The Goldman Sachs Group, Inc. (GS) 8-K/A Report of Independent Accountants

Exhibit 99.2

Review Report of Independent Accountants

To the Members of SLK LLC:

We have reviewed the accompanying consolidated statements of financial condition of SLK LLC and Subsidiaries (the “Company”) as of June 30, 2000 and June 30, 1999, and the related consolidated statements of income, changes in members’ equity and cash flows for each of the nine month periods then ended. These consolidated 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 consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

/s/ PricewaterhouseCoopers LLP

New York, New York
January 12, 2001

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SLK LLC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)

	As of June 30,
	2000		1999
	(in thousands)
Assets:
Cash	$	26,869	$	16,863
Cash and securities deposited with clearing organizations or segregated in     compliance with Federal regulations		2,835,527		1,943,861
Securities purchased under agreements to resell		734,981		706,342
Securities borrowed		9,348,684		6,766,837
Receivable from brokers and dealers		1,233,394		968,512
Receivable from customers		5,100,538		3,816,113
Securities owned —at market value		5,662,710		4,924,050
Exchange memberships owned —at cost (market value $24,222 and $44,129)		11,645		23,688
Other assets		391,038		359,610
Total assets	$	25,345,386	$	19,525,876
Liabilities and Members’ Equity:
Borrowings from banks and other financial institutions	$	1,554,606	$	846,400
Securities sold under agreements to repurchase		737,557		842,247
Securities loaned		10,755,182		9,010,722
Payable to brokers and dealers		1,146,262		633,270
Payable to customers		5,765,651		4,379,639
Securities sold, but not yet purchased —at market value		3,032,809		2,085,438
Accrued expenses and other liabilities		356,800		244,568
Long-term borrowings		92,868		112,299
Liabilities subordinated to claims of general creditors		401,942		296,513
		23,843,677		18,451,096
Commitments and contingencies
Members’ equity		1,501,709		1,074,780
Total liabilities and members’ equity	$	25,345,386	$	19,525,876

The accompanying notes are an integral part of the consolidated financial statements.

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SLK LLC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

		Nine Months Ended June 30,
		2000		1999
		(in thousands)
Revenues:
Commissions, clearance and floor brokerage		$	475,774	$	336,713
Net gain from principal transactions			1,056,444		627,584
Interest and dividends			1,148,912		655,706
Other revenues			14,875		13,064
	Total revenues		2,696,005		1,633,067
Interest and dividend expense			1,052,197		620,679
Revenues, net of interest and dividend expense			1,643,808		1,012,388
Expenses:
Employee compensation and benefits			436,381		268,239
Brokerage, clearance and exchange fees			143,923		110,497
Communications			21,133		13,522
Data processing and equipment rental			53,675		36,508
Depreciation and amortization			21,623		13,238
Printing, postage and office supplies			12,826		8,447
Professional fees			11,569		12,504
Rent and occupancy			21,394		18,579
Other expenses			22,687		17,069
	Total expenses		745,211		498,603
Pre-tax income			898,597		513,785
Provision for taxes (UBT and corporate subsidiary)			53,066		38,376
Net income		$	845,531	$	475,409

The accompanying notes are an integral part of the consolidated financial statements.

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SLK LLC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
(unaudited)

	Nine Months Ended June 30,
	2000			1999
	(in thousands)
Members’ equity — beginning of period	$	1,123,723		$	707,721
Net income		845,531			475,409
Net withdrawals		(467,545	)		(108,350	)
Members’ equity — end of period	$	1,501,709		$	1,074,780

The accompanying notes are an integral part of the consolidated financial statements.

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SLK LLC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

					Nine Months Ended June 30,
					2000			1999
					(in thousands)
Cash flows from operating activities:
	Net income				$	845,531		$	475,409
	Adjustments to reconcile net income to net cash used in operating activities:
		Depreciation and amortization				21,623			13,238
		Gain on sales of exchange memberships owned				(1,508	)		(3,356	)
	(Increase) decrease in operating assets:
		Cash and securities deposited with clearing organizations or segregated in
			compliance with Federal regulations			(501,564	)		(168,754	)
		Securities purchased under agreements to resell				410,111			(320,744	)
		Securities borrowed				(1,960,513	)		(996,373	)
		Receivable from brokers and dealers				(335,977	)		(242,832	)
		Receivable from customers				(1,574,281	)		(898,534	)
		Securities owned				(627,668	)		(620,530	)
		Other assets				(63,671	)		(24,689	)
	Increase (decrease) in operating liabilities:
		Securities sold under agreements to repurchase				(238,733	)		286,247
		Securities loaned				3,509,426			2,465,711
		Payable to brokers and dealers				320,277			348,932
		Payable to customers				(503,975	)		(996,232	)
		Securities sold, but not yet purchased				470,418			352,705
		Accrued expenses and other liabilities				37,862			37,808
				Total adjustments		(1,038,173	)		(767,403	)
				Net cash used in operating activities		(192,642	)		(291,994	)
Cash flows from financing activities:
	Net increase in borrowings from banks and other financial institutions					692,706			353,700
	Net increase (decrease) in long-term borrowings					(15,424	)		36,954
	Additions to subordinated liabilities					115,550			170,200
	Repayments of subordinated liabilities					(111,121	)		(55,966	)
	Net members’ withdrawals					(467,545	)		(108,350	)
				Net cash provided by financing activities		214,166			396,538
Cash flows from investing activities:
	Purchase of exchange memberships					(15	)		(14,146	)
	Proceeds from sales of exchange memberships					3,925			6,190
	Purchases of intangible assets					(312	)		(81,980	)
	Purchases of long-lived assets					(30,059	)		(11,432	)
				Net cash used in investing activities		(26,461	)		(101,368	)
				Net increase (decrease) in cash		(4,937	)		3,176
				Cash at beginning of period		31,806			13,687
				Cash at end of period	$	26,869		$	16,863
Supplemental disclosure of cash flow information:
				Cash paid for interest	$	1,026,138		$	597,204

Supplemental disclosure for noncash operating activities:

      For the nine months ended June 30, 2000, securities sold, but not yet purchased and other assets decreased $1,393 due to a reduction in securities pledged collateralizing securities sold under agreements to repurchase without the right of substitution.

      For the nine months ended June 30, 1999, securities sold, but not yet purchased and other assets decreased $18,918 due to a reduction in securities pledged collateralizing securities sold under agreements to repurchase without the right of substitution.

Supplemental disclosure for noncash financing activities:

      For the nine months ended June 30, 2000, secured demand notes receivable increased $1,000 with a corresponding addition to subordinated liabilities.

      For the nine months ended June 30, 1999, secured demand notes receivable decreased $10,000 with a corresponding reduction to subordinated liabilities.

The accompanying notes are an integral part of the consolidated financial statements.

-5-

SLK LLC and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Significant Accounting Policies

      SLK LLC is a limited liability company. It is the sole general partner of Spear, Leeds & Kellogg, L.P. (“SLK”), a registered broker-dealer and futures commission merchant. The consolidated financial statements include the accounts of SLK LLC and its wholly owned subsidiaries (collectively, the “Company”). All material intercompany transactions and balances have been eliminated.

      Customers’ securities transactions are recorded on a settlement date basis, which is generally three business days after trade date, with related revenues and expenses recorded on a trade date basis. All other securities transactions and related revenues and expenses are recorded on a trade date basis.

      Securities owned or sold, but not yet purchased, and contractual commitments arising pursuant to futures, forwards, equity swaps and other derivative contracts are recorded at market value, with unrealized gains and losses reflected in income.

      Securities purchased under agreements to resell (“reverse repurchase agreements”) and sold under agreements to repurchase (“repurchase agreements”) are treated as collateralized financing transactions and are recorded at their contracted resale or repurchase amounts plus accrued interest. It is the Company’s policy to take possession of securities with a market value equaling the principal amount loaned plus accrued interest in order to collateralize reverse repurchase agreements. Similarly, the Company is required to provide securities to counterparties in order to collateralize repurchase agreements. The Company monitors the market value of collateral daily, with additional collateral obtained or refunded as appropriate. At June 30, 2000, cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations included $2,195,390,000 of securities purchased under agreements to resell, of which $84,286,000 were on deposit and $2,111,104,000 were segregated. At June 30, 1999, cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations included $1,645,646,000 of securities purchased under agreements to resell, of which $184,760,000 were on deposit and $1,460,886,000 were segregated.

      Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions require the Company to deposit cash, letters of credit or other collateral with the lender. With respect to securities loaned, the Company receives collateral in the form of cash or other collateral. The amount of collateral required to be deposited for securities borrowed or received for securities loaned is an amount generally in excess of the market value of the applicable securities. The Company monitors the market value of securities borrowed and loaned daily, with additional collateral obtained or refunded as appropriate.

      Substantially all of the Company’s assets and liabilities are carried at fair value or contracted amounts, which approximate fair value. Assets, which are recorded at contracted amounts approximating fair value, consist largely of short-term secured receivables. Similarly, the Company’s short-term liabilities are recorded at contracted amounts approximating fair value. These instruments generally have variable interest rates and short-term maturities, and, accordingly, are not materially affected by changes in interest rates. The carrying amount of subordinated liabilities closely approximates fair value based upon market rates of interest available to the Company. For discussion of the Company’s financial instruments with off-balance-sheet risk see Note 8.

      The consolidated financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

-6-

SLK LLC and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

      Federal income taxes have not been provided on the profits of the Company, as the members are individually liable for their own tax payments. Unincorporated business taxes on the profits of the Company and corporate taxes on the profits of certain subsidiaries have been provided for in the consolidated financial statements.

      In management’s opinion, the unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position and results of operations. Operating results for the nine months ended June 30, 2000 are not necessarily indicative of results that may be expected for the entire year or any other period.

Accounting Developments

      In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities ” (“SFAS 133”). In June 1999, the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133” (“SFAS 137”), which postponed the effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000.

      SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively, “derivatives”), and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting designation. We intend to adopt the provisions of SFAS 133 in our fiscal year ending September 30, 2001 and are currently assessing its effect.

Note 2. Securities Owned and Sold, But Not Yet Purchased

      Securities owned and securities sold, but not yet purchased, consisted of the following, at market value:

      June 30, 2000

			Sold, But Not Yet
	Owned		Purchased
United States government and agency	$	1,056,142,000	$	448,233,000
Corporate debt		407,697,000		364,703,000
Corporate equity		3,334,954,000		1,583,757,000
Options		863,917,000		636,116,000
	$	5,662,710,000	$	3,032,809,000

      June 30, 1999

			Sold, But Not Yet
	Owned		Purchased
United States government and agency	$	968,138,000	$	484,906,000
Corporate debt		271,450,000		330,019,000
Corporate equity		3,254,052,000		918,083,000
Options		430,410,000		352,430,000
	$	4,924,050,000	$	2,085,438,000

      At June 30, 2000, cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations included $364,238,000 of U.S. government securities owned, of which $176,759,000 were on deposit and $187,479,000 were segregated. At June 30, 1999, cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations included $135,369,000 of U.S. government securities owned, of which $127,466,000 were on deposit and $7,903,000 were segregated. Securities sold, but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price, and thereby create a liability to repurchase the security in the market at prevailing prices. Accordingly, these transactions result in off-balance-sheet risk as the Company’s ultimate obligation to satisfy the sale of securities sold, but not yet purchased may exceed the amount recognized in the consolidated financial statements. The average monthly market value of options held and options written for the nine months ended June 30, 2000, all of which were held or written for trading purposes, was $789,305,000 and $662,070,000, respectively. The average monthly market value of options held and options written for the nine months ended June 30, 1999, all of which were held or written for trading purposes, was $375,174,000 and $353,859,000, respectively. For discussion of the Company’s financial instruments with off-balance-sheet risk see Note 8.

-7-

SLK LLC and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

Note 3. Borrowings from Banks and Other Financial Institutions

      At June 30, 2000, the Company had obtained short-term borrowings of $1,554,606,000 at rates generally negotiated at the time of the transactions and reflecting market interest rates. These borrowings were collateralized primarily by securities valued at $1,993,333,000, of which $1,516,380,000 were owned by customers. At June 30, 1999, the Company had obtained short-term borrowings of $846,400,000 at rates generally negotiated at the time of the transactions and reflecting market interest rates. These borrowings were collateralized primarily by securities valued at $964,042,000, of which $412,913,000 were owned by customers. As of June 2000 and June 1999, weighted average interest rates for short-term borrowings were 7.58% and 6.09%, respectively.

      At June 30, 2000, no amount was borrowed under a $100,000,000 revolving subordinated agreement, which matures September 2002 and bears interest at the lender reference rate. At June 30, 1999, this revolving subordinated agreement was for $75,000,000, none of which was borrowed, which matures September 30, 2001 and bears interest at the lender reference rate. The agreements are conditional upon an individual subsidiary satisfying certain financial, reporting and other covenants, including the maintenance of certain levels of tangible net worth, as defined, and regulatory capital that the subsidiary monitors daily. At June 30, 2000 and June 30, 1999, the subsidiary was in compliance with all of the covenants.

Note 4. Commitments and Contingencies

      At June 30, 2000, the Company was contingently liable for unsecured letters of credit of $272,854,000 and letters of credit of $176,854,000 collateralized primarily by securities valued at $225,638,000, of which $113,690,000 were owned by customers. At June 30, 1999, the Company was contingently liable for unsecured letters of credit of $364,576,000 and letters of credit of $271,166,000 collateralized primarily by securities valued at $349,436,000, of which $233,047,000 were owned by customers. The letters were principally used to satisfy deposit requirements with clearing organizations and others.

      The Company is obligated under various lease commitments for office space and equipment. At June 30, 2000, minimum annual rentals under these leases were $8,821,000 for the remainder of the fiscal year ending September 30, 2000 and $32,673,000, $28,153,000, $16,721,000 and $11,500,000 for the fiscal years ending September 30, 2001 through 2004, respectively, with further commitments through fiscal 2009 aggregating $23,153,000. At June 30, 1999, minimum annual rentals under these leases were $9,393,000 for the remainder of the fiscal year ending September 30, 1999 and $26,176,000, $22,660,000, $18,411,000 and $11,546,000 for the fiscal years ending September 30, 2000 through 2003, respectively, with further commitments through fiscal 2009 aggregating $27,109,000. Certain of the leases contain renewal options and provisions for rent escalations based on increased costs incurred by the lessor.

      The Company is involved in certain legal proceedings arising in the ordinary course of business. In the opinion of management, after consultation with counsel, these proceedings will not result in any material adverse effect on the Company’s financial position.

      At June 30, 2000, the Company was a guarantor for $10,069,000 under bank loans made to purchase exchange memberships. At June 30, 1999, the Company was a guarantor for $22,310,000 under bank loans made to purchase exchange memberships.

Note 5. Long-Term Borrowings

      At June 30, 2000 and June 30, 1999, long-term borrowings included $65,000,000 under a term loan agreement — $25,000,000 bearing interest at a rate of 8.16% with a bullet maturity in December 2002 and

-8-

SLK LLC and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

$40,000,000 bearing interest at a rate of 8.37% with a bullet maturity in December 2004. At June 30, 1999, long-term borrowings also included a non-recourse agreement with an outstanding principal balance of $9,548,000 and bearing interest at the lender reference rate plus 2.5% with a bullet maturity in December 2000. At June 30, 2000 and June 30, 1999, SLK’s long-term borrowings included $16,000,000 and $20,000,000, respectively, under a non-recourse agreement bearing interest at a rate of 7.18%, with bullet maturities in November 2002 and collateralized by certain equipment of the Company.

      At June 30, 2000 and June 30, 1999, a subsidiary of SLK had $11,868,000 and $17,751,000 outstanding under other long-term subordinated loan agreements, bearing interest at a rate of 8%. At June 30, 2000, maturities of these loans were $6,355,000 and $5,513,000 for the fiscal years ending September 30, 2002 and 2003. At June 30, 1999, maturities of these loans were $5,883,000, $6,355,000 and $5,513,000 for the fiscal years ending September 30, 2001 through 2003.

Note 6. Subordinated Liabilities

      At June 30, 2000, subordinated liabilities include a total of $200,000,000 borrowed under the terms of a Note Purchase Agreement — $140,000,000 of Series A Senior Subordinated Notes bearing an interest rate of 7.45% and maturing September 2004, $20,000,000 of Series B Senior Subordinated Notes bearing an interest rate of 7.59% and maturing September 2006 and $40,000,000 of Series C Senior Subordinated Notes bearing an interest rate of 7.67% and maturing September 2009. These Notes became effective in September 1999. The agreement subjects the Company to certain financial, reporting and other covenants, including the maintenance of certain levels of tangible net worth, as defined, and regulatory capital, that the Company monitors daily. At June 30, 2000, the Company was in compliance with all of the covenants.

      SLK has a revolving senior subordinated loan agreement, which ranks equally with the claims of the Company’s Series A, Series B and Series C Senior Subordinated Notes discussed above, whereby it can borrow up to $100,000,000, none of which was borrowed at June 30, 2000, all of which was borrowed at June 30,1999. This loan agreement is conditional upon the Company satisfying certain financial, reporting and other covenants, including the maintenance of certain levels of tangible net worth, as defined, and regulatory capital, that the Company monitors daily. At June 30, 2000 and at June 30, 1999, the Company was in compliance with all of the covenants.

      As of June 30, 2000, SLK borrowed $201,942,000 under other subordinated loan agreements, of which $90,625,000 is pursuant to secured demand note collateral agreements. The maturity of these loans was $30,904,000, $51,510,000, $57,326,000, and $51,795,000 for the fiscal years ending September 30, 2001 through 2004, respectively, and $10,407,000 thereafter. Of these loans, $104,950,000 have been borrowed from related individuals or entities. As of June 30, 1999, SLK borrowed $196,513,000 under other subordinated loan agreements, of which $89,625,000 was pursuant to secured demand note collateral agreements. The maturity of these loans was $8,896,000, $89,799,000, $31,010,000, and $56,626,000 for the fiscal years ending September 30, 2000 through 2003, respectively, and $10,182,000 thereafter. Of these loans, $101,050,000 have been borrowed from related individuals or entities. The subordinated liabilities are all includable in SLK’s regulatory capital, and can be repaid only if, after giving effect to such repayment, SLK meets the Securities and Exchange Commission’s capital regulations. For the nine months ended June 30, 2000 and June 30, 1999, total interest of $25,734,000 and $11,762,000, respectively, was expensed for these subordinated liabilities.

Note 7. Net Capital Requirement

      As a registered broker-dealer and futures commission merchant, SLK is subject to Rule 15c3-1 of the Securities and Exchange Commission and Rule 1.17 of the Commodity Futures Trading Commission, which specify uniform minimum net capital requirements, as defined, for their registrants. In computing its net capital, SLK elected to use

-9-

SLK LLC and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

the alternative net capital method permitted by Rule 15c3-1. At June 30, 2000, SLK had net capital of $534,977,000, which exceeded requirements of $34,484,000 by $500,493,000. At June 30, 1999, SLK had net capital of $441,861,000, which exceeded requirements of $26,511,000 by $415,350,000. Certain of SLK’s subsidiaries are also subject to Rule 15c3-1 and Rule 1.17, all of which were in compliance at June 30, 2000 and June 30, 1999. SLK and certain of its subsidiaries are also subject to additional regulatory requirements of exchanges of which they are members. At June 30, 2000 and June 30, 1999, these requirements were greater than the minimum requirements under Rule 15c3-1. SLK’s net capital included a reduction for the capital invested in each subsidiary to satisfy any applicable requirements. At June 30, 2000 and June 30, 1999, each entity was in compliance with their respective exchange requirements.

Note 8. Financial Instruments

      In connection with its proprietary trading activities, the Company enters into transactions in a variety of derivative financial instruments in order to reduce its exposure to market, currency and interest rate risk. These derivative instruments include futures, forwards, swap and option contracts. Generally, derivative financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at specific dates or to exchange payment streams. The Company’s net gain from principal transactions of $1,056,444,000 and $627,584,000 for the nine months ended June 30, 2000 and June 30, 1999, respectively, primarily consisted of equity trading inclusive of derivatives and, to a lesser extent, fixed income and other trading activity.

      Derivative financial instruments contain varying degrees of off-balance-sheet risk whereby changes in the level or volatility of market values of the underlying securities or commodities may result in changes in the value of the financial instruments in excess of the amounts currently reflected in the consolidated financial statements. The Company attempts to minimize its exposure to market risk through the use of various hedging strategies and analytical monitoring techniques. In many cases, the use of derivative financial instruments serves to modify or offset market risk associated with other transactions and, accordingly, serves to decrease the Company’s overall exposure to market risk. Additionally, these financial instruments expose the Company to credit risk arising from the potential inability of counterparties to perform under the terms of the contracts. The Company has controls in place to monitor credit exposure by limiting transactions with specific counterparties and assessing the future creditworthiness of counterparties. The Company also seeks to control credit risk by following an established credit approval process, monitoring credit limits, and requiring additional collateral where appropriate.

      The notional or contract amount of derivative financial instruments, which are not included in the consolidated financial statements, represent the extent of the Company’s involvement in the particular class of financial instrument and does not reflect the Company’s risk of loss due to market risk or counterparty nonperformance. The Company’s exposure to credit risk associated with counterparty nonperformance is limited to the amounts reflected in the Company’s consolidated financial statements.

      A summary (in millions) of the Company’s contract or notional amount of financial instrument commitments is:

	June 30, 2000		June 30, 1999
Forward and futures contracts commitments to purchase	$	977	$	338
Forward and futures contracts commitments to sell		1,891		2,352
Options held on securities and stock indices		5,320		2,876
Options written on securities and stock indices		3,971		2,169
Equity and interest rate swap agreements purchased		43		40
Equity swap agreements sold		—		29

-10-

SLK LLC and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

      The Company’s customer activities involve the execution, settlement and financing of various customer securities and commodities transactions. Customer securities activities are transacted on either a cash or margin basis and customer commodity transactions are generally transacted on a margin basis subject to individual exchange regulations. In connection with these activities, the Company executes and clears customer transactions involving the sale of securities not yet purchased and the writing of option contracts. These transactions may expose the Company to off-balance-sheet risk in the event the customer is unable to fulfill its contracted obligations and margin requirements are not sufficient to fully cover losses which customers may incur. In the event the customer fails to satisfy its obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices in order to fulfill the customer’s obligations.

      The Company seeks to control the risks associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels daily and, pursuant to such guidelines, requires the customers to deposit additional collateral or reduce positions, when necessary. The Company also establishes credit limits for customers engaged in commodity futures activities, which are monitored daily. The Company’s customer financing and securities settlement activities may require the Company to pledge customer securities as collateral in support of various secured-financing sources such as bank loans, securities loaned and repurchase agreements and to satisfy margin deposits of various exchanges. In the event the counterparty is unable to meet its contracted obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. The Company controls this risk by monitoring the market value of securities pledged daily and by requiring adjustments of collateral levels in the event of excess market exposure. Additionally, the Company establishes credit limits for such activities and monitors compliance daily.

      As a securities broker and dealer, the Company is engaged in various securities trading and brokerage activities servicing a diverse group of corporate, institutional and individual investors. A substantial portion of the Company’s transactions is collateralized and is executed with and on behalf of other financial institutions. The Company’s exposure to credit risk associated with the nonperformance of these customers in fulfilling their contractual obligations pursuant to securities and commodities transactions can be directly impacted by volatile trading markets, which may impair the customers’ ability to satisfy their obligations to the Company. The Company attempts to minimize credit risk associated with these activities by monitoring customer credit exposure and collateral values daily and requiring additional collateral to be deposited with or returned to the Company when deemed necessary.

      A significant portion of the Company’s securities activities includes clearing transactions for specialists, market-makers, risk arbitrageurs, managed funds and other professional traders. Due to the nature of their operations, which may include a significant level of margin lending and involve short sales and option writing, the Company may have significant credit exposure due to the potential inability of these customers to meet their commitments. The Company seeks to control this risk by monitoring margin collateral levels daily for compliance with both regulatory and internal guidelines and requesting additional collateral where necessary. Additionally, in order to further control this risk, the Company has developed computerized risk control systems which analyze the customer’s sensitivity to major market movements. Where deemed necessary, the Company will require the customer to deposit additional margin collateral or reduce positions, if it is believed that the customer’s activities may be subject to above-normal market risks.

Note 9. Employee Benefit Plans

      The Company has noncontributory profit-sharing and retiree medical plans covering substantially all full-time employees. The profit-sharing plan is funded as of each December 31 from current contributions, which are made at the Company’s discretion. Contributions to the retiree medical plan are made at the Company’s discretion.

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SLK LLC and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

Substantially all of the Company's employees are covered by discretionary profit-sharing plans and/or 401(k) plans. All obligations under these plans are currently funded. The Company’s expense for these plans totaled $20,363,000 and $16,097,000 for the nine months ended June 30, 2000 and June 30, 1999, respectively.

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