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EXHIBIT 19.1
OUR COMPUTER SYSTEMS AND THOSE OF THIRD PARTIES MAY NOT ACHIEVE YEAR 2000
READINESS -- YEAR 2000 READINESS DISCLOSURE
With the year 2000 approaching, many institutions around the world are
reviewing and modifying their computer systems to ensure that they are Year 2000
compliant. The issue, in general terms, is that many existing computer systems
and microprocessors (including those in non-information technology equipment and
systems) use only two digits to identify a year in the date field with the
assumption that the first two digits of the year are always "19". Consequently,
on January 1, 2000, computers that are not Year 2000 compliant may read the year
as 1900. Systems that calculate, compare or sort using the incorrect data may
malfunction.
The Year 2000 problems described below could disrupt our normal funding
administration process, resulting in late payments or the payment of wrong
amounts on our debt, including the notes. If sufficiently severe and protracted,
these problems could also lead the rating agencies to reduce our credit ratings,
which could hurt the market value of the notes and possibly your ability to
resell them.
OUR COMPUTER SYSTEMS MAY FAIL
Because we are dependent, to a very substantial degree, upon the proper
functioning of our computer systems, a failure of our systems to be Year 2000
compliant would have a material adverse effect on us. Failure of this kind
could, for example, cause settlement of trades to fail, lead to incomplete or
inaccurate accounting, recording or processing of trades in securities,
currencies, commodities and other assets, result in generation of erroneous
results or give rise to uncertainty about our exposure to trading risks and our
need for liquidity. If not remedied, potential risks include business
interruption or shutdown, financial loss, regulatory actions, reputational harm
and legal liability.
THE COMPUTER SYSTEMS OF THIRD PARTIES ON WHICH WE DEPEND MAY FAIL
We depend upon the proper functioning of third-party computer and
non-information technology systems. These parties include trading
counterparties, financial intermediaries such as securities and commodities
exchanges, depositories, clearing agencies, clearing houses and commercial banks
and vendors such as providers of telecommunication services and other utilities.
We continue to assess counterparties, intermediaries and vendors with whom we
have important financial or operational relationships to determine the extent of
their Year 2000 preparedness. We have not yet received sufficient information
from all parties about their Year 2000 preparedness to assess the effectiveness
of their efforts. Moreover, in many cases, we are not in a position to verify
the accuracy or completeness of the information we receive from third parties
and as a result are dependent on their willingness and ability to disclose, and
to address, their Year 2000 problems. In addition, in some international markets
in which we do business, the level of awareness and remediation efforts relating
to the Year 2000 issue may be less advanced than in the United States.
If third parties with whom we interact have Year 2000 problems that are not
remedied, problems could include the following:
- in the case of vendors, disruption of important services upon which
Goldman Sachs depends, such as telecommunications and electrical power;
- in the case of third-party data providers, receipt of inaccurate or
out-of-date information that would impair our ability to perform critical
data functions, such as pricing our securities or other assets;
- in the case of financial intermediaries, such as exchanges and clearing
agents, failed trade settlements, inability to trade in certain markets
and disruption of funding flows;
- in the case of banks and other lenders, disruption of capital flows
potentially resulting in liquidity stress; and
- in the case of counterparties and customers, financial and accounting
difficulties for those parties that expose Goldman Sachs to increased
credit risk and lost business.
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Disruption or suspension of activity in the world's financial markets is also
possible.
OUR REVENUES MAY DECLINE IF MARKET ACTIVITY DECREASES SHORTLY BEFORE AND AFTER
THE YEAR 2000
We believe that uncertainty about the success of remediation efforts
generally may cause many market participants to reduce the level of their market
activities temporarily as they assess the effectiveness of these efforts during
a "phase-in" period beginning in late 1999. We believe that lenders are likely
to take similar steps, which will result in a reduction in available funding
sources. Consequently, there may be a downturn in customer and general market
activity for a short period of time before and after January 1, 2000. If this
occurs, our net revenues may be adversely affected, possibly materially,
depending on how long the reduction in activity continues and how broadly it
affects the markets. In addition, we expect to reduce our own trading activities
and the size of our balance sheet in order to manage the number and type of our
transactions that settle during this period and our related funding needs. This
also could reduce our net revenues. We cannot predict the magnitude of the
impact that these kinds of reductions would have on our businesses.
WE MAY BE EXPOSED TO LITIGATION AS A RESULT OF YEAR 2000 PROBLEMS
We may be exposed to litigation with our customers and counterparties as a
result of Year 2000 problems. For example, litigation could arise from problems
relating to our internal systems or to external systems on which we depend, as
well as from problems involving companies in which our clients or the funds we
manage hold investments.
OUR YEAR 2000 PROGRAM MAY NOT BE EFFECTIVE AND OUR ESTIMATES OF TIMING AND
COST MAY NOT BE ACCURATE
Our Year 2000 program may not be effective and our estimates about the
timing and cost of completing our program may not be accurate. For a description
of our program and the steps that remain to be taken, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Management -- Operational and Year 2000 Risks -- Year 2000 Readiness
Disclosure".
YEAR 2000 READINESS DISCLOSURE. Goldman Sachs has determined that it will
be required to modify or replace portions of its information technology systems,
both hardware and software, and its non-information technology systems so that
they will properly recognize and utilize dates beyond December 31, 1999. We
presently believe that with modifications to existing software, conversions to
new software and replacement of some hardware, the Year 2000 issue will be
satisfactorily resolved in our own systems worldwide. However, if such
modifications and conversions are not made or are not completed on a timely
basis, the Year 2000 issue would have a material adverse effect on Goldman
Sachs. Moreover, even if these changes are successful, failure of third parties
to which we are financially or operationally linked to address their own Year
2000 problems would also have a material adverse effect on Goldman Sachs. For a
description of the Year 2000 issue and some of the related risks, including
possible problems that could arise, see "Risk Factors -- Our Computer Systems
and Those of Third Parties May Not Achieve Year 2000 Readiness -- Year 2000
Readiness Disclosure".
Recognizing the broad scope and complexity of the Year 2000 problem, we
have established a Year 2000 Oversight Committee to promote awareness and ensure
the active participation of senior management. This Committee, together with
numerous subcommittees chaired by senior managers throughout Goldman Sachs and
our Global Year 2000 Project Office, is responsible for planning, managing and
monitoring our Year 2000 efforts on a global basis. Our Management Controls
Department assesses the scope and sufficiency of our Year 2000 program and
verifies that the principal aspects of our Year 2000 program are being
implemented according to plan.
Our Year 2000 plans are based on a five-phase approach, which includes
awareness; inventory, assessment and planning; remediation; testing; and
implementation. The awareness phase (in which we defined the scope and
components of the problem, our methodology and approach and obtained senior
management support and funding) was completed in September 1997. We also
completed the inventory, assessment and planning phase for our systems in
September 1997. By the end of March 1999, we completed
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the remediation, testing and implementation phases for 99% of our
mission-critical systems, and we plan to complete these three phases for the
remaining 1% by the end of June 1999. In March 1999, we completed the first
cycle of our internal integration testing with respect to critical securities
and transaction flows. This cycle, which related to U.S. products, was completed
successfully with no material problem. The remaining cycle, which will relate
primarily to non-U.S. products, is to be completed in June 1999. This testing is
intended to validate that our systems can successfully perform critical business
functions beginning in January 2000. With respect to our non-mission-critical
systems, we expect to complete our Year 2000 efforts during calendar 1999.
For technology products that are supplied by third-party vendors, we have
completed an inventory, ranked products according to their importance and
developed a strategy for achieving Year 2000 readiness for substantially all
non-compliant versions of software and hardware. While this process included
collecting information from vendors, we are not relying solely on vendors'
verifications that their products are Year 2000 compliant or ready. As of March
31, 1999, we had substantially completed testing and implementation of
vendor-supplied technology products that we consider mission-critical. With
respect to telecommunications carriers, we are relying on information provided
by these vendors as to whether they are Year 2000 compliant because these
vendors have indicated that they will not test with individual companies.
We are also addressing Year 2000 issues that may exist outside our own
technology activities, including our facilities, external service providers and
other third parties with which we interface. We have inventoried and ranked our
customers, business and trading partners, utilities, exchanges, depositories,
clearing and custodial banks and other third parties with which we have
important financial and operational relationships. We are continuing to assess
the Year 2000 preparedness of these customers, business and trading partners and
other third parties.
By the end of March 1999, we had participated in approximately 115
"external", i.e., industry-wide or point-to-point, tests with exchanges,
clearing houses and other industry utilities, as well as the "Beta" test
sponsored by the Securities Industry Association for its U.S. members in July
1998. We successfully completed all of these tests, as well as the Securities
Industry Association "Streetwide" test in April 1999, with no material problems.
By the end of June 1999, we expect to have participated in approximately 60
additional external tests, including major industry tests in those global
markets where we conduct significant business.
Acknowledging that a Year 2000 failure, whether internal or external, could
have an adverse effect on the ability to conduct day-to-day business, we are
employing a comprehensive and global approach to contingency planning. Our
contingency planning objective is to identify potential system failure points
that support processes that are critical to our mission and to develop
contingency plans for those failures that may reasonably be expected to occur,
with the general goal of ensuring, to the maximum extent practical, that minimum
acceptable levels of service can be maintained by us. In the event of system
failures, our contingency plans will not guarantee that existing levels of
service will be fully maintained, especially if these failures involve external
systems or processes over which we have little or no direct control or involve
multiple failures across a variety of systems.
We anticipate that contingency plans for our core business units will be
substantially complete during June 1999, and by September 30, 1999 for the rest
of our businesses. In addition, we are developing contingency plans for funding
and balance sheet management and other related activities. We expect our
contingency plans to include establishing additional sources of liquidity that
could be drawn upon in the event of systems disruption. We are also developing a
crisis management group to guide us through the transition period. We expect to
reduce trading activity in the period leading up to January 2000 to minimize the
impact of potential Year 2000-related failures. A reduction in trading activity
by us or by other market participants in anticipation of possible Year 2000
problems could adversely affect our results of operations, as discussed under
"Risk Factors -- Our Computer Systems and Those of Third Parties May Not Achieve
Year 2000 Readiness -- Year 2000 Readiness Disclosure".
We have incurred and expect to continue to incur expenses allocable to
internal staff, as well as costs for outside consultants, to complete the
remediation and testing of internally developed systems and the replacement and
testing of third-party products and services, including non-technology products
and services,
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in order to achieve Year 2000 compliance. We currently estimate that these costs
will total approximately $150 million, a substantial majority of which has been
spent to date. These estimates include the cost of technology personnel but do
not include the cost of most non-technology personnel involved in our Year 2000
effort. The remaining cost of our Year 2000 program is expected to be incurred
in 1999 and early 2000. The Year 2000 program costs will continue to be funded
through operating cash flow. These costs are expensed as incurred. We do not
expect that the costs associated with implementing our Year 2000 program will
have a material adverse effect on our results of operations, financial
condition, liquidity or capital resources.
The costs of the Year 2000 program and the date on which we plan to
complete the Year 2000 modifications are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of resources, the timing and effectiveness of third-party
remediation plans and other factors. We can give no assurance that these
estimates will be achieved, and actual results could differ materially from our
plans. Special factors that might cause material differences include, but are
not limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct relevant computer source codes and embedded chip
technology, the results of internal and external testing and the timeliness and
effectiveness of remediation efforts of third parties.
In order to focus attention on the Year 2000 problem, management has
deferred several technology projects that address other issues. However, we do
not believe that this deferral will have a material adverse effect on our
results of operations or financial condition.