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Exhibit 99.1
RISK FACTORS
An investment in the common stock involves a number of risks, some of
which, including market, liquidity, credit, operational, legal and regulatory
risks, could be substantial and are inherent in our businesses. You should
carefully consider the following information about these risks, together with
the other information in this prospectus, before buying shares of common stock.
MARKET FLUCTUATIONS COULD ADVERSELY AFFECT OUR BUSINESSES IN MANY WAYS
As an investment banking and securities firm, our businesses are
materially affected by conditions in the financial markets and economic
conditions generally, both in the United States and elsewhere around the world.
The equity and debt markets in the United States and elsewhere have achieved
record or near record levels, and this favorable business environment will not
continue indefinitely. In the event of a market downturn, our businesses could
be adversely affected in many ways, including those described below. Our
revenues are likely to decline in such circumstances and, if we were unable to
reduce expenses at the same pace, our profit margins would erode. For example,
in the second half of fiscal 1998, we recorded negative net revenues from our
Trading and Principal Investments business and from mid-August to mid-October
the number of equity underwritings and announced mergers and acquisitions
transactions in which we participated declined substantially due to adverse
economic and market conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Business Environment" for a
discussion of the market environment in which we operated during that period.
Even in the absence of a market downturn, we are exposed to substantial risk of
loss due to market volatility.
We May Incur Significant Losses from Our Trading and Investment Activities Due
to Market Fluctuations and Volatility
We generally maintain large trading and investment positions in the
fixed income, currency, commodity and equity markets. To the extent that we own
assets, i.e., have long positions, in any of those markets, a downturn in those
markets could result in losses from a decline in the value of those long
positions. Conversely, to the extent that we have sold assets we do not own,
i.e., have short positions, in any of those markets, an upturn in those markets
could expose us to potentially unlimited losses as we attempt to cover our short
positions by acquiring assets in a rising market. We may from time to time have
a trading strategy consisting of holding a long position in one asset and a
short position in another, from which we expect to earn revenues based on
changes in the relative value of the two assets. If, however, the relative value
of the two assets changes in a direction or manner that we did not anticipate or
against which we are not hedged, we might realize a loss in those paired
positions. We incurred significant losses in our Trading and Principal
Investments business in the second half of fiscal 1998 from this type of
"relative value" trade. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Business Environment" for a discussion of
those losses and the market environment in which we operated during that period.
In addition, we maintain substantial trading positions that can be adversely
affected by the level of volatility in the financial markets, i.e., the degree
to which trading prices fluctuate over a particular period, in a particular
market, regardless of market levels.
Our Investment Banking Revenues May Decline In Adverse Market or Economic
Conditions
Unfavorable financial or economic conditions would likely reduce the
number and size of transactions in which we provide underwriting, mergers and
acquisitions advisory and other services. Our Investment Banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. In particular,
our results of operations would be adversely affected by a significant
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reduction in the number or size of mergers and acquisitions transactions.
We May Generate Lower Revenues from Commissions and Asset Management Fees in a
Market Downturn
A market downturn could lead to a decline in the volume of transactions
that we execute for our customers and, therefore, to a decline in the revenues
we receive from commissions and spreads. In addition, because the fees that we
charge for managing our clients' portfolios are in many cases based on the value
of those portfolios, a market downturn that reduces the value of our clients'
portfolios or increases the amount of withdrawals would reduce the revenue we
receive from our asset management business.
Holding Large and Concentrated Positions May Expose Us to Large Losses
Concentration of risk in the past has increased the losses that we have
incurred in our arbitrage, market-making, block trading, underwriting and
lending businesses and may continue to do so in the future. Goldman Sachs has
committed substantial amounts of capital to these businesses, which often
require Goldman Sachs to take large positions in the securities of a particular
issuer or issuers in a particular industry, country or region. Moreover, the
trend in all major capital markets is towards larger and more frequent
commitments of capital in many of these activities. For example, as described
under "Business - Trading and Principal Investments - Equities", we are
experiencing an increase in the number and size of block trades that we execute,
and we expect this trend to continue.
Our Hedging Strategies May Not Prevent Losses
If any of the variety of instruments and strategies we utilize to hedge our
exposure to various types of risk are not effective, we may incur losses. Many
of our strategies are based on historical trading patterns and correlations. For
example, if we hold a long position in an asset, we may hedge this position by
taking a short position in an asset where the short position has, historically,
moved in a direction that would offset a change in value in the long position.
However, these strategies may not be fully effective in mitigating our risk
exposure in all market environments or against all types of risk. We have often
hedged our exposure to corporate fixed income securities by taking a short
position in U.S. Treasury securities, since historically the value of U.S.
Treasury securities has changed in a manner similar to changes in the value of
corporate fixed income securities. Due to the move by investors to higher credit
quality fixed income securities in mid-August to mid-October 1998, however, the
prices for corporate fixed income securities declined while the prices for U.S.
Treasury securities increased and, as a result, we incurred losses on both
positions. Unexpected market developments also affected other hedging strategies
during this time, and unanticipated developments could impact these or different
hedging strategies in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Management" for a
discussion of the policies and procedures we use to identify, monitor and manage
the risks we assume in conducting our businesses and of refinements we have made
to our risk management policies and procedures as a result of our recent
experience.
A Prolonged Market Downturn Could Impair Our Operating Results
While we encountered extremely difficult market conditions in mid-August to
mid-October 1998, the financial markets rebounded late in the fourth quarter of
fiscal 1998. At some time in the future, there may be a more sustained period of
market decline or weakness that will leave us operating in a difficult market
environment and subject us to the risks that we describe in this section for a
longer period of time.
Market Risk May Increase the Other Risks That We Face
In addition to the potentially adverse effects on our businesses described
above, market risk could exacerbate other risks that we face. For example, if we
incur substantial
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trading losses, our need for liquidity could rise sharply while our access to
liquidity could be impaired. In addition, in conjunction with a market downturn,
our customers and counterparties could incur substantial losses of their own,
thereby weakening their financial condition and increasing our credit risk to
them. Our liquidity risk and credit risk are described below.
OUR RISK MANAGEMENT POLICIES AND PROCEDURES
MAY LEAVE US EXPOSED TO UNIDENTIFIED OR UNANTICIPATED RISK
We have devoted significant resources to develop our risk management
policies and procedures and expect to continue to do so in the future.
Nonetheless, our policies and procedures to identify, monitor and manage risks
may not be fully effective. Some of our methods of managing risk are based upon
our use of observed historical market behavior. As a result, these methods may
not predict future risk exposures, which could be significantly greater than the
historical measures indicate. For example, the market movements of the late
third and early fourth quarters of fiscal 1998 were larger and involved greater
divergences in relative asset values than we anticipated. This caused us to
experience trading losses that were greater and recurred more frequently than
some of our risk measures indicated were likely to occur. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Business Environment" for a discussion of the market environment in which we
operated during the second half of fiscal 1998 and "-- Risk Management" for a
discussion of the policies and procedures we use to identify, monitor and manage
the risks we assume in conducting our businesses and of refinements we have
made to our risk management policies and procedures as a result of our recent
experience.
Other risk management methods depend upon evaluation of information
regarding markets, clients or other matters that is publicly available or
otherwise accessible by Goldman Sachs. This information may not in all cases be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risk requires, among other things, policies and procedures
to record properly and verify a large number of transactions and events, and
these policies and procedures may not be fully effective.
LIQUIDITY RISK COULD IMPAIR OUR ABILITY TO FUND OPERATIONS
AND JEOPARDIZE OUR FINANCIAL CONDITION
Liquidity, i.e., ready access to funds, is essential to our businesses. In
addition to maintaining a cash position, we rely on three principal sources of
liquidity: borrowing in the debt markets; access to the repurchase and
securities lending markets; and selling securities and other assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" for a discussion of our sources of liquidity.
An Inability to Access the Debt Capital Markets Could Impair Our Liquidity
We depend on continuous access to the debt capital markets to finance our
day-to-day operations. An inability to raise money in the long-term or
short-term debt markets, or to engage in repurchase agreements or securities
lending, could have a substantial negative effect on our liquidity. Our access
to debt in amounts adequate to finance our activities could be impaired by
factors that affect Goldman Sachs in particular or the financial services
industry in general. For example, lenders could develop a negative perception of
our long-term or short-term financial prospects if we incurred large trading
losses, if the level of our business activity decreased due to a market
downturn, if regulatory authorities took significant action against us or if we
discovered that one of our employees had engaged in serious unauthorized or
illegal activity. Our ability to borrow in the debt markets also could be
impaired by factors that are not specific to Goldman Sachs, such as a severe
disruption of the financial markets or negative views about the prospects for
the investment banking, securities or financial services industries generally.
We also depend on banks to finance our day-to-day operations. As a result
of the recent consolidation in the banking industry,
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some of our lenders have merged or consolidated with other banks and financial
institutions. While we have not been materially adversely affected to date, it
is possible that further consolidation could lead to a loss of a number of our
key banking relationships and a reduction in the amount of credit extended to
us.
An Inability to Access the Short-Term Debt Markets Could Impair Our Liquidity
We depend on the issuance of commercial paper and promissory notes as a
principal source of unsecured short-term funding for our operations. As of
February 26, 1999, Goldman Sachs had $21.63 billion of outstanding commercial
paper and promissory notes with a weighted-average maturity of approximately 75
days. Our liquidity depends to an important degree on our ability to refinance
these borrowings on a continuous basis. Investors who hold our outstanding
commercial paper and promissory notes have no obligation to purchase new
instruments when the outstanding instruments mature.
Our Liquidity Could Be Adversely Affected If Our Ability to Sell Assets Is
Impaired
If we were unable to borrow in the debt capital markets, we would need to
liquidate assets in order to meet our maturing liabilities. In certain market
environments, such as times of market volatility or uncertainty, overall market
liquidity may decline. In a time of reduced liquidity, we may be unable to sell
some of our assets, or we may have to sell assets at depressed prices, which
could adversely affect our results of operations and financial condition.
Our ability to sell our assets may be impaired by other market
participants seeking to sell similar assets into the market at the same time. In
the late third and early fourth quarters of fiscal 1998, for example, the
markets for some assets were adversely affected by simultaneous attempts by a
number of institutions to sell similar assets.
A Reduction in Our Credit Ratings Could Adversely Affect Our Liquidity
and Competitive Position and Increase Our Borrowing Costs
Our borrowing costs and our access to the debt capital markets depend
significantly on our credit ratings. These ratings are assigned by rating
agencies, which may reduce or withdraw their ratings or place Goldman Sachs on
"credit watch" with negative implications at any time. Credit ratings are also
important to Goldman Sachs when competing in certain markets and when seeking to
engage in longer-term transactions, including over-the-counter derivatives. A
reduction in our credit ratings could increase our borrowing costs and limit our
access to the capital markets. This, in turn, could reduce our earnings and
adversely affect our liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity -- Credit Ratings"
for additional information concerning our credit ratings.
CREDIT RISK EXPOSES US TO LOSSES CAUSED
BY FINANCIAL OR OTHER PROBLEMS
EXPERIENCED BY THIRD PARTIES
We are exposed to the risk that third parties that owe us money,
securities or other assets will not perform their obligations. These parties
include our trading counterparties, customers, clearing agents, exchanges,
clearing houses and other financial intermediaries as well as issuers whose
securities we hold. These parties may default on their obligations to us due to
bankruptcy, lack of liquidity, operational failure or other reasons. This risk
may arise, for example, from holding securities of third parties; entering into
swap or other derivative contracts under which counterparties have long-term
obligations to make payments to us; executing securities, futures, currency or
commodity trades that fail to settle at the required time due to non-delivery by
the counterparty or systems failure by clearing agents, exchanges, clearing
houses or other financial intermediaries; and extending credit to our clients
through bridge or margin loans or other arrangements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Manage-
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ment--Credit Risk" for a further discussion of the credit risks to which we are
exposed.
We May Suffer Significant Losses from Our Credit Exposures
In recent years, we have significantly expanded our swaps and other
derivatives businesses and placed a greater emphasis on providing credit and
liquidity to our clients. As a result, our credit exposures have increased in
amount and in duration. In addition, as competition in the financial services
industry has increased, we have experienced pressure to assume longer-term
credit risk, extend credit against less liquid collateral and price more
aggressively the credit risks that we take.
Our Clients and Counterparties May Be Unable to Perform Their Obligations to Us
as a Result of Economic or Political Conditions
Country, regional and political risks are components of credit risk, as
well as market risk. Economic or political pressures in a country or region,
including those arising from local market disruptions or currency crises, may
adversely affect the ability of clients or counterparties located in that
country or region to obtain foreign exchange or credit and, therefore, to
perform their obligations to us. See "--We Are Exposed to Special Risks in
Emerging and Other Markets" for a further discussion of our exposure to these
risks.
Defaults by a Larger Financial Institution Could Adversely Affect Financial
Markets Generally and Us Specifically
The commercial soundness of many financial institutions may be closely
interrelated as a result of credit, trading, clearing or other relationships
between the institutions. As a result, concerns about, or a default by, one
institution could lead to significant liquidity problems or losses in, or
defaults by, other institutions. This is sometimes referred to as "systemic
risk" and may adversely affect financial intermediaries, such as clearing
agencies, clearing houses, banks, securities firms and exchanges, with which
we interact on a daily basis.
The possibility of default by a major market participant in the second
half of fiscal 1998 and concerns throughout the financial industry regarding
the resulting impact on markets led us to participate in an industry-wide
consortium that invested in Long-Term Capital Portfolio, L.P., which is
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity--The Balance Sheet". Actual defaults,
increases in perceived default risk and other similar events could arise in the
future and could have an adverse effect on the financial markets and on Goldman
Sachs.
The Information That We Use in Managing Our Credit Risk May Be Inaccurate or
Incomplete
Although we regularly review our credit exposure to specific clients and
counterparties and to specific industries, countries and regions that we
believe may present credit concerns, default risk may arise from events or
circumstances that are difficult to detect, such as fraud. We may also fail to
receive full information with respect to the trading risks of a counterparty.
In addition, in cases where we have extended credit against collateral, we may
find that we are undersecured, for example, as a result of sudden declines in
market values that reduce the value of collateral.
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OTHER OPERATIONAL RISKS MAY DISRUPT OUR BUSINESSES, RESULT IN REGULATORY ACTION
AGAINST US OR LIMIT OUR GROWTH
We face operational risk arising from mistakes made in the confirmation or
settlement of transactions or from transactions not being properly recorded,
evaluated or accounted for. Our businesses are highly dependent on our ability
to process, on a daily basis, a large number of transactions across numerous
and diverse markets in many currencies, and the transactions we process have
become increasingly complex. Consequently, we rely heavily on our financial,
accounting and other data processing systems. If any of these systems do not
operate properly or are disabled, we could suffer financial loss, a disruption
of our businesses, liability to clients, regulatory intervention or
reputational damage. The inability of our systems to accommodate an increasing
volume of transactions could also constrain our ability to expand our
businesses. In recent years, we have substantially upgraded and expanded the
capabilities of our data processing systems and other operating technology, and
we expect that we will need to continue to upgrade and expand in the future to
avoid disruption of, or constraints on, our operations.
LEGAL AND REGULATORY RISKS ARE INHERENT AND SUBSTANTIAL IN OUR BUSINESSES
Substantial legal liability or a significant regulatory action against
Goldman Sachs could have a material financial effect or cause significant
reputational harm to Goldman Sachs, which in turn could seriously harm our
business prospects.
Our Exposure to Legal Liability is Significant
We face significant legal risks in our businesses and the volume and
amount of damages claimed in litigation against financial intermediaries are
increasing. These risks include potential liability under securities or other
laws for materially false or misleading statements made in connection with
securities and other transactions, potential liability for the "fairness
opinions" and other advice we provide to participants in corporate transactions
and disputes over the terms and conditions of complex trading arrangements. We
also face the possibility that counterparties in complex or risky trading
transactions will claim that we improperly failed to tell them of the risks or
that they were not authorized or permitted to enter into these transactions
with us and that their obligations to Goldman Sachs are not enforceable.
Particularly in our rapidly growing business focused on high net worth
individuals, we are increasingly exposed to claims against Goldman Sachs for
recommending investments that are not consistent with a client's investment
objectives or engaging in unauthorized or excessive trading. During a
prolonged market downturn, we would expect these types of claims to increase.
We are also subject to claims arising from disputes with employees for alleged
discrimination or harassment, among other things. These risks often may be
difficult to assess or quantify and their existence and
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magnitude often remain unknown for substantial periods of time. We incur
significant legal expenses every year in defending against litigation, and we
expect to continue to do so in the future. See "Business--Legal Matters" for a
discussion of some of the legal matters in which we are currently involved.
Extensive Regulation of Our Businesses Limits Our Activities and May Subject Us
to Significant Penalties
The financial services industry is subject to extensive regulation. Goldman
Sachs is subject to regulation by governmental and self-regulatory organizations
in the United States and in virtually all other jurisdictions in which it
operates around the world.
The requirements imposed by our regulators are designed to ensure the
integrity of the financial markets and to protect customers and other third
parties who deal with Goldman Sachs and are not designed to protect our
shareholders. Consequently, these regulations often serve to limit our
activities, including through net capital, customer protection and market
conduct requirements. We face the risk of significant intervention by regulatory
authorities, including extended investigation and surveillance activity,
adoption of costly or restrictive new regulations and judicial or administrative
proceedings that may result in substantial penalties. Among other things, we
could be fined or prohibited from engaging in some of our business activities.
See "Business--Regulation" for a further discussion of the regulatory
environment in which we conduct our businesses.
Legal Restrictions on Our Clients May Reduce the Demand for Our Services
New laws or regulations or changes in enforcement of existing laws or
regulations applicable to our clients may also adversely affect our businesses.
For example, changes in antitrust enforcement could affect the level of mergers
and acquisitions activity and changes in regulation could restrict the
activities of our clients and, therefore, the services we provide on their
behalf.
EMPLOYEE MISCONDUCT COULD HARM
GOLDMAN SACHS AND IS DIFFICULT TO
DETECT AND DETER
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. Misconduct by
employees could include binding Goldman Sachs to transactions that exceed
authorized limits or present unacceptable risks, or hiding from Goldman Sachs
unauthorized or unsuccessful activities, which, in either case, may result in
unknown and unmanaged risks or losses. Employee misconduct could also involve
the improper use or disclosure of confidential information, which could result
in regulatory sanctions and serious reputational or financial harm. It is not
always possible to deter employee misconduct and the precautions we take to
prevent and detect this activity may not be effective in all cases.
THE FINANCIAL SERVICES INDUSTRY IS INTENSELY
COMPETITIVE AND RAPIDLY CONSOLIDATING
The financial services industry--and all of our businesses--are intensely
competitive, and we expect them to remain so. We compete on the basis of a
number of factors, including transaction execution, our products and services,
innovation, reputation and price. We have experienced intense price competition
in some of our businesses in recent years, such as underwriting fees on
investment grade debt offerings and privatizations. We believe we may experience
pricing pressures in these and other areas in the future as some of our
competitors seek to obtain market share by reducing prices.
We Face Increased Competition Due to a Trend Toward Consolidation
In recent years, there has been substantial consolidation and convergence
among companies in the financial services industry. In particular, a number of
large commercial banks, insurance companies and other broad-based financial
services firms have established or acquired broker-dealers or have merged with
other financial institutions. Many of these firms have the ability to offer a
wide
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range of products, from loans, deposit-taking and insurance to brokerage, asset
management and investment banking services, which may enhance their competitive
position. They also have the ability to support investment banking and
securities products with commercial banking, insurance and other financial
services revenues in an effort to gain market share, which could result in
pricing pressure in our businesses.
Consolidation Has Increased Our Need for Capital
This trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have had to commit capital to support our international
operations and to execute large global transactions.
Our Ability to Expand Internationally Will Depend on Our Ability to Compete
Successfully with Local Financial Institutions
We believe that some of our most significant challenges and opportunities
will arise outside the United States, as described under "Industry and Economic
Outlook". In order to take advantage of these opportunities, we will have to
compete successfully with financial institutions based in important non-U.S.
markets, particularly in Europe. Some of these institutions are larger, better
capitalized and have a stronger local presence and a longer operating history
in these markets.
Our Revenues May Decline Due to Competition from Alternative Trading Systems
Securities and futures transactions are now being conducted through the
Internet and other alternative, non-traditional trading systems, and it appears
that the trend toward alternative trading systems will continue and probably
accelerate. A dramatic increase in computer-based or other electronic trading
may adversely affect our commission and trading revenues, reduce our
participation in the trading markets and associated access to market
information and lead to the creation of new and stronger competitors.
WE ARE EXPOSED TO SPECIAL RISKS IN EMERGING AND OTHER MARKETS
In conducting our businesses in major markets around the world, including
many developing markets in Asia, Latin America and Eastern Europe, we are
subject to political, economic, legal, operational and other risks that are
inherent in operating in other countries. These risks range from difficulties
in settling transactions in emerging markets to possible nationalization,
expropriation, price controls and other restrictive governmental actions. We
also face the risk that exchange controls or similar restrictions imposed by
foreign governmental authorities may restrict our ability to convert local
currency received or held by us in their countries into U.S. dollars or other
currencies, or to take those dollars or other currencies out of those countries.
To date, a relatively small part of our businesses has been conducted in
emerging and other markets. As we expand our businesses in these areas, our
exposure to these risks will increase.
Turbulence in Emerging Markets May Adversely Affect Our Businesses
In the last several years, various emerging market countries have
experienced severe economic and financial disruptions, including significant
devaluations of their currencies and low or negative growth rates in their
economies. The possible effects of these conditions include an adverse impact
on our businesses and increased volatility in financial markets generally.
Moreover, economic or market problems in a single country or region are
increasingly affecting other markets generally. For example, the economic
crisis in Russia in August 1998 adversely affected other emerging markets and
led to turmoil in financial markets worldwide. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Business
Environment" for a discussion of the business environment in which we operated
during the second half of fiscal 1998. A continuation of these situations could
adversely affect global economic conditions and world markets and, in turn,
could adversely affect our businesses. Among the risks are
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regional or global market downturns and, as noted above, increasing liquidity
and credit risks, particularly in Japan where the economy continues to be weak
and we have significant exposure.
Compliance with Local Laws and Regulations May Be Difficult
In many countries, the laws and regulations applicable to the securities
and financial services industries are uncertain and evolving, and it may be
difficult for us to determine the exact requirements of local laws in every
market. Our inability to remain in compliance with local laws in a particular
foreign market could have a significant and negative effect not only on our
businesses in that market but also on our reputation generally. These
uncertainties may also make it difficult for us to structure our transactions
in such a way that the results we expect to achieve are legally enforceable in
all cases. See "-- Legal and Regulatory Risks Are Inherent and Substantial in
Our Businesses -- Our Exposure to Legal Liability is Significant" for
additional information concerning these matters and "Business -- Regulation"
for a discussion of the regulatory environment in which we conduct our
businesses.
OUR CONVERSION TO CORPORATE FORM
MAY ADVERSELY AFFECT OUR ABILITY TO RECRUIT,
RETAIN AND MOTIVATE KEY EMPLOYEES
Our performance is largely dependent on the talents and efforts of highly
skilled individuals. Competition in the financial services industry for
qualified employees is intense. Our continued ability to compete effectively
in our businesses depends on our ability to attract new employees and to retain
and motivate our existing employees.
In connection with the offerings and the conversion of Goldman Sachs from
partnership to corporate form, the managing directors who were profit
participating limited partners will receive substantial amounts of common stock
in exchange for their interests in Goldman Sachs. Because these shares of common
stock will be received in exchange for partnership interests, ownership of
these shares will not be dependent upon these partners' continued employment.
However, these shares will be subject to certain restrictions on transfer under
a shareholders' agreement and a portion may be pledged to support these
partners' obligations under noncompetition agreements. The transfer restrictions
under the shareholders' agreement may, however, be waived, as described under
"Certain Relationships and Related Transactions -- Shareholders' Agreement --
Transfer Restrictions" and "--Waivers". The steps we have taken to encourage
the continued service of these individuals after the offerings may not be
effective. For a description of the compensation plan for our senior
professionals to be implemented after the offerings, see "Management -- The
Partner Compensation Plan".
In connection with the offerings and conversion of Goldman Sachs from
partnership to corporate form, employees, other than the managing directors who
were profit participating limited partners, will receive grants of restricted
stock units, stock options or interests in a defined contribution plan. The
incentives to attract, retain and motivate employees provided by these awards
or by future arrangements may not be as effective as the opportunity, which
existed prior to conversion, to become a partner of Goldman Sachs. See
"Management -- The Employee Initial Public Offering Awards" for a description
of these awards.
GOLDMAN SACHS WILL BE CONTROLLED BY ITS
MANAGING DIRECTORS WHOSE INTERESTS MAY
DIFFER FROM THOSE OF OTHER SHAREHOLDERS
Upon completion of the offerings, our managing directors will collectively
own not less than 281,000,000 shares of common stock, or 60% of the total
shares of common stock outstanding, which includes the shares of common stock
underlying the restricted stock units to be awarded based on a formula. These
shares will be subject to a shareholders' agreement, which will provide for
coordinated voting by the parties. Further, both Sumitomo Bank Capital Markets,
Inc. and Kamehameha Activities Association, which together will own 43,400,473
shares of common stock, or 9.3% of the total shares of common stock
outstanding after consummation of the offerings, have agreed to vote their
shares of common stock in the same manner as a majority of the shares held by
our
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managing directors are voted. See "Certain Relationships and Related
Transactions -- Shareholders' Agreement -- Voting" and "-- Voting Agreement"
for a discussion of these voting arrangements.
As a result of these arrangements, the managing directors initially
will be able to elect our entire board of directors, control the management and
policies of Goldman Sachs and, in general, determine, without the consent of
the other shareholders, the outcome of any corporate transaction or other
matter submitted to the shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of the assets of
Goldman Sachs. The managing directors initially will be able to prevent or
cause a change in control of Goldman Sachs.
Provisions of Our Organizational Documents May Discourage an Acquisition of
Goldman Sachs
Our organizational documents contain provisions that will impede the
removal of directors and may discourage a third party from making a proposal to
acquire us. For example, our board of directors may, without the consent of
shareholders, issue preferred stock with greater voting rights than the common
stock. See "Description of Capital Stock -- Certain Anti-Takeover Matters" for
a discussion of these anti-takeover provisions.
OUR SHARE PRICE MAY DECLINE DUE TO THE
LARGE NUMBER OF SHARES ELIGIBLE
FOR FUTURE SALE
Sales of substantial amounts of common stock, or the possibility of
such sales, may adversely affect the price of the common stock and impede our
ability to raise capital through the issuance of equity securities. See "Shares
Eligible for Future Sale" for a discussion of possible future sales of common
stock.
Upon consummation of the offerings, there will be 467,271,909 shares
of common stock outstanding. Of these shares, the 69,000,000 shares of common
stock sold in the offerings will be freely transferable without restriction or
further registration under the Securities Act of 1933. The remaining
398,271,909 shares of common stock will be available for future sale upon the
expiration or the waiver of transfer restrictions or in accordance with
registration rights. See "Shares Eligible for Future Sale" for a discussion of
the shares of common stock that may be sold into the public market in the
future.