SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
For the quarterly period ended February 23, 2001
or
For the transition period to
Commission File Number: 001-14965
The Goldman Sachs Group, Inc.
(212) 902-1000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
As of March 30, 2001, there were 481,884,744 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Cash payments for interest approximated the related expense for each of the fiscal periods presented.
Payments of income taxes were $300 million and $260 million for the three months ended February 23, 2001 and February 25, 2000, respectively.
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Note 1. Description of Business
The Goldman Sachs Group, Inc. (“Group Inc.”), a Delaware corporation, together with its consolidated subsidiaries (collectively, the “firm”), is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base.
The firm’s activities are divided into two segments:
Note 2. Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of Group Inc. and its U.S. and international subsidiaries including Goldman, Sachs & Co. (“GS&Co.”), J. Aron & Company and Spear, Leeds & Kellogg, L.P. (“SLK”) in New York, Goldman Sachs International (“GSI”) in London and Goldman Sachs (Japan) Ltd. (“GSJL”) in Tokyo. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements incorporated by reference in the Annual Report on Form 10-K of Group Inc. for the fiscal year ended November 24, 2000. The condensed consolidated financial information as of and for the period ended November 24, 2000 has been derived from audited consolidated financial statements not included herein. Certain reclassifications have been made to prior-year amounts to conform to the current-year presentation. All material intercompany transactions and balances have been eliminated.
These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require management to make estimates and assumptions regarding trading inventory valuations, the outcome of pending litigation and other matters that affect the consolidated financial statements and related disclosures. These estimates and assumptions are based on judgment and available information and, consequently, actual results could be materially different from these estimates.
These unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results in the interim periods presented. Interim period operating results may not be indicative of the operating results for a full year.
Unless otherwise stated herein, all references to February 2001 and February 2000 refer to the firm’s fiscal periods ended, or the date, as the context requires, February 23, 2001 and February 25, 2000, respectively. All references to November 2000 refer to the firm’s fiscal year ended, or the date, as the context requires, November 24, 2000.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Financial Instruments
Gains and losses on financial instruments and commission income and related expenses are recorded on a trade date basis in the condensed consolidated statements of earnings. The condensed consolidated statements of financial condition generally reflect purchases and sales of financial instruments, including agency transactions, on a trade date basis.
Substantially all financial instruments used in the firm’s trading and nontrading activities are carried at fair value or amounts that approximate fair value, and unrealized gains and losses are recognized in earnings. Fair value is based generally on listed market prices or broker or dealer price quotations. To the extent that prices are not readily available, or if liquidating the firm’s position is reasonably expected to affect market prices, fair value is based on either internal valuation models or management’s estimate of amounts that could be realized under current market conditions, assuming an orderly liquidation over a reasonable period of time. Over-the-counter derivative instruments are valued using pricing models that consider, among other factors, current and contractual market prices, time value, and yield curve and/or volatility factors of the underlying positions.
The following table sets forth the firm’s financial instruments owned, at fair value:
Derivative Activities
On November 25, 2000, the firm adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended. The adoption of this statement did not have a material effect on the firm’s statements of financial condition or the results of operations. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively, referred to as “derivatives”), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting designation.
Most of the firm’s derivative transactions are entered into for trading purposes. The firm uses derivatives in its trading activities to facilitate customer transactions, to take proprietary positions and as a means of risk management. Risk exposures are managed through diversification, by controlling position sizes and by establishing hedges in related securities or
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derivatives. For example, the firm may hedge a portfolio of common stock by taking an offsetting position in a related equity-index futures contract. Gains and losses on derivatives used for trading purposes are generally included in “Trading and principal investments” on the consolidated statements of earnings.
The firm also enters into derivative contracts, which are designated as fair-value hedges, to manage the interest rate and currency exposure on its long term borrowings. These derivatives generally include interest rate futures contracts and interest rate and currency swap agreements, which are primarily utilized to convert a substantial portion of the firm’s fixed rate debt into U.S. dollar-based floating rate obligations. The gains and losses associated with the ineffective portion of the fair value hedges were included in “Trading and principal investments” on the condensed consolidated statement of earnings and were immaterial for the three months ended February 2001.
Derivative contracts are financial instruments, such as futures, forwards, swaps or option contracts, that derive their value from underlying assets, indices, reference rates or a combination of these factors. Derivatives may involve future commitments to purchase or sell financial instruments or commodities, or to exchange currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, securities, commodities or indices.
Derivative contracts exclude certain cash instruments, such as mortgage-backed securities, interest-only and principal-only obligations, and indexed debt instruments, that derive their values or contractually required cash flows from the price of some other security or index. Derivatives also exclude option features that are embedded in cash instruments, such as the conversion features and call provisions embedded in bonds. The firm has elected to include commodity-related contracts in its derivative disclosure, although not required to do so, as these contracts may be settled in cash or are readily convertible into cash.
Derivative contracts are reported on a net-by-counterparty basis on the firm’s condensed consolidated statements of financial condition where management believes a legal right of setoff exists under an enforceable netting agreement. The fair value of derivative financial instruments, computed in accordance with the firm’s netting policy, is set forth below:
Note 4. Short-Term Borrowings
The firm obtains secured short-term financing principally through the use of repurchase agreements and securities lending agreements, collateralized mainly by U.S. government, federal agency, investment-grade foreign sovereign obligations and equity securities. The firm obtains
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unsecured short-term borrowings through issuance of commercial paper, promissory notes and bank loans. The carrying value of these short-term obligations approximates fair value due to their short-term nature.
Short-term borrowings are set forth below:
The firm maintains unencumbered securities with a market value in excess of all uncollateralized short-term borrowings.
Note 5. Earnings Per Share
Earnings per share (“EPS”) is computed in accordance with SFAS No. 128, “Earnings Per Share”. Basic EPS is calculated by dividing net earnings by the weighted average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilutive potential common shares.
The computations of basic and diluted EPS are set forth below:
Note 6. Commitments and Contingencies
The firm is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its businesses. Management
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believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the firm’s financial condition, but might be material to the firm’s operating results for any particular period, depending, in part, upon the operating results for such period.
Note 7. Regulated Subsidiaries
GS&Co. and SLK are registered U.S. broker-dealers and futures commission merchants subject to Rule 15c3-1 under the Securities Exchange Act of 1934 and Rule 1.17 under the Commodity Exchange Act which specify uniform minimum net capital requirements, as defined, for their registrants. GS&Co. and SLK have elected to compute their net capital in accordance with the “Alternative Net Capital Requirement” as permitted byRule 15c3-1. As of February 2001, GS&Co. had regulatory net capital, as defined, of $4.21 billion, which exceeded the amount required by $3.52 billion. As of February 2001, SLK had regulatory net capital, as defined, of $1.04 billion, which exceeded the amount required by $998 million.
GSI, a registered U.K. broker-dealer, is subject to the capital requirements of the Securities and Futures Authority Limited, and GSJL, a Tokyo-based broker-dealer, is subject to the capital requirements of the Financial Services Agency. As of February 2001, GSI and GSJL were in compliance with their local capital adequacy requirements.
Certain other subsidiaries of the firm are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of February 2001, these subsidiaries were in compliance with their local capital adequacy requirements.
Note 8. Business Segments
In reporting to management, the firm’s operating results are categorized into two principal segments: Global Capital Markets, and Asset Management and Securities Services. For a further discussion of the firm’s segments, see the firm’s Annual Report on Form 10-K for the fiscal year ended November 2000.
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Management believes that the following information provides a reasonable representation of each segment’s contribution to consolidated pre-tax earnings and total assets:
Note 9. Subsequent Events
The Board of Directors of Group Inc. declared a dividend of $0.12 per share to be paid on May 24, 2001 to common shareholders of record on April 24, 2001.
On March 19, 2001, the firm completed its acquisition of Benjamin Jacobson & Sons, LLC, a specialist firm on the floor of The New York Stock Exchange, for approximately $250 million in a combination of common stock and cash.
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Review Report of Independent Accountants
To the Directors and Shareholders,
We have reviewed the accompanying condensed consolidated statement of financial condition of The Goldman Sachs Group, Inc. and Subsidiaries (the “Company”) as of February 23, 2001, the related condensed consolidated statements of earnings for the three months ended February 23, 2001 and February 25, 2000, the condensed consolidated statements of cash flows for the three months ended February 23, 2001 and February 25, 2000, and the condensed consolidated statements of comprehensive income for the three months ended February 23, 2001 and February 25, 2000. These condensed financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial condition of The Goldman Sachs Group, Inc. and Subsidiaries as of November 24, 2000, and the related consolidated statements of earnings, changes in shareholders’ equity, cash flows and comprehensive income for the year ended November 24, 2000 (not presented herein); in our report dated January 19, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of November 24, 2000 is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.
/s/ PricewaterhouseCoopers LLP
New York, New York
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Introduction
Goldman Sachs is a leading global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base.
Our activities are divided into two segments:
Unless specifically stated otherwise, all references to February 2001 and February 2000 refer to our fiscal periods ended, or the date, as the context requires, February 23, 2001 and February 25, 2000, respectively. All references to November 2000, unless specifically stated otherwise, refer to our fiscal year ended, or the date, as the context requires, November 24, 2000.
When we use the terms “Goldman Sachs”, “we” and “our”, we mean The Goldman Sachs Group, Inc., a Delaware corporation, and its consolidated subsidiaries.
Business Environment
The slowdown in global economic growth experienced in the second half of fiscal 2000 accelerated during the first quarter of 2001. Economic uncertainty in the United States and Japan led to further declines in global equity valuations and significantly reduced levels of announced mergers and acquisitions and new issue offerings.
In the United States, reductions in employment and consumer confidence levels as well as declines in technology capital spending resulted in slower economic growth. In addition, uncertainty regarding corporate earnings led to continued equity price reductions, particularly in the Nasdaq, which declined 24% during the quarter. In an attempt to stimulate economic growth, the Federal Reserve lowered overnight interest rates by 100 basis points to 5.50% in January 2001. Fixed income markets benefited from these interest rate reductions and narrowing credit spreads.
Economic growth in Europe slowed as exports declined. However, low unemployment and reduced inflationary pressures minimized the pace of this slowdown. In Japan, lower levels of corporate investment and declines in export demand resulted in slower economic growth, which prompted the Bank of Japan to lower interest rates during the quarter. Other Asian economies experienced slowdowns reflecting lower demand for exports.
Results of Operations
The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary over the shorter term due to fluctuations in U.S. and global economic and market conditions. As a result, period-to-period comparisons may not be meaningful. In particular, a continuing decline in the volume of equity underwritings and mergers and acquisitions activity may adversely affect the
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Overview
The following table sets forth a summary of our financial results:
Financial Overview
The following table sets forth the net revenues, operating expenses and pre-tax earnings of our segments:
Results by Segment
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Net revenues in our segments include allocations of interest income and interest expense to specific securities, commodities and other positions in relation to the cash generated by, or funding requirements of, the underlying positions. See Note 8 to the consolidated financial statements for further information regarding our segments.
Global Capital Markets
The components of the Global Capital Markets segment are set forth below:
Investment Banking. Goldman Sachs provides a broad range of investment banking services to a diverse group of corporations, financial institutions, governments and individuals. Our investment banking activities are divided into two categories:
Trading and Principal Investments. Our Trading and Principal Investments business facilitates transactions with a diverse group of corporations, financial institutions, governments and individuals and takes proprietary positions through market making in and trading of fixed income and equity products, currencies, commodities, and swaps and other derivatives. In addition, we engage in floor-based market making as a specialist on U.S. equities and options exchanges. Trading and Principal Investments is divided into three categories:
Net revenues from Principal Investments do not include management fees and the increased share of the income and gains from our merchant banking funds to which Goldman Sachs is entitled when the return on investments exceeds certain threshold returns to fund investors. These management fees and increased shares of income and gains are included in the net revenues of Asset Management and Securities Services.
Substantially all of our inventory is marked-to-market daily and, therefore, its value and our net revenues are subject to fluctuations based on market movements. In addition, net revenues derived from our principal investments in privately held concerns and in real estate may fluctuate significantly depending on the revaluation or sale of these investments in any given period.
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The following table sets forth the net revenues of our Global Capital Markets segment:
Global Capital Markets Net Revenues
February 2001 versus February 2000
Net revenues in Global Capital Markets decreased slightly. Operating expenses increased 12%, principally due to our acquisition of Spear, Leeds & Kellogg, L.P. (“SLK”). Pre-tax earnings were $900 million compared to $1.18 billion in 2000.
Net revenues in Investment Banking decreased 7% to $1.15 billion. Net revenues in the Financial Advisory business increased 25%, principally due to the completion of mergers and acquisitions in the communications, media and entertainment, healthcare and high technology sectors. Net revenue growth was strong across all major regions. Underwriting net revenues decreased 36%, primarily due to a slowdown in equity new issue activity. Our backlog declined significantly during the quarter reflecting lower equity market valuations, reduced merger activity and general market uncertainty.
Net revenues in Trading and Principal Investments increased 3% to $2.16 billion. Net revenues in FICC increased 11%, primarily due to increased customer flow and market volatility in commodities and currencies. These increases were offset by lower net revenues as a result of reduced customer flow in fixed income derivatives and mortgages. Equities net revenues increased 37% primarily due to the contribution from SLK and strength in equity arbitrage. These increases were partially offset by lower net revenues from decreased secondary market activity in our European shares business compared to an exceptionally strong first quarter of 2000. Principal Investments experienced negative net revenues, due to unrealized losses on our merchant banking investments in the high technology and telecommunications sectors, partially offset by real estate disposition gains.
Asset Management and Securities Services
The components of the Asset Management and Securities Services segment are set forth below:
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The following table sets forth the net revenues of our Asset Management and Securities Services segment:
Asset Management and Securities Services Net Revenues
Our assets under supervision consist of assets under management and other client assets. Assets under management typically generate fees based on a percentage of their value and include our mutual funds, separate accounts managed for institutional and individual investors, our merchant banking funds and other alternative investment funds. Other client assets consist of assets in brokerage accounts of primarily high-net-worth individuals, on which we earn commissions. Substantially all assets under supervision are valued as of calendar month-end.
The following table sets forth our assets under supervision:
Assets Under Supervision
Net revenues in Asset Management and Securities Services increased 22% to $1.43 billion, reflecting growth across all businesses. Operating expenses increased 26%, principally due to the inclusion of SLK. Pre-tax earnings were $464 million compared to $406 million in 2000.
Asset Management net revenues increased 20%, primarily reflecting a 12% increase in average assets under management. Strong net inflows were partially offset by declines in asset values due to depreciation in global equity markets. Securities Services net revenues increased 18%, primarily due to the inclusion of SLK’s securities and margin lending business, as well as increased spreads in our fixed income matched book. Commissions increased 24%, due to the contribution from SLK’s clearing and execution business and increased customer flow in equity derivatives. These increases were partially offset by decreased activity in our global shares businesses.
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Operating Expenses
In recent years, our operating expenses have increased as a result of numerous factors, including higher levels of employment and compensation, increased worldwide activities, greater levels of business complexity, and additional systems and consulting costs relating to various technology initiatives.
The following table sets forth our operating expenses and number of employees:
Operating Expenses and Employees
Operating expenses increased 15% to $3.47 billion, primarily due to the inclusion of SLK expenses, as well as incremental costs associated with our growth during fiscal 2000.
Compensation and benefits expense increased 5% to $2.37 billion. The ratio of compensation and benefits to net revenues was 50% for each of the quarters ended February 2001 and February 2000. Employment levels increased 47%, reflecting growth in our businesses and the inclusion of SLK. Expenses associated with our temporary staff and consultants were $229 million, an increase of 88%, reflecting increased global expansion and consulting costs associated with technology initiatives.
Brokerage, clearing and exchange fees increased 51%, primarily due to the inclusion of SLK. Market development expenses increased 17%, principally due to higher levels of travel and entertainment costs associated with growth in employment levels and business activity. Communications and technology expenses increased 65%, reflecting higher telecommunications and market data costs associated with higher employment levels and the inclusion of SLK. Depreciation and amortization expenses increased 43%, primarily due to additional technology-related equipment expenditures, leasehold improvements and telecommunications equipment needed for our continued global expansion. Amortization of goodwill and other intangibles increased significantly due to the acquisition of SLK. Occupancy expenses increased 68%,
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Provision for Taxes
The provision for taxes for the quarter ended February 2001 was $491 million. Goldman Sachs’ effective tax rate for the quarter was 39%.
Liquidity
Management believes that one of the most important issues for a company in the financial services sector is access to liquidity. Accordingly, Goldman Sachs has established a comprehensive structure to oversee its liquidity and funding policies. For a description of our liquidity policies, see our Annual Report on Form 10-K for the fiscal year ended November 24, 2000.
The Balance Sheet
Goldman Sachs maintains a highly liquid balance sheet that fluctuates significantly between financial statement dates. The following table sets forth our total assets, adjusted assets, leverage ratios and book value per share:
As of February 2001 and November 2000, we held approximately $3.04 billion and $2.74 billion, respectively, in high-yield debt and emerging market securities and $2.75 billion and $2.83 billion, respectively, in bank loans. These assets may be relatively illiquid during times of market stress. We seek to diversify our holdings of these assets by industry and by geographic location.
As of February 2001 and November 2000, the aggregate carrying value of our principal investments held directly or through our merchant banking funds was approximately $3.45 billion and $3.52 billion, respectively. These carrying values were comprised of corporate principal investments with an aggregate carrying value of approximately $2.42 billion and $2.51 billion, respectively, and real estate investments with an aggregate carrying value of approximately $1.03 billion and $1.01 billion, respectively.
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Credit Ratings
The following table sets forth our credit ratings as of February 2001:
Long-Term Debt
As of February 2001, our consolidated long-term borrowings were $30.78 billion. Substantially all of these borrowings were unsecured and consisted principally of senior borrowings with maturities extending to 2024. The weighted average maturity of our long-term borrowings as of February 2001 was approximately 4.50 years. A substantial portion of our long-term borrowings are swapped into U.S. dollar obligations with short-term floating rates of interest in order to minimize our exposure to interest rates and foreign exchange movements.
Accounting Developments
In September 2000, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125,” which revises the standards for accounting for securitizations and other transfers of financial assets and collateral. In addition, specific implementation guidelines have been established to further distinguish transfers of financial assets that are sales from transfers that are secured borrowings. We intend to adopt the provisions of SFAS No. 140 during 2001, as required. The adoption of SFAS No. 140 will not materially impact our financial condition or our results of operations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
For a description of our risk management policies and procedures, see Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended November 24, 2000 and the information incorporated by reference therein.
VaR. VaR is the potential loss in value of Goldman Sachs’ trading positions due to adverse market movements over a defined time horizon with a specified confidence level.
For the VaR numbers reported below, a one-day time horizon and a 95% confidence level were used. This means that there is a one in 20 chance that daily trading net revenues will fall below the expected daily trading net revenues by an amount at least as large as the reported VaR. Thus, shortfalls from expected trading net revenues on a single trading day greater than the reported VaR would be anticipated to occur, on average, about once a month. Shortfalls on a single day can exceed reported VaR by significant amounts. Shortfalls can also accumulate over a longer time horizon such as a number of consecutive trading days.
The VaR numbers below are shown separately for interest rate, currency, equity and commodity products, as well as for our overall trading positions. These VaR numbers include the underlying product positions and related hedges, which may include positions in other product areas. For example, the hedge of a foreign exchange forward may include an interest rate futures position and the hedge of a long corporate bond position may include a short position in the related equity.
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The modeling of the risk characteristics of our trading positions involves a number of assumptions and approximations. While management believes that these assumptions and approximations are reasonable, there is no uniform industry methodology for estimating VaR, and different assumptions and/ or approximations could produce materially different VaR estimates.
We use historical data to estimate our VaR and, to better reflect current asset volatilities, these historical data are weighted to give greater importance to more recent observations. Given its reliance on historical data, VaR is most effective in estimating risk exposures in markets in which there are no sudden fundamental changes or shifts in market conditions. An inherent limitation of VaR is that past changes in market risk factors, even when weighted toward more recent observations, may not produce accurate predictions of future market risk. VaR is calculated assuming a normal distribution and different distributional assumptions could produce a materially different VaR. Moreover, VaR calculated for a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day.
The following table sets forth the daily VaR for substantially all of our trading positions:
Daily VaR
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The following chart presents the daily VaR for substantially all of our trading positions during the quarter ended February 2001:
Firmwide VaR
Trading Net Revenues Distribution
Substantially all of our inventory positions are marked-to-market on a daily basis and changes are recorded in net revenues. The following chart sets forth the frequency distribution for substantially all of our daily trading net revenues for the quarter ended February 2001:
Daily Trading Net Revenues
As part of our overall risk control process, daily trading net revenues are compared with VaR calculated as of the end of the prior business day. Trading losses incurred on a single day did not exceed our 95% one-day VaR during the first quarter of 2001.
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Nontrading Risk
The market risk on our nontrading financial instruments, including our merchant banking investments, is measured using a sensitivity analysis that estimates the potential reduction in our net revenues associated with a 10% decline in the S&P 500. This sensitivity analysis is based on certain assumptions regarding the relationship between changes in the S&P 500 and changes in the fair value of the individual nontrading financial instruments. Different assumptions could produce materially different risk estimates. As of February 2001, the sensitivity of our nontrading market risk to a 10% decline in the S&P 500 was $234 million.
Derivative Contracts
We utilize replacement cost as a measure of derivative credit risk. Replacement cost, as reported in “Financial instruments owned, at fair value” on the condensed consolidated statements of financial condition, represents amounts receivable from various counterparties, net of any unrealized losses, where management believes a legal right of setoff exists under an enforceable netting agreement. Replacement cost for purchased option contracts is the market value of the contract. We control our credit risk through an established credit approval process, by monitoring counterparty limits, obtaining collateral where appropriate and, in some cases, entering into enforceable netting agreements.
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The following table sets forth the distribution, by credit rating, of substantially all of our exposure with respect to over-the-counter derivatives as of February 2001, after taking into consideration the effect of netting agreements. The categories shown reflect our internally determined public rating agency equivalents.
Over-the-Counter Derivative Credit Exposure
Over-the-counter derivative credit exposure, net of collateral, by maturity is set forth below:
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
The following supplements and amends our discussion set forth under Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended November 24, 2000.
Antitrust Matters
In the lawsuit alleging a conspiracy to discourage or restrict the resale of securities issued in public offerings, the plaintiffs have appealed from dismissal of their complaint.
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The Goldman Sachs Group, Inc. is one of numerous financial services firms that have been named as defendants in purported class actions filed on March 9, 2001 and March 21, 2001, respectively, in the U.S. District Courts for the Southern District of New York and the District of New Jersey by purchasers of securities in public offerings, who claim the defendants engaged in a conspiracy to “tie” allocations in offerings to higher customer brokerage commission rates as well as purchase orders in the aftermarket. The Goldman Sachs Group, Inc. has also, together with other underwriters in the offerings as well as the issuers and certain of their officers and directors, been named as a defendant in a number of related lawsuits alleging, among other things, that the prospectuses for the offerings violated the federal securities laws by failing to disclose the existence of the alleged “tying” arrangements. In addition, The Goldman Sachs Group, Inc. has, together with other underwriters in the offerings, received subpoenas for documents and information from various governmental agencies in connection with an investigation relating to allocations in public offerings. Goldman Sachs is cooperating with the investigation.
Goldman, Sachs & Co. has been informed that the U.S. Department of Justice has closed its investigation of an alleged conspiracy among securities underwriters to fix underwriting fees.
Rockefeller Center Properties, Inc. Litigation
On March 12, 2001, the federal district court granted defendants’ motion to dismiss the amended complaint. Plaintiffs have filed a notice of appeal.
AMF Securities Litigation
By a decision dated March 22, 2001, the federal district court denied defendants’ motion to dismiss the amended complaint.
World Online Litigation
In March 2001, the Dutch shareholders association initiated legal proceedings in connection with the initial public offering of World Online. Goldman Sachs International is named as a defendant in the writ served on its Dutch attorneys on March 14. The amount of damages sought is not specified in the writ.
Item 2: Changes in Securities and Use of Proceeds
On March 19, 2001, we issued approximately 1.45 million shares of common stock in connection with our acquisition of Benjamin Jacobson & Sons, LLC, a specialist firm on the floor of The New York Stock Exchange. These shares were issued in a transaction not involving a public offering in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933 and Rule 506 thereunder for transactions by an issuer not involving a public offering (with the recipients representing their intentions to acquire the shares for their own accounts and not with a view to the distribution thereof and acknowledging that the shares were issued in a transaction not registered under the Securities Act of 1933).
Item 5: Other Information
Cautionary Statement Pursuant to The Private Securities
We have included in this Form 10-Q filing, and from time to time our management may make, statements which may constitute “forward-looking statements” within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These forward-looking
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Additional information regarding these and other important factors that could cause actual results to differ from those in our forward-looking statements is contained in our Form 10-K for our fiscal year ended November 24, 2000, under Item 1 “Business — Certain Factors That May Affect Our Business.”
Statements about our investment banking transaction backlog also may constitute forward-looking statements. Such statements are subject to the risk that the terms of these transactions may be modified or that they may not be completed at all; therefore, the net revenues that we expect to earn from these transactions may differ, possibly materially, from those currently expected. Important factors that could result in a modification of the terms of a transaction or a transaction not being completed include, in the case of underwriting transactions, a decline in general economic conditions, volatility in the securities markets generally or an adverse development with respect to the issuer of the securities and, in the case of financial advisory transactions, a decline in the securities markets, an adverse development with respect to a party to the transaction or a failure to obtain a required regulatory approval. Other important factors that could adversely affect our investment banking transactions are contained in our Form 10-K for our fiscal year ended November 24, 2000, under Item 1 “Business — Certain Factors That May Affect Our Business.”
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
(b) Reports on Form 8-K:
On February 16, 2001, Group Inc. filed an amended Current Report on Form 8-K to include additional pro forma and historical financial statements relating to its combination with SLK LLC.
On March 20, 2001, Group Inc. filed a Current Report on Form 8-K reporting its net earnings for its fiscal first quarter ended February 23, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 6, 2001
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