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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.
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 reduction
in the number or size of mergers and acquisitions transactions.
We May Generate Lower Revenues from Commissions and Asset Management
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 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.
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, 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, 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.
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 Management — 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 Large 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.
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 date may
malfunction.
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:
Disruption or suspension of activity in the world's financial markets is
also possible.
Our Revenues May Be Adversely Affected 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".
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.
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 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.
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 — 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 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.
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 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 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.
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 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.
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.
The price of the common stock after the offerings may fluctuate widely,
depending upon many factors, including the perceived prospects of Goldman Sachs
and the securities and financial services industries in general, differences
between our actual financial and operating results and those expected by
investors and analysts, changes in analysts' recommendations or projections,
changes in general economic or market conditions and broad market fluctuations.
The common stock may trade at prices significantly below the initial public
offering price.
We will list the common stock on the NYSE. The NYSE listing does not,
however, guarantee that a trading market for the common stock will develop or,
if a market does develop, the liquidity of that market for the common stock.
After the offerings, because Goldman, Sachs & Co. is a member of the
NYSE and because of Goldman, Sachs & Co.'s relationship to us, it will not be
permitted under the rules of the NYSE to make markets in, or recommendations
regarding the purchase or sale of, the common stock. This may adversely affect
the trading market for the common stock.
We expect to record a substantial pre-tax loss in the second quarter of fiscal 1999 due to a number of nonrecurring items described under "Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations".
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