Business Context and Reporting Period
Company: The Goldman Sachs Group, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended November 26, 1999
Overview: Goldman Sachs is a leading global investment banking and securities firm. The 1999 fiscal year marked the company's conversion from a limited partnership to a corporation and its initial public offering (IPO) in May 1999. The firm operates in over 20 countries with 15,361 employees, 37% of whom are based outside the United States.
Key Financial Metrics
| Metric | 1999 | 1998 | 1997 |
|---|---|---|---|
| Total Revenues | $25,363 million | $22,478 million | $20,433 million |
| Net Revenues | $13,345 million | $8,520 million | $7,447 million |
| Pre-tax Earnings | $1,992 million | $2,921 million | $3,014 million |
| Net Earnings (Parent Company) | $2,708 million | $2,428 million | $2,746 million |
| Earnings Per Share (Diluted) | $5.57 | N/A | N/A |
| Total Assets | $250,491 million | $217,380 million | $178,401 million |
| Long-term Borrowings | $20,952 million | $19,906 million | $15,667 million |
| Stockholders' Equity | $10,145 million | N/A | N/A |
| Assets Under Supervision | $485.5 billion | $336.8 billion | $238.0 billion |
Note: Pre-tax earnings for 1999 include $2.26 billion in nonrecurring expenses related to the corporate conversion and a $200 million charitable contribution. Prior years' pre-tax earnings are not directly comparable due to accounting differences regarding partner distributions.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased significantly to $13.3 billion in 1999 from $8.5 billion in 1998, driven by strong performance in Global Capital Markets (76% of net revenues) and Asset Management (24% of net revenues).
- Corporate Conversion: The firm converted from a partnership to a corporation in May 1999, resulting in a $2.26 billion nonrecurring charge that reduced reported pre-tax earnings.
- Asset Growth: Assets under supervision grew to $485.5 billion, a 44% increase from 1998, with equities and alternative investments representing 59% of assets under management.
- Employee Count: Total employees increased to 15,361 from 13,033 in 1998, reflecting expansion in both U.S. and international operations.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management anticipates continued growth in electronic connectivity and online trading, which may impact commission revenues. The firm is actively expanding its international footprint, particularly in Europe and Asia, to compete with larger, better-capitalized global institutions. Strategic investments in electronic trading systems (e.g., The Hull Group acquisition) and alternative trading systems are underway.
Risks and Contingencies
- Market Risk: Significant exposure to market fluctuations in fixed income, equity, currency, and commodity markets. Past losses have occurred during periods of market turbulence.
- Liquidity Risk: Dependence on access to debt capital markets and repurchase markets. A reduction in credit ratings could impair liquidity and increase borrowing costs.
- Legal Proceedings: The firm is involved in various litigation matters, including antitrust claims regarding underwriting fees, securities litigation (MobileMedia, AMF, Iridium), and municipal securities pricing inquiries. Management believes the aggregate results will not have a material adverse effect on financial condition.
- Regulatory Risk: Subject to extensive regulation globally. New financial modernization legislation may accelerate consolidation and increase competition.
Unusual Items
The 1999 financial results include a $200 million charitable contribution to The Goldman Sachs Foundation and $2.26 billion in nonrecurring expenses associated with the conversion to corporate form.
Key Facts for Investor Verification
- Nonrecurring Charges: Verify the impact of the $2.26 billion conversion expense and $200 million donation on the reported $1.99 billion pre-tax earnings.
- Comparability: Note that pre-tax earnings for 1998 and prior years are not directly comparable to 1999 due to the shift from partnership distributions to corporate compensation accounting.
- Legal Exposure: Monitor the status of antitrust investigations regarding underwriting fee fixing and the MobileMedia securities litigation settlement.
- Asset Quality: Review the composition of the $2.88 billion in principal investments (merchant banking) and the $17.27 billion in committed capital for merchant banking funds.
- Capital Structure: Confirm the firm's ability to maintain required net capital levels under SEC Rule 15c3-1 and international regulatory standards.