Goldman Sachs is a leading global investment banking and securities
firm with three principal business lines:
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 offerings, we will grant restricted stock units, stock options or interests
in a defined contribution plan to substantially all of our employees. Following
the offerings, our employees, including former partners, will own approximately
65% of Goldman Sachs. None of our employees are selling shares in the
offerings.
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 offerings, 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.
Except as otherwise indicated, all amounts with respect to the volume,
number and market share of mergers and acquisitions and underwriting
transactions and related ranking information have been derived from information
compiled and classified by Securities Data Company. Securities Data Company
obtains and gathers its information from sources it considers reliable, but
Securities Data Company does not guarantee the accuracy or completeness of the
information. In the case of mergers and acquisitions, data are based upon the
dollar value of announced transactions for the period indicated, taken as a
whole, with full credit to each of the advisors to each party in a transaction.
In the 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%.
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:
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 billion as of November 25, 1994 to $369.7
billion as of February 26, 1999, representing a compound annual growth rate of
38%. As of February 26, 1999, we had $206.4 billion of assets under management.
We manage merchant banking funds that had $15.5 billion of capital commitments
as of the end of 1998.
We pursue our strategy to grow our three core businesses through an
emphasis on:
Expanding High Value-Added Businesses
To achieve strong growth and high returns, we seek to build leadership
positions in high value-added services for our clients. For example, we have
substantially increased the number of professionals in investment banking to
improve and expand our ability to execute mergers and acquisitions, initial
public offerings and high-yield financings. In trading, we structure and execute
large and complex transactions for institutional investors, pension funds and
corporate clients around the world. In asset management, we emphasize equity and
alternative investment products and use our established international presence
to build a global asset management franchise.
Increasing the Stability of Our Earnings
We seek to balance the stability of our earnings with return on equity
and long-term earnings growth. We believe our trading businesses are key
ingredients to our success. While we plan to continue to grow our trading
businesses, the financial market shocks of the past year underscored the
importance of our strategy of emphasizing growth in our investment banking,
asset management and securities services businesses. Through a greater relative
emphasis on these businesses, our goal is to gradually increase the stability of
our earnings.
Pursuing International Opportunities
We believe that our global reach will allow us to take advantage of
growth in international markets. In Europe, for example, we anticipate that the
recent establishment of the European Economic and Monetary Union will, over
time, create a large pan-European market rivaling the U.S. capital markets in
size and liquidity. We believe this will generate increased activity across our
businesses in the region. In Asia, we believe that an increase in corporate
restructurings and in the need for liquidity will increase our mergers and
acquisitions and trading opportunities. In the longer term, we anticipate
additional opportunities in asset management activities due to a shift we
anticipate toward the privatization of pension systems and in demographics.
Leveraging the Franchise
We believe our various businesses are generally stronger and more
successful because they are part of the Goldman Sachs franchise. Our culture of
teamwork fosters cooperation among our businesses, which allows us to provide
our clients with a full range of products and services on a coordinated basis.
Our investment bankers, for example, refer clients who are selling their
businesses to those in Goldman Sachs who manage wealth. In addition, our
merchant banking investments in companies lead to future clients for investment
banking.
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 philosophy that
rewards teamwork. We were ranked number seven in Fortune magazine's "The
100 Best Companies to Work for in America" in January 1999 and were ranked
number three in Fortune magazine's 1999 "The Top 50 MBA Dream Companies",
the highest-ranked investment banking and securities firm in each case.
Global Reach
Over the past decade, we have made a significant commitment to building
a worldwide business. We have achieved leading positions in major international
markets by capitalizing on our product knowledge and global research, as well as
by building a local presence where appropriate. In doing so, we have become one
of the few truly global investment banking and securities firms with the ability
to execute large and complex cross-border transactions. We had the number one
market share of 23.2% in cross-border mergers and acquisitions for the period
January 1, 1994 to December 31, 1998. In addition, in Japan, we were the largest
non-Japanese mutual fund manager as of the end of February 1999, according to
The Investment Trusts Association.
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:
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; 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.
The following table illustrates our leadership in the mergers and
acquisitions advisory market for the indicated period taken as a whole:
(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.
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:
(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.
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:
(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.
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
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:
In our proprietary activities, we assume a variety of risks and devote
substantial resources to identify, analyze and benefit from these exposures. We
leverage our strong research capabilities and capitalize on our proprietary
analytical models to analyze information and make informed trading judgments. We
seek to benefit from perceived disparities in the value of assets in the trading
markets and from macroeconomic and company-specific trends.
FICC has established itself as a leading market participant by using a
three-part approach to deliver high quality service to its clients. First, we
offer broad market-making, research and market knowledge to our clients on a
global basis. Second, we create innovative solutions to complex client problems
by drawing upon our structuring and trading expertise. Third, we use our
expertise to take positions in markets when we believe the return is at least
commensurate with the risk.
A core activity in FICC is market-making in a broad array of securities
and products. For example, we are a primary dealer in many of the largest
government bond markets around the world, including the United States, Japan,
the United Kingdom and Canada; we are a member of the major futures exchanges;
and we have interbank dealer status in the currency markets in New York, London,
Tokyo and Hong Kong. Our willingness to make markets in a broad range of fixed
income, currency and commodity products and their derivatives is crucial both to
our client relationships and to support our underwriting business by providing
secondary market liquidity. Our clients value counterparties that are active in
the marketplace and are willing to provide liquidity and research-based points
of view. In addition, we believe that our significant investment in research
capabilities and proprietary analytical models are critical to our ability to
provide advice to our clients. 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
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 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 is comprised of the
following:
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:
(in billions)
![]()
The following table sets forth the amount of assets under management by
asset class:
(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.
The table below sets forth the amount of assets under supervision by
distribution channel and client category as of November 1998:
(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
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 funds' income and gains are included in
commissions. Third, Goldman Sachs, as a substantial investor in these funds, is
allocated its proportionate share of the funds' unrealized appreciation or
depreciation arising from changes in fair value as well as gains and losses upon
realization. These items are included in Trading and Principal Investments.
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 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.
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:
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-Onlinesm, which, in conjunction with Goldman, Sachs &
Co., will act as an underwriter of securities offerings via the Internet and
other electronic means. GS-Onlinesm 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".
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:
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.
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.
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 the offerings 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.
The financial services industry and all of our businesses are
intensely competitive, and we expect them to remain so. Our competitors are
other brokers and dealers, investment banking firms, insurance companies,
investment advisors, mutual funds, hedge funds, commercial banks and merchant
banks. We compete with some of our competitors globally and with some others on
a regional, product or niche basis. We compete on the basis of a number of
factors, including transaction execution, our products and services, innovation,
reputation and price.
Competition is also intense for the attraction and retention of
qualified employees. Our ability to continue to compete effectively in our
businesses will depend upon our ability to attract new employees and retain and
motivate our existing employees. See " Employees" for a discussion of our
efforts in this regard.
In recent years there has been substantial consolidation and
convergence among companies in the financial services industry. In particular, a
number of large commercial banks, insurance companies and other broad-based
financial services firms have established or acquired broker-dealers or have
merged with other financial institutions. Many of these firms have the ability
to offer a wide range of products, from loans, deposit-taking and insurance to
brokerage, asset management and investment banking services, which may enhance
their competitive position. They also have the ability to support investment
banking and securities products with commercial banking, insurance and other
financial services revenues in an effort to gain market share, which could
result in pricing pressure in our businesses.
This trend toward consolidation and convergence has significantly
increased the capital base and geographic reach of our competitors. This trend
has also hastened the globalization of the securities and other finan-cial
services markets. As a result, we have had to commit capital to support our
international operations and to execute large global transactions.
We believe that some of our most significant challenges and
opportunities will arise outside the United States. See "Industry and Economic
Outlook" for a discussion of these challenges and opportunities. In order to
take advantage of these opportunities, we will have to compete successfully with
financial institutions based in important non-U.S. markets, particularly in
Europe. Some of these institutions are larger, better capitalized and have a
stronger local presence and a longer operating history in these markets.
We have experienced intense price competition in some of our businesses
in recent years. For example, equity and debt underwriting discounts have been
under pressure for a number of years and the ability to execute trades
electronically, through the Internet and other alternative trading systems may
increase the pressure on trading commissions. It appears that this trend toward
alternative trading systems will continue and perhaps accelerate. Similarly,
underwriting spreads in Latin American and other privatizations have been
subject to considerable pressure in the last year. We believe that we may
experience pricing pressures in these and other areas in the future as some of
our competitors seek to obtain market share by reducing prices.
See "Risk Factors The Financial Services Industry Is Intensely
Competitive and Rapidly Consolidating" for a discussion of the competitive risks
we face in our businesses.
Goldman Sachs' business is, and the securities and commodity futures
and options industries generally are, subject to extensive regulation in the
United States and elsewhere. As a matter of public policy, regulatory bodies in
the United States and the rest of the world are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets, not with protecting the
interests of Goldman Sachs' shareholders or creditors. In the United States, the
SEC is the federal agency responsible for the administration of the federal
securities laws. Goldman, Sachs & Co. is registered as a broker-dealer and as an
investment adviser with the SEC and as a broker-dealer in all 50 states and the
District of Columbia. Self-regulatory organizations, such as the NYSE, adopt
rules and examine broker-dealers, such as Goldman, Sachs & Co. In addition,
state securities and other regulators also have regulatory or oversight
authority over Goldman, Sachs & Co. Similarly, our businesses are also subject
to regulation by various non-U.S. governmental and regulatory bodies and
self-regulatory authorities in virtually all countries where we have
offices.
Broker-dealers are subject to regulations that cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure, record-keeping, the financing of customers' purchases and the conduct
of directors, officers and employees. Additional legislation, changes in rules
promulgated by self-regulatory organizations or changes in the interpretation or
enforcement of existing laws and rules, either in the United States or
elsewhere, may directly affect the mode of operation and profitability of
Goldman Sachs.
The U.S. and non-U.S. government agencies and self-regulatory
organizations, as well as state securities commissions in the United States, are
empowered to conduct administrative proceedings that can result in censure,
fine, the issuance of cease-and-desist orders or the suspension or expulsion of
a broker-dealer or its directors, officers or employees. Occasionally, our
subsidiaries have been subject to investigations and proceedings, and sanctions
have been imposed for infractions of various regulations relating to our
activities, none of which has had a material adverse effect on us or our
businesses.
The commodity futures and options industry in the United States is
subject to
regulation under the Commodity Exchange Act, as amended. The Commodity Futures
Trading Commission is the federal agency charged with the administration of the
Commodity Exchange Act and the regulations thereunder. Goldman, Sachs & Co. is
registered with the Commodity Futures Trading Commission as a futures commission
merchant, commodity pool operator and commodity trading advisor.
As a registered broker-dealer and member of various self-regulatory
organizations, Goldman, Sachs & Co. is subject to the SEC's uniform net capital
rule, Rule 15c3-1. This rule specifies the minimum level of net capital a
broker-dealer must maintain and also requires that at least a minimum part of
its assets be kept in relatively liquid form. Goldman, Sachs & Co. is also
subject to the net capital requirements of the Commodity Futures Trading
Commission and various securities and commodity exchanges. See Note 8 to the
audited consolidated financial statements and Note 5 to the unaudited condensed
consolidated financial statements for a discussion of our net capital.
The SEC and various self-regulatory organizations impose rules that
require notification when net capital falls below certain predefined criteria,
dictate the ratio of subordinated debt to equity in the regulatory capital
composition of a broker-dealer and constrain the ability of a broker-dealer to
expand its business under certain circumstances. Additionally, the SEC's uniform
net capital rule imposes certain requirements that may have the effect of
prohibiting a broker-dealer from distributing or withdrawing capital and
requiring prior notice to the SEC for certain withdrawals of capital.
In January 1999, the SEC adopted revisions to its uniform net capital
rule and related regulations that permit the registration of over-the-counter
derivatives dealers as broker-dealers. An over-the-counter derivatives dealer
can, upon adoption of a risk management framework in accordance with the new
rules, utilize a capital requirement based upon proprietary models for
estimating market risk exposures. We have established Goldman Sachs Financial
Markets, L.P. and are in the process of registering this company with the SEC as
an over-the-counter derivatives dealer to conduct in a more capital efficient
manner certain over-the-counter derivative businesses now conducted in other
affiliates.
Goldman Sachs is an active participant in the international fixed
income and equity markets. Many of our affiliates that participate in those
markets are subject to comprehensive regulations that include some form of
capital adequacy rule and other customer protection rules. For example, Goldman
Sachs provides investment services in and from the United Kingdom under a
regulatory regime that is undergoing comprehensive restructuring aimed at
implementing the Financial Services Authority as the United Kingdom's unified
regulator. The relevant 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 or pay dividends on our common stock.
We are involved in a number of judicial, regulatory and arbitration
proceedings (including those described below) concerning matters arising in
connection with the conduct of our businesses. We believe, based on currently
available information, that the results of such proceedings, in the aggregate,
will not have a material adverse effect on our financial condition, but might be
material to our operating results for any particular period, depending, in part,
upon the operating results for such period.
MobileMedia Securities Litigation
Goldman, Sachs & Co. has been named as a defendant in a purported class
action lawsuit commenced on December 6, 1996 and pending in the U.S. District
Court for the District of New Jersey. This lawsuit was brought on behalf of
purchasers of common stock of MobileMedia Corporation in an underwritten
offering in 1995 and purchasers of senior subordinated notes of MobileMedia
Communications Inc. in a concurrent underwritten offering. Defendants are
MobileMedia Corporation, certain of its officers and directors, and the lead
underwriters, including Goldman, Sachs & Co. MobileMedia Corporation is
currently reorganizing in bankruptcy.
Goldman, Sachs & Co. underwrote 2,242,500 shares of common stock, for a
total price of approximately $53 million, and Goldman Sachs International
underwrote 718,750 shares, for a total price of approximately $17 million.
Goldman, Sachs & Co. underwrote approximately $38 million in principal amount of
the senior subordinated notes.
The consolidated class action complaint alleges violations of the
disclosure requirements of the federal securities laws and seeks compensatory
and/or rescissory damages. In light of MobileMedia Corporation's bankruptcy, the
action against it has been stayed. Defendants' motion to dismiss was denied in
October 1998.
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 in
March 30, 1998 in the Commercial Court in London against Goldman Sachs
International in relation to the plaintiffs' 1997 purchase of the polymer
division of one of Goldman Sachs International's Norwegian clients, Jotun A/S.
The plaintiffs claim that they overpaid by $40 million based upon
misrepresentations concerning the financial performance of the polymer
division.
In November 1998, the Commercial Court granted Goldman Sachs
International's application for a stay of the action pending the outcome of
arbitration proceedings between Reichhold Chemicals, Inc. and Reichhold Norway
ASA, on the one hand, and Jotun A/S in Norway, on the other. 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.
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
offices comprise approximately 650,000 square feet of leased space.
Consistent with Goldman Sachs' global approach to its business, we also
have offices in Europe, Asia, Africa and Australia. In Europe, we have offices
that total approximately 790,000 square feet. Our largest presence in Europe is
in London, where we lease approximately 639,000 square feet through various
leases, with the principal one, for Peterborough Court, expiring in 2016. An
additional 396,000 square feet of leased space in London is expected to be
occupied during 2001.
In Asia, we have offices that total approximately 360,000 square feet.
Our largest offices in these regions are in Tokyo and Hong Kong. In Tokyo, we
currently lease approximately 175,000 square feet under leases that expire
between November 1999 and June 2005. In Hong Kong, we currently lease
approximately 103,000 square feet under a lease that expires in May 2000. We
recently entered into a new 12-year lease in Hong Kong for approximately 190,000
square feet. There are also significant expansion efforts underway in Tokyo and
Singapore.
Our space requirements have increased significantly over the last several years. Currently, Goldman Sachs is at or near capacity at most of its locations. As a result, we have been actively leasing additional space to support our anticipated growth. Based on our progress to date, we believe that we will be able to acquire additional space to meet our anticipated needs.
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