SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended May 26,August 25, 2000
or
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period to
Commission File Number: 001-14965
The Goldman Sachs Group, Inc.
Delaware | ||
(State or Other Jurisdiction of Incorporation or Organization) | 13-4019460 (I.R.S. Employer Identification No.) | |
85 Broad Street, New York, NY | ||
(Address of principal executive offices) | 10004 (Zip Code) |
(212) 902-1000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
As of June 23,September 22, 2000, there were 447,171,965454,235,989 shares of the registrant’s common stock outstanding and 7,440,362 shares of the registrant’s nonvoting common stock outstanding.
The Goldman Sachs Group, Inc.
FORM 10-Q
Page No. | ||||||
PART I: | FINANCIAL INFORMATION | |||||
Item 1: | Financial Statements (Unaudited) | |||||
Condensed Consolidated Statements of Earnings for the periods ended | 2 | |||||
Condensed Consolidated Statements of Financial Condition as of | 3 | |||||
Condensed Consolidated Statements of Changes in Stockholders’ Equity and Partners’ Capital for the periods ended | 4 | |||||
Condensed Consolidated Statements of Cash Flows for the periods ended | 5 | |||||
Condensed Consolidated Statements of Comprehensive Income for the periods ended | 6 | |||||
Notes to Condensed Consolidated Financial Statements | 7 | |||||
Review Report of Independent Accountants | 14 | |||||
Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||||
Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 26 | ||||
PART II: | OTHER INFORMATION | |||||
Item 1: | Legal Proceedings | 26 | ||||
Item | ||||||
Item 5: | Other Information | |||||
Item 6: | Exhibits and Reports on Form 8-K | |||||
Signatures |
1
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
Three Months Ended May | Six Months Ended May | Three Months Ended August | Nine Months Ended August | |||||||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||||||
(in millions, except share and per share amounts) | (in millions, except share and per share amounts) | |||||||||||||||||||||||||||||||||||
Revenues | Revenues | Revenues | ||||||||||||||||||||||||||||||||||
Global capital markets | Global capital markets | Global capital markets | ||||||||||||||||||||||||||||||||||
Investment banking | $ | 1,585 | $ | 1,002 | $ | 2,815 | $ | 1,904 | Investment banking | $ | 1,316 | $ | 1,150 | $ | 4,131 | $ | 3,054 | |||||||||||||||||||
Trading and principal investments | 1,335 | 1,719 | 3,431 | 3,117 | Trading and principal investments | 2,112 | 1,423 | 5,543 | 4,540 | |||||||||||||||||||||||||||
Asset management and securities services | Asset management and securities services | 942 | 616 | 1,886 | 1,159 | Asset management and securities services | 872 | 629 | 2,758 | 1,788 | ||||||||||||||||||||||||||
Interest income | Interest income | 4,334 | 3,018 | 8,028 | 6,031 | Interest income | 4,551 | 3,238 | 12,579 | 9,269 | ||||||||||||||||||||||||||
Total revenues | 8,196 | 6,355 | 16,160 | 12,211 | Total revenues | 8,851 | 6,440 | 25,011 | 18,651 | |||||||||||||||||||||||||||
Interest expense | Interest expense | 4,041 | 2,886 | 7,512 | 5,747 | Interest expense | 4,324 | 3,032 | 11,836 | 8,779 | ||||||||||||||||||||||||||
Revenues, net of interest expense | 4,155 | 3,469 | 8,648 | 6,464 | Revenues, net of interest expense | 4,527 | 3,408 | 13,175 | 9,872 | |||||||||||||||||||||||||||
Operating expenses | Operating expenses | Operating expenses | ||||||||||||||||||||||||||||||||||
Compensation and benefits, excluding employee initial public offering awards | Compensation and benefits, excluding employee initial public offering awards | 2,077 | 1,953 | 4,324 | 3,228 | Compensation and benefits, excluding employee initial public offering awards | 2,263 | 1,704 | 6,587 | 4,932 | ||||||||||||||||||||||||||
Nonrecurring employee initial public offering awards(1) | — | 2,257 | — | 2,257 | ||||||||||||||||||||||||||||||||
Nonrecurring employee initial public offering awards (1) | Nonrecurring employee initial public offering awards (1) | — | — | — | 2,257 | |||||||||||||||||||||||||||||||
Amortization of employee initial public offering awards | Amortization of employee initial public offering awards | 101 | 39 | 212 | 39 | Amortization of employee initial public offering awards | 102 | 115 | 314 | 154 | ||||||||||||||||||||||||||
Brokerage, clearing and exchange fees | Brokerage, clearing and exchange fees | 154 | 109 | 283 | 220 | Brokerage, clearing and exchange fees | 136 | 108 | 419 | 328 | ||||||||||||||||||||||||||
Market development | Market development | 111 | 78 | 217 | 155 | Market development | 126 | 92 | 343 | 247 | ||||||||||||||||||||||||||
Communications and technology | Communications and technology | 100 | 71 | 193 | 149 | Communications and technology | 111 | 75 | 304 | 224 | ||||||||||||||||||||||||||
Depreciation and amortization | Depreciation and amortization | 102 | 61 | 203 | 158 | Depreciation and amortization | 119 | 71 | 322 | 229 | ||||||||||||||||||||||||||
Occupancy | Occupancy | 101 | 67 | 196 | 145 | Occupancy | 116 | 76 | 312 | 221 | ||||||||||||||||||||||||||
Professional services and other | Professional services and other | 151 | 121 | 283 | 212 | Professional services and other | 181 | 85 | 464 | 297 | ||||||||||||||||||||||||||
Charitable contribution | Charitable contribution | — | 200 | — | 200 | Charitable contribution | — | — | — | 200 | ||||||||||||||||||||||||||
Total operating expenses | 2,897 | 4,956 | 5,911 | 6,763 | Total operating expenses | 3,154 | 2,326 | 9,065 | 9,089 | |||||||||||||||||||||||||||
Pre-tax earnings/(loss) | 1,258 | (1,487 | ) | 2,737 | (299 | ) | ||||||||||||||||||||||||||||||
Pre-tax earnings | Pre-tax earnings | 1,373 | 1,082 | 4,110 | 783 | |||||||||||||||||||||||||||||||
Provision/(benefit) for taxes | Provision/(benefit) for taxes | 503 | (1,827 | ) | 1,095 | (1,646 | ) | Provision/(benefit) for taxes | 549 | 444 | 1,644 | (1,202 | ) | |||||||||||||||||||||||
Net earnings | Net earnings | $ | 755 | $ | 340 | $ | 1,642 | $ | 1,347 | Net earnings | $ | 824 | $ | 638 | $ | 2,466 | $ | 1,985 | ||||||||||||||||||
Earnings per share | Earnings per share | Earnings per share | ||||||||||||||||||||||||||||||||||
Basic | Basic | $ | 1.56 | $ | 0.72 | $ | 3.39 | $ | 2.84 | Basic | $ | 1.71 | $ | 1.34 | $ | 5.10 | $ | 4.18 | ||||||||||||||||||
Diluted | Diluted | 1.48 | 0.71 | 3.23 | 2.81 | Diluted | 1.62 | 1.32 | 4.85 | 4.11 | ||||||||||||||||||||||||||
Average common shares outstanding | Average common shares outstanding | Average common shares outstanding | ||||||||||||||||||||||||||||||||||
Basic | Basic | 484,380,052 | 474,712,271 | 484,478,275 | 474,712,271 | Basic | 481,252,647 | 474,694,245 | 483,403,066 | 474,698,130 | ||||||||||||||||||||||||||
Diluted | Diluted | 510,262,727 | 479,908,301 | 507,824,885 | 479,908,301 | Diluted | 508,894,645 | 483,892,677 | 508,181,472 | 483,146,111 |
(1) | Includes expense of $666 million related to the initial irrevocable contribution of shares of common stock to a defined contribution plan. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
As of | As of | |||||||||||||||||
May 2000 | November 1999 | August 2000 | November 1999 | |||||||||||||||
(in millions, except share | (in millions, except share | |||||||||||||||||
and per share amounts) | and per share amounts) | |||||||||||||||||
Assets | Assets | Assets | ||||||||||||||||
Cash and cash equivalents | Cash and cash equivalents | $ | 3,982 | $ | 3,055 | Cash and cash equivalents | $ | 3,036 | $ | 3,055 | ||||||||
Cash and securities segregated in compliance with U.S. federal and other regulations | Cash and securities segregated in compliance with U.S. federal and other regulations | 15,504 | 9,135 | Cash and securities segregated in compliance with U.S. federal and other regulations | 14,370 | 9,135 | ||||||||||||
Receivables from brokers, dealers and clearing organizations | Receivables from brokers, dealers and clearing organizations | 5,561 | 4,490 | Receivables from brokers, dealers and clearing organizations | 5,167 | 4,490 | ||||||||||||
Receivables from customers and counterparties | Receivables from customers and counterparties | 25,014 | 30,140 | Receivables from customers and counterparties | 23,995 | 30,140 | ||||||||||||
Securities borrowed | Securities borrowed | 92,699 | 78,418 | Securities borrowed | 87,631 | 78,418 | ||||||||||||
Securities purchased under agreements to resell | Securities purchased under agreements to resell | 31,606 | 37,106 | Securities purchased under agreements to resell | 41,016 | 37,106 | ||||||||||||
Right to receive securities | Right to receive securities | 1,101 | 1,604 | Right to receive securities | 1,717 | 1,604 | ||||||||||||
Financial instruments owned, at fair value | Financial instruments owned, at fair value | Financial instruments owned, at fair value | ||||||||||||||||
Commercial paper, certificates of deposit and time deposits | 1,944 | 1,435 | Commercial paper, certificates of deposit and time deposits | 1,070 | 1,435 | |||||||||||||
U.S. government, federal agency and sovereign obligations | 24,125 | 22,193 | U.S. government, federal agency and sovereign obligations | 24,056 | 22,193 | |||||||||||||
Corporate debt | 13,043 | 9,821 | Corporate debt | 12,360 | 9,821 | |||||||||||||
Equities and convertible debentures | 20,190 | 16,381 | Equities and convertible debentures | 20,902 | 16,381 | |||||||||||||
State, municipal and provincial obligations | 903 | 756 | State, municipal and provincial obligations | 822 | 756 | |||||||||||||
Derivative contracts | 37,082 | 30,661 | Derivative contracts | 32,848 | 30,661 | |||||||||||||
Physical commodities | 439 | 562 | Physical commodities | 444 | 562 | |||||||||||||
Other assets | Other assets | 5,126 | 4,734 | Other assets | 5,570 | 4,734 | ||||||||||||
$ | 278,319 | $ | 250,491 | $ | 275,004 | $ | 250,491 | |||||||||||
Liabilities and Equity | ||||||||||||||||||
Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | |||||||||||||||||
Short-term borrowings, including commercial paper | Short-term borrowings, including commercial paper | $ | 44,801 | $ | 37,756 | Short-term borrowings, including commercial paper | $ | 37,917 | $ | 37,756 | ||||||||
Payables to brokers, dealers and clearing organizations | Payables to brokers, dealers and clearing organizations | 3,600 | 2,129 | Payables to brokers, dealers and clearing organizations | 3,420 | 2,129 | ||||||||||||
Payables to customers and counterparties | Payables to customers and counterparties | 61,329 | 57,405 | Payables to customers and counterparties | 57,879 | 57,405 | ||||||||||||
Securities loaned | Securities loaned | 10,957 | 9,169 | Securities loaned | 6,535 | 9,169 | ||||||||||||
Securities sold under agreements to repurchase | Securities sold under agreements to repurchase | 35,114 | 40,183 | Securities sold under agreements to repurchase | 42,697 | 40,183 | ||||||||||||
Obligation to return securities | Obligation to return securities | 2,858 | 1,595 | Obligation to return securities | 4,098 | 1,595 | ||||||||||||
Financial instruments sold, but not yet purchased, at fair value | Financial instruments sold, but not yet purchased, at fair value | Financial instruments sold, but not yet purchased, at fair value | ||||||||||||||||
U.S. government, federal agency and sovereign obligations | 23,733 | 19,170 | U.S. government, federal agency and sovereign obligations | 23,062 | 19,170 | |||||||||||||
Corporate debt | 4,333 | 2,642 | Corporate debt | 4,521 | 2,642 | |||||||||||||
Equities and convertible debentures | 11,619 | 14,002 | Equities and convertible debentures | 13,019 | 14,002 | |||||||||||||
Derivative contracts | 36,695 | 28,488 | Derivative contracts | 32,786 | 28,488 | |||||||||||||
Physical commodities | 738 | 586 | Physical commodities | 690 | 586 | |||||||||||||
Other liabilities and accrued expenses | Other liabilities and accrued expenses | 5,903 | 6,269 | Other liabilities and accrued expenses | 7,159 | 6,269 | ||||||||||||
Long-term borrowings | Long-term borrowings | 24,734 | 20,952 | Long-term borrowings | 28,528 | 20,952 | ||||||||||||
266,414 | 240,346 | 262,311 | 240,346 | |||||||||||||||
Commitments and contingencies | Commitments and contingencies | Commitments and contingencies | ||||||||||||||||
Stockholders’ Equity | Stockholders’ Equity | |||||||||||||||||
Preferred stock, par value $0.01 per share; 150,000,000 shares authorized, no shares issued and outstanding | Preferred stock, par value $0.01 per share; 150,000,000 shares authorized, no shares issued and outstanding | — | — | Preferred stock, par value $0.01 per share; 150,000,000 shares authorized, no shares issued and outstanding | — | — | ||||||||||||
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 441,489,874 and 441,421,899 shares issued, 440,901,874 and 441,421,899 shares outstanding as of May 2000 and November 1999, respectively | 4 | 4 | ||||||||||||||||
Restricted stock units; 77,660,893 and 76,048,404 units issued and outstanding as of May 2000 and November 1999, respectively | 4,574 | 4,339 | ||||||||||||||||
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, 7,440,362 shares issued and outstanding as of May 2000 and November 1999 | — | — | ||||||||||||||||
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 455,226,134 and 441,421,899 shares issued, 454,535,989 and 441,421,899 shares outstanding as of August 2000 and November 1999, respectively | Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 455,226,134 and 441,421,899 shares issued, 454,535,989 and 441,421,899 shares outstanding as of August 2000 and November 1999, respectively | 5 | 4 | |||||||||||||||
Restricted stock units; 67,361,270 and 76,048,404 units issued and outstanding as of August 2000 and November 1999, respectively | Restricted stock units; 67,361,270 and 76,048,404 units issued and outstanding as of August 2000 and November 1999, respectively | 4,048 | 4,339 | |||||||||||||||
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, 7,440,362 shares issued and outstanding as of November 1999 | Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, 7,440,362 shares issued and outstanding as of November 1999 | — | — | |||||||||||||||
Additional paid-in capital | Additional paid-in capital | 7,368 | 7,359 | Additional paid-in capital | 7,728 | 7,359 | ||||||||||||
Retained earnings | Retained earnings | 1,978 | 444 | Retained earnings | 2,747 | 444 | ||||||||||||
Unearned compensation | Unearned compensation | (1,891 | ) | (2,038 | ) | Unearned compensation | (1,681 | ) | (2,038 | ) | ||||||||
Accumulated other comprehensive (loss)/income | Accumulated other comprehensive (loss)/income | (73 | ) | 37 | Accumulated other comprehensive (loss)/income | (89 | ) | 37 | ||||||||||
Treasury stock, at cost, par value $0.01 per share; 588,000 shares | (55 | ) | — | |||||||||||||||
Treasury stock, at cost, par value $0.01 per share; 690,145 shares as of August 2000 | Treasury stock, at cost, par value $0.01 per share; 690,145 shares as of August 2000 | (65 | ) | — | ||||||||||||||
11,905 | 10,145 | Total stockholders’ equity | 12,693 | 10,145 | ||||||||||||||
$ | 278,319 | $ | 250,491 | $ | 275,004 | $ | 250,491 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
Period Ended | Period Ended | |||||||||||||||||
May 2000 | November 1999 | August 2000 | November 1999 | |||||||||||||||
(in millions, except | (in millions, except | |||||||||||||||||
per share amounts) | per share amounts) | |||||||||||||||||
Partners’ capital | Partners’ capital | Partners’ capital | ||||||||||||||||
Balance, beginning of period | $ | — | $ | 6,310 | Balance, beginning of period | $ | — | $ | 6,310 | |||||||||
Transfer of beginning partners’ capital allocated for income taxes and potential withdrawals | — | 74 | Transfer of beginning partners’ capital allocated for income taxes and potential withdrawals | — | 74 | |||||||||||||
Net earnings | — | 2,264 | (1) | Net earnings | — | 2,264 | (1) | |||||||||||
Capital contributions | — | 48 | Capital contributions | — | 48 | |||||||||||||
Return on capital and certain distributions to partners | — | (306 | ) | Return on capital and certain distributions to partners | — | (306 | ) | |||||||||||
Distributions of remaining partners’ capital | — | (4,520 | )(2) | Distributions of remaining partners’ capital | — | (4,520 | )(2) | |||||||||||
Exchange of partnership interests for shares of common stock | — | (3,901 | ) | Exchange of partnership interests for shares of common stock | — | (3,901 | ) | |||||||||||
Transfer to accumulated other comprehensive income | — | 31 | Transfer to accumulated other comprehensive income | — | 31 | |||||||||||||
Balance, end of period | — | — | Balance, end of period | — | — | |||||||||||||
Common stock, par value $0.01 per share | Common stock, par value $0.01 per share | Common stock, par value $0.01 per share | ||||||||||||||||
Balance, beginning of period | 4 | — | Balance, beginning of period | 4 | — | |||||||||||||
Common stock issued | — | 4 | Issued | 1 | 4 | |||||||||||||
Balance, end of period | 4 | 4 | Balance, end of period | 5 | 4 | |||||||||||||
Restricted stock units | Restricted stock units | Restricted stock units | ||||||||||||||||
Balance, beginning of period | 4,339 | — | ||||||||||||||||
Balance, beginning of period | 4,339 | — | Granted | 363 | 4,381 | |||||||||||||
Restricted stock units granted | 307 | 4,381 | Delivered | (501 | ) | — | ||||||||||||
Restricted stock units forfeited | (72 | ) | (42 | ) | Forfeited | (153 | ) | (42 | ) | |||||||||
Balance, end of period | 4,574 | 4,339 | Balance, end of period | 4,048 | 4,339 | |||||||||||||
Nonvoting common stock, par value $0.01 per share | Nonvoting common stock, par value $0.01 per share | Nonvoting common stock, par value $0.01 per share | ||||||||||||||||
Balance, beginning of period | — | — | Balance, beginning of period | — | — | |||||||||||||
Nonvoting common stock issued | — | — | Issued | — | — | |||||||||||||
Balance, end of period | — | — | Balance, end of period | — | — | |||||||||||||
Additional paid-in capital | Additional paid-in capital | Additional paid-in capital | ||||||||||||||||
Balance, beginning of period | 7,359 | — | Balance, beginning of period | 7,359 | — | |||||||||||||
Exchange of partnership interests for shares of common stock | — | 3,901 | Exchange of partnership interests for shares of common stock | — | 3,901 | |||||||||||||
Issuance of common stock | 9 | 2,891 | Issuance of common stock | 369 | 2,891 | |||||||||||||
Issuance of common stock contributed to a defined contribution plan | — | 674 | Issuance of common stock contributed to a defined contribution plan | — | 674 | |||||||||||||
Dividends paid | — | (107 | )(3) | Dividends paid | — | (107 | )(3) | |||||||||||
Balance, end of period | 7,368 | 7,359 | Balance, end of period | 7,728 | 7,359 | |||||||||||||
Retained earnings | Retained earnings | Retained earnings | ||||||||||||||||
Balance, beginning of period | 444 | — | Balance, beginning of period | 444 | — | |||||||||||||
Net earnings | 1,642 | 444 | (4) | Net earnings | 2,466 | 444 | (4) | |||||||||||
Dividends paid | (108 | ) | — | Dividends paid | (163 | ) | — | |||||||||||
Balance, end of period | 1,978 | 444 | Balance, end of period | 2,747 | 444 | |||||||||||||
Unearned compensation | Unearned compensation | Unearned compensation | ||||||||||||||||
Balance, beginning of period | (2,038 | ) | — | Balance, beginning of period | (2,038 | ) | — | |||||||||||
Restricted stock units granted | (307 | ) | (2,334 | ) | Restricted stock units granted | (363 | ) | (2,334 | ) | |||||||||
Restricted stock units forfeited | 70 | 23 | Restricted stock units forfeited | 126 | 23 | |||||||||||||
Amortization of restricted stock units | 384 | 273 | Amortization of restricted stock units | 594 | 273 | |||||||||||||
Balance, end of period | (1,891 | ) | (2,038 | ) | Balance, end of period | (1,681 | ) | (2,038 | ) | |||||||||
Accumulated other comprehensive (loss)/ income | Accumulated other comprehensive (loss)/ income | Accumulated other comprehensive (loss)/ income | ||||||||||||||||
Balance, beginning of period | 37 | — | Balance, beginning of period | 37 | — | |||||||||||||
Transfer from partners’ capital | — | (31 | ) | Transfer from partners’ capital | — | (31 | ) | |||||||||||
Currency translation adjustment | (110 | ) | 68 | Currency translation adjustment | (126 | ) | 68 | |||||||||||
Balance, end of period | (73 | ) | 37 | Balance, end of period | (89 | ) | 37 | |||||||||||
Treasury stock, at cost | ||||||||||||||||||
Treasury stock, at cost, par value $0.01 per share | Treasury stock, at cost, par value $0.01 per share | |||||||||||||||||
Balance, beginning of period | — | — | Balance, beginning of period | — | — | |||||||||||||
Shares repurchased | (55 | ) | — | Shares repurchased | (65 | ) | — | |||||||||||
Balance, end of period | (55 | ) | — | Balance, end of period | (65 | ) | — | |||||||||||
$ | 11,905 | $ | 10,145 | $ | 12,693 | $ | 10,145 | |||||||||||
(1) | Represents net earnings of the partnership from November 28, 1998 through May 6, 1999. |
(2) | Represents the retired limited partners’ exchanges of partnership interests for cash and junior subordinated debentures, the redemption of senior limited partnership interests for cash and other distributions of partners’ capital in accordance with the partnership agreement. |
(3) | Represents two quarterly dividends of $0.12 per common share each. |
(4) | Represents net earnings of the corporation from May 7, 1999 through November 26, 1999. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
Nine Months | ||||||||||||||||||||||
Six Months Ended May | Ended August | |||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||
Cash flows from operating activities | Cash flows from operating activities | Cash flows from operating activities | ||||||||||||||||||||
Net earnings | $ | 1,642 | $ | 1,347 | Net earnings | $ | 2,466 | $ | 1,985 | |||||||||||||
Noncash items included in net earnings | Noncash items included in net earnings | |||||||||||||||||||||
Depreciation and amortization | 203 | 158 | Depreciation and amortization | 322 | 229 | |||||||||||||||||
Stock-based compensation | 384 | 2,296 | Stock-based compensation | 576 | 2,405 | |||||||||||||||||
Changes in operating assets and liabilities | Changes in operating assets and liabilities | |||||||||||||||||||||
Cash and securities segregated in compliance with U.S. federal and other regulations | (6,369 | ) | 177 | Cash and securities segregated in compliance with U.S. federal and other regulations | (5,235 | ) | (1,058 | ) | ||||||||||||||
Net receivables from brokers, dealers and clearing organizations | 400 | 619 | Net receivables from brokers, dealers and clearing organizations | 614 | 116 | |||||||||||||||||
Net payables to customers and counterparties | 9,050 | (7,563 | ) | Net payables to customers and counterparties | 6,619 | (3,812 | ) | |||||||||||||||
Securities borrowed, net | (12,493 | ) | (9,104 | ) | Securities borrowed, net | (11,847 | ) | (9,025 | ) | |||||||||||||
Financial instruments owned, at fair value | (15,315 | ) | (1,212 | ) | Financial instruments owned, at fair value | (9,187 | ) | (5,983 | ) | |||||||||||||
Financial instruments sold, but not yet purchased, at fair value | 13,227 | 12,873 | Financial instruments sold, but not yet purchased, at fair value | 10,173 | 10,012 | |||||||||||||||||
Other, net | (484 | ) | (1,077 | ) | Other, net | 474 | (176 | ) | ||||||||||||||
Net cash used for operating activities | (9,755 | ) | (1,486 | ) | Net cash used for operating activities | (5,025 | ) | (5,307 | ) | |||||||||||||
Cash flows from investing activities | Cash flows from investing activities | Cash flows from investing activities | ||||||||||||||||||||
Property, leasehold improvements and equipment | (583 | ) | (196 | ) | Property, leasehold improvements and equipment | (990 | ) | (368 | ) | |||||||||||||
Financial instruments owned, at fair value | 170 | 143 | Financial instruments owned, at fair value | (118 | ) | 119 | ||||||||||||||||
Net cash used for investing activities | (413 | ) | (53 | ) | Net cash used for investing activities | (1,108 | ) | (249 | ) | |||||||||||||
Cash flows from financing activities | Cash flows from financing activities | Cash flows from financing activities | ||||||||||||||||||||
Short-term borrowings, net | 2,964 | (955 | ) | Short-term borrowings, net | (5,092 | ) | 720 | |||||||||||||||
Issuance of long-term borrowings | 8,171 | 7,000 | Issuance of long-term borrowings | 13,157 | 9,098 | |||||||||||||||||
Repayment of long-term borrowings | (308 | ) | (301 | ) | Repayment of long-term borrowings | (327 | ) | (572 | ) | |||||||||||||
Securities sold under agreements to repurchase, net | 431 | (1,768 | ) | Securities sold under agreements to repurchase, net | (1,396 | ) | (2,842 | ) | ||||||||||||||
Common stock repurchased | (55 | ) | — | Common stock repurchased | (65 | ) | — | |||||||||||||||
Dividends paid | (108 | ) | — | Dividends paid | (163 | ) | (53 | ) | ||||||||||||||
Capital contributions | — | 48 | Capital contributions | — | 48 | |||||||||||||||||
Returns on capital and certain distributions to partners | — | (306 | ) | Returns on capital and certain distributions to partners | — | (306 | ) | |||||||||||||||
Proceeds from issuance of common stock | — | 2,639 | Proceeds from issuance of common stock | — | 2,639 | |||||||||||||||||
Partners’ capital distributions, net | — | (4,112 | ) | Partners’ capital distributions, net | — | (4,112 | ) | |||||||||||||||
Net cash provided by financing activities | 11,095 | 2,245 | Net cash provided by financing activities | 6,114 | 4,620 | |||||||||||||||||
Net increase in cash and cash equivalents | 927 | 706 | Net decrease in cash and cash equivalents | (19 | ) | (936 | ) | |||||||||||||||
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | 3,055 | 2,836 | Cash and cash equivalents, beginning of period | 3,055 | 2,836 | ||||||||||||||||
Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | 3,982 | $ | 3,542 | Cash and cash equivalents, end of period | $ | 3,036 | $ | 1,900 | ||||||||||||
Cash payments for interest approximated the related expense for each of the fiscal periods presented.
Payments of income taxes were $1.18$1.59 billion and $236 million for the sixnine months ended May 26,August 25, 2000 and were immaterial for the six months ended May 28, 1999.August 27, 1999, respectively.
Other, net for the sixnine months ended MayAugust 27, 1999 includes an increase in deferred tax assets of $1.78 billion associated with the firm’s conversion to corporate form and related transactions.
Noncash activities:
In connection with the firm’s conversion to corporate form, junior subordinated debentures of $371 million were issued to retired limited partners in exchange for their partnership interests.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
Three Months | Six Months | Three Months | Nine Months | |||||||||||||||||||||||||||||
Ended May | Ended May | Ended August | Ended August | |||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Net earnings | $ | 755 | $ | 340 | $ | 1,642 | $ | 1,347 | $ | 824 | $ | 638 | $ | 2,466 | $ | 1,985 | ||||||||||||||||
Currency translation adjustment, net of tax | (39 | ) | (29 | ) | (110 | ) | (35 | ) | (16 | ) | 47 | (126 | ) | 12 | ||||||||||||||||||
Comprehensive income | $ | 716 | $ | 311 | $ | 1,532 | $ | 1,312 | $ | 808 | $ | 685 | $ | 2,340 | $ | 1,997 | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
Note 1. Description of Business
The Goldman Sachs Group, Inc. (“Group Inc.”), a Delaware corporation, together with its consolidated subsidiaries (collectively, the “firm”), is a global investment banking and securities firm that provides a wide range of financial services worldwide to a substantial and diversified client base. On May 7, 1999, the firm converted from a partnership to a corporation and completed its initial public offering.
The firm’s activities are divided into two business segments:
• | Global Capital Markets.This segment comprises Investment Banking, which includes Financial Advisory and Underwriting, and Trading and Principal Investments, which includes Fixed Income, Currency and Commodities (“FICC”), Equities and Principal Investments (Principal Investments primarily represents net revenues from the firm’s merchant banking investments); and | |
• | Asset Management and Securities Services.This segment comprises Asset Management, Securities Services and Commissions. |
Note 2. Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of Group Inc. and its U.S. and international subsidiaries including Goldman, Sachs & Co. (“GS&Co.”) and J. Aron & Company in New York, Goldman Sachs International (“GSI”) in London and Goldman Sachs (Japan) Ltd. (“GSJL”) in Tokyo. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K of Group Inc. for the fiscal year ended November 26, 1999. The condensed consolidated financial information as of and for the period ended November 26, 1999 has been derived from audited consolidated financial statements not included herein. Certain reclassifications have been made to prior-year amounts to conform to the current-year presentation. All material intercompany transactions and balances have been eliminated.
These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require management to make estimates and assumptions regarding trading inventory valuations, the outcome of pending litigation and other matters that affect the consolidated financial statements and related disclosures. These estimates and assumptions are based on judgment and available information and, consequently, actual results could be materially different from these estimates.
These unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results in the interim periods presented. Interim period operating results may not be indicative of the operating results for a full year.
Unless otherwise stated herein, all references to MayAugust 2000 and MayAugust 1999 refer to the firm’s fiscal period ended, or the date, as the context requires, May 26,August 25, 2000 and May 28,August 27, 1999, respectively. All references to November 1999 refer to the firm’s fiscal year ended, or the date, as the context requires, November 26, 1999.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounting Developments
In JuneSeptember 2000, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125”, which revises the standards for accounting for securitizations and other transfers of financial assets and collateral. In addition, specific implementation guidelines have been established to further distinguish transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The firm intends to adopt the provisions of SFAS No. 140 in 2001 and is currently assessing its effect.
In June 2000, the FASB issued SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, which is an amendment of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”.Activities.” The Statement is effective concurrently with SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133 — an amendment of FASB Statement No. 133”, which deferred to fiscal years beginning after June 15, 2000 the effective date of the accounting and reporting requirements of SFAS No. 133. These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively, referred to as “derivatives”), and for hedging activities. These statements require that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting designation. The firm intends to adopt the provisions of SFAS No. 133 deferred by SFAS No. 137 and amended by SFAS No. 138 in fiscal 2001 and is currently assessing its effect.
In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”Use”. SOP No. 98-1 requires capitalization of certain internal use software costs. SOP No. 98-1 was adopted by the firm in the first quarter of fiscal 2000 and was not material to the firm’s financial condition or its results of operations for the periodquarter and nine months ended MayAugust 2000.
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 condensed consolidated statements of earnings. The condensed consolidated statements of financial condition generally reflect purchases and sales of financial instruments, including agency transactions, on a trade date basis.
Substantially all financial instruments used in the firm’s trading and nontrading activities are carried at fair value or amounts that approximate fair value, and unrealized gains and losses are recognized in earnings. Fair value is based generally on listed market prices or broker or dealer price quotations. To the extent that prices are not readily available, or if liquidating the firm’s position is reasonably expected to affect market prices, fair value is based on either internal valuation models or management’s estimate of amounts that could be realized under current market conditions, assuming an orderly liquidation over a reasonable period of time. Certain over-the-counter derivative instruments are valued using pricing models that consider, among
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
other factors, current and contractual market prices, time value, and yield curve and/or volatility factors of the underlying positions.
Derivative Activities
Most of the firm’s derivative transactions are entered into for trading purposes. The firm uses derivatives in its trading activities to facilitate customer transactions, to take proprietary positions and as a means of risk management. The firm also enters into nontrading derivative contracts to manage the interest rate and currency exposure on its long-term borrowings.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
The firm utilizes replacement cost as a measure of derivative credit risk. Replacement cost, as reported in “Financial instruments owned, at fair value” on the condensed consolidated statements of financial condition, represents amounts receivable from various counterparties, net of any unrealized losses, where management believes a legal right of setoff exists under an enforceable netting agreement. Replacement cost for purchased option contracts is the market value of the contract. The firm controls its credit risk through an established credit approval process, by monitoring counterparty limits, obtaining collateral where appropriate and, in some cases, entering into enforceable netting agreements.
The fair value of derivative financial instruments used for trading purposes, computed in accordance with the firm’s netting policy, is set forth below:
As of May 2000 | As of November 1999 | As of August 2000 | As of November 1999 | |||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Forward settlement contracts | $ | 6,650 | $ | 5,743 | $ | 4,555 | $ | 4,625 | $ | 4,680 | $ | 4,419 | $ | 4,555 | $ | 4,625 | ||||||||||||||||
Swap agreements | 18,064 | 16,864 | 12,052 | 11,587 | 15,507 | 14,982 | 12,052 | 11,587 | ||||||||||||||||||||||||
Option contracts | 12,366 | 14,047 | 14,018 | 12,274 | 12,659 | 13,335 | 14,018 | 12,274 | ||||||||||||||||||||||||
Total | $ | 37,080 | $ | 36,654 | $ | 30,625 | $ | 28,486 | $ | 32,846 | $ | 32,736 | $ | 30,625 | $ | 28,486 | ||||||||||||||||
Derivatives used for nontrading purposes generally include interest rate futures contracts and interest rate and currency swap agreements, which are primarily utilized to convert a substantial portion of the firm’s fixed rate debt into U.S. dollar-based floating rate obligations. Gains and losses on these derivatives are generally deferred and recognized as adjustments to interest expense over the life of the derivative contract. Gains and losses resulting from the early termination of derivatives used for nontrading purposes are generally deferred and recognized
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value and carrying value of derivatives used for nontrading purposes are set forth below:
As of May 2000 | As of November 1999 | As of August 2000 | As of November 1999 | |||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Fair value | $ | 15 | $ | 868 | $ | 3 | $ | 159 | $ | 13 | $ | 595 | $ | 3 | $ | 159 | ||||||||||||||||
Carrying value | 2 | 41 | 36 | 2 | 2 | 50 | 36 | 2 |
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 | As of | |||||||||||||||
May 2000 | November 1999 | August 2000 | November 1999 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Commercial paper | $ | 19,475 | $ | 9,403 | $ | 15,201 | $ | 9,403 | ||||||||
Promissory notes | 12,071 | 11,061 | 13,330 | 11,061 | ||||||||||||
Bank loans and other(1) | 13,255 | 17,292 | 9,386 | 17,292 | ||||||||||||
Total | $ | 44,801 | $ | 37,756 | $ | 37,917 | $ | 37,756 | ||||||||
(1) | As of |
The firm maintains unencumbered securities with a market value in excess of all uncollateralized short-term borrowings.
Note 5. Equity
In March 2000, the Board of Directors of Group Inc. approved a common stock repurchase program authorizing the repurchase of up to 15 million shares of the firm’s common stock. DuringFor the quarter,nine months ended August 2000, the firm repurchased 588,000690,145 shares of its common stock.
On April 10,August 21, 2000, the firm granted 1,690,882 restrictedSumitomo Bank Capital Markets, Inc. exchanged all 7,440,362 shares of its nonvoting common stock, units to certain employees. These restricted stock units will vest inpar value $0.01 per share, of Group Inc. for an equal installments on or about the first, second and third fiscal year end following the datenumber of grant.shares of common stock.
Note 6. Earnings Per Share
Earnings per share (“EPS”) is computed in accordance with SFAS No. 128, “Earnings Per Share.”Share”. Basic EPS is calculated by dividing net earnings by the weighted average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilutive potential common shares.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilutive potential common shares.
The computations of basic and diluted EPS are set forth below:
Three Months Ended May | Six Months Ended May | Three Months Ended August | Nine Months Ended August | |||||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||||
(in millions, except share and per share amounts) | (in millions, except share and per share amounts) | |||||||||||||||||||||||||||||||||
Numerator for basic and diluted EPS — earnings available to common stockholders | Numerator for basic and diluted EPS — earnings available to common stockholders | $ | 755 | $ | 340 | $ | 1,642 | $ | 1,347 | Numerator for basic and diluted EPS — earnings available to common stockholders | $ | 824 | $ | 638 | $ | 2,466 | $ | 1,985 | ||||||||||||||||
Denominator for basic EPS — weighted average number of common shares(1) | Denominator for basic EPS — weighted average number of common shares(1) | 484,380,052 | 474,712,271 | 484,478,275 | 474,712,271 | Denominator for basic EPS — weighted average number of common shares(1) | 481,252,647 | 474,694,245 | 483,403,066 | 474,698,130 | ||||||||||||||||||||||||
Effect of dilutive securities Restricted stock units | Effect of dilutive securities Restricted stock units | 15,262,410 | 2,432,037 | 13,613,313 | 2,432,037 | Effect of dilutive securities Restricted stock units | 17,101,019 | 4,987,721 | 14,775,882 | 4,508,530 | ||||||||||||||||||||||||
Stock options | 10,620,265 | 2,763,993 | 9,733,297 | 2,763,993 | Stock options | 10,540,979 | 4,210,711 | 10,002,524 | 3,939,451 | |||||||||||||||||||||||||
Dilutive potential common shares | Dilutive potential common shares | 25,882,675 | 5,196,030 | 23,346,610 | 5,196,030 | Dilutive potential common shares | 27,641,998 | 9,198,432 | 24,778,406 | 8,447,981 | ||||||||||||||||||||||||
Denominator for diluted EPS — weighted average number of common shares and dilutive potential common shares | Denominator for diluted EPS — weighted average number of common shares and dilutive potential common shares | 510,262,727 | 479,908,301 | 507,824,885 | 479,908,301 | Denominator for diluted EPS — weighted average number of common shares and dilutive potential common shares | 508,894,645 | 483,892,677 | 508,181,472 | 483,146,111 | ||||||||||||||||||||||||
Basic EPS | Basic EPS | $ | 1.56 | $ | 0.72 | $ | 3.39 | $ | 2.84 | Basic EPS | $ | 1.71 | $ | 1.34 | $ | 5.10 | $ | 4.18 | ||||||||||||||||
Diluted EPS | Diluted EPS | 1.48 | 0.71 | 3.23 | 2.81 | Diluted EPS | 1.62 | 1.32 | 4.85 | 4.11 |
(1) | Includes common stock and nonvoting common stock as well as restricted stock units awarded to employees for which no future service is required as a condition to the delivery of the underlying shares of common stock. |
Note 7. Commitments and Contingencies
The firm is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its businesses. Management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the firm’s financial condition, but might be material to the firm’s operating results for any particular period, depending, in part, upon the operating results for such period.
Note 8. 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 MayAugust 2000, GS&Co. had regulatory net capital, as defined, of $4.60$4.31 billion, which exceeded the amount required by $3.91$3.63 billion.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
GSI, a registered U.K. broker-dealer and subsidiary of Group Inc., is subject to the capital requirements of the Securities and Futures Authority Limited, and GSJL, a Tokyo-based broker-dealer, is subject to the capital requirements of the Japanese Ministry of Finance and the
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial SupervisoryServices Agency. As of MayAugust 2000, 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 MayAugust 2000, these subsidiaries were in compliance with their local capital adequacy requirements.
Note 9. Business Segments
In reporting to management, the firm’s operating results are categorized into two principal segments: Global Capital Markets; and Asset Management and Securities Services. For a further discussion of the firm’s segments, see the firm’s Annual Report on Form 10-K for the fiscal year ended November 1999.
Management believes that the following information provides a reasonable representation of each segment’s contribution to consolidated pre-tax earnings and total assets:
Three Months | Nine Months | |||||||||||||||||||||||||||||||||||
Three Months Ended May | Six Months Ended May | Ended August | Ended August | |||||||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||
Global Capital | Net revenues | $ | 2,993 | $ | 2,720 | $ | 6,317 | $ | 4,979 | Net revenues | $ | 3,436 | $ | 2,597 | $ | 9,753 | $ | 7,576 | ||||||||||||||||||
Markets | Operating expenses | 2,038 | 1,794 | 4,178 | 3,078 | Operating expenses | 2,211 | 1,623 | 6,389 | 4,701 | ||||||||||||||||||||||||||
Pre-tax earnings(1) | $ | 955 | $ | 926 | $ | 2,139 | $ | 1,901 | Pre-tax earnings | $ | 1,225 | $ | 974 | $ | 3,364 | $ | 2,875 | |||||||||||||||||||
Segment assets | $ | 158,755 | $ | 117,087 | $ | 158,755 | $ | 117,087 | Segment assets | $ | 143,039 | $ | 116,680 | $ | 143,039 | $ | 116,680 | |||||||||||||||||||
Asset Management | Net revenues | $ | 1,162 | $ | 749 | $ | 2,331 | $ | 1,485 | Net revenues | $ | 1,091 | $ | 811 | $ | 3,422 | $ | 2,296 | ||||||||||||||||||
and Securities | Operating expenses | 758 | 666 | 1,521 | 1,189 | Operating expenses | 841 | 588 | 2,362 | 1,777 | ||||||||||||||||||||||||||
Services | Pre-tax earnings(1) | $ | 404 | $ | 83 | $ | 810 | $ | 296 | Pre-tax earnings | $ | 250 | $ | 223 | $ | 1,060 | $ | 519 | ||||||||||||||||||
Segment assets | $ | 118,360 | $ | 126,281 | $ | 118,360 | $ | 126,281 | Segment assets | $ | 130,974 | $ | 118,283 | $ | 130,974 | $ | 118,283 | |||||||||||||||||||
Total | Net revenues | $ | 4,155 | $ | 3,469 | $ | 8,648 | $ | 6,464 | Net revenues | $ | 4,527 | $ | 3,408 | $ | 13,175 | $ | 9,872 | ||||||||||||||||||
Operating expenses(2) | 2,897 | 4,956 | (4) | 5,911 | 6,763 | (4) | Operating expenses(1) | 3,154 | 2,326 | 9,065 | 9,089 | (3) | ||||||||||||||||||||||||
Pre-tax earnings/ (loss)(1) | $ | 1,258 | $ | (1,487 | ) | $ | 2,737 | $ | (299 | ) | Pre-tax earnings | $ | 1,373 | $ | 1,082 | $ | 4,110 | $ | 783 | |||||||||||||||||
Total assets(3) | $ | 278,319 | $ | 244,632 | $ | 278,319 | $ | 244,632 | Total assets(2) | $ | 275,004 | $ | 236,273 | $ | 275,004 | $ | 236,273 | |||||||||||||||||||
(1) | |
Includes the ongoing amortization of employee initial public offering awards that has not been allocated to the firm’s segments. | |
Includes deferred tax assets relating to the firm’s conversion to corporate form and certain other assets that are not allocable to a particular segment. |
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Includes nonrecurring employee initial public offering awards of $2.26 billion and a charitable contribution to The Goldman Sachs Foundation of $200 million made at the time of the firm’s initial public offering that have not been allocated to the firm’s segments. |
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 10. Subsequent Events
The Board of Directors of Group Inc. declared a dividend of $0.12 per share to be paid on August 24,November 20, 2000 to voting and nonvoting common stockholders of record on July 24,October 23, 2000.
On September 11, 2000, the firm announced an agreement to combine with Spear, Leeds & Kellogg, L.P. (“SLK”), a leader in securities clearing and execution, floor-based market making and off-floor market making. As part of this agreement, the consideration will include approximately 34 million shares of Group Inc. common stock and approximately $2 billion in cash. In addition, the firm is establishing a $900 million retention pool in Group Inc. common stock for all SLK employees, which will have varying vesting and delivery provisions. The transaction is expected to close before year-end, and is subject to customary regulatory and other approvals.
13
Review Report of Independent Accountants
To the Directors and Shareholders,
We have reviewed the accompanying condensed consolidated statement of financial condition of The Goldman Sachs Group, Inc. and Subsidiaries (the “Company”) as of May 26,August 25, 2000, the related condensed consolidated statements of earnings for the three and sixnine months ended May 26,August 25, 2000 and May 28,August 27, 1999, the condensed consolidated statement of changes in stockholders’ equity and partners’ capital for the sixnine months ended May 26,August 25, 2000, the condensed consolidated statements of cash flows for the sixnine months ended May 26,August 25, 2000 and May 28,August 27, 1999, and the condensed consolidated statements of comprehensive income for the three and sixnine months ended May 26,August 25, 2000 and May 28,August 27, 1999. These condensed financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, 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 interim financial statements for them to be in conformity with accounting principles generally accepted in the United States.States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial condition of The Goldman Sachs Group, Inc. and Subsidiaries as of November 26, 1999, and the related consolidated statements of earnings, changes in stockholders’ equity and partners’ capital, cash flows and comprehensive income for the year ended November 26, 1999 (not presented herein); and in our report dated January 21, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of November 26, 1999, and the condensed consolidated statement of changes in stockholders’ equity and partners’ capital for the year ended November 26, 1999, 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
14
Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
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. On May 7, 1999, we converted from a partnership to a corporation and completed our initial public offering.
Our activities are divided into two segments:
• | Global Capital Markets.This segment comprises Investment Banking, which includes Financial Advisory and Underwriting, and Trading and Principal Investments, which includes Fixed Income, Currency and Commodities (“FICC”), Equities and Principal Investments (Principal Investments primarily represents net revenues from our merchant banking investments); and | |
• | Asset Management and Securities Services.This segment comprises Asset Management, Securities Services and Commissions. |
Unless specifically stated otherwise, all references to MayAugust 2000 and MayAugust 1999 refer to our fiscal period ended, or the date, as the context requires, May 26,August 25, 2000 and May 28,August 27, 1999, respectively. All references to November 1999 and November 1998, unless specifically stated otherwise, refer to our fiscal year ended, or the date, as the context requires, November 26, 1999 and November 27, 1998, respectively.
When we use the terms “Goldman Sachs”, “we” and “our”, we mean, prior to our conversion to corporate form, The Goldman Sachs Group, L.P., a Delaware limited partnership, and its consolidated subsidiaries and, after our conversion to corporate form, The Goldman Sachs Group, Inc. (“Group Inc.”), a Delaware corporation, and its consolidated subsidiaries.
Business Environment
TheDuring the quarter, economic growth in the world economy strengthenedcontinued to be strong, although the pace of growth slowed primarily as a result of earlier increases in interest rates, stabilization in asset prices and rising oil prices.
Growth in the U.S. economy was driven by strong exports and corporate investment. Despite these factors, the rate of growth declined during the quarter as output growth in many of the major economies was strong and many emerging market countries continued their recovery.
The United States continued its longest period of economic expansion as growth was fueled by increased levelssome elements of consumer spending slowed and low levels of unemployment. In an effort to slow the pace of economic growth and alleviate possible inflationary pressures, the Federal Reserve raised overnight interest rates by 75 basis points during the quarter. Theresidential investment fell. U.S. equity markets were strong inrebounded from the beginningsharp declines at the end of the prior quarter, but corrections in the technology and telecommunications sectors led to sharp declines in major equity markets, particularly the Nasdaq which fell 30%gained 23% during the fiscal quarter. FixedThe fixed income markets were also affected as rising interest rates, wideninggenerally benefited from narrowing credit spreads and reduced new issues led to a decrease in secondary market activity.steady short-term interest rates.
The European economy continued to grow duringat a healthy rate, fueled by strong growth in foreign demand, consumer spending and corporate investment. During the quarter, fueled by a competitive exchange rate and expansion in domestic demand. Concerns about a potential rise in inflation, resulting from economic growth and rising oil prices, prompted the European Central Bank continued to raise short-term rates in response to inflation and the weakness of the euro.
Economic growth in Japan slowed from the exceptional rates recorded earlier in the year. Despite this slowdown, deflationary pressures receded and growth in investment rose significantly amidst a rebound in corporate profitability. The Bank of Japan’s zero-rate policy was terminated and interest rates duringwere raised for the quarter.
Japan generated economic growth during the quarterfirst time in a decade. Growth fell back to more normal rates in several other Asian economies as consumptionexports slowed modestly, and corporate investment increased. The recovery in Japan helped boost economic growth in the rest of Asia which continued itsfailed to rebound after the recent recession.to earlier levels.
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Results of Operations
The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary over the shorter term due to fluctuations in U.S. and global economic and market conditions. As a result, period-to-period comparisons may not be meaningful. In addition, Goldman Sachs’ conversion to corporate form has affected, and will continue to affect, our operating results in several significant ways:
1. Former Partner Compensation.As a corporation, payments for services rendered by managing directors who, prior to our conversion to corporate form, were profit participating limited partners are included in compensation and benefits expense. Prior to our conversion to corporate form, these payments were accounted for as distributions of partners’ capital rather than as compensation and benefits expense.
2. Ongoing Stock-Based Compensation.As part of compensation, restricted stock units and other forms of stock-based compensation can be awarded to employees. Of the total restricted stock units that were granted at the end of November 1999, approximately 50% require future service as a condition to the delivery of the underlying shares of common stock. In accordance with Accounting Principles Board Opinion No. 25, these restricted stock units with future service requirements will generally be recorded as compensation expense over the four-year service period following the date of grant as follows: 52%, 28%, 14%, and 6% in years one, two, three and four, respectively.
3. Amortization of Employee Initial Public Offering Awards.We have recorded, and will continue to record over the five-year vesting period following the date of grant, noncash expense related to the amortization of certain restricted stock units awarded to employees in connection with our initial public offering. These restricted stock units had a value of $1.76 billion at date of grant, approximately 26% of which has beenwas amortized as a noncash expense, after giving effect to forfeitures, in the 12 months following the date of grant. The remaining 74% of the value of these restricted stock units will beis being amortized over the next four years as follows: 26%, 26%, 15% and 7% in years two, three, four and five, respectively.
4. Income Taxes.As a corporation, our operating results have become, and will continue to be, subject to U.S. federal, state and local corporate income taxes, and, therefore, to a higher tax rate than we incurred as a partnership. Our effective tax rate for the six-monthquarter and the nine-month period ended MayAugust 2000 was 40%.
Overview
The following table sets forth a summary of our financial results:
Financial Overview
Three Months Ended May | Six Months Ended May | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended August | Nine Months Ended August | |||||||||||||||||||||||||||||||||||||||||||||||
Actual | Pro Forma | Actual | Pro Forma | |||||||||||||||||||||||||||||||||||||||||||||
Actual | Pro Forma | Actual | Pro Forma | |||||||||||||||||||||||||||||||||||||||||||||
2000 | 1999(1) | 1999 | 2000 | 1999(1) | 1999 | |||||||||||||||||||||||||||||||||||||||||||
2000 | 1999 | 1999 | 2000 | 1999(1) | 1999 | |||||||||||||||||||||||||||||||||||||||||||
Net revenues | $ | 4,155 | $ | 3,469 | $ | 3,469 | $ | 8,648 | $ | 6,464 | $ | 6,457 | $ | 4,527 | $ | 3,408 | $ | 3,408 | $ | 13,175 | $ | 9,872 | $ | 9,865 | ||||||||||||||||||||||||
Pre-tax earnings/ (loss) | 1,258 | (1,487 | ) | 1,058 | 2,737 | (299 | ) | 1,959 | ||||||||||||||||||||||||||||||||||||||||
Pre-tax earnings | 1,373 | 1,082 | 1,082 | 4,110 | 783 | 3,041 | ||||||||||||||||||||||||||||||||||||||||||
Net earnings | 755 | 340 | 624 | 1,642 | 1,347 | 1,156 | 824 | 638 | 638 | 2,466 | 1,985 | 1,794 | ||||||||||||||||||||||||||||||||||||
Diluted earnings per share | 1.48 | 0.71 | 1.30 | 3.23 | 2.81 | 2.42 | 1.62 | 1.32 | 1.31 | 4.85 | 4.11 | 3.73 |
(1) | Includes |
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Pro forma net earnings reflect the results of Goldman Sachs as if our conversion to corporate form and related transactions had taken place at the beginning of 1999.
Pro forma net earnings do not give effect to the following items due to their nonrecurring nature:
• | the employee initial public offering award of restricted stock units, for which future service is not required as a condition to the delivery of the underlying shares of common stock; | |
• | the initial irrevocable contribution of shares of common stock to the defined contribution plan; | |
• | the recognition of certain net tax assets; and | |
• | a contribution to The Goldman Sachs Foundation, a charitable foundation. |
Pro forma net earnings give effect to the following items:
• | interest expense on junior subordinated debentures issued to retired limited partners in exchange for their partnership interests; | |
• | ||
the amortization of the restricted stock units awarded to employees in connection with our initial public offering, for which future service is required as a condition to the delivery of the underlying shares of common stock; and | ||
• | the provision for income taxes in corporate form. |
For the purpose of calculating May 1999 pro forma diluted average common shares outstanding for the quarter and nine months ended August 1999 we used the initial public offering price of $53 per share from the beginning of fiscal 1999 until May 4, 1999, the day trading in our common stock commenced.
Our net earnings of $340 million, or $0.71 per diluted share, in the three-month period ended May 1999 were reduced by $672 million, or $1.40 per diluted share, due to nonrecurring items associated with Goldman Sachs’ conversion to corporate form and related transactions. These nonrecurring items included (i) $2.26 billion for employee initial public offering awards, (ii) $200 million for a contribution to The Goldman Sachs Foundation, and (iii) a net tax benefit of $1.78 billion.
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The following table sets forth the net revenues, operating expenses and pre-tax earnings of our segments:
Results by Segment
Three Months | Six Months | Three Months | Nine Months | |||||||||||||||||||||||||||||||||
Ended May | Ended May | Ended August | Ended August | |||||||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||||||
Global Capital | Net revenues | $ | 2,993 | $ | 2,720 | $ | 6,317 | $ | 4,979 | Net revenues | $ | 3,436 | $ | 2,597 | $ | 9,753 | $ | 7,576 | ||||||||||||||||||
Markets | Operating expenses | 2,038 | 1,794 | 4,178 | 3,078 | Operating expenses | 2,211 | 1,623 | 6,389 | 4,701 | ||||||||||||||||||||||||||
Pre-tax earnings(1) | $ | 955 | $ | 926 | $ | 2,139 | $ | 1,901 | Pre-tax earnings | $ | 1,225 | $ | 974 | $ | 3,364 | $ | 2,875 | |||||||||||||||||||
Asset Management | Net revenues | $ | 1,162 | $ | 749 | $ | 2,331 | $ | 1,485 | Net revenues | $ | 1,091 | $ | 811 | $ | 3,422 | $ | 2,296 | ||||||||||||||||||
And Securities | Operating expenses | 758 | 666 | 1,521 | 1,189 | Operating expenses | 841 | 588 | 2,362 | 1,777 | ||||||||||||||||||||||||||
Services | Pre-tax earnings | $ | 250 | $ | 223 | $ | 1,060 | $ | 519 | |||||||||||||||||||||||||||
Pre-tax earnings(1) | $ | 404 | $ | 83 | $ | 810 | $ | 296 | ||||||||||||||||||||||||||||
Total | Net revenues | $ | 4,155 | $ | 3,469 | $ | 8,648 | $ | 6,464 | Net revenues | $ | 4,527 | $ | 3,408 | $ | 13,175 | $ | 9,872 | ||||||||||||||||||
Operating expenses(2) | 2,897 | 4,956 | (3) | 5,911 | 6,763 | (3) | Operating expenses(1) | 3,154 | 2,326 | 9,065 | 9,089 | (2) | ||||||||||||||||||||||||
Pre-tax earnings/(loss)(1) | $ | 1,258 | $ | (1,487 | ) | $ | 2,737 | $ | (299 | ) | Pre-tax earnings | $ | 1,373 | $ | 1,082 | $ | 4,110 | $ | 783 | |||||||||||||||||
(1) | |
Includes the ongoing amortization of employee initial public offering awards that has not been allocated to our segments. | |
Includes nonrecurring employee initial public offering awards of $2.26 billion and a charitable contribution to The Goldman Sachs Foundation of $200 million made at the time of our initial public offering that have not been allocated to our segments. |
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Global Capital Markets
The components of the Global Capital Markets segment are set forth below:
Investment Banking.Goldman Sachs provides a broad range of investment banking services to a diverse group of corporations, financial institutions, governments and individuals. Our investment banking activities are divided into two categories:
• | Financial Advisory.Financial Advisory includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs; and | |
• | Underwriting.Underwriting includes public offerings and private placements of equity and debt securities. |
Trading and Principal Investments.Our Trading and Principal Investments business facilitates transactions with a diverse group of corporations, financial institutions, governments and individuals and takes proprietary positions through market making in and trading of fixed income and equity products, currencies, commodities, and swaps and other derivatives. Trading and Principal Investments is divided into three categories:
• | FICC.We make markets in and trade fixed income products, currencies and commodities, structure and enter into a wide variety of derivative transactions, and engage in proprietary trading and arbitrage activities; |
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• | Equities.We make markets in and trade equities and equity-related products, structure and enter into equity derivative transactions, and engage in proprietary trading and equity arbitrage; and | |
• | Principal Investments.Principal Investments primarily represents net revenues from our merchant banking investments. |
Net revenues from Principal Investments do not include management fees and the increased share of the income and gains from our merchant banking funds to which Goldman Sachs is entitled when the return on investments exceeds certain threshold returns to fund investors. These management fees and increased shares of income and gains are included in the net revenues of Asset Management and Securities Services.
Substantially all of our inventory is marked-to-market daily and, therefore, its value and our net revenues are subject to fluctuations based on market movements. In addition, net revenues derived from our principal investments in privately held concerns and in real estate may fluctuate significantly depending on the revaluation or sale of these investments in any given period.
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The following table sets forth the net revenues of our Global Capital Markets segment:
Global Capital Markets Net Revenues
Three Months | Six Months | Three Months | Nine Months | |||||||||||||||||||||||||||||
Ended May | Ended May | Ended August | Ended August | |||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||
Financial Advisory | $ | 712 | $ | 510 | $ | 1,295 | $ | 1,032 | $ | 673 | $ | 616 | $ | 1,968 | $ | 1,648 | ||||||||||||||||
Underwriting | 882 | 492 | 1,535 | 872 | 648 | 534 | 2,183 | 1,406 | ||||||||||||||||||||||||
Investment Banking | 1,594 | 1,002 | 2,830 | 1,904 | 1,321 | 1,150 | 4,151 | 3,054 | ||||||||||||||||||||||||
FICC | 634 | 911 | 1,650 | 1,787 | 872 | 661 | 2,522 | 2,448 | ||||||||||||||||||||||||
Equities | 1,086 | 618 | 1,944 | 1,073 | 763 | 458 | 2,707 | 1,531 | ||||||||||||||||||||||||
Principal Investments | (321 | ) | 189 | (107 | ) | 215 | 480 | 328 | 373 | 543 | ||||||||||||||||||||||
Trading and Principal Investments | 1,399 | 1,718 | 3,487 | 3,075 | 2,115 | 1,447 | 5,602 | 4,522 | ||||||||||||||||||||||||
Total | $ | 2,993 | $ | 2,720 | $ | 6,317 | $ | 4,979 | $ | 3,436 | $ | 2,597 | $ | 9,753 | $ | 7,576 | ||||||||||||||||
Three Months Ended MayAugust 2000 versus Three Months Ended May 1999.August 1999
Net revenues in Global Capital Markets were $2.99increased 32% to $3.44 billion, an increase of 10% compared with the same 1999 period, reflecting a 59%strong revenue growth in Investment Banking partially offset by a 19% decrease inand Trading and Principal Investments. Pre-tax earnings were $955 million compared to $926 million in the same period in 1999. Operating expenses increased 14%36%, principally due to higher levels of compensation commensurate with growth in net revenues, and increased costs associated with global expansion, higher employment levels and higher levels ofincreased business activity. Pre-tax earnings were $1.23 billion compared to $974 million in 1999.
Net revenues in Investment Banking were $1.59 billion, 59% above last year’s second quarter. Net revenuesincreased 15% to $1.32 billion. Revenue growth was strong in theall major regions. Financial Advisory businessnet revenues increased 40% over the same period in 1999, primarily due to9% as we capitalized on increased mergers and acquisitions activity in the high technology, financial institutions, and energy and power sectors. Underwriting net revenues increased 79% over the same period in 1999, as we capitalized on strong equity new issue activity in the communications, media and entertainment and high technology sectors. Net revenues in Underwriting increased 21% as we benefited from increased new issue activity in all major regions compared toglobal equity markets. Net revenue growth was largely driven by strong performances in the second quartercommunications, media and entertainment and high technology sectors. Our investment banking transaction backlog as of 1999, particularly in Europe.August 2000 remained strong.
Net revenues in Trading and Principal Investments were $1.40 billion, 19% below last year’s second quarter.increased 46% to $2.12 billion. FICC net revenues decreased 30% comparedincreased 32%, primarily due to a strong second quarter of
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SixNine Months Ended MayAugust 2000 versus SixNine Months Ended May 1999.August 1999
Net revenues in Global Capital Markets were $6.32increased 29% to $9.75 billion, an increase of 27% compared with the same 1999 period, reflecting a 49% increasestrong performances in both Investment Banking and a 13% increase in Trading and Principal Investments. Pre-tax earnings were $2.14 billion compared to $1.90 billion in the same period in 1999. Operating expenses increased 36%, principally due to higher levels of compensation commensurate with growth in net revenues, and increased costs associated with global expansion and higher levels of business activity. Pre-tax earnings were $3.36 billion compared to $2.88 billion in 1999.
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Investment Banking net revenues increased 36% to $4.15 billion. Net revenues in Investment Banking were $2.83 billion, 49% above the same 1999 period. Net revenues in the Financial Advisory businessand Underwriting increased 25% compared to the first half of 1999, principally due to active global19% and 55%, respectively, reflecting continued strength in our mergers and acquisitions marketsand equity new issues businesses, particularly in the technology, communications, media and entertainment and financial institutions sectors, as well as an increase in the number of large transactions. Underwriting revenues increased 76% over the same period in 1999, primarily due to growth in the high technology and communications, media and entertainment sectors. Investment Banking netNet revenue growth was strong in all major regions compared to the first half of 1999.regions.
Net revenues in Trading and Principal Investments were $3.49 billion, 13% above the same 1999 period.increased 24% to $5.60 billion. FICC net revenues decreased 8% compared to a strong first half of 1999,grew 3%, as interest rate uncertainty and widening credit spreads led to reduced net revenuesincreased customer flow in corporate bonds, while reduced activity and liquidity in U.S. Treasury markets led toour fixed income derivatives business was partially offset by lower net revenues in our credit-sensitive (which includes high-yield debt, bank loans and investment-grade corporate debt), commodities and U.S. government bonds. These decreases werebond businesses. Net revenues in Equities increased 77%, primarily due to strength in equity derivatives and higher transaction volumes in our U.S. and European shares businesses. Principal Investments decreased 31% primarily due to lower unrealized gains in technology and telecommunications stocks, partially offset by higher net revenues in our fixed income derivatives business, which benefited from increased customer activity. Net revenues in Equities increased 81% over the same 1999 period as higher transaction volumes and increased volatility led to growth across all components of the business, particularly in equity derivatives and global shares. Principal Investments experienced negative net revenues of $107 million, as significant market declines in technology and telecommunications stocks in the latter part of the period led to unrealized losses in our merchant banking portfolio. These losses were offset, in part, by increased gains on the disposition of investments compared with the prior year period.investments.
Asset Management and Securities Services
The components of the Asset Management and Securities Services segment are set forth below:
• | Asset Management.Asset Management generates management fees by providing investment advisory services to a diverse client base of institutions and individuals; | |
• | Securities Services.Securities Services includes prime brokerage, financing services and securities lending, and our matched book businesses, all of which generate revenues primarily in the form of fees or interest rate spreads; and |
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• | Commissions.Commissions include agency transactions for clients on major stock and futures exchanges and revenues from the increased share of the income and gains derived from our merchant banking funds. |
The following table sets forth the net revenues of our Asset Management and Securities Services segment:
Asset Management and Securities Services Net Revenues
Three Months | Six Months | Three Months | Nine Months | |||||||||||||||||||||||||||||
Ended May | Ended May | Ended August | Ended August | |||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||
Asset Management | $ | 354 | $ | 214 | $ | 660 | $ | 416 | $ | 327 | $ | 221 | $ | 987 | $ | 637 | ||||||||||||||||
Securities Services | 252 | 174 | 490 | 381 | 234 | 195 | 724 | 576 | ||||||||||||||||||||||||
Commissions | 556 | 361 | 1,181 | 688 | 530 | 395 | 1,711 | 1,083 | ||||||||||||||||||||||||
Total | $ | 1,162 | $ | 749 | $ | 2,331 | $ | 1,485 | $ | 1,091 | $ | 811 | $ | 3,422 | $ | 2,296 | ||||||||||||||||
Our assets under supervision consist of assets under management and other client assets. Assets under management typically generate fees based on a percentage of their value and include our mutual funds, separate accounts managed for institutional and individual investors, our merchant banking funds and other alternative investment funds. Other client assets consist of assets in brokerage accounts of primarily high-net-worth individuals, on which we earn commissions. Substantially all assets under supervision are valued as of calendar month-end.
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The following table sets forth our assets under supervision:
Assets Under Supervision
As of May 31, | As of November 30, | As of August 31, | As of November 30, | |||||||||||||||||||||||||||||
2000 | 1999 | 1999 | 1998 | 2000 | 1999 | 1999 | 1998 | |||||||||||||||||||||||||
Assets under management | $ | 276,610 | $ | 206,553 | $ | 258,045 | $ | 194,821 | $ | 307,851 | $ | 220,522 | $ | 258,045 | $ | 194,821 | ||||||||||||||||
Other client assets | 235,103 | 176,369 | 227,424 | 142,018 | 273,090 | 192,034 | 227,424 | 142,018 | ||||||||||||||||||||||||
Total | $ | 511,713 | $ | 382,922 | $ | 485,469 | $ | 336,839 | $ | 580,941 | $ | 412,556 | $ | 485,469 | $ | 336,839 | ||||||||||||||||
Three Months Ended MayAugust 2000 versus Three Months Ended May 1999.August 1999
Net revenues in Asset Management and Securities Services were $1.16increased 35% to $1.09 billion an increase of 55% above the same prior year period as all major components of the business exhibited strong growth. Operating expenses increased 43%, principally due to higher levels of compensation commensurate with growth in net revenues, and increased costs associated with global expansion, higher employment levels and increased business activity. Pre-tax earnings were $404$250 million compared to $83$223 million in 1999.
Net revenues in Asset Management increased 48%, primarily reflecting a 37% increase in average assets under management as well as favorable changes in the same periodcomposition of assets managed. Strong net inflows and market appreciation led to the growth in 1999.assets under management. Securities Services net revenues were 20% higher, primarily due to increased customer balances in securities lending and margin lending, partially offset by reduced spreads in the fixed income matched book. Commissions increased 34%, primarily due to higher transaction volumes in global equity markets. Revenues from the increased share of income and gains from our merchant banking funds also contributed to the increase in Commissions.
Nine Months Ended August 2000 versus Nine Months Ended August 1999
Net revenues in Asset Management and Securities Services increased 49% to $3.42 billion, due to increased contributions from all major components of the business. Operating expenses increased 14%, principally33% due to higher levels of compensation commensurate with growth in net revenues, and increased costs associated with global expansion and higher levels of business activity. Pre-tax earnings were $1.06 billion compared to $519 million in 1999.
Net revenues in Asset Management increased 65% compared55%, primarily due to last year’s second quarter, primarily reflecting a 34%35% increase in average assets under management, as well as favorable changes in the composition of assets managed. Securities Services net revenues were 45%increased 26%, reflecting the impact of higher than the same 1999 period, primarily due to continued growth in our prime brokerage business and increased customer balances in securities lending and margin lending. Commissions increased 54% compared to the same period last year as transaction volumes in global equity markets rose to record levels.
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Six Months Ended May 2000 versus Six Months Ended May 1999.
Net revenues in Asset Management and Securities Services were $2.33 billion, an increase of 57% above the same prior year period due to increased contributions from all major components of the business. Pre-tax earnings were $810 million compared to $296 million in the same period in 1999. Operating expenses increased 28% due to higher levels of compensation commensurate with growth in net revenues, and increased costs associated with global expansion and higher levels of business activity.
Net revenues in Asset Management increased 59% compared to the first half of 1999, primarily due to a 33% increase in average assets under management, as well as favorable changes in the composition of assets managed. Securities Services net revenues were 29% higher than the same 1999 period, reflecting growth in our prime brokerage business and substantial increases in average customer balances in our securities lending and margin lending businesses. These increases wereThis increase was partially offset by reduced spreads in our fixed income matched book. Commissions increased substantially compared58% due to the same period last year as increased volatility in global equity markets led to recordworldwide transaction volumes. Revenuesvolumes and higher net revenues from the increased share of income and gains from our merchant banking funds recognized in the first quarter of 2000 also contributed to the increase in Commissions.funds.
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Operating Expenses
The following table sets forth our operating expenses and number of employees:
Operating Expenses and Employees
Three Months | Six Months | Three Months | Nine Months | |||||||||||||||||||||||||||||
Ended May | Ended May | Ended August | Ended August | |||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||
Compensation and benefits, excluding employee initial public offering awards | $ | 2,077 | $ | 1,953 | $ | 4,324 | $ | 3,228 | $ | 2,263 | $ | 1,704 | $ | 6,587 | $ | 4,932 | ||||||||||||||||
Nonrecurring employee initial public offering awards | — | 2,257 | — | 2,257 | — | — | — | 2,257 | ||||||||||||||||||||||||
Amortization of employee initial public offering awards | 101 | 39 | 212 | 39 | 102 | 115 | 314 | 154 | ||||||||||||||||||||||||
Brokerage, clearing and exchange fees | 154 | 109 | 283 | 220 | 136 | 108 | 419 | 328 | ||||||||||||||||||||||||
Market development | 111 | 78 | 217 | 155 | 126 | 92 | 343 | 247 | ||||||||||||||||||||||||
Communications and technology | 100 | 71 | 193 | 149 | 111 | 75 | 304 | 224 | ||||||||||||||||||||||||
Depreciation and amortization | 102 | 61 | 203 | 158 | 119 | 71 | 322 | 229 | ||||||||||||||||||||||||
Occupancy | 101 | 67 | 196 | 145 | 116 | 76 | 312 | 221 | ||||||||||||||||||||||||
Professional services and other | 151 | 121 | 283 | 212 | 181 | 85 | 464 | 297 | ||||||||||||||||||||||||
Charitable contribution | — | 200 | — | 200 | — | — | — | 200 | ||||||||||||||||||||||||
Total operating expenses | $ | 2,897 | $ | 4,956 | $ | 5,911 | $ | 6,763 | $ | 3,154 | $ | 2,326 | $ | 9,065 | $ | 9,089 | ||||||||||||||||
Employees at period end(1) | 16,512 | 13,454 | ||||||||||||||||||||||||||||||
Employees at period end (1) | 18,666 | 14,454 |
(1) | Excludes employees of Goldman Sachs’ property management subsidiaries. Substantially all of the costs of these employees are reimbursed to Goldman Sachs by the real estate investment funds to which these companies provide property management services. |
Three Months Ended MayAugust 2000 versus Three Months Ended May 1999.August 1999
Operating expenses increased 36% to $3.15 billion, primarily reflecting increased compensation and benefits commensurate with higher net revenues levels.
Compensation and benefits expense increased 33% to $2.26 billion. The ratio of compensation and benefits to net revenues was 50% for each of the quarters ended August 2000 and August 1999. Employment levels increased 29%, reflecting growth in our businesses. Expenses associated with our temporary staff and consultants were $2.90 billion, a significant decrease compared to the same period in 1999,$183 million, an increase of 71%, reflecting increased global expansion and consulting costs associated with technology initiatives.
Brokerage, clearing and exchange fees increased 26% primarily due to the inclusionhigher levels of trading volumes in May 1999equity derivatives and U.S. equities. Market development expenses increased 37%, principally due to higher levels of nonrecurring chargestravel and entertainment costs associated with growth in employment levels and business activity. Communications and technology expenses increased 48%, reflecting higher telecommunications and market data costs associated with higher employment levels. Additional spending on technology initiatives also led to the increase in communications and technology expenses. Depreciation and amortization expenses increased 68% primarily due to additional technology-related equipment expenditures, leasehold improvements and telecommunications equipment needed for our continued global expansion. Occupancy expenses increased 53%, reflecting continued office expansion needed to accommodate growth in employment levels. Professional services and other expenses increased significantly due to increased business activity.
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Nine Months Ended August 2000 versus Nine Months Ended August 1999
Operating expenses of $9.07 billion remained at prior year levels. In 1999, operating expenses included nonrecurring charges associated with Goldman Sachs’ conversion to corporate form and related transactions. These nonrecurring charges included $2.26 billion for employee initial public offering awards and $200 million for a contribution to The Goldman Sachs Foundation.
Compensation and benefits expense was $2.08 billion, an increase of 6% over the same 1999 period. During the quarter ended May 1999, additional compensation expense was recorded equalincreased 34% to 50% of the estimated annual 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. This was offset, in part, by the effect of issuing restricted stock units to employees with future service requirements, in lieu of a portion of ongoing cash compensation. As a result, compensation and benefits for the three months ended May 1999 is not comparable with the three months ended May 2000.$6.59 billion. The ratio of compensation and benefits to net revenues was 50% for each of the three monthsnine-month periods ended May 2000. Employment levels increased 23% from May 1999, reflecting growth in our businesses.August 2000 and August 1999. Expenses associated with our temporary staff and consultants were $142$447 million, an increase of 64%53% compared with 1999, reflecting increased global expansion and consulting costs associated with technology initiatives.
Brokerage, clearing and exchange fees increased 41%28% primarily due to higher transaction volumes in equity derivatives and Pan-EuropeanU.S. and U.S. shares.European equities. Market development expenses increased 42%39%, principally due to higher levels of travel and entertainment costs associated with growth in employment levels and business activity and global expansion.activity. Communications and technology expenses increased 41%36%, reflecting higher telecommunications and market data costs associated with higher employment levels, and additional spending on technology initiatives. Depreciation and amortization expenses increased 41% primarily due to leasehold improvements and technology-related and telecommunications equipment in support of our increased worldwide activities. Occupancy expenses increased 51%41%, reflecting additionalglobal office spaceexpansion needed to accommodate growth inincreased employment levels. Professional services and other expenses increased 25% due to higher levels of business activity.
Six Months Ended May 2000 versus Six Months Ended May 1999.
Operating expenses were $5.91 billion, a 13% decrease compared to the same period in 1999, primarily due to the inclusion in May 1999 of nonrecurring charges of $2.46 billion associated with Goldman Sachs’ conversion to corporate form and related transactions. This decrease was partially offset by higher levels of compensation commensurate with higher net revenues and increased amortization of employee initial public offering awards.
Compensation and benefits expense was $4.32 billion, an increase of 34% over the same 1999 period. The ratio of compensation and benefits to net revenues was 50%. Expenses associated with our temporary staff and consultants were $264 million, an increase of 43% compared with 1999, reflecting increased global expansion and consulting costs associated with technology initiatives.
Brokerage, clearing and exchange fees increased 29% primarily due to higher transaction volumes in equity derivatives and European equities. Market development expenses increased 40%, principally due to higher levels of business activity and global expansion. Communications and technology expenses increased 30%, reflecting higher telecommunications and market data costs associated with higher employment levels, and additional spending on technology initiatives. Occupancy expenses increased 35%, reflecting additional office space needed to accommodate growth in employment levels. Professional services and other expenses increased 33%56% due to higher levels of business activity.
Provision for Taxes
The provision for taxes for the sixquarter and nine months ended MayAugust 2000 was $1.10 billion.$549 million and $1.64 billion, respectively. Goldman Sachs’ effective tax rate for the quarter and year to date was 40%.
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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, which are described below.
Diversification of Funding Sources and Liquidity Planning.Goldman Sachs seeks to maintain broad and diversified funding sources with both banks and nonbank lenders globally. These diversified funding sources include insurance companies, mutual funds, banks, bank trust departments and other asset managers. Management believes that Goldman Sachs’ relationships with its lenders are critical to its liquidity.
We access liquidity in a variety of markets in the United States, as well as in Europe and Asia. We make extensive use of the repurchase agreement markets and have raised debt publicly as well as in the private placement and commercial paper markets, and through Eurobonds, money broker loans, commodity-based financings, letters of credit and promissory notes. We seek to structure our liabilities to avoid significant amounts of debt coming due on any one day or during any single week or year.
Asset Liquidity.Goldman Sachs maintains a highly liquid balance sheet. Many of our assets are readily funded in the repurchase agreement markets, which generally have proven to be a consistent source of funding even in periods of market stress. A substantial portion of our
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Excess Liquidity.In addition to maintaining a highly liquid balance sheet and a significant amount of longer-term liabilities to assure liquidity even during adverse conditions, we seek to maintain a liquidity cushion that consists principally of unencumbered U.S. government and agency obligations to ensure the availability of immediate liquidity.
Dynamic Liquidity Management.Goldman Sachs seeks to manage the composition of its asset base and the maturity profile of its funding to ensure that it can liquidate its assets prior to its liabilities coming due, even in times of liquidity stress. We have traditionally been able to fund our liquidity needs through security-based and collateralized funding, such as repurchase transactions and securities lending, as well as short-term and long-term borrowings and equity capital. To further evaluate the adequacy of our liquidity management policies and guidelines, we perform weekly “stress funding” simulations of disruptions to our access to unsecured credit.
Excess Liquidity.In addition to maintaining a highly liquid balance sheet and a significant amount of longer-term liabilities to assure liquidity even during adverse conditions, we seek to maintain a liquidity cushion that consists principally of unencumbered U.S. government and agency obligations to ensure the availability of immediate liquidity.
Liquidity Ratio Maintenance.It is Goldman Sachs’ policy to further manage its liquidity by maintaining a “liquidity ratio” of at least 100%. This ratio measures the relationship between the loan value of our unencumbered assets and our short-term unsecured liabilities. The maintenance of this liquidity ratio is intended to ensure that we could fund our positions on a fully secured basis in the event that we were unable to replace our unsecured debt maturing within one year. Under this policy, we seek to maintain unencumbered assets in an amount that, if pledged or sold, would provide the funds necessary to replace unsecured obligations that are scheduled to mature (or where holders have the option to redeem) within the coming year.
Intercompany Funding.Most of the liquidity of Goldman Sachs is raised by the parent company, Group Inc. The parent company then lends the necessary funds to its subsidiaries and affiliates. We carefully manage our intercompany exposure by generally requiring intercompany loans to have maturities equal to or shorter than the maturities of the aggregate borrowings of the parent company. This policy ensures that the subsidiaries’ obligations to the parent company will generally mature in advance of the parent company’s third-party long-term borrowings. In addition, many of the advances made to our subsidiaries and affiliates are secured by marketable securities or other liquid collateral. We generally fund our equity investments in subsidiaries with equity capital.
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The Balance Sheet
Goldman Sachs maintains a highly liquid balance sheet that fluctuates significantly between financial statement dates. The following table sets forth our total assets, adjusted assets, leverage ratios and book value per share:
As of | As of | |||||||||||||||
May | November | August | November | |||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||
($ in billions, except | ($ in billions, except | |||||||||||||||
per share amounts) | per share amounts) | |||||||||||||||
Total assets | $ | 278 | $ | 250 | $ | 275 | $ | 250 | ||||||||
Adjusted assets(1) | 213 | 188 | 199 | 188 | ||||||||||||
Leverage ratio(2) | 23.4 | x | 24.7 | x | 21.7 | x | 24.7 | x | ||||||||
Adjusted leverage ratio(3) | 17.9 | x | 18.5 | x | 15.6 | x | 18.5 | x | ||||||||
Book value per share(4) | $ | 24.60 | $ | 20.94 | $ | 26.43 | $ | 20.94 |
(1) | Adjusted assets represent total assets less securities purchased under agreements to resell, certain securities borrowed transactions and the increase in total assets related to certain provisions of Statement of Financial Accounting Standards No. 125. |
(2) | Leverage ratio equals total assets divided by stockholders’ equity. |
(3) | Adjusted leverage ratio equals adjusted assets divided by stockholders’ equity. |
(4) | Book value per share was based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of |
As of MayAugust 2000, we held approximately $2.79$2.43 billion in high-yield debt and emerging market securities and $3.81$2.55 billion in bank loans. These assets may be relatively illiquid during times of market stress. We seek to diversify our holdings of these assets by industry and by geographic location.
As of MayAugust 2000, the aggregate carrying value of our principal investments held directly or through our merchant banking funds was $3.31$3.54 billion, which consisted of corporate principal investments with an aggregate carrying value of $2.42$2.63 billion and real estate investments with an aggregate carrying value of $888$913 million.
Credit Ratings
Goldman Sachs relies upon the debt capital markets to fund a significant portion of its day-to-day operations. The cost and availability of debt financing is influenced by our credit ratings. Credit ratings are also important to us when competing in certain markets and when seeking to engage in longer-term transactions, including over-the-counter derivatives. A reduction in our credit ratings could increase our borrowing costs and limit our access to the capital markets. This, in turn, could reduce our earnings and adversely affect our liquidity.
The following table sets forth our credit ratings as of MayAugust 2000:
Short-Term Debt | Long-Term Debt | |||||||
CBRS | A-1 (High) | AA | ||||||
Fitch | F1+ | AA- | ||||||
Moody’s | P-1 | A1 | ||||||
Standard & Poor’s | A-1+ | A+ | ||||||
Thomson | TBW-1 | AA |
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Long-Term Debt
As of MayAugust 2000, our consolidated long-term borrowings were $24.73$28.53 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 MayAugust 2000 was approximately five years. Substantially all of our long-term borrowings are swapped into U.S. dollar obligations with short-term floating rates of interest in order to minimize our exposure to interest rate and foreign exchange movements.
For a description of our risk management policies and procedures, value-at-risk (VaR) model, including such model’s assumptions and limitations, and nontrading risk sensitivity analysis, see Part II, Item 7A “Quantitative and Qualitative Disclosures aboutAbout Market Risk” in our Annual Report on Form 10-K for the fiscal year ended November 26, 1999 and the information incorporated by reference therein.
PART II: OTHER INFORMATION
The following developments have occurred with respect to certain matters previously reportedsupplements and amends our discussion set forth under Part I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended November 26, 1999, as updated by our Quarterly ReportReports on Form 10-Q for the quarterquarters ended February 25, 2000 and our Current ReportMay 26, 2000.
Antitrust Matters
The Goldman Sachs Group, Inc. is a named defendant in a purported class action filed on Form 8-K, filed May 4, 2000.August 17, 2000 in the U.S. District Court for the Southern District of Florida by an alleged issuer in a 1996 initial public offering. The action asserts substantively similar allegations to the New York action which alleges a conspiracy to fix at 7% the discount that underwriting syndicates receive from issuers of shares in certain offerings. On October 2, 2000, defendants, most of which are named in the New York action, moved to transfer the action to the New York federal court.
In the lawsuit alleging a conspiracy to preclude the multiple listing of equity options on the exchanges, certain defendants including Hull Trading Co. L.L.C. have entered into a settlement, subject to court approval, pursuant to which Hull will be required to pay an aggregate of $2.475 million.
Rockefeller Center Properties, Inc. Litigation
On July 18, 2000, the federal district court granted plaintiffs’ motion for leave to file an amended complaint. Defendants have renewed their motion to dismiss with respect to the amended complaint.
Reichhold Chemicals Litigation
The lawsuit brought by Reichhold Chemicals, Inc. and Reichhold Norway ASA was dismissed on August 29, 2000 pursuant to a settlement.
HUD Litigation
On April 17,The civil action under thequi tam provisions of the federal False Claims Act was voluntarily dismissed without prejudice on August 28, 2000.
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Laidlaw Bondholders Litigation
Goldman, Sachs & Co. has been named as a defendant in purported class actions filed on September 24, 2000 in the U.S. government served a noticeDistrict Court for the Southern District of New York and on September 22, 2000 in the U.S. District Court for the District of South Carolina arising from certain offerings of debentures by Laidlaw, Inc. during 1997-1999. The defendants include Laidlaw, certain of its election declining to interveneofficers and directors, the lead underwriters for the offerings (including Goldman, Sachs & Co., which was lead manager in the action.
Item 4: Submission The lawsuits, brought by certain institutional holders of Matters to a Votethe debentures, allege that the prospectuses issued in connection with the offerings were false and misleading in violation of Security Holdersthe disclosure requirements of the federal securities laws. The plaintiffs are seeking, among other things, unspecified damages.
World Online Litigation
On September 11, 2000, several Dutch World Online shareholders as well as a Dutch entity purporting to represent the interests of certain World Online shareholders commenced a proceeding in Amsterdam District Court against “ABN AMRO Bank N.V., also acting under the name of ABN AMRO Rothschild”, alleging misrepresentations and omissions relating to the initial public offering of World Online in March 17,2000. The lawsuit seeks, among other things, the return of the purchase price of the shares purchased by the plaintiffs or unspecified damages. Neither Goldman, Sachs & Co. nor Goldman Sachs International has been named in the proceeding, but the firm and ABN AMRO Rothschild served as joint global co-ordinators of the offering.
On August 21, 2000, Sumitomo Bank Capital Markets, Inc. exchanged all 7,440,362 shares of its nonvoting common stock, par value $.01 per share, of Group Inc. held its Annual Meetingfor an equal number of Shareholders. Further details concerning matters submitted to a voteshares of common stock. The issuance of common stock upon exchange was not registered under the Securities Act of 1933 in reliance on Section 3(a)(9) thereof as involving exclusively the exchange of one security holders can be foundof Group Inc. for another security of Group Inc. where no commission or other remuneration was paid in our Quarterly Report on Form 10-Q forconnection with the quarter ended February 25, 2000.exchange.
Cautionary Statement Pursuant to The Private Securities
We have included in this Form 10-Q filing, and from time to time our management may make, statements which may constitute “forward-looking statements” within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. It is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in our specific forward-looking statements include, but are not limited to, the following:
• | a decline in general economic conditions or the global financial markets; | |
• | losses due to unidentified or unanticipated risks; | |
• | competitive pressure, including for our employees; | |
• | a lack of liquidity, i.e., ready access to funds, for use in our business; |
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• | losses caused by financial or other problems experienced by third | |
• | volatility or a downturn in the technology and communications sectors. |
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Additional information regarding these and other important factors that could cause actual results to differ from those in our forward-looking statements is contained in our prospectus, dated August 1, 2000 (as filed with the SEC on August 2), under the caption “Business — Certain Factors That May Affect Our Business”“Risk Factors”.
Forward-looking statements regarding the expected date of completion of the transaction with Spear, Leeds & Kellogg, L.P. are subject to the risk that the closing conditions will not be satisfied, including the risk that the necessary regulatory and other approvals will not be obtained.
Statements about our investment banking transaction backlog also may constitute forward-looking statements. Such statements are subject to the risk that the terms of these transactions may be modified or that they may not be completed at all; therefore, the net revenues that we expect to earn from these transactions may differ, possibly materially, from those currently expected. Important factors that could result in a modification of the terms of a transaction or a transaction not being completed include, in the case of underwriting transactions, a decline in general economic conditions, volatility in the securities markets generally or an adverse development with respect to the issuer of the securities and, in the case of financial advisory transactions, a decline in the securities markets, an adverse development with respect to a party to the transaction or a failure to obtain a required regulatory approval. Other important factors that could adversely affect our investment banking transactions are contained in our prospectus, dated August 1, 2000 (as filed with the SEC on August 2), under Part I, Item 1the caption “Risk Factors”.
Rule 144 Sales Program
On September 22, 2000, our Board of Directors approved a program to permit the former profit participating limited partners of The Goldman Sachs Group, L.P. and the former owners of our Annual ReportHull subsidiary to sell, in a coordinated manner, a portion of their shares of common stock in accordance with the volume and manner of sale limitations of Rule 144 under the Securities Act of 1933. Sales under the program commenced on Form 10-K, for the fiscal year ended November 26, 1999.September 25, 2000.
(a) Exhibits:
10.1 | Form of Indemnification Agreement, dated as of July 5, 2000. | |
10.2 | ||
10.3 | ||
11.1 | Statement re computation of per share earnings. | |
12.1 | Statement re computation of ratios of earnings to fixed charges. | |
15.1 | Letter re Unaudited Interim Financial Information. | |
27.1 | Financial Data Schedule. |
(b) Reports on Form 8-K:
On May 4,July 18, 2000, Group Inc. filed a Current Report on Form 8-K with respect to matters relating toreporting the initial public offeringsale of World Online.$1,250,000,000 principal amount of its 7.625% Notes due 2005.
On May 10,July 31, 2000, Group Inc. filed a Current Report on Form 8-K (amended on May 12, 2000) attachingreporting the waiver of transfer restrictions to permit its former partners to pledge Group Inc. common stock to obtain loan commitments to invest in certain exhibits relating to its publicly registered debt securities.merchant banking funds sponsored by Group Inc.
On June 20,September 11, 2000, Group Inc. filed a Current Report attaching its press release announcing the agreement to combine with Spear, Leeds & Kellogg, L.P.
On September 19, 2000, Group Inc. filed a Current Report on Form 8-K reporting the firm’s net earnings for its fiscal secondthird quarter ended May 26,August 25, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE GOLDMAN SACHS GROUP, INC. |
By: | /s/DAVID A. VINIAR |
Name: David A. Viniar | |
Title: Chief Financial Officer |
By: | /s/SARAH G. SMITH |
Name: Sarah G. Smith | |
Title: Principal Accounting Officer |
Date: July 5,October 10, 2000
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