................... (1,445) (670) (2,984) Net receivables from brokers, dealers and clearing organizations.......................................... 169 (1,599) (789) Net payables to customers and counterparties............ 4,279 2,339 8,116 Securities borrowed, net................................ (17,075) (8,124) (14,610) Financial instruments owned, at fair value.............. (9,415) (7,439) 148 Financial instruments sold, but not yet purchased, at fair value............................................. 5,276 11,702 7,559 Other, net.............................................. 926 905 (71) -------- ------- -------- Net cash (used for)/provided by operating activities........................................... (14,629) 70 62 -------- ------- -------- Cash flows from investing activities: Property, leasehold improvements and equipment............ (258) (259) (476) Financial instruments owned, at fair value................ 115 (360) (180) Acquisitions, net of cash acquired........................ (75) (74) -- -------- ------- -------- Net cash used for investing activities................ (218) (693) (656) -------- ------- -------- Cash flows from financing activities: Short-term borrowings, net................................ 391 1,082 2,193 Securities sold under agreements to repurchase, net....... 16,012 (4,717) (5,909) Issuance of long-term borrowings.......................... 5,172 7,734 10,527 Repayment of long-term borrowings......................... (3,986) (1,855) (2,058) Capital contributions..................................... 4 89 9 Returns on capital and certain distributions to partners................................................ (473) (557) (619) Termination of the Profit Participation Plans............. -- -- (368) Partners' capital allocated for income taxes and potential withdrawals............................................. (1,017) (2,034) (1,673) -------- ------- -------- Net cash provided by/(used for) financing activities........................................... 16,103 (258) 2,102 -------- ------- -------- Net increase/(decrease) in cash and cash equivalents...... 1,256 (881) 1,508 Cash and cash equivalents, beginning of year................ 953 2,209 1,328 -------- ------- -------- Cash and cash equivalents, end of year...................... $ 2,209 $ 1,328 $ 2,836 ======== ======= ========
SUPPLEMENTAL DISCLOSURES: Cash payments for interest approximated the related expense for each of the fiscal periods presented. Payments of income taxes were not material. A zero coupon bond of $32 million representing a portion of the acquisition price of CIN Management Limited was recorded on the consolidated statement of financial condition as of November 1996 and was excluded from the consolidated statement of cash flows as it represented a non-cash item. An increase in total assets and liabilities of $11.64 billion related to the provisions of SFAS No. 125 that were deferred under SFAS No. 127 was excluded from the consolidated statement of cash flows for the year ended November 1998 as it represented a non-cash item. The accompanying notes are an integral part of these consolidated financial statements. F-6 143 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS The Goldman Sachs Group, L.P., a Delaware limited partnership ("Group L.P."), together with its consolidated subsidiaries (collectively, the "Firm"), is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base. The Firm's activities are divided into three principal business lines: - Investment Banking, which includes financial advisory services and underwriting; - Trading and Principal Investments, which includes fixed income, currency and commodities ("FICC"), equities and principal investments (principal investments reflect primarily the Firm's investments in its merchant banking funds); and - Asset Management and Securities Services, which includes asset management, securities services and commissions. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Group L.P. and its U.S. and international subsidiaries including Goldman, Sachs & Co. ("GS&Co.") and J. Aron & Company in New York, Goldman Sachs International ("GSI") in London and Goldman Sachs (Japan) Ltd. ("GSJL") in Tokyo. Certain reclassifications have been made to prior year amounts to conform to the current presentation. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require management to make estimates and assumptions regarding trading inventory valuations, partner retirements, the outcome of pending litigation and other matters that affect the consolidated financial statements and related disclosures. These estimates and assumptions are based on judgment and available information and, consequently, actual results could be materially different from these estimates. Unless otherwise stated herein, all references to 1996, 1997 and 1998 refer to the Firm's fiscal year ended, or the date, as the context requires, November 29, 1996, November 28, 1997 and November 27, 1998, respectively. CASH AND CASH EQUIVALENTS The Firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. REPURCHASE AGREEMENTS AND COLLATERALIZED FINANCING ARRANGEMENTS Securities purchased under agreements to resell and securities sold under agreements to repurchase, principally U.S. government, federal agency and investment-grade foreign sovereign obligations, represent short-term collateralized financing transactions and are carried at their contractual amounts plus accrued interest. These amounts are presented on a net-by- counterparty basis, where management believes a legal right of setoff exists under an enforceable master netting agreement. The Firm takes possession of securities purchased under agreements to resell, monitors the market value of the underlying securities on a daily basis and obtains additional collateral as appropriate. F-7 144 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Securities borrowed and loaned are recorded on the statements of financial condition based on the amount of cash collateral advanced or received. These transactions are generally collateralized by either cash, securities or letters of credit. The Firm takes possession of securities borrowed, monitors the market value of securities loaned and obtains additional collateral as appropriate. Income or expense is recognized as interest over the life of the transaction. FINANCIAL INSTRUMENTS Gains and losses on financial instruments and commission income and related expenses are recorded on a trade date basis in the consolidated statements of earnings. For purposes of the consolidated statements of financial condition only, purchases and sales of financial instruments, including agency transactions, are generally recorded on a settlement date basis. Recording such transactions on a trade date basis would not result in a material adjustment to the consolidated statements of financial condition. Substantially all financial instruments used in the Firm's trading and non-trading activities are carried at fair value or amounts that approximate fair value and unrealized gains and losses are recognized in earnings. Fair value is based generally on listed market prices or broker or dealer price quotations. To the extent that prices are not readily available, fair value is based on either internal valuation models or management's estimate of amounts that could be realized under current market conditions, assuming an orderly liquidation over a reasonable period of time. Certain over-the-counter ("OTC") derivative instruments are valued using pricing models that consider, among other factors, current and contractual market prices, time value, and yield curve and/or volatility factors of the underlying positions. The fair value of the Firm's trading and non-trading assets and liabilities is discussed further in Notes 3, 4 and 5. PRINCIPAL INVESTMENTS Principal investments are carried at fair value, generally as evidenced by quoted market prices or by comparable substantial third-party transactions. Where fair value is not readily ascertainable, principal investments are recorded at cost or management's estimate of the realizable value. The Firm is entitled to receive merchant banking overrides (i.e., an increased share of a fund's income and gains) when the return on the fund's investments exceeds certain threshold returns. Overrides are based on investment performance over the life of each merchant banking fund, and future investment underperformance may require amounts previously distributed to the Firm to be returned to the funds. Accordingly, overrides are recognized in earnings only when management determines that the probability of return is remote. Overrides are included in "Asset Management and Securities Services" on the consolidated statements of earnings. DERIVATIVE CONTRACTS Derivatives used for trading purposes are reported at fair value and are included in "Derivative contracts" on the consolidated statements of financial condition. Gains and losses on derivatives used for trading purposes are included in "Trading and Principal Investments" on the consolidated statements of earnings. Derivatives used for non-trading purposes include interest rate futures contracts and interest rate and currency swap agreements, which are primarily utilized to convert a substantial portion of the Firm's fixed rate debt into U.S. dollar-based floating rate obligations. Gains and losses on F-8 145 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) these transactions are generally deferred and recognized as adjustments to interest expense over the life of the derivative contract. Gains and losses resulting from the early termination of derivatives used for non-trading purposes are generally deferred and recognized over the remaining life of the underlying debt. If the underlying debt is terminated prior to its stated maturity, gains and losses on these transactions, including the associated hedges, are recognized in earnings immediately. Derivatives are reported on a net-by-counterparty basis on the consolidated statements of financial condition where management believes a legal right of setoff exists under an enforceable master netting agreement. PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT Depreciation and amortization generally are computed using accelerated cost recovery methods for all property and equipment and for leasehold improvements where the term of the lease is greater than the economic useful life of the asset. All other leasehold improvements are amortized on a straight-line basis over the term of the lease. GOODWILL The cost of acquired companies in excess of the fair value of net assets acquired at acquisition date is recorded as goodwill and amortized over periods of 15 to 25 years on a straight-line basis. PROVISION FOR TAXES The Firm accounts for income taxes incurred by its corporate subsidiaries in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". The consolidated statements of earnings for the periods presented include a provision for, or benefit from, income taxes on income earned, or losses incurred, by Group L.P. and its subsidiaries including a provision for, or benefit from, unincorporated business tax on income earned, or losses incurred, by Group L.P. and its subsidiaries conducting business in New York City. No additional income tax provision is required in the consolidated statements of earnings because Group L.P. is a partnership and the remaining tax effects accrue directly to its partners. FOREIGN CURRENCY TRANSLATION Assets and liabilities of subsidiaries whose functional currency is other than the U.S. dollar are translated using currency exchange rates prevailing at the end of the period presented, while revenues and expenses are translated using average exchange rates during the period. Gains or losses resulting from the translation of foreign currency financial statements are recorded as cumulative translation adjustments, and are included as a component of "Partners' capital allocated for income taxes and potential withdrawals" on the consolidated statements of financial condition. Gains or losses resulting from foreign exchange transactions are recorded in earnings. INVESTMENT BANKING Underwriting revenues and fees from mergers and acquisitions and other corporate finance advisory assignments are recorded when the underlying transaction is completed under the terms of the engagement. Syndicate expenses related to securities offerings in which the Firm acts as an underwriter or agent are deferred until the related revenue is recognized. F-9 146 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTING DEVELOPMENTS In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", effective for transactions occurring after December 31, 1996. SFAS No. 125 establishes standards for distinguishing transfers of financial assets that are accounted for as sales from transfers that are accounted for as secured borrowings. The provisions of SFAS No. 125 relating to repurchase agreements, securities lending transactions and other similar transactions were deferred by the provisions of SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", and became effective for transactions entered into after December 31, 1997. This Statement requires that the collateral obtained in certain types of secured lending transactions be recorded on the balance sheet with a corresponding liability reflecting the obligation to return such collateral to its owner. Effective January 1, 1998, the Firm adopted the provisions of SFAS No. 125 that were deferred by SFAS No. 127. The adoption of this standard increased the Firm's total assets and liabilities by $11.64 billion as of November 1998. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("EPS"), effective for periods ending after December 15, 1997, with restatement required for all prior periods. SFAS No. 128 establishes new standards for computing and presenting EPS. This Statement replaces primary and fully diluted EPS with "basic EPS", which excludes dilution, and "diluted EPS", which includes the effect of all potentially dilutive common shares and other dilutive securities. Because the Firm has not historically reported EPS, this Statement will have no impact on the Firm's historical financial statements. This Statement will, however, apply to financial statements of the Firm prepared after its common stock offering. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", effective for fiscal years beginning after December 15, 1997, with reclassification of earlier periods required for comparative purposes. SFAS No. 130 establishes standards for the reporting and presentation of comprehensive income and its components in the financial statements. The Firm intends to adopt this standard in the first quarter of fiscal 1999. This Statement is limited to issues of reporting and presentation and, therefore, will not affect the Firm's results of operations or financial condition. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", effective for fiscal years beginning after December 15, 1997, with reclassification of earlier periods required for comparative purposes. SFAS No. 131 establishes the criteria for determining an operating segment and establishes the disclosure requirements for reporting information about operating segments. The Firm intends to adopt this standard at the end of fiscal 1999. This Statement is limited to issues of reporting and presentation and, therefore, will not affect the Firm's results of operations or financial condition. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", effective for fiscal years beginning after December 15, 1997, with restatement of disclosures for earlier periods required for comparative purposes. SFAS No. 132 revises certain employers' disclosures about pension and other post-retirement benefit plans. The Firm intends to adopt this standard at the end of fiscal 1999. This Statement is limited to issues of reporting and presentation and, therefore, will not affect the Firm's results of operations or financial condition. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-1, "Accounting for F-10 147 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Costs of Computer Software Developed or Obtained for Internal Use", effective for fiscal years beginning after December 15, 1998. SOP No. 98-1 requires that certain costs of computer software developed or obtained for internal use be capitalized and amortized over the useful life of the related software. The Firm currently expenses the cost of all software development in the period in which it is incurred. The Firm intends to adopt this Statement in fiscal 2000 and is currently assessing its effect. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This Statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting designation. The Firm intends to adopt this standard in fiscal 2000 and is currently assessing its effect. NOTE 3. FINANCIAL INSTRUMENTS Financial instruments, including both cash instruments and derivatives, are used to manage market risk, facilitate customer transactions, engage in trading transactions and meet financing objectives. These instruments can be either executed on an exchange or negotiated in the OTC market. Transactions involving financial instruments sold, but not yet purchased, entail an obligation to purchase a financial instrument at a future date. The Firm may incur a loss if the market value of the financial instrument subsequently increases prior to the purchase of the instrument. FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the Firm's assets and liabilities are carried at fair value or amounts that approximate fair value. Trading assets and liabilities, including derivative contracts used for trading purposes, are carried at fair value and reported as financial instruments owned and financial instruments sold, but not yet purchased on the consolidated statements of financial condition. Non-trading assets and liabilities are carried at fair value or amounts that approximate fair value. Non-trading assets include cash and cash equivalents, cash and securities segregated in compliance with U.S. federal and other regulations, receivables from brokers, dealers and clearing organizations, receivables from customers and counterparties, securities borrowed, securities purchased under agreements to resell, right to receive securities and certain investments, primarily those made in connection with the Firm's merchant banking activities. Non-trading liabilities include short-term borrowings, payables to brokers, dealers and clearing organizations, payables to customers and counterparties, securities loaned, securities sold under agreements to repurchase, obligation to return securities, other liabilities and accrued expenses and long-term borrowings. Fair value of the Firm's long-term borrowings and associated hedges is discussed in Note 5. F-11 148 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TRADING AND PRINCIPAL INVESTMENTS The Firm's Trading and Principal Investments business facilitates customer transactions and takes proprietary positions through market-making in and trading of securities, currencies, commodities and swaps and other derivatives. Derivative financial instruments are often used to hedge cash instruments or other derivative financial instruments as an integral part of the Firm's strategies. As a result, it is necessary to view the results of any activity on a fully-integrated basis, including cash positions, the effect of related derivatives and the financing of the underlying positions. Net revenues represent total revenues less allocations of interest expense to specific securities, commodities and other positions in relation to the level of financing incurred by each. The following table sets forth the net revenues of the Firm's Trading and Principal Investments business:
YEAR ENDED NOVEMBER -------------------------- 1996 1997 1998 ---- ---- ---- (in millions) FICC................................................... $1,749 $2,055 $1,438 Equities............................................... 730 573 795 Principal investments.................................. 214 298 146 ------ ------ ------ Total Trading and Principal Investments................ $2,693 $2,926 $2,379 ====== ====== ======
RISK MANAGEMENT The Firm seeks to monitor and control its risk exposure through a variety of separate but complementary financial, credit, operational and legal reporting systems for individual entities and the Firm as a whole. Management believes that it has effective procedures for evaluating and managing the market, credit and other risks to which it is exposed. The Management Committee, the Firm's primary decision-making body, determines (both directly and through delegated authority) the types of business in which the Firm engages, approves guidelines for accepting customers for all product lines, outlines the terms under which customer business is conducted and establishes the parameters for the risks that the Firm is willing to undertake in its business. MARKET RISK. The Firmwide Risk Committee, which reports to senior management and meets weekly, is responsible for managing and monitoring all of the Firm's risk exposures. In addition, the Firm maintains segregation of duties, with credit review and risk-monitoring functions performed by groups that are independent from revenue-producing departments. The potential for changes in the market value of the Firm's trading positions is referred to as "market risk". The Firm's trading positions result from underwriting, market-making and proprietary trading activities. The broadly defined categories of market risk include exposures to interest rates, currency rates, equity prices and commodity prices. - - Interest rate risks primarily result from exposures to changes in the level, slope and curvature of the yield curve, the volatility of interest rates, mortgage prepayment speeds and credit spreads. - - Currency rate risks result from exposures to changes in spot prices, forward prices and volatilities of currency rates. F-12 149 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - - Equity price risks result from exposures to changes in prices and volatilities of individual equities, equity baskets and equity indices. - - Commodity price risks result from exposures to changes in spot prices, forward prices and volatilities of commodities, such as electricity, natural gas, crude oil, petroleum products and precious and base metals. These risk exposures are managed through diversification, by controlling position sizes and by establishing offsetting hedges in related securities or derivatives. For example, the Firm may hedge a portfolio of common stock by taking an offsetting position in a related equity-index futures contract. The ability to manage these exposures may, however, be limited by adverse changes in the liquidity of the security or the related hedge instrument and in the correlation of price movements between the security and the related hedge instrument. CREDIT RISK. Credit risk represents the loss that the Firm would incur if a counterparty or issuer of securities or other instruments it holds fails to perform its contractual obligations to the Firm. To reduce its credit exposures, the Firm seeks to enter into netting agreements with counterparties that permit the Firm to offset receivables and payables with such counterparties. The Firm does not take into account any such agreements when calculating credit risk, however, unless management believes a legal right of setoff exists under an enforceable master netting agreement. Credit concentrations may arise from trading, underwriting and securities borrowing activities and may be impacted by changes in economic, industry or political factors. The Firm's concentration of credit risk is monitored actively by the Credit Policy Committee. As of November 1998, U.S. government and federal agency obligations represented 7% of the Firm's total assets. In addition, most of the Firm's securities purchased under agreements to resell are collateralized by U.S. government, federal agency and sovereign obligations. DERIVATIVE ACTIVITIES Most of the Firm's derivative transactions are entered into for trading purposes. The Firm uses derivatives in its trading activities to facilitate customer transactions, to take proprietary positions and as a means of risk management. The Firm also enters into non-trading derivative contracts to manage the interest rate and currency exposure on its long-term borrowings. Non- trading derivatives related to the Firm's long-term borrowings are discussed in Note 5. Derivative contracts are financial instruments, such as futures, forwards, swaps or option contracts, that derive their value from underlying assets, indices, reference rates or a combination of these factors. Derivatives may involve future commitments to purchase or sell financial instruments or commodities, or to exchange currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, securities, commodities or indices. Derivative contracts exclude certain cash instruments, such as mortgage-backed securities, interest-only and principal-only obligations and indexed debt instruments, that derive their values or contractually required cash flows from the price of some other security or index. Derivatives also exclude option features that are embedded in cash instruments, such as the conversion features and call provisions embedded in bonds. The Firm has elected to include commodity-related contracts in its derivative disclosure, although not required to do so, as these contracts may be settled in cash or are readily convertible into cash. F-13 150 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The gross notional (or contractual) amounts of derivative financial instruments represent the volume of these transactions and not the amounts potentially subject to market risk. In addition, measurement of market risk is meaningful only when all related and offsetting transactions are taken into consideration. Gross notional (or contractual) amounts of derivative financial instruments used for trading purposes with off-balance-sheet market risk are set forth below:
AS OF NOVEMBER ---------------------- 1997 1998 ---- ---- (in millions) INTEREST RATE RISK: Financial futures and forward settlement contracts......... $334,916 $ 406,302 Swap agreements............................................ 918,067 1,848,977 Written option contracts................................... 351,359 423,561 EQUITY PRICE RISK: Financial futures and forward settlement contracts......... 7,457 7,405 Swap agreements............................................ 1,993 2,752 Written option contracts................................... 51,916 54,856 CURRENCY AND COMMODITY PRICE RISK: Financial futures and forward settlement contracts......... 355,882 420,138 Swap agreements............................................ 32,355 51,502 Written option contracts................................... 179,481 183,929
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:
AS OF NOVEMBER -------------------- 1997 1998 ---- ---- (in millions) PURCHASED OPTION CONTRACTS: Interest rate............................................... $301,685 $509,770 Equity...................................................... 24,021 59,571 Currency and commodity...................................... 180,859 186,748
The Firm utilizes replacement cost as its measure of derivative credit risk. Replacement cost, as reported in financial instruments owned, at fair value on the consolidated statements of financial condition, represents amounts receivable from various counterparties, net of any unrealized losses owed where management believes a legal right of setoff exists under an enforceable master netting agreement. Replacement cost for purchased option contracts is the market value of the contract. The Firm controls its credit risk through an established credit approval process, by monitoring counterparty limits, obtaining collateral where appropriate and, in some cases, using legally enforceable master netting agreements. F-14 151 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of derivative financial instruments used for trading purposes, computed in accordance with the Firm's netting policy, is set forth below:
AS OF NOVEMBER ------------------------------------------------ 1997 1998 ---------------------- ---------------------- ASSETS LIABILITIES ASSETS LIABILITIES ------- ----------- ------- ----------- (in millions) PERIOD END: Forward settlement contracts............................. $ 3,634 $ 3,436 $ 4,061 $ 4,201 Swap agreements.......................................... 4,269 5,358 10,000 11,475 Option contracts......................................... 5,787 7,166 7,140 9,038 ------- ------- ------- ------- Total.................................................... $13,690 $15,960 $21,201 $24,714 ======= ======= ======= ======= MONTHLY AVERAGE: Forward settlement contracts............................. $ 3,351 $ 3,162 $ 4,326 $ 3,979 Swap agreements.......................................... 3,397 4,020 7,340 8,158 Option contracts......................................... 4,511 5,059 6,696 8,958 ------- ------- ------- ------- Total.................................................... $11,259 $12,241 $18,362 $21,095 ======= ======= ======= =======
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:
AS OF NOVEMBER ------------------ 1997 1998 ---- ---- (in millions) Commercial paper....................................... $ 4,468 $10,008 Promissory notes(1).................................... 10,411 10,763 Bank loans and other(1)................................ 6,129 6,659 ------- ------- Total(2)............................................... $21,008 $27,430 ======= =======
- --------------- (1) As of November 1997 and November 1998, short-term borrowings included $2,454 million and $2,955 million of long-term borrowings maturing within one year, respectively. (2) Weighted average interest rates for total short-term borrowings, including commercial paper, were 5.43% as of November 1997 and 5.19% as of November 1998. The Firm maintains unencumbered securities with a market value in excess of all uncollateralized short-term borrowings. F-15 152 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. LONG-TERM BORROWINGS The Firm's long-term borrowings are set forth below:
AS OF NOVEMBER ------------------- 1997 1998 ---- ---- (in millions) Fixed-rate obligations(1) U.S. dollar denominated.............................. $ 5,217 $ 5,260 Non-U.S. dollar denominated.......................... 1,556 2,066 Floating-rate obligations(2) U.S. dollar denominated.............................. 8,342 11,858 Non-U.S. dollar denominated.......................... 552 722 ------- ------- Total long-term borrowings(3).......................... $15,667 $19,906 ======= =======
- --------------- (1) Interest rate ranges for U.S. dollar and non-U.S. dollar fixed rate obligations are set forth below:
AS OF NOVEMBER --------------- 1997 1998 ---- ---- U.S. dollar denominated High...................................................... 10.10% 10.10% Low....................................................... 5.82 5.74 Non-U.S. dollar denominated High...................................................... 9.51 9.51 Low....................................................... 1.90 1.90
(2) Floating interest rates generally are based on LIBOR, the U.S. treasury bill rate or the federal funds rate. Certain equity-linked and indexed instruments are included in floating rate obligations. (3) Long-term borrowings bear fixed or floating interest rates and have maturities that range from 1 to 30 years from the date of issue. Long-term borrowings by maturity date are set forth below:
AS OF NOVEMBER 1997 AS OF NOVEMBER 1998 ------------------------------ ------------------------------ U.S. NON-U.S. U.S. NON-U.S. DOLLAR DOLLAR TOTAL DOLLAR DOLLAR TOTAL ------ -------- ----- ------ -------- ----- (in millions) MATURITY DATES: 1998................. $ 1,159 $ 135 $ 1,294 $ -- $ -- $ -- 1999................. 2,436 451 2,887 2,443 199 2,642 2000................. 2,544 263 2,807 4,293 272 4,565 2001................. 971 142 1,113 2,261 148 2,409 2002................. 1,376 281 1,657 1,669 265 1,934 2003................. 941 109 1,050 1,409 412 1,821 2004-24.............. 4,132 727 4,859 5,043 1,492 6,535 ------- ------ ------- ------- ------ ------- Total................ $13,559 $2,108 $15,667 $17,118 $2,788 $19,906 ======= ====== ======= ======= ====== =======
F-16 153 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Firm enters into non-trading derivative contracts, such as interest rate and currency swap agreements, to effectively convert a substantial portion of its fixed rate long-term borrowings into U.S. dollar-based floating rate obligations. Accordingly, the aggregate carrying value of these long-term borrowings and related hedges approximates fair value. The effective weighted average interest rates for long-term borrowings, after hedging activities, are set forth below:
AS OF AS OF NOVEMBER 1997 NOVEMBER 1998 --------------- ---------------- AMOUNT RATE AMOUNT RATE ------ ---- ------ ---- ($ in millions) Long-term borrowings: Fixed-rate obligations................ $ 291 7.76% $ 222 8.09% Floating-rate obligations............. 15,376 5.84 19,684 5.63 ------- ------- Total long-term borrowings................ $15,667 5.88 $19,906 5.66 ======= =======
The notional amounts, fair value and carrying value of the related swap agreements used for non-trading purposes are set forth below:
AS OF NOVEMBER -------------- 1997 1998 ---- ---- (in millions) Notional amount........................................ $8,708 $10,206
AS OF NOVEMBER ----------------------------------------------- 1997 1998 ---------------------- --------------------- ASSETS LIABILITIES ASSETS LIABILITIES ------ ----------- ------ ----------- (in millions) Fair value.......................... $212 $4 $519 $7 Carrying value...................... 98 4 98 8
NOTE 6. COMMITMENTS AND CONTINGENCIES LITIGATION The Firm is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its businesses. Management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the Firm's financial condition, but might be material to the Firm's operating results for any particular period, depending, in part, upon the operating results for such period. LEASES The Firm has obligations under long-term non-cancelable lease agreements, principally for office space, expiring on various dates through 2016. Certain agreements are subject to periodic escalation charges for increases in real estate taxes and other charges. Minimum rental F-17 154 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) commitments, net of minimum sublease rentals, under non-cancelable leases for 1999 and the succeeding four years and rent charged to operating expense for the last three years are set forth below:
(in millions) MINIMUM RENTAL COMMITMENTS: 1999.......................................... $ 142 2000.......................................... 139 2001.......................................... 139 2002.......................................... 136 2003.......................................... 128 Thereafter.................................... 860 ------ Total............................... $1,544 ====== NET RENT EXPENSE: 1996.......................................... $ 83 1997.......................................... 87 1998.......................................... 104
OTHER COMMITMENTS The Firm acts as an investor in merchant banking transactions which includes making long-term investments in equity and debt securities in privately negotiated transactions, corporate acquisitions and real estate transactions, and in connection with a bridge loan fund. In connection with these activities, the Firm had commitments to invest up to $670 million and $1.39 billion in corporate and real estate merchant banking investment and bridge loan funds as of November 1997 and November 1998, respectively. In connection with loan origination and participation, the Firm had loan commitments of $5.23 billion and $1.51 billion as of November 1997 and November 1998, respectively. These commitments are agreements to lend to counterparties, have fixed termination dates and are contingent on all conditions to borrowing set forth in the contract having been met. Since these commitments may expire unused, the total commitment amount does not necessarily reflect the actual future cash flow requirements. The Firm also had outstanding guarantees of $786 million and $790 million relating to its fund management activities as of November 1997 and November 1998, respectively. The Firm had pledged securities of $23.60 billion and $22.88 billion as collateral for securities borrowed of approximately equivalent value as of November 1997 and November 1998, respectively. The Firm obtains letters of credit issued to counterparties by various banks that are used in lieu of securities or cash to satisfy various collateral and margin deposit requirements. Letters of credit outstanding were $10.13 billion and $8.81 billion as of November 1997 and November 1998, respectively. NOTE 7. EMPLOYEE BENEFIT PLANS The Firm sponsors various pension plans and certain other post-retirement benefit plans, primarily health care and life insurance, which cover most employees worldwide. The Firm also provides certain benefits to former or inactive employees prior to retirement. Plan benefits are F-18 155 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) primarily based on the employee's compensation and years of service. Pension costs are determined actuarially and are funded in accordance with the Internal Revenue Code. Plan assets are held in a trust and consist primarily of listed stocks and U.S. bonds. A summary of these plans is set forth below: DEFINED BENEFIT PENSION PLANS The components of pension expense/(income) are set forth below:
YEAR ENDED NOVEMBER -------------------- 1996 1997 1998 ---- ---- ---- (in millions) Service cost, benefits earned during the period............. $ 15 $ 15 $ 14 Interest cost on projected benefit obligation............... 8 10 11 Return on plan assets....................................... (24) (18) (14) Net amortization............................................ 14 4 (1) ---- ---- ---- Total pension expense............................. $ 13 $ 11 $ 10 ==== ==== ==== U.S. plans.................................................. $ (1) $ (3) $ (3) International plans......................................... 14 14 13 ---- ---- ---- Total pension expense............................. $ 13 $ 11 $ 10 ==== ==== ====
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.
YEAR ENDED NOVEMBER -------------------- 1996 1997 1998 ---- ---- ---- U.S. PLANS: Discount rate............................................... 7.50% 7.50% 7.00% Rate of increase in future compensation levels.............. 5.00 5.00 5.00 Expected long-term rate of return on plan assets............ 7.50 7.50 7.50 INTERNATIONAL PLANS: Discount rate............................................... 5.70 5.70 5.00 Rate of increase in future compensation levels.............. 5.30 5.30 4.75 Expected long-term rate of return on plan assets............ 7.00 7.00 6.00
F-19 156 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The funded status of the qualified plans is set forth below:
YEAR ENDED NOVEMBER -------------- 1997 1998 ---- ---- (in millions) Actuarial present value of vested benefit obligation........ $(149) $(203) ----- ----- Accumulated benefit obligation.............................. (151) (207) Effect of future salary increases........................... (16) (21) ----- ----- Projected benefit obligation................................ (167) (228) Plan assets at fair market value............................ 187 208 ----- ----- Projected benefit obligation less than/(greater than) plan assets.................................................... 20 (20) Unrecognized net loss....................................... 2 43 Unrecognized net transition gain............................ (20) (18) ----- ----- Prepaid pension cost, end of year........................... $ 2 $ 5 ===== ===== PREPAID PENSION COST: U.S. plans.................................................. $ 2 $ 5 International plans......................................... -- -- ----- ----- Prepaid pension cost, end of year........................... $ 2 $ 5 ===== =====
POST-RETIREMENT PLANS The Firm has unfunded post-retirement benefit plans that provide medical and life insurance for eligible retirees, employees and dependents. The Firm's accrued post-retirement benefit liability was $50 million and $53 million as of November 1997 and November 1998, respectively. The Firm's expense for these plans was $6 million, $7 million and $6 million in the years ended 1996, 1997 and 1998, respectively. POST-EMPLOYMENT PLANS Post-employment benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, and continuation of health care and life insurance coverage provided to former or inactive employees after employment but before retirement. The accrued but unfunded liability under the plans was $12 million and $10 million as of November 1997 and November 1998, respectively. The Firm's expense for these plans was $2 million in each of the fiscal years ended 1996, 1997 and 1998. DEFINED CONTRIBUTION PLANS The Firm contributes to employer sponsored U.S. and international defined contribution plans. The Firm's contribution to the U.S. plans was $39 million, $44 million and $48 million for the years ended 1996, 1997 and 1998, respectively. The Firm's contribution to the international plans was $7 million, $14 million and $10 million for the years ended 1996, 1997 and 1998, respectively. F-20 157 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. CAPITAL PARTNERS' CAPITAL Partners' capital includes both the general partner's and limited partners' capital and is subject to certain withdrawal restrictions. As of November 1998, the Firm had $6.31 billion in partners' capital. Managing directors that are participating limited partners in Group L.P. ("PLPs") who elect to retire are entitled to redeem their capital over a period of not less than five years following retirement, but often reinvest a significant portion of their capital as limited partners for longer periods. Partners' capital was reduced by $368 million in 1998 due to the termination of the Profit Participation Plans under which certain employees received payments based on the earnings of the Firm. Partners' capital allocated for income taxes and potential withdrawals represents management's estimate of net amounts currently distributable, primarily to the PLPs, under the Partnership Agreement, for items including, among other things, income taxes and capital withdrawals. Sumitomo Bank Capital Markets, Inc. ("SBCM"), a limited partner that had capital invested of approximately $834 million as of November 1998, may require Group L.P. to redeem its capital over a five-year period beginning no earlier than 2007. Kamehameha Activities Association ("KAA"), a limited partner that had capital invested of approximately $757 million as of November 1998, may require Group L.P. to redeem $391 million of its capital over a five-year period beginning no earlier than 2010 and $366 million of its capital over a five-year period beginning no earlier than 2013. Institutional Limited Partners (other than SBCM and KAA) had aggregate capital invested of $755 million as of November 1998. Group L.P. must repay these Institutional Limited Partners' capital as follows: $270 million in six equal annual installments commencing in December 2001, $257 million in March 2005, $146 million in November 2013 and $82 million in November 2023. Group L.P. may defer any required redemption of capital if the redemption would cause a subsidiary subject to regulatory authority to be in violation of the rules of such authority or if the withdrawal of funds to satisfy the redemption from an unregulated subsidiary would have a material effect on such subsidiary. REGULATED SUBSIDIARIES GS&Co. is a registered U.S. broker-dealer subsidiary, which is subject to the Securities and Exchange Commission's "Uniform Net Capital Rule", and has elected to compute its net capital in accordance with the "Alternative Net Capital Requirement" of that rule. As of November 1997 and November 1998, GS&Co. had regulatory net capital, as defined, of $1.77 billion and $3.25 billion, respectively, which exceeded the amounts required by $1.37 billion and $2.70 billion, respectively. GSI, a registered U.K. broker-dealer and subsidiary of Group L.P., is subject to the capital requirements of the Securities and Futures Authority Limited and GSJL, a Tokyo-based broker-dealer, is subject to the capital requirements of the Japanese Ministry of Finance and the Financial Supervisory Agency. As of November 1997 and November 1998, GSI and GSJL were in compliance with their local capital adequacy requirements. Certain other subsidiaries of the Firm are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of November 1997 and November 1998, these subsidiaries were in compliance with their local capital adequacy requirements. F-21 158 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9. GEOGRAPHIC DATA The Firm's activities as an investment banking and securities firm constitute a single business segment pursuant to SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise". Due to the highly integrated nature of international financial markets, the Firm manages its business based on the profitability of the enterprise as a whole, not by geographic region. Accordingly, management believes that profitability by geographic region is not necessarily meaningful. The total revenues, net revenues, pre-tax earnings and identifiable assets of Group L.P. and its consolidated subsidiaries by geographic region are summarized below:
YEAR ENDED NOVEMBER ----------------------------- 1996 1997 1998 ---- ---- ---- (in millions) TOTAL REVENUES: Americas(1)......................................... $12,864 $15,091 $15,972 Europe.............................................. 3,762 4,463 5,156 Asia................................................ 663 879 1,350 ------- ------- ------- Total............................................... $17,289 $20,433 $22,478 ======= ======= ======= NET REVENUES: Americas(1)......................................... $ 4,397 $ 5,104 $ 5,436 Europe.............................................. 1,355 1,739 2,180 Asia................................................ 377 604 904 ------- ------- ------- Total............................................... $ 6,129 $ 7,447 $ 8,520 ======= ======= ======= PRE-TAX EARNINGS: Americas(1)......................................... $ 1,963 $ 2,061 $ 1,527 Europe.............................................. 536 683 913 Asia................................................ 107 270 481 ------- ------- ------- Total............................................... $ 2,606 $ 3,014 $ 2,921 ======= ======= =======
F-22 159 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF NOVEMBER ----------------------------------- 1996 1997 1998 ---- ---- ---- (in millions) IDENTIFIABLE ASSETS: Americas(1).......................................... $ 171,345 $ 206,312 $ 229,412 Europe............................................... 62,172 80,551 106,721 Asia................................................. 6,894 13,240 19,883 Eliminations......................................... (88,365) (121,702) (138,636) --------- --------- --------- Total................................................ $ 152,046 $ 178,401 $ 217,380 ========= ========= =========
- --------------- (1) Americas principally represents the United States. NOTE 10. QUARTERLY RESULTS (UNAUDITED)
YEAR ENDED NOVEMBER 1996 ------------------------------------ 1ST 2ND 3RD 4TH --- --- --- --- (in millions) Total revenues....................................... $4,030 $4,656 $4,313 $4,290 Interest expense, principally on short-term funding............................................ 2,566 2,986 2,845 2,763 ------ ------ ------ ------ Revenues, net of interest expense.................... 1,464 1,670 1,468 1,527 Operating expenses................................... 899 961 879 784 ------ ------ ------ ------ Pre-tax earnings..................................... 565 709 589 743 Provision for taxes.................................. 21 23 31 132 ------ ------ ------ ------ Net earnings.................................... $ 544 $ 686 $ 558 $ 611 ====== ====== ====== ======
YEAR ENDED NOVEMBER 1997 ------------------------------------ 1ST 2ND 3RD 4TH --- --- --- --- (in millions) Total revenues....................................... $4,932 $4,608 $5,957 $4,936 Interest expense, principally on short-term funding............................................ 2,975 2,934 3,727 3,350 ------ ------ ------ ------ Revenues, net of interest expense.................... 1,957 1,674 2,230 1,586 Operating expenses................................... 1,052 1,064 1,298 1,019 ------ ------ ------ ------ Pre-tax earnings..................................... 905 610 932 567 Provision for taxes.................................. 44 99 60 65 ------ ------ ------ ------ Net earnings.................................... $ 861 $ 511 $ 872 $ 502 ====== ====== ====== ======
YEAR ENDED NOVEMBER 1998 ------------------------------------ 1ST 2ND 3RD 4TH --- --- --- --- (in millions) Total revenues....................................... $5,903 $6,563 $5,735 $4,277 Interest expense, principally on short-term funding............................................ 3,431 3,574 3,591 3,362 ------ ------ ------ ------ Revenues, net of interest expense.................... 2,472 2,989 2,144 915 Operating expenses................................... 1,450 1,952 1,389 808 ------ ------ ------ ------ Pre-tax earnings..................................... 1,022 1,037 755 107 Provision for taxes.................................. 138 190 102 63 ------ ------ ------ ------ Net earnings.................................... $ 884 $ 847 $ 653 $ 44 ====== ====== ====== ======
F-23 160 REVIEW REPORT OF INDEPENDENT ACCOUNTANTS To the Partners, The Goldman Sachs Group, L.P.: We have reviewed the condensed consolidated statement of financial condition of The Goldman Sachs Group, L.P. and Subsidiaries (the "Firm") as of February 26, 1999, and the related condensed consolidated statements of earnings, and cash flows for the three months ended February 26, 1999 and February 27, 1998 and the related condensed consolidated statement of changes in partners' capital for the three months ended February 26, 1999 (included on pages F-25 to F-33 of this prospectus). These financial statements are the responsibility of the Firm's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York April 9, 1999. F-24 161 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED FEBRUARY ------------------ 1998 1999 ------- ------- (unaudited) (in millions) REVENUES: Investment banking.......................................... $ 633 $ 902 Trading and principal investments........................... 1,115 1,398 Asset management and securities services.................... 512 543 Interest income............................................. 3,643 3,013 ------ ------ Total revenues.................................... 5,903 5,856 Interest expense, principally on short-term funding......... 3,431 2,861 ------ ------ Revenues, net of interest expense................. 2,472 2,995 OPERATING EXPENSES: Compensation and benefits................................... 1,100 1,275 Brokerage, clearing and exchange fees....................... 93 111 Market development.......................................... 54 77 Communications and technology............................... 58 78 Depreciation and amortization............................... 42 97 Occupancy................................................... 44 78 Professional services and other............................. 59 91 ------ ------ Total operating expenses.......................... 1,450 1,807 Pre-tax earnings............................................ 1,022 1,188 Provision for taxes......................................... 138 181 ------ ------ Net earnings................................................ $ 884 $1,007 ====== ======
The accompanying notes are an integral part of these condensed consolidated financial statements. F-25 162 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF FEBRUARY 1999 ------------- (unaudited) (in millions) ASSETS: Cash and cash equivalents................................... $ 3,345 Cash and securities segregated in compliance with U.S. federal and other regulations (principally U.S. government obligations).............................................. 7,361 Receivables from brokers, dealers and clearing organizations............................................. 4,624 Receivables from customers and counterparties............... 19,311 Securities borrowed......................................... 74,036 Securities purchased under agreements to resell............. 41,776 Right to receive securities................................. 7,280 Financial instruments owned, at fair value: Commercial paper, certificates of deposit and time deposits............................................... 1,413 U.S. government, federal agency and sovereign obligations............................................ 26,580 Corporate debt............................................ 9,080 Equities and convertible debentures....................... 11,298 State, municipal and provincial obligations............... 1,021 Derivative contracts...................................... 20,441 Physical commodities...................................... 688 Other assets................................................ 2,370 -------- $230,624 ======== LIABILITIES AND NET WORTH: Short-term borrowings, including commercial paper........... $ 33,863 Payables to brokers, dealers and clearing organizations..... 1,294 Payables to customers and counterparties.................... 32,143 Securities loaned........................................... 24,770 Securities sold under agreements to repurchase.............. 36,906 Obligation to return securities............................. 9,078 Financial instruments sold, but not yet purchased, at fair value: U.S. government, federal agency and sovereign obligations............................................ 29,391 Corporate debt............................................ 1,579 Equities and convertible debentures....................... 8,238 Derivative contracts...................................... 22,677 Physical commodities...................................... 267 Other liabilities and accrued expenses...................... 3,022 Long-term borrowings........................................ 20,405 -------- 223,633 Commitments and contingencies Accumulated other comprehensive income...................... (37) Partners' capital allocated for income taxes and potential withdrawals............................................... 416 Partners' capital........................................... 6,612 -------- $230,624 ========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-26 163 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
PERIOD ENDED FEBRUARY 1999 -------- (unaudited) (in millions) Partners' capital, beginning of period...................... $6,310 Additions: Net earnings.............................................. 1,007 Capital contributions..................................... 48 ------ Total additions................................... 1,055 Deductions: Returns on capital and certain distributions to partners............................................... (171) Transfers to partners' capital allocated for income taxes and potential withdrawals, net......................... (582) ------ Total deductions.................................. (753) ------ Partners' capital, end of period............................ $6,612 ======
The accompanying notes are an integral part of these condensed consolidated financial statements. F-27 164 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FEBRUARY ------------------- 1998 1999 -------- ------- (unaudited) (in millions) Cash flows from operating activities: Net earnings.............................................. $ 884 $ 1,007 Non-cash items included in net earnings: Depreciation and amortization.......................... 42 97 Deferred income taxes.................................. 8 5 Changes in operating assets and liabilities: Cash and securities segregated in compliance with U.S. federal and other regulations......................... (191) 526 Net receivables from brokers, dealers and clearing organizations......................................... 233 260 Net payables to customers and counterparties........... 1,950 (8,394) Securities borrowed, net............................... (12,579) (1,225) Financial instruments owned, at fair value............. (51,461) (2,267) Financial instruments sold, but not yet purchased, at fair value............................................ 14,601 8,205 Other, net............................................. (759) (617) -------- ------- Net cash used for operating activities............... (47,272) (2,403) Cash flows from investing activities: Property, leasehold improvements and equipment......... (63) (103) Financial instruments owned, at fair value............. (45) 58 -------- ------- Net cash used for investing activities............... (108) (45) -------- ------- Cash flows from financing activities: Short-term borrowings, net............................. 11,500 2,567 Securities sold under agreements to repurchase, net.... 34,157 (3,643) Issuance of long-term borrowings....................... 5,630 4,468 Repayment of long-term borrowings...................... (608) (105) Capital contributions.................................. 6 48 Returns on capital and certain distributions to partners.............................................. (157) (171) Partners' capital allocated for income taxes and potential withdrawals................................. (309) (207) -------- ------- Net cash provided by financing activities............ 50,219 2,957 -------- ------- Net increase in cash and cash equivalents.............. 2,839 509 Cash and cash equivalents, beginning of period.............. 1,328 2,836 -------- ------- Cash and cash equivalents, end of period.................... $ 4,167 $ 3,345 ======== =======
- --------------- SUPPLEMENTAL DISCLOSURES: Cash payments for interest approximated the related expense for each of the fiscal periods presented. Payments of income taxes were not material. The increases in total assets and liabilities related to the provisions of Statement of Financial Accounting Standards No. 125 that were deferred under Statement of Financial Accounting Standards No. 127 were excluded from the consolidated statements of cash flows as they represented non-cash items. The accompanying notes are an integral part of these condensed consolidated financial statements. F-28 165 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. DESCRIPTION OF BUSINESS The Goldman Sachs Group, L.P., a Delaware limited partnership ("Group L.P."), together with its consolidated subsidiaries (collectively, the "Firm"), is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base. The Firm's activities are divided into three principal business lines: - Investment Banking, which includes financial advisory services and underwriting; - Trading and Principal Investments, which includes fixed income, currency and commodities ("FICC"), equities and principal investments (principal investments reflect primarily the Firm's investments in its merchant banking funds); and - Asset Management and Securities Services, which includes asset management, securities services and commissions. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Group L.P. and its U.S. and international subsidiaries including Goldman, Sachs & Co. ("GS&Co.") and J. Aron & Company in New York, Goldman Sachs International ("GSI") in London and Goldman Sachs (Japan) Ltd. ("GSJL") in Tokyo. The consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included elsewhere in this prospectus. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require management to make estimates and assumptions regarding trading inventory valuations, partner retirements, the outcome of pending litigation and other matters that affect the consolidated financial statements and related disclosures. These estimates and assumptions are based on judgment and available information and, consequently, actual results could be materially different from these estimates. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim period operating results may not be indicative of the operating results for a full year. Unless otherwise stated herein, all references to February 1998 and February 1999 refer to the Firm's fiscal quarter ended, or the date, as the context requires, February 27, 1998 and February 26, 1999, respectively. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and presentation of comprehensive income and its components in the financial statements. This Statement is effective for fiscal years beginning after December 15, 1997 and was adopted by the Firm in the first quarter of 1999. The components of comprehensive income are set forth below: F-29 166 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED)
THREE MONTHS ENDED FEBRUARY ------------------ 1998 1999 ------- ------- (in millions) Net earnings............................................. $ 884 $1,007 Other comprehensive loss Foreign currency translation adjustment................ (5) (6) ------ ------ Total comprehensive income............................... $ 879 $1,001 ====== ======
NOTE 3. FINANCIAL INSTRUMENTS Gains and losses on financial instruments and commission income and related expenses are recorded on a trade date basis in the consolidated statements of earnings. For purposes of the consolidated statement of financial condition only, purchases and sales of financial instruments, including agency transactions, are generally recorded on a settlement date basis. Recording such transactions on a trade date basis would not result in a material adjustment to the consolidated statement of financial condition. Substantially all financial instruments used in the Firm's trading and non-trading activities are carried at fair value or amounts that approximate fair value and unrealized gains and losses are recognized in earnings. Fair value is based generally on listed market prices or broker or dealer price quotations. To the extent that prices are not readily available, fair value is based on either internal valuation models or management's estimate of amounts that could be realized under current market conditions, assuming an orderly liquidation over a reasonable period of time. Certain over-the-counter derivative instruments are valued using pricing models that consider, among other factors, current and contractual market prices, time value, and yield curve and/or volatility factors of the underlying positions. The Firm's Trading and Principal Investments business facilitates customer transactions and takes proprietary positions through market-making in and trading of securities, currencies, commodities and swaps and other derivatives. Derivative financial instruments are often used to hedge cash instruments or other derivative financial instruments as an integral part of the Firm's strategies. As a result, it is necessary to view the results of any activity on a fully-integrated basis, including cash positions, the effect of related derivatives and the financing of the underlying positions. Net revenues represent total revenues less allocations of interest expense to specific securities, commodities and other positions in relation to the level of financing incurred by each. The following table sets forth the net revenues of the Firm's Trading and Principal Investments business:
THREE MONTHS ENDED FEBRUARY ------------------ 1998 1999 ------- ------- (in millions) FICC..................................................... $ 741 $ 876 Equities................................................. 365 455 Principal investments.................................... 76 26 ------ ------ Total Trading and Principal Investments.................. $1,182 $1,357 ====== ======
F-30 167 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) DERIVATIVE ACTIVITIES Most of the Firm's derivative transactions are entered into for trading purposes. The Firm uses derivatives in its trading activities to facilitate customer transactions, to take proprietary positions and as a means of risk management. The Firm also enters into non-trading derivative contracts to manage the interest rate and currency exposure on its long-term borrowings. Derivative contracts are financial instruments, such as futures, forwards, swaps or option contracts, that derive their value from underlying assets, indices, reference rates or a combination of these factors. Derivatives may involve future commitments to purchase or sell financial instruments or commodities, or to exchange currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, securities, commodities or indices. Derivative contracts exclude certain cash instruments, such as mortgage-backed securities, interest-only and principal-only obligations and indexed debt instruments, that derive their values or contractually required cash flows from the price of some other security or index. Derivatives also exclude option features that are embedded in cash instruments, such as the conversion features and call provisions embedded in bonds. The Firm has elected to include commodity-related contracts in its derivative disclosure, although not required to do so, as these contracts may be settled in cash or are readily convertible into cash. Derivatives used for trading purposes are reported at fair value and are included in "Derivative contracts" on the consolidated statement of financial condition. Gains and losses on derivatives used for trading purposes are included in "Trading and Principal Investments" on the consolidated statements of earnings. The Firm utilizes replacement cost as its measure of derivative credit risk. Replacement cost, as reported in financial instruments owned, at fair value on the consolidated statement of financial condition, represents amounts receivable from various counterparties, net of any unrealized losses owed where management believes a legal right of setoff exists under an enforceable master netting agreement. Replacement cost for purchased option contracts is the market value of the contract. The Firm controls its credit risk through an established credit approval process, by monitoring counterparty limits, obtaining collateral where appropriate and, in some cases, using legally enforceable master netting agreements. The fair value of derivative financial instruments used for trading purposes, computed in accordance with the Firm's netting policy, is set forth below:
AS OF FEBRUARY 1999 ---------------------- ASSETS LIABILITIES ------ ----------- (in millions) Forward settlement contracts................................ $ 3,991 $ 3,725 Swap agreements............................................. 9,233 10,460 Option contracts............................................ 7,140 8,484 ------- ------- Total....................................................... $20,364 $22,669 ======= =======
Derivatives used for non-trading purposes include interest rate futures contracts and interest rate and currency swap agreements, which are primarily utilized to convert a substantial portion of the Firm's fixed rate debt into U.S. dollar-based floating rate obligations. Gains and losses on these transactions are generally deferred and recognized as adjustments to interest expense F-31 168 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) over the life of the derivative contract. Gains and losses resulting from the early termination of derivatives used for non-trading purposes are generally deferred and recognized over the remaining life of the underlying debt. If the underlying debt is terminated prior to its stated maturity, gains and losses on these transactions, including the associated hedges, are recognized in earnings immediately. The fair value and carrying value of derivatives used for non- trading purposes are set forth below:
AS OF FEBRUARY 1999 --------------------- ASSETS LIABILITIES ------ ----------- (in millions) Fair value........................................ $319 $13 Carrying value.................................... 77 8
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:
AS OF FEBRUARY 1999 ------------- (in millions) Commercial paper............................................ $10,740 Promissory notes*........................................... 10,893 Bank loans and other*....................................... 12,230 ------- Total....................................................... $33,863 =======
- --------------- * As of February 1999, short-term borrowings included $6,285 million of long-term borrowings maturing within one year. The Firm maintains unencumbered securities with a market value in excess of all uncollateralized short-term borrowings. NOTE 5. REGULATED SUBSIDIARIES GS&Co. is a registered U.S. broker-dealer subsidiary, which is subject to the Securities and Exchange Commission's "Uniform Net Capital Rule", and has elected to compute its net capital in accordance with the "Alternative Net Capital Requirement" of that rule. As of February 1999, GS&Co. had regulatory net capital, as defined, of $2.89 billion, which exceeded the amount required by $2.40 billion. GSI, a registered U.K. broker-dealer and subsidiary of Group L.P., is subject to the capital requirements of the Securities and Futures Authority Limited and GSJL, a Tokyo-based broker-dealer, is subject to the capital requirements of the Japanese Ministry of Finance and the Financial Supervisory Agency. As of February 1999, GSI and GSJL were in compliance with their local capital adequacy requirements. F-32 169 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) Certain other subsidiaries of the Firm are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of February 1999, these subsidiaries were in compliance with their local capital adequacy requirements. NOTE 6. CONTINGENCIES The Firm is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its businesses. Management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the Firm's financial condition, but might be material to the Firm's operating results for any particular period, depending, in part, upon the operating results for such period. F-33 170 UNDERWRITING The Goldman Sachs Group, Inc. and the underwriters for this offering named below have entered into an underwriting agreement with respect to the Notes. Subject to certain conditions, each underwriter has severally agreed to purchase the number of Notes indicated in the following table. Goldman Sachs International is the representative of the underwriters.
Underwriters Principal Amount of Notes ------------ ------------------------- Goldman Sachs International.................... -------------------- Total................................ (euro) 1,000,000,000 ====================
------------------------ Notes sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any Notes sold by the underwriters to securities dealers may be sold at a discount of up to (euro) per Note from the initial public offering price. Any such securities dealers may resell any Notes purchased from the underwriters to other brokers or dealers at a discount of up to (euro) per Note from the initial public offering price. If all the Notes are not sold at the initial offering price, the representative may change the offering price and the other selling terms. The underwriters intend to offer the Notes for sale primarily in Europe. Goldman Sachs International, acting through Goldman, Sachs & Co. as its U.S. selling agent, may also offer the Notes for sale in the United States. The offer and sale of the Notes by the underwriters, including Goldman, Sachs & Co., is subject to the underwriters having received and accepted the Notes from The Goldman Sachs Group, Inc. In addition, the underwriters, including Goldman, Sachs & Co., may, in their sole discretion, reject all or any part of any order for the Notes that is received by them. The underwriters expect to deliver the Notes through Cedel and Euroclear on the date indicated on the front cover page of this prospectus in exchange for payment for the Notes, in euros and in immediately available funds. The Notes are a new issue of securities with no established trading market. The Goldman Sachs Group, Inc. cannot assure you that any trading market for the Notes will develop. The Goldman Sachs Group, Inc. has been advised by Goldman Sachs International and Goldman, Sachs & Co. that they intend to make a market in the Notes. Other affiliates of The Goldman Sachs Group, Inc. may also do so. Neither Goldman Sachs International, Goldman, Sachs & Co. nor any other affiliate, however, is obligated to do so and any of them may discontinue market-making at any time without notice. No assurance can be given as to the liquidity or the trading market for the Notes. In connection with this offering, the underwriters may purchase and sell Notes in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater principal amount of Notes than they are required to purchase in this offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the Notes while this offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representative has repurchased Notes sold by or for the account of U-1 171 that underwriter in stabilizing or short-covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the Notes. As a result, the price of the Notes may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may occur in the over-the-counter market or otherwise. The Goldman Sachs Group, Inc. estimates that its share of the total expenses of this offering, excluding underwriting discounts and commissions, whether paid to Goldman Sachs International or any other underwriter, will be approximately $ . The Goldman Sachs Group, Inc. has agreed to indemnify the several underwriters and Goldman, Sachs & Co. against certain liabilities, including liabilities under the Securities Act of 1933. Goldman, Sachs & Co. is a subsidiary of The Goldman Sachs Group, Inc. Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. imposes certain requirements when an NASD member such as Goldman, Sachs & Co. distributes an affiliated company's debt securities. Goldman, Sachs & Co. has advised The Goldman Sachs Group, Inc. that the portion of this offering made through Goldman, Sachs & Co. will comply with the applicable requirements of Rule 2720. Goldman, Sachs & Co. has also informed The Goldman Sachs Group, Inc. that it does not expect sales made through it in this offering to accounts over which it exercises discretionary authority to exceed five percent of the aggregate initial offering price of the Notes. No such sales will be made without the prior written approval of the customer to which such account relates. This prospectus may be used by Goldman, Sachs & Co. and other dealers in connection with offers and sales of Notes to persons located in the United States. These offers and sales may involve Notes initially sold by the underwriters in this offering outside the United States. Each underwriter has also agreed that: (a) it has not offered or sold and prior to the date six months after the date of original issue of the Notes will not offer or sell any Notes to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances that have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (b) it has complied, and will comply, with all applicable provisions of the Financial Services Act of 1986 of Great Britain with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom; and (c) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of the Notes to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom the document may otherwise lawfully be issued or passed on. This prospectus has been approved for distribution in the United Kingdom by Goldman Sachs International, a firm regulated by the Securities and Futures Authority for the conduct of investment business in the United Kingdom. This offer is being made to persons within applicable exemptions of the Public Offers of Securities Regulations 1995 and, accordingly, no offer is being made to the public pursuant to those regulations. The Goldman Sachs Group, Inc. does not have a permanent place of business in the United Kingdom and is not authorized under the Financial Services Act 1986. A different regulatory regime, including compensation arrangements, from that applicable in the United Kingdom will be applicable for any dealings with The Goldman Sachs Group, Inc. and its non-United Kingdom affiliates. U-2 172 GENERAL INFORMATION The board of directors of The Goldman Sachs Group, Inc. authorized the issuance of the Notes by a resolution dated March 29, 1999. Euroclear and Cedel have accepted the Notes for clearance through their systems. The Common Code for the Notes is , the International Security Identification Number (ISIN) for the Notes is and the CUSIP number for the Notes is . The Goldman Sachs Group, Inc. has applied to list the Notes on the Luxembourg Stock Exchange. Prior to the listing, a legal notice relating to the Notes with The Goldman Sachs Group, Inc.'s certificate of incorporation and by-laws will be registered with the Greffier en Chef du Tribunal d'Arrondissement de et a Luxembourg, where copies may be obtained upon request. As long as the Notes are listed on the Luxembourg Stock Exchange, The Goldman Sachs Group, Inc. will maintain a paying agent in Luxembourg. The initial paying agent and listing agent in Luxembourg is Banque Internationale a Luxembourg. As long as any Notes remain outstanding, you may obtain copies of our certificate of incorporation, by-laws and most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K during normal business hours on any weekday (except Saturdays, Sundays and public holidays) at the specified office of, or upon written request to, the trustee and, as long as the Notes are listed on the Luxembourg Stock Exchange and its rules require, free of charge at the office of the listing agent in Luxembourg. In addition, a copy of the indenture will be available for inspection at those offices during those hours. The Goldman Sachs Group, Inc. has taken all reasonable care to ensure that the information with regard to Goldman Sachs and the Notes stated in this prospectus is true and accurate in all material respects as of the date of this prospectus and that there are no other material facts the omission of which would make the information contained in this prospectus as of its date misleading in any material respect, and The Goldman Sachs Group, Inc. accepts responsibility accordingly. Since February 26, 1999 to the date of this prospectus, there has been no material change in our capitalization as set forth above in the table under "Capitalization", other than as indicated in or contemplated by this prospectus. As of the date of this prospectus and except as indicated in or contemplated by this prospectus, there has been no material adverse change in the financial position of Goldman Sachs as set forth in its audited financial statements included in this prospectus since the date of those audited financial statements. Various legal actions and proceedings involving Goldman Sachs are currently pending. Management does not anticipate that any losses resulting from those actions and proceedings would be material with respect to Goldman Sachs. U-3 173 PRINCIPAL EXECUTIVE OFFICE OF THE ISSUER The Goldman Sachs Group, Inc. 85 Broad Street New York, New York 10004 TRUSTEE, REGISTRAR, TRANSFER AGENT AND PRINCIPAL PAYING AGENT The Bank of New York 101 Barclay Street New York, New York 10286 COMMON DEPOSITARY FOR CEDEL AND EUROCLEAR The Bank of New York Depository (Nominees) Limited 3 Birchin Lane London EC3 V9BY, England LISTING AGENT, TRANSFER AGENT AND PAYING AGENT IN LUXEMBOURG Banque Internationale a Luxembourg 69, route d'Esch L-1470 Luxembourg LEGAL ADVISORS
TO THE ISSUER TO THE UNDERWRITERS Sullivan & Cromwell Cleary, Gottlieb, Steen & Hamilton 125 Broad Street One Liberty Plaza New York, New York 10004 New York, New York 10006
INDEPENDENT AUDITORS FOR THE ISSUER PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York 10036 174 - ------------------------------------------------------- - ------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell or a solicitation of an offer to buy the securities it describes, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------ TABLE OF CONTENTS
Page ---- Our Business Principles............... 3 Prospectus Summary.................... 4 Risk Factors.......................... 12 Use of Proceeds....................... 26 Pro Forma Consolidated Financial Information......................... 27 Capitalization........................ 34 Selected Consolidated Financial Data................................ 36 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 38 Industry and Economic Outlook......... 63 Business.............................. 66 Management............................ 91 Principal Shareholders................ 104 Certain Relationships and Related Transactions........................ 106 Description of Notes We Are Offering............................ 111 United States Taxation................ 127 Employee Retirement Income Security Act................................. 132 Validity of the Notes................. 132 Experts............................... 132 Available Information................. 134 Index to Consolidated Financial Statements.......................... F-1 Underwriting.......................... U-1 General Information................... U-3
------------------ Through and including , 1999 (the 40th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------- - ------------------------------------------------------- - ------------------------------------------------------- - ------------------------------------------------------- E1,000,000,000 THE GOLDMAN SACHS GROUP, INC. % Notes due 2009 ------------------ [GOLDMAN SACHS LOGO] ------------------ GOLDMAN SACHS INTERNATIONAL Representative of the Underwriters ------------------------------------------------------- ------------------------------------------------------- 175 The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. [Alternate Front Cover Page for Market-Making Prospectus] Subject to Completion. Dated April 30, 1999. THE GOLDMAN SACHS GROUP, INC. [GOLDMAN SACHS LOGO] % E Notes due 2009 ------------------------ The Goldman Sachs Group, Inc. will pay interest on the Notes on May 15 and November 15 of each year, beginning on November 15, 1999. Goldman Sachs may redeem the Notes before their stated maturity if the principal amount of all outstanding Notes falls below E100,000,000 or if Goldman Sachs becomes obligated to pay additional amounts to non-U.S. investors due to changes in U.S. withholding tax requirements, in either case, at a price equal to 100% of the principal amount redeemed plus accrued interest to the redemption date. The Notes have been issued only in book-entry form through the Cedel and Euroclear systems. Goldman Sachs has filed an application to list the Notes on the Luxembourg Stock Exchange. See "Risk Factors" beginning on page 12 to read about factors you should consider before investing in the Notes. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ Goldman Sachs International and Goldman, Sachs & Co., subsidiaries of Goldman Sachs, will use this prospectus in connection with offers and sales of the Notes in market-making transactions. Offers and sales in the United States will be made by Goldman, Sachs & Co., acting on its own behalf or as U.S. selling agent for Goldman Sachs International. GOLDMAN SACHS INTERNATIONAL ------------------------ Prospectus dated , 1999. 176 [Alternate Page for Market-Making Prospectus] PLAN OF DISTRIBUTION Goldman Sachs International and Goldman, Sachs & Co., each subsidiaries of The Goldman Sachs Group, Inc., will use this prospectus in connection with offers and sales of the Notes in market-making transactions from time to time. These transactions may occur in the open market or may be privately negotiated, at prices related to prevailing market prices at the time of sale or at negotiated prices. In these transactions, Goldman Sachs International and Goldman, Sachs & Co. may act as principal or agent, including as agent for the counterparty in a transaction in which they act as principal or as agent for both counterparties in a transaction in which they do not act as principal. Goldman Sachs International and Goldman, Sachs & Co. may receive compensation in the form of discounts and commissions, including from both counterparties in some transactions. Market-making offers and sales in the United States will be made by Goldman, Sachs & Co., acting either on its own behalf or as U.S. selling agent for Goldman Sachs International. Other affiliates of The Goldman Sachs Group, Inc. may also engage in transactions of this kind and may use this prospectus for this purpose. Neither Goldman Sachs International, Goldman, Sachs & Co. nor any other affiliate of The Goldman Sachs Group, Inc., however, is obligated to make a market in the Notes and may stop doing so at any time without notice. The Goldman Sachs Group, Inc. does not expect to receive the proceeds from market-making transactions. The Goldman Sachs Group, Inc. does not expect Goldman Sachs International, Goldman, Sachs & Co. or any other affiliate that engages in these transactions to pay the proceeds from their market-making resales to The Goldman Sachs Group, Inc. Goldman, Sachs & Co. does not expect the amount of Notes held, as a result of market-making resales, by accounts over which it exercises discretionary authority to exceed, at any time, five percent of the aggregate initial offering price of the Notes. Goldman Sachs International acted as the lead underwriter, and Goldman, Sachs & Co. acted as U.S. selling agent for the underwriters, in connection with the original offering and sale of the Notes and received underwriting compensation in the form of a discount totaling approximately E in the aggregate. U-1 177 In connection with the original offering and sale of the Notes, each underwriter has also agreed that (a) it has not offered or sold and prior to the date six months after the date of original issue of the Notes will not offer or sell any Notes to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances that have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (b) it has complied, and will comply, with all applicable provisions of the Financial Services Act of 1986 of Great Britain with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom; and (c) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of the Notes to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom the document may otherwise lawfully be issued or passed on. This prospectus has been approved for distribution in the United Kingdom by Goldman Sachs International, a firm regulated by the Securities and Futures Authority for the conduct of investment business in the United Kingdom. This offer is being made to persons within applicable exemptions of the Public Offers of Securities Regulations 1995 and, accordingly, no offer is being made to the public pursuant to those regulations. The Goldman Sachs Group, Inc. does not have a permanent place of business in the United Kingdom and is not authorized under the Financial Services Act 1986. A different regulatory regime, including compensation arrangements, from that applicable in the United Kingdom will be applicable for any dealings with The Goldman Sachs Group, Inc. and its non-United Kingdom affiliates. In this prospectus the term "offering" means the initial offering of the Notes, which occurred in connection with their original issuance on or about , 1999. This term does not refer to any subsequent resale of the Notes by Goldman Sachs International, Goldman, Sachs & Co. or our other affiliates in market-making transactions. U-2 178 - ------------------------------------------------------- - ------------------------------------------------------- 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
Page ---- Our Business Principles............... 3 Prospectus Summary.................... 4 Risk Factors.......................... 12 Use of Proceeds....................... 26 Pro Forma Consolidated Financial Information......................... 27 Capitalization........................ 34 Selected Consolidated Financial Data................................ 36 Management's Discussion And Analysis of Financial Condition And Results of Operations....................... 38 Industry and Economic Outlook......... 63 Business.............................. 66 Management............................ 91 Principal Shareholders................ 104 Certain Relationships and Related Transactions........................ 106 Description of Notes We Are Offering............................ 111 United States Taxation................ 127 Employee Retirement Income Security Act................................. 132 Validity of the Notes................. 132 Experts............................... 132 Available Information................. 134 Index to Consolidated Financial Statements.......................... F-1 Plan of Distribution.................. U-1 General Information................... U-3
- ------------------------------------------------------- - ------------------------------------------------------- [Alternate Back Cover Page for Market-Making Prospectus] - ------------------------------------------------------- - ------------------------------------------------------- THE GOLDMAN SACHS GROUP, INC. % Notes due 2009 ------------------ [GOLDMAN SACHS LOGO] ------------------ GOLDMAN SACHS INTERNATIONAL ------------------------------------------------------- ------------------------------------------------------- 179 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is a statement of the expenses (all of which are estimated other than the SEC registration fee and the NASD fees), other than underwriting discounts and commissions, to be incurred in connection with the distribution of the securities registered under this registration statement.
AMOUNT TO BE PAID ---------- Securities and Exchange Commission registration fee......... $294,402 NASD fees................................................... 30,500 Legal fees and expenses..................................... 600,000 Listing fees................................................ 8,400 Fees and expenses of qualification under state securities laws (including legal fees)............................... 10,000 Accounting fees and expenses................................ * Printing and engraving fees................................. * Rating agency fees.......................................... 15,000 Trustee's fees and expenses................................. 10,000 Miscellaneous............................................... * -------- Total.................................................. $ * ========
- --------------- * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee of or agent to the registrant. The statute provides that it is not exclusive of other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise. Section 6.4 of the registrant's by-laws provides for indemnification by the registrant of any director or officer (as such term is defined in the by-laws) of the registrant who is or was a director of any of its subsidiaries, is or was a member of the Shareholders' Committee (as defined in the prospectus included in this registration statement) acting pursuant to the shareholders' agreement (as defined in the prospectus included in this registration statement) or, at the request of the registrant, is or was serving as a director or officer of, or in any other capacity for, any other enterprise, to the fullest extent permitted by law. The by-laws also provide that the registrant shall advance expenses to a director or officer and, if reimbursement of such expenses is demanded in advance of the final disposition of the matter with respect to which such demand is being made, upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it is ultimately determined that the director or officer is not entitled to be indemnified by the registrant. To the extent authorized from time to time by the board of directors of the registrant, the registrant may provide to any one or more employees of the registrant, one or more officers, employees and other agents of any subsidiary or one or more II-1 180 directors, officers, employees and other agents of any other enterprise, rights of indemnification and to receive payment or reimbursement of expenses, including attorneys' fees, that are similar to the rights conferred in the by-laws of the registrant on directors and officers of the registrant or any subsidiary or other enterprise. The by-laws do not limit the power of the registrant or its board of directors to provide other indemnification and expense reimbursement rights to directors, officers, employees, agents and other persons otherwise than pursuant to the by-laws. The registrant intends to enter into agreements with certain directors, officers and employees who are asked to serve in specified capacities at subsidiaries and other entities. The registrant will enter into an agreement that provides indemnification to its directors and officers and to the directors and certain officers of the general partner of The Goldman Sachs Group, L.P., members of its Management Committee or its Partnership Committee or the former Executive Committee of The Goldman Sachs Group, L.P. and all other persons requested or authorized by the registrant's board of directors or the board of directors of the general partner of The Goldman Sachs Group, L.P. to take actions on behalf of the registrant, The Goldman Sachs Group, L.P. or the general partner of The Goldman Sachs Group, L.P. in connection with the plan of incorporation, this registration statement and certain other registration statements for all losses, damages, costs and expenses incurred by the indemnified person arising out of the relevant registration statements or the transactions contemplated by the plan of incorporation. This agreement is in addition to the registrant's indemnification obligations under its by-laws. Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for payments of unlawful dividends or unlawful stock repurchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. The registrant's amended and restated certificate of incorporation provides for such limitation of liability. Policies of insurance are maintained by the registrant under which its directors and officers are insured, within the limits and subject to the limitations of the policies, against certain expenses in connection with the defense of, and certain liabilities which might be imposed as a result of, actions, suits or proceedings to which they are parties by reason of being or having been such directors or officers. Reference is also made to Section 9 of the underwriting agreement filed as Exhibit 1.1 to the registration statement for information concerning the underwriters' obligation to indemnify the Registrant and its officers and directors in certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES As part of the incorporation transactions, the registrant has entered into definitive binding agreements to issue: (i) shares of the registrant's common stock, par value $0.01 per share, to certain managing directors who were profit participating limited partners of The Goldman Sachs Group, L.P. in exchange for all of the managing directors' interests in The Goldman Sachs Group, L.P. and certain other entities; (ii) shares of common stock and 12% junior subordinated debentures of the registrant to certain retired limited partners of The Goldman Sachs Group, L.P. in exchange for all of such limited partners' interests in The Goldman Sachs Group, L.P. and certain other entities; (iii) shares of common stock and shares of the registrant's nonvoting common stock, par value $0.01 per share, to Sumitomo Bank Capital Markets, Inc.; and (iv) shares of common stock to Kamehameha Activities Association. Also simultaneously with the registrant's common stock offering, the registrant will make awards of restricted stock units and/or options to substantially all of its employees and will make an irrevocable contribution of II-2 181 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 will not be registered under the Securities Act of 1933, as amended, because the offering and sale (i) will be made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933 and Rule 506 thereunder for transactions by an issuer not involving a public offering (with the recipients representing their intentions to acquire the securities for their own accounts and not with a view to the distribution thereof and acknowledging that the securities will be issued in a transaction not registered under the Securities Act of 1933) or (ii) will be made outside the United States pursuant to Regulation S under the Securities Act of 1933 to persons who are not citizens or residents of the United States. The foregoing employee awards and contribution of common stock will not be registered under the Securities Act of 1933 because the awards and contribution either will 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 will be made to a relatively broad class of employees who will provide no consideration in exchange for their awards, or will be offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) and in compliance with Rule 506 thereunder. On April 13, 1999, the registrant entered into an arrangement with a group of 10 employees pursuant to which a portion of a performance-based bonus that is payable to such employees in 2002 will be paid in shares of common stock of the registrant valued at the initial public offering price per share in the registrant's common stock offering. Under this arrangement, up to 386,500 shares of common stock may be issued (based upon the midpoint of the range of initial public offering prices set forth on the cover page of the prospectus included in the registrant's registration statement on Form S-1 (No. 333-74449)). The offering and sale of these 386,500 shares of common stock was made pursuant to Rule 701 under the Securities Act of 1933. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS 1.1 Form of Underwriting Agreement.* 2.1 Plan of Incorporation.** 2.2 Form of Agreement and Plan of Merger of The Goldman Sachs Corporation into The Goldman Sachs Group, Inc.** 2.3 Form of 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 Form of Amended and Restated Certificate of Incorporation of The Goldman Sachs Group, Inc.** 3.3 Form of Amended and Restated By-Laws of The Goldman Sachs Group, Inc.** 4.1 Form of Indenture between The Goldman Sachs Group, Inc. and The Bank of New York. 4.2 Form of debt securities of The Goldman Sachs Group, Inc. (included in Exhibit 4.1). 5.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs Group, Inc. 8.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs Group, Inc., re tax matters. 10.1 Lease, dated June 11, 1985, between Metropolitan Life Insurance Company and Goldman, Sachs & Co.** 10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank (National Association) and The Goldman Sachs Group, L.P., as amended.**
II-3 182 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 Form of The Goldman Sachs 1999 Stock Incentive Plan.** 10.16 Form of The Goldman Sachs Defined Contribution Plan.** 10.17 Letter Agreement with Mr. Weinberg.** 10.18 Form of 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).**
II-4 183 10.25 Form of Tax Indemnification Agreement, by and among The Goldman Sachs Group, Inc. and various parties.** 10.26 Form of Shareholders' Agreement among The Goldman Sachs Group, Inc. and various parties.** 10.27 Instrument of Indemnification.** 10.28 Form of Indemnification Agreement.** 10.29 Subscription Agreement, dated as of April 24, 1992, among the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi Holdings Corporation, Royal Hawaiian Shopping Center, Inc. and The Goldman Sachs Group, L.P.** 10.30 Subscription Agreement, dated as of November 21, 1994, among the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi Holdings Corporation, Royal Hawaiian Shopping Center, Inc. and The Goldman Sachs Group, L.P.** 10.31 Letter Agreement, dated March 15, 1999, among Kamehameha Activities Association and The Goldman Sachs Group, L.P.** 10.32 Amended and Restated Subscription Agreement, dated as of March 28, 1989, among The Sumitomo Bank, Limited, Sumitomo Bank Capital Markets, Inc., Goldman, Sachs & Co. and The Goldman Sachs Group, L.P.** 10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo Bank, Limited, Sumitomo Bank Capital Markets, Inc. and The Goldman Sachs Group, L.P.** 10.34 Lease, dated September 24, 1992, from LDT Partners to Goldman Sachs International.** 12.1 Statement re computation of ratios of earnings to fixed charges. 15.1 Letter re Unaudited Interim Financial Information. 21.1 List of subsidiaries of The Goldman Sachs Group, L.P.** 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Sullivan & Cromwell (included in Exhibits 5.1 and 8.1 above). 23.3 Consent of Sir John Browne. 23.4 Consent of James A. Johnson. 23.5 Consent of John L. Weinberg. 23.6 Consent of Securities Data Company. 24.1 Powers of Attorney.*** 25.1 Statement of Eligibility of Trustee. 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Incorporated herein by reference to the corresponding exhibit to the registrant's registration statement on Form S-1 (No. 333-74449). *** Previously filed. (b) FINANCIAL STATEMENT SCHEDULES Condensed financial information of The Goldman Sachs Group, L.P. and report of PricewaterhouseCoopers LLP thereon. II-5 184 ITEM 17. UNDERTAKINGS (A) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (B) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (C) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted against the registrant by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 185 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, New York on the 29th day of April, 1999. 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 name in his 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 substitute or substitutes, may lawfully do or cause to be done by virtue hereof. II-7 186 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 April 29, 1999:
TITLE SIGNATURE ----- --------- /s/ JON S. CORZINE -------------------------------------------------------- Director and Co-Chairman of the Board Jon S. Corzine /s/ HENRY M. PAULSON, JR. -------------------------------------------------------- Director, Co-Chairman of the Board and Henry M. Paulson, Jr. Chief Executive Officer (Principal Executive Officer) /s/ ROBERT J. HURST -------------------------------------------------------- Director and Vice Chairman Robert J. Hurst /s/ JOHN A. THAIN -------------------------------------------------------- Director, President and Co-Chief Operating John A. Thain Officer /s/ JOHN L. THORNTON -------------------------------------------------------- Director, President and Co-Chief Operating John L. Thornton Officer /s/ DAVID A. VINIAR -------------------------------------------------------- Chief Financial Officer David A. Viniar (Principal Financial Officer) /s/ SARAH G. SMITH -------------------------------------------------------- Principal Accounting Officer Sarah G. Smith
II-8 187 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners, The Goldman Sachs Group, L.P.: In connection with our audits of the consolidated financial statements of The Goldman Sachs Group, L.P. and Subsidiaries as of November 27, 1998 and November 28, 1997, and for the three years in the period ended November 27, 1998, which financial statements are included on pages F-3 to F-23 of this Form S-1, we have also audited the financial statement schedule listed in Item 16(b) herein. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York January 22, 1999. S-1 188 SCHEDULE IV CONDENSED FINANCIAL INFORMATION OF REGISTRANT THE GOLDMAN SACHS GROUP, L.P. CONDENSED STATEMENTS OF EARNINGS (PARENT COMPANY ONLY)
YEAR ENDED NOVEMBER ----------------------------- 1996 1997 1998 ---- ---- ---- (in millions) REVENUES: Equity earnings of subsidiaries............................. $ 2,184 $ 2,378 $ 1,780 Principal investments....................................... 208 339 540 Interest income, principally from affiliates................ 2,602 2,943 4,369 ------- ------- ------- Total revenues......................................... 4,994 5,660 6,689 Interest expense, principally on short-term funding......... 2,547 2,858 4,201 ------- ------- ------- Revenues, net of interest expense...................... 2,447 2,802 2,488 OPERATING EXPENSES: Compensation and benefits................................... 13 12 9 Other....................................................... 33 29 43 ------- ------- ------- Total operating expenses............................... 46 41 52 Pre-tax earnings............................................ 2,401 2,761 2,436 Provision for unincorporated business taxes................. 2 15 8 ------- ------- ------- Net earnings................................................ $ 2,399 $ 2,746 $ 2,428 ======= ======= =======
See note to condensed financial statements. S-2 189 SCHEDULE IV THE GOLDMAN SACHS GROUP, L.P. CONDENSED STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY)
AS OF NOVEMBER ------------------ 1997 1998 ---- ---- (in millions) ASSETS: Cash and cash equivalents................................... $ 4 $ 11 Financial instruments owned, at fair value.................. 1,896 2,147 Receivables from affiliates................................. 23,767 33,562 Subordinated loan receivables from affiliates............... 6,889 8,668 Investment in subsidiaries.................................. 5,005 5,077 Other....................................................... 434 1,123 ------- ------- $37,995 $50,588 ======= ======= LIABILITIES AND NET WORTH: Short-term borrowings, including commercial paper........... $16,597 $23,364 Payables to affiliates...................................... 119 1,679 Other....................................................... 137 147 Long-term borrowings: With third parties........................................ 14,290 18,584 With affiliates........................................... 315 430 ------- ------- 31,458 44,204 Partners' capital allocated for income taxes and potential withdrawals............................................... 430 74 Partners' capital........................................... 6,107 6,310 ------- ------- $37,995 $50,588 ======= =======
See note to condensed financial statements. S-3 190 SCHEDULE IV THE GOLDMAN SACHS GROUP, L.P. CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
YEAR ENDED NOVEMBER ----------------------------- 1996 1997 1998 ---- ---- ---- (in millions) Cash flows from operating activities: Net earnings.............................................. $ 2,399 $ 2,746 $ 2,428 Non-cash items included in net earnings: Equity in earnings of subsidiaries...................... (2,184) (2,378) (1,780) Depreciation and amortization........................... 25 19 35 Changes in operating assets and liabilities: Financial instruments owned, at fair value................ (110) (395) (8) Other, net................................................ (43) (98) (501) ------- ------- ------- Net cash provided by/(used for) operating activities.... 87 (106) 174 ------- ------- ------- Cash flows from investing activities: Financial instruments owned, at fair value................ 126 (331) (243) Receivables from affiliates, net.......................... (1,476) (4,320) (8,235) Subordinated loan receivables from affiliates............. (480) (1,528) (1,779) Investment in subsidiaries................................ 2,031 2,147 1,362 Property, leasehold improvements and equipment............ (1) (4) (145) ------- ------- ------- Net cash provided by/(used for) investing activities.... 200 (4,036) (9,040) ------- ------- ------- Cash flows from financing activities: Short-term borrowings, net................................ 496 39 2,586 Issuance of long-term borrowings.......................... 4,636 7,498 10,289 Repayment of long-term borrowings......................... (3,886) (1,005) (1,698) Capital contributions..................................... 4 89 9 Returns on capital and certain distributions to partners................................................ (473) (557) (619) Termination of the Profit Participation Plans............. -- -- (21) Partners' capital allocated for income taxes and potential withdrawals, net........................................ (1,017) (2,034) (1,673) ------- ------- ------- Net cash (used for)/provided by financing activities.... (240) 4,030 8,873 ------- ------- ------- Net increase/(decrease) in cash and cash equivalents...... 47 (112) 7 Cash and cash equivalents, beginning of year................ 69 116 4 ------- ------- ------- Cash and cash equivalents, end of year...................... $ 116 $ 4 $ 11 ======= ======= =======
SUPPLEMENTAL DISCLOSURES: Cash payments for interest approximated the related expense for each of the fiscal periods presented. Payments of unincorporated business taxes were not material. Cash payments of $347 million related to the termination of the Profit Participation Plans in 1998 were paid by Group L.P.'s subsidiaries and were excluded from the condensed statement of cash flows above as these payments represented non-cash items to Group L.P. See note to condensed financial statements. S-4 191 SCHEDULE IV THE GOLDMAN SACHS GROUP, L.P. NOTE TO CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The condensed unconsolidated financial statements of The Goldman Sachs Group, L.P. should be read in conjunction with the consolidated financial statements of The Goldman Sachs Group, L.P. and Subsidiaries and the footnotes thereto. Certain reclassifications have been made to prior year amounts to conform to the current presentation. Investments in subsidiaries are accounted for using the equity method. The condensed unconsolidated financial statements have been prepared in accordance with generally accepted accounting principles that require management to make estimates and assumptions regarding investment valuations, partner retirements, the outcome of pending litigation and other matters that affect the condensed unconsolidated financial statements and related disclosures. These estimates and assumptions are based on judgment and available information and, consequently, actual results could be materially different from these estimates. S-5 192 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ------- ------------------------------------------------------------ ------------ 1.1 Form of Underwriting Agreement.* 2.1 Plan of Incorporation.** 2.2 Form of Agreement and Plan of Merger of The Goldman Sachs Corporation into The Goldman Sachs Group, Inc.** 2.3 Form of 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 Form of Amended and Restated Certificate of Incorporation of The Goldman Sachs Group, Inc.** 3.3 Form of Amended and Restated By-Laws of The Goldman Sachs Group, Inc.** 4.1 Form of Indenture between The Goldman Sachs Group, Inc. and The Bank of New York. 4.2 Form of debt securities of The Goldman Sachs Group, Inc. (included in Exhibit 4.1). 5.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs Group, Inc. 8.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs Group, Inc., re tax matters. 10.1 Lease, dated June 11, 1985, between Metropolitan Life Insurance Company and Goldman, Sachs & Co.** 10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank (National Association) and The Goldman Sachs Group, L.P., as amended.** 10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC and The Goldman Sachs Group, L.P.** 10.4 Lease, dated as of July 16, 1998, between TCC Acquisition Corp. and The Goldman Sachs Group, L.P.** 10.5 Agreement for Lease, dated April 2, 1998, among (i) JC No. 3 (UK) Limited and Fleet Street Square Management Limited trading as Fleet Street Partnership, (ii) Goldman Sachs International, (iii) Restamove Limited, (iv) The Goldman Sachs Group, L.P. and (v) Itochu Corporation.** 10.6 Annexure 1 to Agreement for Lease, dated April 2, 1998, among (i) JC No. 3 (UK) Limited and Fleet Street Square Management Limited trading as Fleet Street Partnership, (ii) Goldman Sachs International, (iii) Restamove Limited, (iv) The Goldman Sachs Group, L.P. and (v) Itochu Corporation (Form of Occupational Lease among (i) JC No. 3 (UK) Limited and Fleet Street Square Management Limited trading as Fleet Street Partnership, (ii) Goldman Sachs International and (iii) The Goldman Sachs Group, L.P.).** 10.7 Agreement relating to Developer's Fit Out Works to be carried out at 120 Fleet Street, London, dated April 2, 1998, among (i) JC No. 3 (UK) Limited and Fleet Street Square Management Limited, (ii) Goldman Sachs Property Management, (iii) Itochu Corporation and (iv) The Goldman Sachs Group, L.P.**
193
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ------- ------------------------------------------------------------ ------------ 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 Form of The Goldman Sachs 1999 Stock Incentive Plan.** 10.16 Form of The Goldman Sachs Defined Contribution Plan.** 10.17 Letter Agreement with Mr. Weinberg.** 10.18 Form of 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 Form of Tax Indemnification Agreement by and among The Goldman Sachs Group, Inc. and various parties.** 10.26 Form of Shareholders' Agreement among The Goldman Sachs Group, Inc. and various parties.** 10.27 Instrument of Indemnification.** 10.28 Form of Indemnification Agreement.** 10.29 Subscription Agreement, dated as of April 24, 1992, among the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi Holdings Corporation, Royal Hawaiian Shopping Center, Inc. and The Goldman Sachs Group, L.P.** 10.30 Subscription Agreement, dated as of November 21, 1994, among the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi Holdings Corporation, Royal Hawaiian Shopping Center, Inc. and The Goldman Sachs Group, L.P.** 10.31 Letter Agreement, dated March 15, 1999, among Kamehameha Activities Association and The Goldman Sachs Group, L.P.**
194
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ------- ------------------------------------------------------------ ------------ 10.32 Amended and Restated Subscription Agreement, dated as of March 28, 1989, among The Sumitomo Bank, Limited, Sumitomo Bank Capital Markets, Inc., Goldman, Sachs & Co. and The Goldman Sachs Group, L.P.** 10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo Bank, Limited, Sumitomo Bank Capital Markets, Inc. and The Goldman Sachs Group, L.P.** 10.34 Lease, dated September 24, 1992, from LDT Partners to Goldman Sachs International.** 12.1 Statement re computation of ratios of earnings to fixed charges. 15.1 Letter re Unaudited Interim Financial Information. 21.1 List of subsidiaries of The Goldman Sachs Group, L.P.** 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Sullivan & Cromwell (included in Exhibits 5.1 and 8.1 above). 23.3 Consent of Sir John Browne. 23.4 Consent of James A. Johnson. 23.5 Consent of John L. Weinberg. 23.6 Consent of Securities Data Company. 24.1 Powers of Attorney.*** 25.1 Statement of Eligibility of Trustee. 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Incorporated herein by reference to the corresponding exhibit to the registrant's registration statement on Form S-1 (No. 333-74449). *** Previously filed. EX-4.1 2 FORM OF INDENTURE 1 Exhibit 4.1 ================================================================================ The Goldman Sachs Group, Inc. TO The Bank of New York Trustee -------------- INDENTURE Dated as of ________ __, 1999 -------------- ================================================================================ 2 THE GOLDMAN SACHS GROUP, INC. CERTAIN SECTIONS OF THIS INDENTURE RELATING TO SECTIONS 310 THROUGH 318, INCLUSIVE, OF THE TRUST INDENTURE ACT OF 1939: TRUST INDENTURE ACT SECTION INDENTURE SECTION ss.310(a)(1) ............................................. 609 (a)(2) ............................................. 609 (a)(3) ............................................. Not Applicable (a)(4) ............................................. Not Applicable (b) ............................................. 608 610 ss.311(a) ............................................. 613 (b) ............................................. 613 ss.312(a) ............................................. 701 702 (b) ............................................. 702 (c) ............................................. 702 ss.313(a) ............................................. 703 (b) ............................................. 703 (c) ............................................. 703 (d) ............................................. 703 ss.314(a) ............................................. 704 (a)(4) ............................................. 101 1004 (b) ............................................. Not Applicable (c)(1) ............................................. 102 (c)(2) ............................................. 102 (c)(3) ............................................. Not Applicable (d) ............................................. Not Applicable (e) ............................................. 102 ss.315(a) ............................................. 601 (b) ............................................. 602 (c) ............................................. 601 (d) ............................................. 601 (e) ............................................. 514 ss.316(a) ............................................. 101 (a)(1)(A) ............................................. 502 512 (a)(1)(B) ............................................. 513 (a)(2) ............................................. Not Applicable (b) ............................................. 508 (c) ............................................. 104 ss.317(a)(1) ............................................. 503 (a)(2) ............................................. 504 (b) ............................................. 1003 ss.318(a) ............................................. 107 - ---------- NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. 3 TABLE OF CONTENTS ---------- PAGE ---- PARTIES.......................................................................1 RECITALS OF THE COMPANY.......................................................1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions.......................................................1 Act .........................................................2 Affiliate.........................................................2 Applicable Procedures.............................................2 Board of Directors................................................2 Board Resolution..................................................2 Business Day......................................................2 Commission........................................................2 Company .........................................................3 Company Request or Company Order..................................3 Corporate Trust Office............................................3 corporation.......................................................3 Covenant Defeasance...............................................3 Defaulted Interest................................................3 Defeasance........................................................3 Depositary........................................................3 Event of Default..................................................3 Exchange Act......................................................3 Expiration Date...................................................3 Global Security...................................................4 GS&Co. .........................................................4 Holder .........................................................4 Indenture.........................................................4 interest .........................................................4 Interest Payment Date.............................................4 Investment Company Act............................................4 Maturity .........................................................4 Notice of Default.................................................4 Officers' Certificate.............................................4 Opinion of Counsel................................................4 Original Issue Discount Security..................................5 Outstanding.......................................................5 Paying Agent......................................................6 - -------------- NOTE: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. 4 PAGE ---- Permitted Lien....................................................6 Person .........................................................6 Place of Payment..................................................6 Predecessor Security..............................................6 Redemption Date...................................................6 Redemption Price..................................................6 Regular Record Date...............................................6 Responsible Officer...............................................6 Securities........................................................6 Securities Act....................................................6 Security Register and Security Registrar..........................7 Special Record Date...............................................7 Stated Maturity...................................................7 Subsidiary........................................................7 Trust Indenture Act...............................................7 Trustee .........................................................7 U.S. Government Obligation........................................7 Vice President....................................................7 SECTION 102. Compliance Certificates and Opinions..............................7 SECTION 103. Form of Documents Delivered to Trustee............................8 SECTION 104. Acts of Holders; Record Dates.....................................8 SECTION 105. Notices, Etc., to Trustee and Company............................10 SECTION 106. Notice to Holders; Waiver........................................11 SECTION 107. Conflict with Trust Indenture Act................................11 SECTION 108. Effect of Headings and Table of Contents.........................12 SECTION 109. Successors and Assigns...........................................12 SECTION 110. Separability Clause..............................................12 SECTION 111. Benefits of Indenture............................................12 SECTION 112. Governing Law....................................................13 SECTION 113. Legal Holidays...................................................13 ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally..................................................13 SECTION 202. Form of Face of Security.........................................14 SECTION 203. Form of Reverse of Security......................................15 SECTION 204. Form of Legend for Global Securities.............................18 SECTION 205. Form of Trustee's Certificate of Authentication..................19 -ii- 5 PAGE ---- ARTICLE THREE THE SECURITIES SECTION 301. Amount Unlimited; Issuable in Series.............................19 SECTION 302. Denominations....................................................22 SECTION 303. Execution, Authentication, Delivery and Dating...................22 SECTION 304. Temporary Securities.............................................23 SECTION 305. Registration, Registration of Transfer and Exchange..............24 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.................26 SECTION 307. Payment of Interest; Interest Rights Preserved...................26 SECTION 308. Persons Deemed Owners............................................28 SECTION 309. Cancellation.....................................................28 SECTION 310. Computation of Interest..........................................28 SECTION 311. CUSIP Numbers....................................................29 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture..........................29 SECTION 402. Application of Trust Money.......................................30 ARTICLE FIVE REMEDIES SECTION 501. Events of Default................................................30 SECTION 502. Acceleration of Maturity; Rescission and Annulment...............32 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee..33 SECTION 504. Trustee May File Proofs of Claim.................................33 SECTION 505. Trustee May Enforce Claims Without Possession of Securities......34 SECTION 506. Application of Money Collected...................................34 SECTION 507. Limitation on Suits..............................................34 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert..............................35 SECTION 509. Restoration of Rights and Remedies...............................35 SECTION 510. Rights and Remedies Cumulative...................................35 SECTION 511. Delay or Omission Not Waiver.....................................36 SECTION 512. Control by Holders...............................................36 SECTION 513. Waiver of Past Defaults..........................................36 SECTION 514. Undertaking for Costs............................................37 SECTION 515. Waiver of Usury, Stay or Extension Laws..........................37 -iii- 6 PAGE ---- ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities.............................37 SECTION 602. Notice of Defaults..............................................37 SECTION 603. Certain Rights of Trustee.......................................38 SECTION 604. Not Responsible for Recitals or Issuance of Securities..........39 SECTION 605. May Hold Securities.............................................39 SECTION 606. Money Held in Trust.............................................39 SECTION 607. Compensation and Reimbursement..................................39 SECTION 608. Conflicting Interests...........................................40 SECTION 609. Corporate Trustee Required; Eligibility.........................40 SECTION 610. Resignation and Removal; Appointment of Successor...............41 SECTION 611. Acceptance of Appointment by Successor..........................42 SECTION 612. Merger, Conversion, Consolidation or Succession to Business.....43 SECTION 613. Preferential Collection of Claims Against Company...............43 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.......45 SECTION 702. Preservation of Information; Communications to Holders..........46 SECTION 703. Reports by Trustee..............................................46 SECTION 704. Reports by Company..............................................46 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms............47 SECTION 802. Successor Substituted...........................................48 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders..............48 SECTION 902. Supplemental Indentures With Consent of Holders.................49 SECTION 903. Execution of Supplemental Indentures............................50 -iv- 7 PAGE ---- SECTION 904. Effect of Supplemental Indentures...............................50 SECTION 905. Conformity with Trust Indenture Act.............................51 SECTION 906. Reference in Securities to Supplemental Indentures..............51 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest......................51 SECTION 1002. Maintenance of Office or Agency.................................51 SECTION 1003. Money for Securities Payments to Be Held in Trust...............52 SECTION 1004. Statement by Officers as to Default.............................53 SECTION 1005. Restriction on Certain Liens....................................53 SECTION 1006. Waiver of Certain Covenants.....................................53 ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Applicability of Article........................................54 SECTION 1102. Election to Redeem; Notice to Trustee...........................54 SECTION 1103. Selection by Trustee of Securities to Be Redeemed...............54 SECTION 1104. Notice of Redemption............................................55 SECTION 1105. Deposit of Redemption Price.....................................56 SECTION 1106. Securities Payable on Redemption Date...........................56 SECTION 1107. Securities Redeemed in Part.....................................57 ARTICLE TWELVE SINKING FUNDS SECTION 1201. Applicability of Article........................................57 SECTION 1202. Satisfaction of Sinking Fund Payments with Securities...........57 SECTION 1203. Redemption of Securities for Sinking Fund.......................58 ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance....58 SECTION 1302. Defeasance and Discharge........................................58 SECTION 1303. Covenant Defeasance.............................................59 SECTION 1304. Conditions to Defeasance or Covenant Defeasance.................59 -v- 8 PAGE ---- SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions.........................61 SECTION 1306. Reinstatement...................................................61 TESTIMONIUM...................................................................63 SIGNATURES AND SEALS..........................................................63 ACKNOWLEDGEMENTS..............................................................64 -vi- 9 INDENTURE, dated as of ________ __, 1999, between The Goldman Sachs Group, Inc., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 85 Broad Street, New York, New York 10004 and The Bank of New York, a New York banking corporation, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein called the "Securities"), to be issued in one or more series as in this Indenture provided. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; (4) unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Indenture; 10 (5) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and (6) when used with respect to any Security, the words "convert", "converted" and "conversion" are intended to refer to the right of the Holder or the Company to convert or exchange such Security into or for securities or other property in accordance with such terms, if any, as may hereafter be specified for such Security as contemplated by Section 301, and these words are not intended to refer to any right of the Holder or the Company to exchange such Security for other Securities of the same series and like tenor pursuant to Section 304, 305, 306, 906 or 1107 or another similar provision of this Indenture, unless the context otherwise requires; and references herein to the terms of any Security that may be converted mean such terms as may be specified for such Security as contemplated in Section 301. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Applicable Procedures" of a Depositary means, with respect to any matter at any time, the policies and procedures of such Depositary, if any, that are applicable to such matter at such time. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day", when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law or executive order to close; provided that, when used with respect to any Security, "Business Day" may have such other meaning, if any, as may be specified for such Security as contemplated by Section 301. -2- 11 "Commission" means the Securities and Exchange Commission, from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any two of the following: a Chairman of the Board, a Vice Chairman of the Board, a President, a Vice President, a Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary of the Company, or any other officer or officers of the Company designated in writing by or pursuant to authority of the Board of Directors and delivered to the Trustee from time to time. "Corporate Trust Office" means the principal office of the Trustee in New York, New York at which at any particular time its corporate trust business shall be administered, which at the date hereof is located at 101 Barclay Street, Floor 21 West, New York, New York 10286. "corporation" means a corporation, association, company (including a limited liability company), joint-stock company, business trust or other similar entity. "Covenant Defeasance" has the meaning specified in Section 1303. "Defaulted Interest" has the meaning specified in Section 307. "Defeasance" has the meaning specified in Section 1302. "Depositary" means, with respect to Securities of any series issuable in whole or in part in the form of one or more Global Securities, a clearing agency that is designated to act as Depositary for such Securities as contemplated by Section 301. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934 and any statute successor thereto, in each case as amended from time to time. "Expiration Date" has the meaning specified in Section 104. -3- 12 "Global Security" means a Security that evidences all or part of the Securities of any series and bears the legend set forth in Section 204 (or such legend as may be specified as contemplated by Section 301 for such Securities). "GS&Co." means Goldman, Sachs & Co., a New York partnership, or any other Person that is a Subsidiary and becomes the successor to GS&Co. as a result of a merger, consolidation or sale of all or substantially all the assets of GS&Co., but only for as long as such other Person continues to be a Subsidiary and such successor. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. The term "Indenture" shall also include the terms of particular series of Securities established as contemplated by Section 301. "interest", when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity. "Interest Payment Date", when used with respect to any Security, means the Stated Maturity of an instalment of interest on such Security. "Investment Company Act" means the Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time. "Maturity", when used with respect to any Security, means the date on which the principal of such Security or an instalment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Notice of Default" means a written notice of the kind specified in Section 501(4). "Officers' Certificate" means a certificate signed by any two of the following: a Chairman of the Board, a Vice Chairman of the Board, a President, a Vice President, a Treasurer, an Assistant Treasurer, a Secretary or an Assistant Secretary of the Company, or any other officer or officers of the Company designated in a writing by or pursuant to authority of the Board of Directors and delivered to the Trustee from time to time. One of the officers signing an Officers' Certificate given pursuant to Section 1004 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, and who shall be acceptable to the Trustee. -4- 13 "Original Issue Discount Security" means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (1) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (2) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (3) Securities as to which Defeasance has been effected pursuant to Section 1302; and (4) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given, made or taken any request, demand, authorization, direction, notice, consent, waiver or other action hereunder as of any date, (A) the principal amount of an Original Issue Discount Security which shall be deemed to be Outstanding shall be the amount of the principal thereof which would be due and payable as of such date upon acceleration of the Maturity thereof to such date pursuant to Section 502, (B) if, as of such date, the principal amount payable at the Stated Maturity of a Security is not determinable, the principal amount of such Security which shall be deemed to be Outstanding shall be the amount as specified or determined as contemplated by Section 301, (C) the principal amount of a Security denominated in one or more foreign currencies, composite currencies or currency units which shall be deemed to be Outstanding shall be the U.S. dollar equivalent, determined as of such date in the manner provided as contemplated by Section 301, of the principal amount of such Security (or, in the case of a Security described in Clause (A) or (B) above, of the amount determined as provided in such Clause), and (D) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Securities which a responsible officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned which have been -5- 14 pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of or any premium or interest on any Securities on behalf of the Company. "Permitted Lien" means each such pledge, lien and other encumbrance as the Board of Directors determines does not materially detract from or interfere with the value or control, as of the date of such determination, of the Company's or any Subsidiary's voting or profit participating equity ownership interests in GS&Co. (or in any Subsidiary that beneficially owns or holds any such interests in GS&Co., directly or indirectly). "Person" means any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment", when used with respect to the Securities of any series and subject to Section 1002, means the place or places where the principal of and any premium and interest on the Securities of that series are payable as specified as contemplated by Section 301. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date on the Securities of any series means the date specified for that purpose as contemplated by Section 301. "Responsible Officer", when used with respect to the Trustee, means any vice president, any assistant secretary, any assistant treasurer, any trust officer, any assistant trust officer or any other officer of the Trustee, in each case, located in the Corporate Trust Office of the Trustee, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. -6- 15 "Securities Act" means the Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security or any instalment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such instalment of principal or interest is due and payable. "Subsidiary" means any Person a majority of the combined voting power of the total outstanding ownership interests in which is, at the time of determination, beneficially owned or held, directly or indirectly, by the Company or one or more other Subsidiaries. For this purpose, "voting power" means power to vote in an ordinary election of directors (or, in the case of a Person that is not a corporation, ordinarily to appoint or approve the appointment of Persons holding similar positions), whether at all times or only as long as no senior class of ownership interests has such voting power by reason of any contingency. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series. "U.S. Government Obligation" has the meaning specified in Section 1304. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by -7- 16 counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirements set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include, (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of, or representation by, counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. -8- 17 SECTION 104. Acts of Holders; Record Dates. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. The ownership of Securities shall be proved by the Security Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities of any series entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities of such series, provided that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of the relevant series on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a -9- 18 new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities of the relevant series in the manner set forth in Section 106. The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities of any series entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in Section 502, (iii) any request to institute proceedings referred to in Section 507(2) or (iv) any direction referred to in Section 512, in each case with respect to Securities of such series. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of such series on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company's expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities of the relevant series in the manner set forth in Section 106. With respect to any record date set pursuant to this Section, the party hereto which sets such record dates may designate any day as the "Expiration Date" and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities of the relevant series in the manner set forth in Section 106, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto which set such record date shall be deemed to have initially designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of -10- 19 which may do so pursuant to such appointment with regard to all or any part of such principal amount. SECTION 105. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Trustee Administration, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every pur pose hereunder. Where this Indenture provides for Notice of any event to a Holder of a Global Security, such notice shall be sufficiently given if given to the Depositary for such Security (or its designee), pursuant to its Applicable Procedures, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. -11- 20 SECTION 107. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 108. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 110. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 111. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. -12- 21 SECTION 112. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the law of the State of New York. SECTION 113. Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Maturity of any Security, or any date on which a Holder has the right to convert his Security, shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities (other than a provision of any Security which specifically states that such provision shall apply in lieu of this Section)) payment of interest or principal (and premium, if any), or conversion of such Security need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Maturity, or on such date for conversion, as the case may be. ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally. The Securities of each series shall be in substantially the form set forth in this Article, or in such other form as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. If the form of Securities of any series is established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such Securities. The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. -13- 22 SECTION 202. Form of Face of Security. [Insert any legend required by the Internal Revenue Code and the regulations thereunder.] The Goldman Sachs Group, Inc. ------------------------------ No. ......... $ ........ The Goldman Sachs Group, Inc., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to........................, or registered assigns, the principal sum of ...................................... Dollars on ........................................................ [if the Security is to bear interest prior to Maturity, insert -- , and to pay interest thereon from ............. or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on ............ and ............ in each year, commencing ........., and at the Maturity thereof, at the rate of ....% per annum, until the principal hereof is paid or made available for payment [if applicable, insert -- , provided that any principal and premium, and any such instalment of interest, which is overdue shall bear interest at the rate of ...% per annum (to the extent that the payment of such interest shall be legally enforceable), from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand]. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the ....... or ....... (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest so payable, but not punctually paid or duly provided for, on any Interest Payment Date will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid in any other lawful manner not inconsistent with the requirements of any securities exchange on which this Security may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture]. [If the Security is not to bear interest prior to Maturity, insert -- The principal of this Security shall not bear interest except in the case of a default in payment of principal upon acceleration, upon redemption or at Stated Maturity and in such case the overdue principal and any overdue premium shall bear interest at the rate of ....% per annum (to the extent that the payment of such interest shall be legally enforceable), from the dates such amounts are due until they are paid or made available for payment. Interest on any overdue principal or premium shall be payable on demand.] -14- 23 Payment of the principal of (and premium, if any) and [if applicable, insert -- any such] interest on this Security will be made at the office or agency of the Company maintained for that purpose in New York, New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company, payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register; and provided, further, that if this Security is a Global Security, payment may be made pursuant to the Applicable Procedures of the Depositary as permitted in said Indenture. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. The Goldman Sachs Group, Inc. By:______________________________ Name: Title: Attest: ................................... SECTION 203. Form of Reverse of Security. This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of ________ __, 1999 (herein called the "Indenture", which term shall have the meaning assigned to it in such instrument), between the Company and The Bank of New York, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, -15- 24 and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof [if applicable, insert -- , limited in aggregate principal amount to $...........]. [If applicable, insert -- The Securities of this series are subject to redemption upon not less than 30 days' nor more than 60 days' notice, at any time [if applicable, insert -- on or after .........., 20..], as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount): If redeemed [if applicable, insert -- on or before ..............., ...%, and if redeemed] during the 12-month period beginning ............. of the years indicated,
Redemption Redemption Year Price Year Price - ---- ---------- ---- ----------
and thereafter at a Redemption Price equal to .....% of the principal amount, together in the case of any such redemption with accrued interest to the Redemption Date, but interest instalments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.] [If the Security is subject to redemption of any kind, insert -- In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.] [If applicable, insert -- The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture.] [If the Security is not an Original Issue Discount Security, insert -- If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.] [If the Security is an Original Issue Discount Security, insert -- If an Event of Default with respect to Securities of this series shall occur and be continuing, an amount of principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. Such amount shall be equal to -- insert formula for determining the amount. Upon payment (i) of the amount of principal so declared due and payable and (ii) of interest on any overdue principal, premium and interest (in each case to -16- 25 the extent that the payment of such interest shall be legally enforceable), all of the Company's obligations in respect of the payment of the principal of and premium and interest, if any, on the Securities of this series shall terminate.] The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of all series to be affected (considered together as one class for this purpose). The Indenture also contains provisions (i) permitting the Holders of a majority in principal amount of the Securities at the time Outstanding of all series to be affected under the Indenture (considered together as one class for this purpose), on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and (ii) permitting the Holders of a majority in principal amount of the Securities at the time Outstanding of any series to be affected under the Indenture (with each such series considered separately for this purpose), on behalf of the Holders of all Securities of such series, to waive certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture, or for the appointment of a receiver or trustee, or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee indemnity reasonably satisfactory to it, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly -17- 26 endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. This Security and the Indenture shall be governed by and construed in accordance with the laws of the State of New York. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. SECTION 204. Form of Legend for Global Securities. Unless otherwise specified as contemplated by Section 301 for the Securities evidenced thereby, every Global Security authenticated and delivered hereunder shall bear a legend in substantially the following form: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. -18- 27 SECTION 205. Form of Trustee's Certificate of Authentication. The Trustee's certificates of authentication shall be in substantially the following form: This is one of the Securities of the series designated herein and referred to in the within-mentioned Indenture. Dated: The Bank of New York, As Trustee By.................................. Authorized Signatory ARTICLE THREE THE SECURITIES SECTION 301. Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in or pursuant to a Board Resolution and, subject to Section 303, set forth, or determined in the manner provided, in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from Securities of any other series); (2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906 or 1107 and except for any Securities which, pursuant to Section 303, are deemed never to have been authenticated and delivered hereunder); (3) the Person to whom any interest on a Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest; (4) the date or dates on which the principal of any Securities of the series is payable; -19- 28 (5) the rate or rates at which any Securities of the series shall bear interest, if any, the date or dates from which any such interest shall accrue, the Interest Payment Dates on which any such interest shall be payable and the Regular Record Date for any such interest payable on any Interest Payment Date; (6) the place or places where the principal of and any premium and interest on any Securities of the series shall be payable and the manner in which any payment may be made; (7) the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series may be redeemed, in whole or in part, at the option of the Company and, if other than by a Board Resolution, the manner in which any election by the Company to redeem the Securities shall be evidenced; (8) the obligation, if any, of the Company to redeem or purchase any Securities of the series pursuant to any sinking fund or analogous provisions or at the option of the Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; (9) if other than denominations of $1,000 and any multiple thereof, the denominations in which any Securities of the series shall be issuable; (10) if the amount of principal of or any premium or interest on any Securities of the series may be determined with reference to an index or pursuant to a formula, the manner in which such amounts shall be determined; (11) if other than the currency of the United States of America, the currency, currencies, composite currency, composite currencies or currency units in which the principal of or any premium or interest on any Securities of the series shall be payable and the manner of determining the equivalent thereof in the currency of the United States of America for any purpose, including for the purposes of making payment in the currency of the United States of America and applying the definition of "Outstanding" in Section 101; (12) if the principal of or any premium or interest on any Securities of the series is to be payable, at the election of the Company or the Holder thereof, in one or more currencies, composite currencies or currency units other than that or those in which such Securities are stated to be payable, the currency, currencies, composite currency, composite currencies or currency units in which the principal of or any premium or interest on such Securities as to which such election is made shall be payable, the periods within which and the terms and conditions upon which such election is to be made and the amount so payable (or the manner in which such amount shall be determined); (13) if other than the entire principal amount thereof, the portion of the principal amount of any Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502; -20- 29 (14) if the principal amount payable at the Stated Maturity of any Securities of the series will not be determinable as of any one or more dates prior to the Stated Maturity, the amount which shall be deemed to be the principal amount of such Securities as of any such date for any purpose thereunder or hereunder, including the principal amount thereof which shall be due and payable upon any Maturity other than the Stated Maturity or which shall be deemed to be Outstanding as of any date prior to the Stated Maturity (or, in any such case, the manner in which such amount deemed to be the principal amount shall be determined); (15) if applicable, that the Securities of the series, in whole or any specified part, shall be defeasible pursuant to Section 1302 or Section 1303 or both such Sections, any provisions to permit a pledge of obligations other than U.S. Government Obligations (or the establishment of other arrangements) to satisfy the requirements of Section 1304(1) for defeasance of such Securities and, if other than by a Board Resolution, the manner in which any election by the Company to defease such Securities shall be evidenced; (16) if applicable, that any Securities of the series shall be issuable in whole or in part in the form of one or more Global Securities and, in such case, the respective Depositaries for such Global Securities, the form of any legend or legends which shall be borne by any such Global Security in addition to or in lieu of that set forth in Section 204, any addition to, elimination of or other change in the circumstances set forth in Clause (2) of the last paragraph of Section 305 in which any such Global Security may be exchanged in whole or in part for Securities registered, and any transfer of such Global Security in whole or in part may be registered, in the name or names of Persons other than the Depositary for such Global Security or a nominee thereof and any other provisions governing exchanges or transfers of any such Global Security; (17) any addition to, elimination of or other change in the Events of Default which applies to any Securities of the series and any change in the right of the Trustee or the requisite Holders of such Securities to declare the principal amount thereof due and payable pursuant to Section 502; (18) any addition to, elimination of or other change in the covenants set forth in Article Ten which applies to Securities of the series; (19) any provisions necessary to permit or facilitate the issuance, payment or conversion of any Securities of the series that may be converted into securities or other property other than Securities of the same series and of like tenor, whether in addition to, or in lieu of, any payment of principal or other amount and whether at the option of the Company or otherwise; and (20) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture, except as permitted by Section 901(5)). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 303) set forth, or determined in the manner -21- 30 provided, in the Officers' Certificate referred to above or in any such indenture supplemental hereto. If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the series. SECTION 302. Denominations. The Securities of each series shall be issuable only in registered form without coupons and only in such denominations as shall be specified as contemplated by Section 301. In the absence of any such specified denomination with respect to the Securities of any series, the Securities of such series shall be issuable in denominations of $1,000 and any multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by a Chairman of the Board, a Vice Chairman of the Board, a President or a Vice President of the Company (or any other officer of the Company designated in writing by or pursuant to authority of the Board of Directors and delivered to the Trustee from time to time), under its corporate seal reproduced thereon attested by a Secretary or Assistant Secretary of the Company. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the form or terms of the Securities of the series have been established by or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating, (1) if the form of such Securities has been established by or pursuant to Board Resolution as permitted by Section 201, that such form has been established in conformity with the provisions of this Indenture; -22- 31 (2) if the terms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 301, that such terms have been established in conformity with the provisions of this Indenture; and (3) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company enforceable in accordance with their 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. If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. Notwithstanding the provisions of Section 301 and of the preceding paragraph, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Officers' Certificate otherwise required pursuant to Section 301 or the Company Order and Opinion of Counsel otherwise required pursuant to such preceding paragraph at or prior to the authentication of each Security of such series if such documents are delivered at or prior to the authentication upon original issuance of the first Security of such series to be issued. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 309, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. SECTION 304. Temporary Securities. Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. -23- 32 If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series and tenor. SECTION 305. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency of the Company in a Place of Payment being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security of a series at the office or agency of the Company in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount. At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. -24- 33 No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer. If the Securities of any series (or of any series and specified tenor) are to be redeemed in part, the Company shall not be required (A) to issue, register the transfer of or exchange any Securities of that series (or of that series and specified tenor, as the case may be) during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of any such Securities selected for redemption under Section 1103 and ending at the close of business on the day of such mailing, or (B) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. The provisions of Clauses (1), (2), (3) and (4) below shall apply only to Global Securities: (1) Each Global Security authenticated under this Indenture shall be registered in the name of the Depositary designated for such Global Security or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture. (2) Notwithstanding any other provision in this Indenture, and subject to such applicable provisions, if any, as may be specified as contemplated by Section 301, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (A) such Depositary has notified the Company that it (i) is unwilling or unable to continue as Depositary for such Global Security or (ii) has ceased to be a clearing agency registered under the Exchange Act, (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security or (C) the Company has executed and delivered to the Trustee a Company Order stating that such Global Security shall be exchanged in whole for Securities that are not Global Securities (in which case such exchange shall promptly be effected by the Trustee). If the Company receives a notice of the kind specified in Clause (A) above or has delivered a Company Order of the kind specified in Clause (C) above, it may, in its sole discretion, designate a successor Depositary for such Global Security within 60 days after receiving such notice or delivery of such order, as the case may be. If the Company designates a successor Depositary as aforesaid, such Global Security shall promptly be exchanged in whole for one or more other Global Securities registered in the name of the successor Depositary, whereupon such designated successor shall be the Depositary for such successor Global Security or Global Securities and the provisions of Clauses (1), (2), (3) and (4) of this Section shall continue to apply thereto. (3) Subject to Clause (2) above and to such applicable provisions, if any, as may be specified as contemplated by Section 301, any exchange of a Global Security for other -25- 34 Securities may be made in whole or in part, and all Securities issued in exchange for a Global Security or any portion thereof shall be registered in such names as the Depositary for such Global Security shall direct. (4) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Section, Section 304, 306, 906 or 1107 or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof. SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. -26- 35 SECTION 307. Payment of Interest; Interest Rights Preserved. Except as otherwise provided as contemplated by Section 301 with respect to any Securities of a series, interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest (or, if no business is conducted by the Trustee at its Corporate Trust Office on such date, at 5:00 P.M. New York City time on such date). Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest payable on any Securities of a series to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each of such Securities and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given to each Holder of such Securities in the manner set forth in Section 106, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest on any Securities of a series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. -27- 36 Except as may otherwise be provided as contemplated in Section 301 with respect to any Securities of a series, the Person to whom interest on any Security that first becomes payable on a day that is not an Interest Payment Date shall be payable shall be the Holder of such Security on the day such interest is paid. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. In the case of any Security which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Security whose Maturity is prior to such Interest Payment Date), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Security which is converted, interest whose Stated Maturity is after the date of conversion of such Security shall not be payable. Notwithstanding the foregoing, the terms of any Security that may be converted may provide that the provisions of this paragraph do not apply, or apply with such additions, changes or omissions as may be provided thereby, to such Security. SECTION 308. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and any premium and (subject to Section 307) any interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 309. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange or conversion or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly -28- 37 permitted by this Indenture. All canceled Securities held by the Trustee shall be disposed of as directed by a Company Order; provided, however, that the Trustee shall not be required to destroy such cancelled Securities. SECTION 310. Computation of Interest. Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 311. CUSIP Numbers. The Company in issuing the Securities may use CUSIP numbers (if then generally in use) and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a convenience to Holders, provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption and that reliance may be placed only on the other identification numbers printed on the Securities. Any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of conversion, registration of transfer or exchange of any Security expressly provided for herein or in the terms of such Security), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or -29- 38 (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose money in an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and any premium and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium and interest for whose payment such money has been deposited with the Trustee. All moneys deposited with the Trustee pursuant to Section 401 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company upon Company Request. -30- 39 ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default", wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of or any premium on any Security of that series at its Maturity; or (3) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or (4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 10% in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days (provided that, if any Person becomes the successor to the Company pursuant to Article Eight and such Person is a corporation, partnership or trust organized and validly existing under the law of a jurisdiction outside the United States, each reference in this Clause 5 to an applicable Federal or State law of a particular kind shall be deemed to refer to such -31- 40 law or any applicable comparable law of such non-U.S. jurisdiction, for as long as such Person is the successor to the Company hereunder and is so organized and existing); or (6) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action (provided that, if any Person becomes the successor to the Company pursuant to Article Eight and such Person is a corporation, partnership or trust organized and validly existing under the law of a jurisdiction outside the United States, each reference in this Clause 6 to an applicable Federal or State law of a particular kind shall be deemed to refer to such law or any applicable comparable law of such non-U.S. jurisdiction, for as long as such Person is the successor to the Company hereunder and is so organized and existing); or (7) any other Event of Default provided with respect to Securities of that series. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(5) or 501(6)) with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal amount of all the Securities of that series (or, in the case of any Security of that series which specifies an amount to be due and payable thereon upon acceleration of the Maturity thereof, such amount as may be specified by the terms thereof) to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable. If an Event of Default specified in Section 501(5) or 501(6) with respect to Securities of any series at the time Outstanding occurs, the principal amount of all the Securities of that series (or, in the case of any Security of that series which specifies an amount to be due and payable thereon upon acceleration of the Maturity thereof, such amount as may be specified by the terms thereof) shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable. -32- 41 At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities of that series, (B) the principal of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and any premium and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium and on any overdue interest, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the -33- 42 reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. SECTION 505. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. -34- 43 SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or any premium or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; and SECOND: To the payment of the amounts then due and unpaid for principal of and any premium and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and any premium and interest, respectively. SECTION 507. Limitation on Suits. No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee indemnity reasonably satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders. -35- 44 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium and (subject to Section 307) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date), and, if the terms of such Security so provide, to convert such Security in accordance with its terms, and to institute suit for the enforcement of any such payment and, if applicable, any such right to convert, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. -36- 45 SECTION 512. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default (1) in the payment of the principal of or any premium or interest on any Security of such series, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs, including reasonable attorneys' fees and expenses, against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company or the Trustee or, if applicable, in any suit for the enforcement of the right to convert any Security in accordance with its terms. -37- 46 SECTION 515. Waiver of Usury, Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 602. Notice of Defaults. If a default occurs hereunder with respect to Securities of any series, the Trustee shall give the Holders of Securities of such series notice of such default as and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default of the character specified in Section 501(4) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series. -38- 47 SECTION 603. Certain Rights of Trustee. Subject to the provisions of Section 601: (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order, and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (4) the Trustee may consult with counsel of its selection and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (8) the Trustee shall not be liable for any action taken, suffered or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; -39- 48 (9) the Trustee shall not be deemed to have notice of any default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Securities and this Indenture; and (10) the rights, privileges, protections, immunities and benefits given to the Trustee, including its rights to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder. SECTION 604. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee does not assume any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 605. May Hold Securities. The Trustee, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. SECTION 607. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time such compensation as shall be agreed in writing between the parties for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); -40- 49 (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify each of the Trustee or any predecessor Trustee for, and to hold it harmless against, any and all losses, liabilities, damages, claims or expenses including taxes (other than taxes imposed on the income of the Trustee) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim (whether asserted by the Company, a Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(5) or Section 501(6), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. SECTION 608. Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. To the extent permitted by the Trust Indenture Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under this Indenture with respect to Securities of more than one series. SECTION 609. Corporate Trustee Required; Eligibility. There shall at all times be one (and only one) Trustee hereunder with respect to the Securities of each series, which may be Trustee hereunder for Securities of one or more other series. Each Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such, has a combined capital and surplus of at least $50,000,000 and has its Corporate Trust Office in the Borough of Manhattan, The City of New York. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee with respect to the Securities of any series shall cease to be eligible in accordance with the provisions of this -41- 50 Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. Resignation and Removal; Appointment of Successor. No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 60 days after the giving of such notice of resignation, the resigning Trustee may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 30 days after the giving of a notice of removal pursuant to this paragraph, the Trustee being removed may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. If at any time: (1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (A) the Company by a Board Resolution may remove the Trustee with respect to all Securities, or (B) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees. -42- 51 If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series to all Holders of Securities of such series in the manner provided in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable -43- 52 to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in the first or second preceding paragraph, as the case may be. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. -44- 53 SECTION 613. Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). -45- 54 -46- 55 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee (1) semi-annually, not later than May 15 and November 15 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities of each series as of the immediately preceding May 1 or November 1, as the case may be, and (2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar. SECTION 702. Preservation of Information; Communications to Holders. The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act. Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 703. Reports by Trustee. The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. -47- 56 Reports so required to be transmitted at stated intervals of not more than 12 months shall be transmitted no later than July 1 and shall be dated as of May 1 in each calendar year, commencing in 2000. A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any stock exchange and of any delisting thereof. SECTION 704. Reports by Company. The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of any domestic or foreign jurisdiction and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and, for each Security that by its terms provides for conversion, shall have provided for the right to convert such Security in accordance with its terms; -48- 57 (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or any Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; (3) if, as a result of any such consolidation or merger or such conveyance, transfer or lease, properties or assets of the Company would become subject to a pledge, lien or other similar encumbrance which would not be permitted by this Indenture, the Company or such successor Person, as the case may be, shall take such steps as shall be necessary effectively to secure the Securities equally and ratably with (or prior to) all indebtedness secured thereby; and (4) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802. Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or -49- 58 (2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default for the benefit of the Holders of all or any series of Securities (and if such additional Events of Default are to be for the benefit of less than all series of Securities, stating that such additional Events of Default are expressly being included solely for the benefit of such series); or (4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of Securities in uncertificated form; or (5) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such addition, change or elimination (A) shall neither (i) apply to any Security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (ii) modify the rights of the Holder of any such Security with respect to such provision or (B) shall become effective only when there is no such Security Outstanding; or (6) to secure the Securities pursuant to the requirements of Section 801(3) or Section 1005 or otherwise; or (7) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301; or (8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 611; or (9) to add to or change any of the provisions of this Indenture with respect to any Securities that by their terms may be converted into securities or other property other than Securities of the same series and of like tenor, in order to permit or facilitate the issuance, payment or conversion of such Securities; or (10) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action pursuant to this Clause (10) shall not adversely affect the interests of the Holders of Securities of any series in any material respect. -50- 59 SECTION 902. Supplemental Indentures With Consent of Holders. With the consent of the Holders of a majority in principal amount of the Outstanding Securities of all series affected by such supplemental indenture (considered together as one class for this purpose), by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities of such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any instalment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or reduce the amount of the principal of an Original Issue Discount Security or any other Security which would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502, or permit the Company to redeem any Security if, absent such supplemental indenture, the Company would not be permitted to do so, or change any Place of Payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or (2) if any Security provides that the Holder may require the Company to repurchase or convert such Security, impair such Holder's right to require repurchase or conversion of such Security on the terms provided therein, or (3) reduce the percentage in principal amount of the Outstanding Securities of any one or more series (considered separately or together as one class, as applicable), the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (4) modify any of the provisions of this Section, Section 513 or Section 1006, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and Section 1006, or the deletion of this proviso, in accordance with the requirements of Sections 611 and 901(8). A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of -51- 60 such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 906. Reference in Securities to Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series. -52- 61 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest. The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of and any premium and interest on the Securities of that series in accordance with the terms of the Securities and this Indenture. SECTION 1002. Maintenance of Office or Agency. The Company will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange, where Securities may be surrendered for conversion and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. With respect to any Global Security, and except as otherwise may be specified for such Global Security as contemplated by Section 301, the Corporate Trust Office of the Trustee shall be the Place of Payment where such Global Security may be presented or surrendered for payment or for registration of transfer or exchange, or where successor Securities may be delivered in exchange therefor, provided, however, that any such payment, presentation, surrender or delivery effected pursuant to the Applicable Procedures of the Depositary for such Global Security shall be deemed to have been effected at the Place of Payment for such Global Security in accordance with the provisions of this Indenture. -53- 62 SECTION 1003. Money for Securities Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of or any premium or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium and interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to each due date of the principal of or any premium or interest on any Securities of that series, deposit (or, if the Company has deposited any trust funds with a trustee pursuant to Section 1304(1), cause such trustee to deposit) with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (1) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (2) during the continuance of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment in respect of the Securities of that series, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities of that series. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or any premium or interest on any Security of any series and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may, at the expense of the Company, cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The City of New York, notice that such money remains -54- 63 unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Statement by Officers as to Default. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 1005. Restriction on Certain Liens. The Company will not create, assume, incur or guarantee any indebtedness for borrowed money that is secured by a pledge, lien or other similar encumbrance (except for Permitted Liens) on the Company's or any Subsidiary's voting or profit participating equity ownership interests in GS&Co. (or in any Subsidiary that beneficially owns or holds any such interests in GS&Co., directly or indirectly), unless the Company also secures the Securities equally and ratably with (or, at the option of the Company, prior to) the indebtedness secured thereby. SECTION 1006. Waiver of Certain Covenants. Except as otherwise specified as contemplated by Section 301 for Securities of a specific series, the Company may, with respect to the Securities of any one or more series, omit in any particular instance to comply with any term, provision or condition set forth in any covenant provided pursuant to Section 301(18), 901(2) or 901(7) for the benefit of the Holders of such series or in Article Eight or Section 1005 if, before the time for such compliance, the Holders of a majority in principal amount of the Outstanding Securities of all series affected by such waiver (considered together as one class for this purpose) shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. -55- 64 ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Applicability of Article. Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for such Securities) in accordance with this Article. SECTION 1102. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities shall be established in or pursuant to a Board Resolution or in another manner specified as contemplated by Section 301 for such Securities. In case of any redemption at the election of the Company of less than all the Securities of any series (including any such redemption affecting only a single Security), the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date, of the principal amount of Securities of such series to be redeemed and, if applicable, of the tenor of the Securities to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction. SECTION 1103. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities of any series are to be redeemed (unless all the Securities of such series and of a specified tenor are to be redeemed or unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security of such series, provided that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. If less than all the Securities of such series and of a specified tenor are to be redeemed (unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series and specified tenor not previously called for redemption in accordance with the preceding sentence. If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for -56- 65 redemption. Securities which have been converted during a selection of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection. The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for redemption as aforesaid and, in case of any Securities selected for partial redemption as aforesaid, the principal amount thereof to be redeemed. The provisions of the two preceding paragraphs shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 1104. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall identify the Securities to be redeemed (including CUSIP numbers, if any) and shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Securities of any series consisting of more than a single Security are to be redeemed, the identification (and, in the case of partial redemption of any such Securities, the principal amounts) of the particular Securities to be redeemed and, if less than all the Outstanding Securities of any series consisting of a single Security are to be redeemed, the principal amount of the particular Security to be redeemed, (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date, (5) the place or places where each such Security is to be surrendered for payment of the Redemption Price, -57- 66 (6) for any Securities that by their terms may be converted, the terms of conversion, the date on which the right to convert the Security to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion, and (7) that the redemption is for a sinking fund, if such is the case. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company and shall be irrevocable. SECTION 1105. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date, other than any Securities called for redemption on that date which have been converted prior to the date of such deposit. If any Security called for redemption is converted, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in the last paragraph of Section 307 or in the terms of such Security) be paid to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust. SECTION 1106. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that, unless otherwise specified as contemplated by Section 301, instalments of interest whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security. -58- 67 SECTION 1107. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series and of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. ARTICLE TWELVE SINKING FUNDS SECTION 1201. Applicability of Article. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of any series except as otherwise specified as contemplated by Section 301 for such Securities. The minimum amount of any sinking fund payment provided for by the terms of any Securities is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of such Securities is herein referred to as an "optional sinking fund payment". If provided for by the terms of any Securities, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities as provided for by the terms of such Securities. SECTION 1202. Satisfaction of Sinking Fund Payments with Securities. The Company (1) may deliver Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been converted in accordance with their terms or which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to any Securities of such series required to be made pursuant to the terms of such Securities as and to the extent provided for by the terms of such Securities; provided that the Securities to be so credited have not been previously so credited. The Securities to be so credited shall be received and credited for such purpose by the Trustee at the Redemption Price, as specified in the Securities so to be redeemed (or at such other prices as may be specified for such Securities as contemplated in Section 301), for redemption through -59- 68 operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. SECTION 1203. Redemption of Securities for Sinking Fund. Not less than 90 days (or such shorter period as shall be satisfactory to the Trustee) prior to each sinking fund payment date for any Securities, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment for such Securities pursuant to the terms of such Securities, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities pursuant to Section 1202 and will also deliver to the Trustee any Securities to be so delivered. Not less than 60 days prior to each such sinking fund payment date, the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107. ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may elect, at its option at any time, to have Section 1302 or Section 1303 applied to any Securities or any series of Securities, as the case may be, designated pursuant to Section 301 as being defeasible pursuant to such Section 1302 or 1303, in accordance with any applicable requirements provided pursuant to Section 301 and upon compliance with the conditions set forth below in this Article. Any such election shall be evidenced by a Board Resolution or in another manner specified as contemplated by Section 301 for such Securities. SECTION 1302. Defeasance and Discharge. Upon the Company's exercise of its option (if any) to have this Section applied to any Securities or any series of Securities, as the case may be, the Company shall be deemed to have been discharged from its obligations with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1304 are satisfied (hereinafter called "Defeasance"). For this purpose, such Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such Securities and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), subject to the -60- 69 following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of such Securities to receive, solely from the trust fund described in Section 1304 and as more fully set forth in such Section, payments in respect of the principal of and any premium and interest on such Securities when payments are due, (2) the Company's obligations with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (3) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (4) this Article. Subject to compliance with this Article, the Company may exercise its option (if any) to have this Section applied to any Securities notwithstanding the prior exercise of its option (if any) to have Section 1303 applied to such Securities. SECTION 1303. Covenant Defeasance. Upon the Company's exercise of its option (if any) to have this Section applied to any Securities or any series of Securities, as the case may be, (1) the Company shall be released from its obligations under Section 801(3) and Section 1005, and any covenants provided pursuant to Section 301(18), 901(2) or 901(7) for the benefit of the Holders of such Securities and (2) the occurrence of any event specified in Sections 501(4) (with respect to any of Section 801(3) and Section 1005, and any such covenants provided pursuant to Section 301(18), 901(2) or 901(7)) and 501(7) shall be deemed not to be or result in an Event of Default, in each case with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1304 are satisfied (hereinafter called "Covenant Defeasance"). For this purpose, such Covenant Defeasance means that, with respect to such Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such specified Section (to the extent so specified in the case of Section 501(4)), whether directly or indirectly by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 1304. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to the application of Section 1302 or Section 1303 to any Securities or any series of Securities, as the case may be: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee which satisfies the requirements contemplated by Section 609 and agrees to comply with the provisions of this Article applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefits of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) such other obligations or arrangements as may be specified as contemplated by Section 301 with respect to such Securities, or (D) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay -61- 70 and discharge, and which shall be applied by the Trustee (or any such other qualifying trustee) to pay and discharge, the principal of and any premium and interest on such Securities on the respective Stated Maturities, in accordance with the terms of this Indenture and such Securities. As used herein, "U.S. Government Obligation" means (x) any security which is (i) a direct obligation of the United States of America for the payment of which the full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (y) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in Clause (x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt. (2) In the event of an election to have Section 1302 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this instrument, there has been a change in the applicable Federal income tax law, in either case (A) or (B) to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit, Defeasance and discharge to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit, Defeasance and discharge were not to occur. (3) In the event of an election to have Section 1303 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit and Covenant Defeasance to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit and Covenant Defeasance were not to occur. (4) The Company shall have delivered to the Trustee an Officers' Certificate to the effect that neither such Securities nor any other Securities of the same series, if then listed on any securities exchange, will be delisted as a result of such deposit. (5) No event which is, or after notice or lapse of time or both would become, an Event of Default with respect to such Securities or any other Securities shall have occurred and be continuing at the time of such deposit or, with regard to any such event specified in Sections 501(5) and (6), at any time on or prior to the 90th day after the date -62- 71 of such deposit (it being understood that this condition shall not be deemed satisfied until after such 90th day). (6) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming all Securities are in default within the meaning of such Act). (7) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound. (8) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act unless such trust shall be registered under the Investment Company Act or exempt from registration thereunder. (9) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with. SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee or other qualifying trustee (solely for purposes of this Section and Section 1306, the Trustee and any such other trustee are referred to collectively as the "Trustee") pursuant to Section 1304 in respect of any Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any such Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal and any premium and interest, but money so held in trust need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 1304 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Securities. Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1304 with respect to any Securities which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect the Defeasance or Covenant Defeasance, as the case may be, with respect to such Securities. -63- 72 SECTION 1306. Reinstatement. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article with respect to any Securities by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations under this Indenture and such Securities from which the Company has been discharged or released pursuant to Section 1302 or 1303 shall be revived and reinstated as though no deposit had occurred pursuant to this Article with respect to such Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to Section 1305 with respect to such Securities in accordance with this Article; provided, however, that if the Company makes any payment of principal of or any premium or interest on any such Security following such reinstatement of its obligations, the Company shall be subrogated to the rights (if any) of the Holders of such Securities to receive such payment from the money so held in trust. ----------------------------- This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. THE GOLDMAN SACHS GROUP, INC. By................................... Attest: .............................. THE BANK OF NEW YORK By................................... Attest: .............................. -64- 73 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the .... day of ..........., ...., before me personally came ..........................., to me known, who, being by me duly sworn, did depose and say that he is .................... of The Goldman Sachs Group, Inc., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. ............................... STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the .... day of ..........., ...., before me personally came ..........................., to me known, who, being by me duly sworn, did depose and say that he is .................... of ................................., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. ............................... -65- EX-5.1 3 OPINION OF SULLIVAN & CROMWELL 1 Exhibit 5.1 SULLIVAN & CROMWELL NEW YORK TELEPHONE: (212) 558-4000 TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC) CABLE ADDRESS: LADYCOURT, NEW YORK FACSIMILE: (212) 558-3588 125 BROAD STREET, NEW YORK 10004-2498 --------------------------------------------------------- 1701 PENNSYLVANIA AVE, N.W. WASHINGTON, D.C. 20006-5805 1888 CENTURY PARK EAST, LOS ANGELES 90067-1725 8, PLACE VENDOME, 75001 PARIS ST. OLAVE'S HOUSE, 9a IRONMONGER LANE, LONDON EC2V 8EY 101 COLLINS STREET, MELBOURNE 3000 2-1, MARUNOUCHI I-CHOME, CHIYODA-KU, TOKYO 100 NINE QUEENS ROAD, CENTRAL, HONG KONG OBERLINDAU 54-56, 60323 FRANKFURT AM MAIN April 29, 1999 The Goldman Sachs Group, Inc., 85 Broad Street New York, NY 10004 Dear Sirs: In connection with the registration under the Securities Act of 1933 (the "Act") of (euro) 1,000,000,000 principal amount of % Euro Notes due 2009 (the "Securities"), of The Goldman Sachs Group, Inc., a Delaware corporation (the "Company"), we, as your counsel, have examined such corporate records, certificates and other documents, and such questions of law, as we have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, we advise you that, in our opinion, when the Registration Statement has become effective under the Act, the Indenture relating to the Securities has been duly authorized, executed and delivered, the terms of the Securities and of their issuance and sale have been duly established in conformity with the Indenture so as not to violate any applicable law or result 2 The Goldman Sachs Group, Inc. -2- in a default under or breach of any agreement or instrument binding upon the Company and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company, and the Securities have been duly executed and authenticated in accordance with the Indenture and issued and sold as contemplated in the Registration Statement, the Securities will constitute valid and legally binding obligations of the Company, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. We 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 Euros into United States dollars will depend upon various factors, including which court renders the judgment. Under Section 27 of the New York Judiciary Law, a state court in the State of New York rendering a judgment on a Security would be required to render such judgment in Euros, and such judgment would be converted into United States dollars at 3 The Goldman Sachs Group, Inc. -3- 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 we are expressing no opinion as to the effect of the laws of any other jurisdiction. We have relied as to certain matters on information obtained from public officials, officers of the Company and other sources believed by us to be responsible. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the references to us under the heading "Validity of the Notes" in the Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /s/ Sullivan & Cromwell EX-8.1 4 OPINION OF SULLIVAN & CROMWELL 1 EXHIBIT 8.1 SULLIVAN & CROMWELL NEW YORK TELEPHONE: (212) 558-4000 TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC) CABLE ADDRESS: LADYCOURT, NEW YORK FACSIMILE: (212) 558-3588 125 BROAD STREET, NEW YORK 10004-2498 ------------ 1701 PENNSYLVANIA AVE, N.W. WASHINGTON, D.C. 20006-5805 1888 CENTURY PARK EAST, LOS ANGELES 90067-1725 8, PLACE VENDOME, 75001 PARIS ST. OLAVE'S HOUSE, 9A IRONMONGER LANE, LONDON EC2V 8EY 101 COLLINS STREET, MELBOURNE 3000 2-1, MARUNOUCHI I-CHOME, CHIYODA-KU, TOKYO 100 NINE QUEEN'S ROAD, CENTRAL, HONG KONG OBERLINDAU 54-56, 60323 FRANKFURT AM MAIN April 29, 1999 The Goldman Sachs Group, Inc., 85 Broad Street, New York, New York 10004. Ladies and Gentlemen: As counsel to The Goldman Sachs Group, Inc. (the "Company") in connection with the issuance of (euro)1,000,000,000 aggregate principal amount of % euro Notes due 2009, we hereby confirm to you our opinion as set forth under the heading "United States Taxation" in the Prospectus which forms a part of the Registration Statement of the Company to which this opinion is filed as an exhibit, 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 EX-12.1 5 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 THE GOLDMAN SACHS GROUP, L.P. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
THREE MONTHS ENDED YEAR ENDED NOVEMBER FEBRUARY ---------------------------------------------- --------------------------- 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- ($ IN MILLIONS) Net earnings......... $ 500 $ 1,348 $ 2,399 $ 2,746 $ 2,428 $ 884 $1,007 Add: Provision for taxes........... 8 20 207 268 493 138 181 Portion of rents representative of an interest factor.......... 27 29 28 29 35 8 11 Interest expense on all indebtedness.... 8,915 9,841 11,160 12,986 13,958 3,431 2,861 ------ ------- ------- ------- ------- ------ ------ Earnings, as adjusted........... $9,450 $11,238 $13,794 $16,029 $16,914 $4,461 $4,060 ====== ======= ======= ======= ======= ====== ====== Fixed charges: Portion of rents representative of an interest factor.......... $ 27 $ 29 $ 28 $ 29 $ 35 $ 8 $ 11 Interest expense on all indebtedness.... 8,915 9,841 11,160 12,986 13,958 3,431 2,861 ------ ------- ------- ------- ------- ------ ------ Fixed charges........ $8,942 $ 9,870 $11,188 $13,015 $13,993 $3,439 $2,872 ====== ======= ======= ======= ======= ====== ====== Ratio of earnings to fixed charges...... 1.06x 1.14x 1.23x 1.23x 1.21x 1.30x 1.41x ====== ======= ======= ======= ======= ====== ======
EX-15.1 6 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION 1 Exhibit 15.1 April 29, 1999 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Re: The Goldman Sachs Group, Inc. Registration Statement on Form S-1 Re (Euro)1,000,000,000 Notes Commissioners: We are aware that our report dated April 9, 1999 on our review of the condensed consolidated financial statements of The Goldman Sachs Group, L.P. and Subsidiaries (the "Firm") as of February 26, 1999 and for the three months ended February 26, 1999 and February 27, 1998 is included in the Firm's Prospectus constituting part of this Registration Statement on Form S-1. Pursuant to Rule 436(c) under the Securities Act of 1933, that report should not be considered a part of the Registration Statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. Very truly yours, /s/ PricewaterhouseCoopers LLP EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP. 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ------------------------ We consent to the inclusion in the Prospectus constituting part of this Registration Statement on Form S-1 of our reports dated January 22, 1999, on our audits of the consolidated financial statements, selected historical consolidated income statement and balance sheet data and the financial statement schedule of The Goldman Sachs Group, L.P. and Subsidiaries. We also consent to the references to our firm under the captions "Experts", "Summary Consolidated Financial Data", and "Selected Consolidated Financial Data". /s/ PricewaterhouseCoopers LLP New York, New York April 29, 1999. EX-23.3 8 CONSENT OF SIR JOHN BROWNE 1 Exhibit 23.3 CONSENT I, Sir John Browne, hereby consent to be named as a director of The Goldman Sachs Group, Inc., a Delaware corporation (the "Company"), in this registration statement on Form S-1 of the Company (including any and all amendments or supplements thereto). Dated: 21 April, 1999 /s/ Sir John Browne --------------------------- Sir John Browne EX-23.4 9 CONSENT OF JAMES A. JOHNSON 1 Exhibit 23.4 CONSENT I, James A. Johnson, hereby consent to be named as a director of The Goldman Sachs Group, Inc., a Delaware corporation (the "Company"), in this registration statement on Form S-1 of the Company (including any and all amendments or supplements thereto). Dated: April 20, 1999 /s/ James A. Johnson --------------------------- James A. Johnson EX-23.5 10 CONSENT OF JOHN L. WEINBERG 1 Exhibit 23.5 CONSENT I, John L. Weinberg, hereby consent to be named as a director of The Goldman Sachs Group, Inc., a Delaware corporation (the "Company"), in this registration statement on Form S-1 of the Company (including any and all amendments or supplements thereto). Dated: April 20, 1999 /s/ John L. Weinberg -------------------------------- John L. Weinberg EX-23.6 11 CONSENT OF SECURITIES DATA COMPANY 1 Exhibit 23.6 SECURITIES DATA COMPANY We hereby consent to the use of the information we provided for use in this Registration Statement relating to the offering of Debt Securities denominated in euros by The Goldman Sachs Group, Inc. and to the references to our name in the Registration Statement, including under the caption "Experts". Securities Data Company, A division of Thomson Information Services /s/ Francine Falchook - -------------------- Francine Falchook Senior Vice President April 26, 1999 EX-25.1 12 STATEMENT OF ELIGIBILITY OF TRUSTEE. 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 New York, New York 10004 (Address of principal executive offices) (Zip code) ---------- % (euro) Notes due 2009 (Title of the indenture securities) ================================================================================ 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.
- -------------------------------------------------------------------------------- Name Address - -------------------------------------------------------------------------------- Superintendent of Banks of the State of 2 Rector Street, New York, 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
(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- 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 26th day of April, 1999. THE BANK OF NEW YORK By: /s/ Mary LaGumina ------------------------------------ Name: Mary LaGumina Title: Assistant Vice President 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 December 31, 1998, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts ASSETS in Thousands Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin .................................. $ 3,951,273 Interest-bearing balances ............................ 4,134,162 Securities: Held-to-maturity securities .......................... 932,468 Available-for-sale securities ........................ 4,279,246 Federal funds sold and Securities purchased under agreements to resell ............................................... 3,161,626 Loans and lease financing receivables: Loans and leases, net of unearned income ............................................. 37,861,802 LESS: Allowance for loan and lease losses ....................................... 619,791 LESS: Allocated transfer risk reserve ............................................ 3,572 Loans and leases, net of unearned income, allowance, and reserve ..................... 37,238,439 Trading Assets ......................................... 1,551,556 Premises and fixed assets (including capitalized leases) .................................. 684,181 Other real estate owned ................................ 10,404 Investments in unconsolidated subsidiaries and associated companies ............................................ 196,032 Customers' liability to this bank on acceptances outstanding .............................. 895,160 Intangible assets ...................................... 1,127,375 Other assets ........................................... 1,915,742 ------------ Total assets ........................................... $ 60,077,664 ============ LIABILITIES Deposits: In domestic offices .................................. $ 27,020,578 Noninterest-bearing .................................. 11,271,304 Interest-bearing ..................................... 15,749,274 In foreign offices, Edge and Agreement subsidiaries, and IBFs ..................... 17,197,743 Noninterest-bearing .................................. 103,007 Interest-bearing ..................................... 17,094,736 Federal funds purchased and Securities sold under agreements to repurchase ........................................ 1,761,170 Demand notes issued to the U.S.Treasury ......................................... 125,423 Trading liabilities .................................... 1,625,632 Other borrowed money: With remaining maturity of one year or less ....................................... 1,903,700 With remaining maturity of more than one year through three years .................. 0 With remaining maturity of more than three years ................................... 31,639 Bank's liability on acceptances executed and outstanding ............................. 900,390 Subordinated notes and debentures ...................... 1,308,000 Other liabilities ...................................... 2,708,852 ------------ Total liabilities ...................................... 54,583,127 ------------ EQUITY CAPITAL Common stock ........................................... 1,135,284 Surplus ................................................ 764,443 Undivided profits and capital reserves ............................................. 3,542,168 Net unrealized holding gains (losses) on available-for-sale securities ........................................... 82,367 Cumulative foreign currency translation adjustments .............................. (29,725) ------------ Total equity capital ................................... 5,494,537 ------------ Total liabilities and equity capital ................... $ 60,077,664 ============
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. Renyi } Gerald L. Hassell } Directors Alan R. Griffith } - -------------------------------------------------------------------------------- EX-27.1 13 FINANCIAL DATA SCHEDULE
BD THE AMOUNTS DISCLOSED IN THE FINANCIAL DATA SUMMARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000,000 3-MOS NOV-26-1999 NOV-30-1998 FEB-26-1999 10,706 23,935 41,776 74,036 70,521 962 230,624 33,863 33,437 36,906 24,770 62,152 20,405 0 0 0 0 223,633 1,398 3,013 327 902 216 2,861 1,275 1,188 1,188 0 0 1,007 0 0 REPRESENTS THE FIRST MONDAY OF THE PERIOD. INCLUDES CASH AND CASH EQUIVALENTS AND CASH AND SECURITIES SEGREGATED IN COMPLIANCE WITH U.S. FEDERAL AND OTHER REGULATIONS AS DISCLOSED ON THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION. INCLUDED IN OTHER ASSETS ON THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION. EXCLUDES PARTNERS' CAPITAL AND PARTNERS' CAPITAL ALLOCATED FOR INCOME TAXES AND POTENTIAL WITHDRAWALS AS DISCLOSED ON THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION. INCLUDES REVENUES FROM PRINCIPAL INVESTMENTS, WHICH MAINLY REPRESENTS REVENUES FROM INVESTMENTS IN MERCHANT BANKING FUNDS. INCLUDED IN REVENUES FROM ASSET MANAGEMENT AND SECURITIES SERVICES ON THE CONSOLIDATED STATEMENT OF EARNINGS.
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